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Financial Assets - Vigorous life under the volcano

  • 16 Jan 2004
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The shadow of Basel II lies across Europe’s banks — after three years of arguments, securitisation specialists are no closer to knowing whether the new regime will blight or inspire the market. But that did not stop a riot of deals in 2003, as banks across the continent diversified their funding and enjoyed a bull run in asset backed spreads. Chris Moore reports.

The world of bank securitisation was overshadowed in 2003, as for the last few years, by uncertainty over the new Basel capital regime.

The year ended with as much confusion as it began. In October the Bank for International Settlements announced, after months of intensive lobbying from banks, that it planned to drop the hugely unpopular and complicated Supervisory Formula Approach for calculating capital charges for securitised assets.

Few banks will mourn the SFA, but it is still unclear what will replace it.

Yet this uncertainty has done little to dent issuers’ will to securitise. Last year saw steady growth, matched, at least in the final two quarters, by robust demand.

Perhaps even more encouragingly, structured finance expanded its reach throughout the European Union and beyond, as several countries adapted their legal frameworks to permit new structures and asset classes.

In June, Greece passed a law on private sector securitisation; five months later the first fruits appeared, with Aspis Bank’s Eu250m mortgage securitisation, led by ABN Amro and NBG International.

France, which has the world’s oldest securitisation law, updated it to allow for synthetic structures and future flow deals, while Ireland amended its tax framework to facilitate synthetics and managed CDOs.

Spain, until recently a stronghold of true sale asset backed securitisation, also passed a law to allow banks to use synthetic securitisation.

In Germany, meanwhile, true sale securitisations were on the up. In April, the six leading banks, including KfW, set up a lobby group known as the True Sale Initiative to push for an amendment to the trade tax framework, which makes true sale securitisation difficult for banks.

Three months later the Bundesrat approved an amendment to trade tax, opening the door for banks in Europe’s largest economy to launch more funded securitisations.

But arguably the greatest step forward in structured finance was not even a securitisation. In May HBOS launched the first UK covered bond. Without an existing law for covered bonds, HBOS managed to create one using securitisation techniques.

The Eu3bn seven year bond was sold by arrangers Citigroup and Goldman Sachs with joint lead Dresdner Kleinwort Wasserstein at 10bp over mid-swaps. Over 200 investors participated.

The success of the deal has prompted other UK issuers such as Bradford & Bingley to start working on deals, while originators in the Netherlands and Italy are exploring similar covered bond structures using their securitisation laws.

Life in the old dog yet
Some market practitioners have started to ask whether covered bonds could replace residential mortgage backed securitisation entirely.

But there is still plenty of life in the old RMBS market — mortgage securitisation had never been more prominent than in 2003, with issuance of UK and Dutch MBS reaching record levels.

And with increased issuance has come greater liquidity, further stimulating demand.

Recycling ABS


While technical and fundamental factors helped drive demand for ABS throughout the latter half of 2003, strong subscription levels should also be attributed to a third factor — the emergence of the CDO of ABS.

The first securitisation of 2003 was in fact a CDO of ABS: Crédit Agricole Indosuez’ Triplas deal, with a nominal value of Eu600m.

After that, synthetic CDOs of ABS proliferated, as BNP Paribas, RBC Capital Markets and Dresdner Kleinwort Wasserstein all rolled out new synthetic programmes.

Classic funded arbitrage deals also blossomed, with Prudential M&G, Gulf Investment Bank, Zais Group and Cambridge Place Investment Managers all closing new funds.

In November HBOS closed a staggering £4.5bn MBS from its Permanent Financing trust, one of the largest deals yet in the asset class. The bank was rewarded with a spread of 19bp over Libor for the five year £750m sterling tranche, even after it was increased from £400m.

In many ways Permanent Financing 3 represented the progress of the MBS market in 2003. It used a carefully engineered capital structure to target global — particularly dollar — demand, and by coupling wide distribution with the sheer bulk of the bonds offered, promised the kind of liquidity that investors were willing to pay for.

Things could not have been farther from the state of the market 12 months earlier.

The last days of 2002 had been coloured by a glut of issuance, a drained and shrinking investor base and wider spreads across the ABS market. Dealers entered 2003 with a combination of relief and uncertainty. For the capital markets as a whole the first few months of 2003 were overshadowed by the war in Iraq. But in a time of great uncertainty, the securitisation market kept its good name as a safe haven for investors, and a reliable funding source for issuers.

On March 19, days before the start of the Iraq war, Abbey National sold a jumbo £2.2bn equivalent securitisation — an achievement that the straight debt market could not have matched at the time.

Italian MBS was leaping ahead at the same time — Banca Intesa and Banca Nazionale del Lavoro launched debut deals in February and April for Eu2bn and Eu2.2bn respectively.

House price fears bite
But beyond geopolitical uncertainty, the MBS market had concerns of its own.

Investors’ fear of a house price crash in the UK and, to a lesser extent, the Netherlands had been growing over the last year, and in the first half of 2003 those fears undermined spreads on prime MBS.

The year’s first issue from Northern Rock’s Granite master trust and February’s Permanent 2 from HBOS were priced wider than previous deals. Granite’s senior sterling tranche was 5bp outside the last issue and HBOS’s triple-B sterling bond 25bp wider.

But the impact on the UK non-conforming and buy-to-let sectors was still more severe.

Triple-A spreads blew out to the 45bp area — the widest point since mid-1999 — as Kensington Mortgages, Southern Pacific Mortgage Ltd and GMAC came to market in March.

But as the year wore on, confidence in the housing market returned.

“There was something of an overreaction,” says David Basra, managing director in securitisation at Citigroup in London.

“But the reality was that investors could see that these deals were performing well and were structured to withstand severe stresses. Market conditions continued to improve over the year and as the US and UK economies showed signs of recovery there was increasing demand for consumer assets.”

The turn in fortunes for MBS came with the end of the Iraq war, which led to a sustained rally in unsecured bond markets.

As spreads narrowed on corporate bonds, investors began to stray into the more complex but stable and higher yielding territory of ABS.

The result was an injection of cash into the asset backed market, which happily coincided with rising issuance of MBS, spurred on by new issuers.

“The uncertainty caused by the Iraq war ended, and growth in house prices slowed, easing investors’ concerns over a crash,” says John Dziadzio, executive director responsible for northern European agency securitisation at Lehman Brothers in London. “But we’ve also seen a lot of new investors coming into the MBS sector, drawn by the greater volume and liquidity from issuers like HBOS and new names like Standard Life.”

Issuance soared, but could scarcely keep up with demand. When Barclays Capital, JP Morgan and Lehman Brothers brought Northern Rock’s third Granite deal of the year in September, spreads had tightened to 19bp for five year euros and sterling. From then on spreads in prime MBS held, or tightened further as more issuers came to market with large, liquid deals.

The non-conforming sector also recovered slowly but steadily. By November GMAC was able to price its last issue at 30bp over for the three year triple-A tranche.

Outside of the UK, the most active sector was Dutch MBS, with repeat issuers SNS, NIB Capital and Aegon Levensverzekering coming to market, as well as new name DSB Bank.

In Germany, despite the fanfare of publicity surrounding the True Sale Initiative, the synthetic deals through KfW’s Provide platform — as well as its Promise programme for SME lending — dominated.

One of Europe’s largest retail banks, Deutsche Postbank, brought its debut transaction in December, shedding the risk on Eu2bn of mortgages from a Eu17bn book. The bank will consider more securitisations in 2004.

Egg Banking of the UK became the first issuer outside Germany to use KfW’s Provide platform with the £1.75bn Provide Release, placed by Merrill Lynch in July.

NIB Capital followed in November with the Eu1bn Provide Orange, launched while it was marketing its second funded RMBS of the year, also for Eu1bn.

While demand held firm for the liquid UK and Dutch issues, as the year wore on and the tally of deals grew, investors came to prize diversity as much as much as liquidity.

The Swedish Housing Finance Corp (SBAB) took advantage of this bid in June when Citigroup sold Eu895m of 4.5 year triple-A MBS at 22bp over Euribor.

Portuguese MBS fared well — pricing of Caixa Geral de Depósitos’ debut, led by JP Morgan, was exceptionally tight at just 21bp over for the Eu980m triple-A bond.

Other beneficiaries were Swiss MBS, revived by Credit Suisse’s two Chalet Finance deals, that totalled over Eu4bn, and ABN Amro’s Eu2.2bn Atomium Finance, the first Belgian MBS in five years.

The appeal of diversity applies to the whole asset class of consumer finance ABS, still a weakling in Europe compared with MBS.

Low levels of issuance drove in spreads on Renault’s Eu1.1bn Cars Alliance Funding, sold by BNP Paribas and Crédit Agricole Indosuez in September.

In the credit card market Capital One, Egg and MBNA Bank Europe all closed deals.

MBNA America Bank also launched two standalone subordinated issues, the first of their kind in Europe. Deutsche Bank sole managed the first £200m triple-B issue in May, and was joined by Credit Suisse First Boston on the £200m single-A deal in September.

Yield, more yield
The MBNA deals were savvy plays on the prevailing market trend of triple-A spread tightening.

“The single-A and triple-B tranches benefited most from the spread tightening,” says Dziadzio at Lehman. “We saw a lot of CDOs of ABS ramping up, but also a lot of triple-A accounts taking the time to do the credit work, moving down the credit spectrum in search of yield.”

And those who couldn’t move down, jumped across.

“There was a lot of upward momentum in the CMBS sector,” says Basra at Citigroup. “A couple of years ago RMBS was much harder to distribute than today, but as investors became more sophisticated and familiar with that asset class they have moved down the credit curve and also across asset classes to buy similiar rated deals which are more credit intensive but with higher yields.”

But the year in CMBS started on shaky ground, when the trustee of HOTELoC, a deal closed in 2002 through Morgan Stanley’s ELoC programme, announced in February a potential mistransfer of funds from an agency account within the securitisation. Later Orb, the equity owner in the portfolio, sold the properties to a third group and the £8m of missing funds were replaced.

The affair did little to spoil investor appetite, and there were several successful single property securitisations, such as Morgan Stanley’s £813m bond to fund the development of the BBC’s London headquarters.

Some sectors did suffer, notably London offices, which many investors avoided due to concerns over falling occupancy.

Eurohypo, for example, had to restructure its  £488m debut deal, Opera Finance No 1, to take out two City properties. CMBS benefited from technical factors, and spreads held broadly firm in the second half of the year, even as issuance soared.

A wider development was the emergence of investment banks’ real estate conduits as not just isolated originators, but a body of regular issuers.

Until last year only Lehman Brothers’ Windermere programme had joined Morgan Stanley’s well established ELoC vehicle.

In 2003 several other conduits launched deals, such as Merrill Lynch and NM Rothschild’s Real Estate Capital and Deutsche Bank’s Deco. Lehman Brothers also sold its second Windermere issue.

Meanwhile, JP Morgan, Bear Stearns, Credit Suisse First Boston, Goldman Sachs and Citigroup were busy ramping up their conduits. 

  • 16 Jan 2004

All International Bonds Ranking

Rank Lead Manager Amount $m No of issues Share %
1 JPMorgan 111,653.77 379 8.03%
2 Barclays 110,498.80 347 7.94%
3 Bank of America Merrill Lynch 101,573.05 316 7.30%
4 Deutsche Bank 99,049.91 375 7.12%
5 Citi 95,827.47 329 6.89%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
1 Credit Agricole CIB 9,929.31 26 7.07%
2 BNP Paribas 9,645.75 40 6.87%
3 HSBC 6,672.28 40 4.75%
4 Barclays 6,583.64 26 4.69%
5 Deutsche Bank 6,575.21 26 4.68%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
1 Goldman Sachs 11,056.32 30 12.83%
2 JPMorgan 8,454.91 40 9.81%
3 UBS 8,155.52 24 9.46%
4 Deutsche Bank 7,347.53 24 8.53%
5 Bank of America Merrill Lynch 6,847.17 17 7.95%