Robert Plehn, head of structured securitization at Lloyds Banking Group in London, says offering asset backed-securities in currencies other than sterling, dollars and euros is one way to attract new investors back to the European market over the next 12 months.
Lloyds earlier this year included a Japanese yen tranche in its U.K. RMBS Arkle deal (TS, 10/19). Plehn told TS he expects more Asia-Pacific investors to dip into similar trades in the coming year. Listen to the complete conversation
Below are edited excerpts from the conversation.
Does the recent Japanese yen-denominated tranche in the Lloyds Arkle U.K. RMBS represent one potential method of tempting new buyers back to this market?
International diversification in terms of currency and geographic location is one of the ways to build back some depth in the investor base. In some instances it's bringing back investors who used to invest from offshore locations. In other instances it's actually bringing in new investors from those jurisdictions. Pre-credit crunch, most people would take the view that for a couple of hundred million it's not worth it to go into a new jurisdiction. But the dynamics have changed. If a couple of hundred million is 10% of a large trade, and you can do that on a regular basis, it's worth the investment. I suspect we will see more investors coming out of that jurisdiction and investing in the U.K. master trusts going forward.
Is it complicated putting together these types of deals?
There is a bit of legal work going into a new jurisdiction, not a massive amount--it's more regulatory driven in terms of what the investors need to comply with from their own regulatory perspective. But if investors have not bought the product then it is an education about the asset class itself. Even when you launch a deal you want to give investors a little bit more time to do their credit work.
Which asset classes will see the most issuance in 2011?
Mortgages will continue to dominate. They did pre-credit crunch and they are the largest asset class out there. It's an asset class that many investors are comfortable with across Europe. You will continue to see more granular consumer assets out of Europe, [including] autos and credit cards. It will be a continuation of more granular assets and a gradual movement into more concentrated corporate assets.
What are some of the challenges facing the market over the next 12 months?
The challenge of showing there hasn't been a problem with European product is probably the biggest challenge. It's the one we've already started to confront as an industry. I'm hopeful the message about the quality of the European product will continue and we will see a warming toward the product, if you will, both from politicians and regulators, but also investors.
The second challenge is a withdrawal of a particular investor base, mainly leveraged buyers who have dropped out of the market and ceased to exist, and will not come back. The depth of the investor base will clearly be one of the deciding factors in terms of how big the market grows going forward.
Are attitudes changing toward securitization among politicians and regulators in Europe?
Yes, it definitely is turning. There is a debate about how you define and distinguish between a good securitization and a bad securitization. You also have a different dynamic here in Europe compared to the U.S., which is that covered bonds are effectively another form of capital markets funding of assets. Clearly people realize now that securitization has performed well.
What about deal size and issuance volume in 2011?
We will continue to see deals of the £2 billion ($3.1 billion) range, which is what we've seen this year. The deals have been done in a larger fashion but oftentimes that's with either pre-placements or retained portions of deals. But the typical deal size has been about £2 billion ($3.1 billion) per deals, give or take a bit if you are a large U.K. bank. That compares to the average size of about £4 billion ($6.2 billion) pre-credit crunch. It's still a respectable size. If you leave the U.K. and look at other jurisdictions, or even stay in the U.K. and look at other types of issuers, then deal size starts to drop to between E500 million and E1 billion ($656 million - $1.3 billion). That's roughly the size I would expect to see.
Do you expect mostly public or private deals next year?
It's a mix. Most large issuers would see it as a mix as well. There will be particular transactions where large investors will come with large reverse inquiries, it may be a structure or pricing dynamic or a particular type of collateral that those investors have appetite for. An issuer may feel for strategic reasons or just market investor reasons it's not the right deal to build a public deal around. Those will be more suitable for private transactions. Most issuers, if they are going to rely on this market will access the public markets as well.