While the American securitization market is withering on the vine, its European cousin will likely see the most active and diverse period of its brief life in the next three months.
Analysts predict that the fourth quarter of 2000 could be the European mortgage-backed and asset-backed securities sector's grand debut in the worldwide capital markets.
So far this year European MBS/ABS new issuance is more than $60 billion, already topping 1998's total issuance and closing in on last year's total of $72 billion. With at least $25 billion in new deals slated for the next three months, and some predicting the pipeline to be much larger, it will likely be the largest European MBS/ABS quarter to date.
That's a far cry from what is expected in many sectors of the U.S. capital markets this year, especially MBS and high-yield corporate debt, which analysts predict will limp to a dismal finish.
It is also a change from the usual fourth-quarter scenario for European securitization markets, which have been plagued with a crisis situation at the end of each of the past two years. In 1998 it was fallout from the Russian currency meltdown, and last year it was investors scurrying away due to unfounded Y2K fears.
A healthy quarter could establish the template for future European securitization issuance, said Alexander Batchvarov, head of international ABS research for Merrill Lynch & Co. "This will be the first year where the fourth quarter will be without a crisis, hopefully," he said.
The Atlantic Passage
The potential already has Wall Street players sniffing around for opportunities, bankers and traders said.
Given that U.S. MBS is down 50% so far this year, and that many traditional sectors of the domestic asset-backed market are in trouble, the potential to tap a fresh vein of securitizations from Europe has many players itching to get in on the action. U.S. ABS leaders like Salomon Smith Barney, Chase Manhattan and Deutsche Bank are all reportedly increasing their efforts in London and on the Continent.
U.S. investors are also making the Atlantic passage, particularly mortgage investors, to whom the burgeoning European MBS market is a godsend.
For one thing, residential mortgages are far and away the most prominent type of structured finance available in Europe, making up about 50% of this year's overall structured finance issuance, so there is plenty of paper to go around.
Further, in the States many mortgage product has come from troubled subprime issuers, thus diluting the value and the issuance rates for new deals. European mortgage deals often hail from top-rated state banks.
"These are top banks for whom securitization is important, but is also only one of many different funding alternatives they have," Batchvarov said.
The trouble with many U.S. mortgage issuers is that securitization was one of their few capital sources, and they wound up dumping too much paper on the market in a desperate need for funding.
Perhaps more importantly for the long-term establishment of a European securitization market is the growing acceptance of more esoteric deals by European investors. The European buy side has tended to be very conservative in its deal tastes, and that has hindered the growth of such sectors as high loan-to-value mortgages, intellectual property securitizations, collateralized debt obligations and other U.S. favorites.
The current quarter, however, should see a much more diverse bunch of deals hit the tape.
In particular, a number of multibillion dollar synthetic loan securitizations are set to come that will be hard for European investors to ignore. Such synthetic deals originally only had success in Germany, but the deals have received good play in the after market and have sold the broader investor base on their merits.
Another sector ready to expand in Europe is consumer credit deals, such as credit card securitizations. Because European countries have far lower levels of consumer lending than the U.S., such securitizations have so far been rare. But as the market grows more dominated by mortgage product, having unsecured consumer credit deals is a good way to diversify holdings, Batchvarov said.
European investors also seem to be growing more sophisticated in tiering various types of deals, which is contributing to a stronger, more accurately priced secondary market, traders said.
While once European MBS were all priced together in an undifferentiated mass, the buy side is now making distinctions between prime and subprime U.K. mortgages, for example, or performing and nonperforming Italian loans.
Perhaps what will most define the openness of the European securitization market is whether government-sponsored deals from the likes of Italy and Spain will be accepted by investors. European governments have tried to offer deals in the past, to indifferent reception. Should the upcoming government deals price well, however, players believe that will be a sign that the European investor base is hungry enough to tackle anything on the menu.