Ross is the head of asset-backed research at ABN AMRO. Based in London, he is responsible for coordinating research support for the firm's securitization activities globally. Ross joined ABN fromMerrill Lynch's international structured credit research team in 2002. Prior to that, he was part of the securitization research teams in Europe atJ.P. Morgan Securities .
How do you think the continuing maturation of the European securitization market will manifest itself this year?
The true maturity of the market will be the distribution of deals' entire capital structure. People used to concentrate on the senior pieces and the investors who bought the triple-B pieces were your best friends. Now, deals sell from the bottom up. Equity is the next stage in this process and the demand is already there from investors. From an issuer's perspective, the regulatory incentive to sell equity pieces is increasing.
Will rising rates affect the credit quality of consumer asset securitizations?
Inevitably, rising rates will affect deals' performance. Most likely it will first be seen in credit card deals or other forms of unsecured consumer finance as consumers begin to feel their liquidity squeezed. While I don't think it will provoke a collapse in performance in a material way, the market will see a structurally higher level of arrears across consumer deals because of the changes in the interest-rate environment. While these issues are unlikely to prove material in terms of ratings performance, they could be the basis for anxious investors to re-price an expensive market.
How might the increasing CDO bid for asset-backeds affect the market?
It has already affected the market in the bid for subordinate pieces. Since investors began to shift decisively toward consumer credit in 2001, the proportional tightening we've seen in subordinate tranches has been greater than the movements of senior pieces. The European CDO of ABS is the new black, everyone is doing one and bidding for the same paper. I'm not convinced there is as much uptake of the product as there is a willingness to structure and manage it. I don't think all the deals that are being ramped up at this time are going to get done and I expect some of those portfolios to resurface quietly in the secondary market. Some of the problems of the '97 and '98 CDO vintages are apparent in the new CDOs of ABS that are ramping up now. They were ramped up in expensive markets, the managers are forced buyers of diversity at the expense of truly considering the credit and the deals are ramping up at the same time and buying the same bonds. If one underlying deal goes bad, many CDOs of ABS will be affected. Investors need to focus on granularity. It's not that I'm cautioning against the product, but there are some eerie similarities and investors should be aware.
The European ABS market has seen tighter spreads to start off the year. Will these levels continue or does something have to give?
The key pricing determinant is the strength of the demand technical, which is why we didn't see any spread widening in the fourth quarter. Now, the key question is its sustainability. On a micro level, investors have capacity allocated to this asset class which should continue to support these levels. On a macro level, investors will be shifting away from fixed income in general and into a stronger-performing equity market, which will have an impact on demand for asset-backeds.
What kinds of new investors are beginning to buy European ABS?
Corporate treasuries, because they are looking to diversify. It's also a relative-value play. Right now we find consumer ABS expensive but it's still cheap compared to corporate credit. Also, the continuing proliferation of funds being ramped up by independent money managers will grow the European ABS investor base.