Although the French securitization market has been slow this year, observers say two particularly interesting deals are giving ideas to other potential issuers. Additionally, a long-anticipated amendment to French securitization law - which addresses co-mingling risk - is likely to be finalized in the next month or so, stirring hope for increased volume next year.
At least one company is looking to copy the success of Credit Logement, which recently priced its second synthetic securitization backed by French residential mortgage guarantees. In addition, several other hopefuls are interested in the structure used by the truck leasing company Fraikin, which marked a few firsts with the deal it closed this summer.
Because of the time-consuming legwork required, no Fraikin-inspired deals are expected in the market until next year. But a synthetic RMBS deal from a new French issuer is likely to come within a few months, according to one source.
Credit Logement pricings
So far, Credit Logement is the only synthetic RMBS issuer in France, and it has made a splashy debut with two deals this year, the latest pricing Sept.14.
Eager for scarce French paper, European investors snapped up the recent 331 million ($406 million) in notes, with all four classes oversubscribed by four to five times. The reference portfolio contains 4.5 billion ($5.5 million) of guarantees to French banks for residential loans, with an average loan-to-value ratio of 63% and average seasoning of 31 months.
"We had a very, very strong response," said Jerome Jacques, a managing director at SG Corporate & Investment Banking and head of its European MBS group. SG CIB acted as sole arranger and bookrunner, sharing the lead manager role with BNP Paribas and Calyon Securities for several of the tranches.
French Residential Asset 2004-2, a newly created Irish special purpose entity, issued four classes of notes benchmarked against three-month Euribor.
With triple-A ratings from both Standard & Poor's and Moody's Investors Service, the two senior classes, worth a combined 180.25 million ($221 million), came in at 17 basis points over. At 180 million, A-class represented the bulk of the triple-A piece, with the remaining amount in a 250,000 ($306,000) super senior tranche.
The double-A rated B class, totaling 76.5 million ($93.8 million) and rated priced at 30 basis points over Libor. The 40.5 million (49.7 million) single-A rated class priced at 43 basis points over and 33.7 million ($41.4 million) D triple-B class, which priced at 85 basis points over.
The structure, which involves two credit default swaps, was almost identical to the first Credit Logement deal in March. The main difference is a slightly longer substitution period - 5 years instead of 4.75 years - according to a Moody's pre-sale report.
The size of the recent deal was also higher, based on interest shown for the previous deal, which offered 245.25 million ($300 million) in notes on a 3.5 billion ($4.29 billion) reference portfolio. Reportedly, the pricing on that deal was 20 basis points over for triple-A paper, 40 basis points over for double-A, 60 basis points over for single-A, and 125 basis points over for triple-B.
"Because we have been testing the appetite of investors, we decided to increase the size from 3.5 billion last March to 4.5 billion," Jacques said. "We knew there was a strong appetite for that type of asset, and the timing was good."
More than 70% of the investors on the recent deal came from outside France, with demand from Germany, the U.K., the Netherlands and Belgium particularly heavy.
Several sources said Credit Logement is likely to inspire other deals. One market observer said because Credit Logement is acting much like an insurance company by helping banks offset credit risk on residential loans, it opens the possibility that French insurance companies might consider a synthetic securitization to offset the risk of automotive insurance claims, particularly after the expected changes to the securitization law are in place.
Fraikin firsts
The 420 million ($515 million) Fraikin deal, issued by FCC EuroTruck Lease, is also attracting attention, according to bankers and rating agency analysts.
A hybrid between a whole business and lease securitization, the MBIA-wrapped deal came to market this summer via Credit Industriel et Commercial (CIC) and Calyon.
"Apparently, the market is quite excited about it," Moody's analyst Sophie Berthelon said, adding that she received calls about the deal from investors and other bankers. "It gives some ideas to others, obviously."
One aspect of the deal that seems most promising for sparking future issuers is that the securitization essentially helped finance a leveraged buyout. An investing company called Eurizeo bought Fraikin in February 2003, with bridge financing put in place through CIC and Calyon. Then it refinanced the debt with its securitization this summer.
The biggest selling point is that the securitization saved the acquiring company at least 1% over other financing options, according to Raja Kawar, director of the asset finance and securitization for CIC.
Now other companies are expressing interest, Kawar said, without revealing any names. "We have seen growth in prospects in the market," he said. "This is the only deal like this so far, but I don't believe it will be the last." Another notable feature of the Fraikin truck lease deal is that it includes both lease receivables and residual values, which Kawar said is a first.
The deal featured two senior pieces, rated triple-A by S&P and Moody's. Class A1, worth 315 million ($386 million), priced at 27 basis points over three-month Euribor.
The 70 million ($85 million) A2 class, which was sold directly into a conduit, priced at 31 basis points over. Kawar said the deal is structured so that tranche can be bumped up as high as 250 million ($306 million) in the future. But if more is issued, it will go into the conduit.
In the senior paper, about 60% of the buyers were banks, with the balance split by pension and mutual funds. About 40% of the investors were based in France, followed by Germany, at 22%, and the U.K., at 20%.
Moody's Berthelon said the whole business component of the lease deal derives from the operating risk. "This is strongly mitigated by the fact that there is hot backup servicing from day one," she said. Berthelon said the assets are also ring-fenced in a special purpose vehicle, much like a whole business securitization.
Kawar said the deal took 18 months to put together and entailed sending letters to all the clients leasing trucks from Fraikin. "We had to face the realities of French bankruptcy laws, which are very difficult," he said. Although arranging a similar deal might not take as long as 18 months the next time, it still would be a lengthy process, he added.
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