The Dutch structured finance market is in its infancy. So far
it has been dominated by housing related transactions - buoyed by
the large mortgage market in Netherlands and the government's
programme to encourage home ownership.
But recent mortgage-backed issues have helped to expand the
investor base for a market which has shown impressive growth over
the past year.
What is needed now is further diversification in the types of
assets being securitised. And there are signs that the range of
securitisation users - from the financial and corporate communities
- is set to widen as Emu becomes reality.Philip Carter
"The Dutch structured finance market has been a bit of a late
starter," says Simon Best, director in the securitisation group
covering western Europe, at ING Barings in London. "And even now we
are still seeing only limited deal volume."
Just one year ago, there was just one Dutch securitisation in the public markets. The Dfl 500m deal, issued through FI Mortgage Securities, was a securitisation of housing loans owned by VSB Bank, a subsidiary of Fortis Bank Nederland. Since then, however, securitisation in the Netherlands has been on a fast growth curve and is now punching above its weight.
The Netherlands claimed a 16.6% market share of European securitisation issuance in 1997, according to figures from Fitch IBCA.
And that impressive performance has continued in 1998, with both new and repeat transactions being brought to market. In late September there were widespread expectations that Fortis would announce a further mortgage securitisation of a similar size to FI Mortgage Securities.
The main bulk of the Dutch securitisation market is made up of property linked issues. "This year and 1997 have been dominated by housing related securitisations," says Markus Schaber, associate director at Fitch IBCA in London.
As a market, the Dutch mortgage sector is large - the fourth biggest in Europe. And the volume of residential mortgages is also growing, driven in part by a government programme to encourage home ownership. After Fortis' MBS, ABN Amro launched the much larger European Mortgage Securities I. The deal was a Dfl 2bn issue secured on a portfolio of ABN Amro's residential mortgages.
The issue was structured into four 'A' tranches - all rated triple-A with expected maturities of two, five, seven and 10 years. A Dfl 100m mezzanine tranche with a single-A rating was privately placed.
The size and credit quality of the deal helped to establish a liquid benchmark in the Dutch MBS market, easing the passage of subsequent deals.
Following the EMS I issue were Dutch MBS 1997-I and 1997-II, both structured by Bear Stearns and De Nationale Investerings bank (DNIB).
The Dutch MBS 1997-1 Dfl 400m issue was securitised on a pool of 2,980 residential mortgages originated by Bouwfonds Hypotheken.
For Dutch MBS 1997-II, Dfl 600m worth of securitised mortgages were issued for Stad Rotterdam Verzekeringen and ASR.
But with the launch of the Dfl 2bn European Mortgage Securities II issue in May 1998, ABN Amro refined its previous structure and broke new ground.
One of the aims of the issue was to broaden the bank's investor base in preparation for the introduction of the euro.
To achieve this, ABN Amro split the issue into French franc and guilder tranches - creating the first non-dollar cross-currency mortgage securitisation.
Not only did ABN Amro utilise the swap market to achieve a wider investor base, it also increased the capital efficiency of the deal over EMS 1 through the use of a build-up spread account.
EMS II's soft bullet senior notes were split into a Ffr1bn 'A1' five year class and Dfl 1bn of 'A2' 10 year notes. Both were rated triple-A by Fitch IBCA, Moody's and Standard & Poor's. The mezzanine and subordinated tranches were also placed into the French franc market.
In June, ING Barings brought to market Colonnade 1998-1, a club borrowing vehicle for Dutch social housing societies.
The deal represented a new approach for the borrowers which usually fund through the private placement market.
"With Emu in sight, we thought the private placement market would be diminishingly efficient for the borrower," says ING Barings' Best. "So Colonnade was designed to work towards Emu by pooling the loans and therefore broadening the investor base."
The resulting Dfl 325m Eurobond was launched with maturity referenced to the 2008 DSL and was priced at 18.5bp over. The bonds achieved a triple-A rating from Standard & Poor's on the back of a guarantee from Waarborgfonds Sociale Woningbouw.
The Dutch social housing societies are likely to become regular users of securitisation as ING Barings estimates that between 2001 and 2005 they will have to refinance some Dfl 90bn to meet the demand for new housing developments.
Indeed, ING Barings is planning a follow-up deal to come to market by end of October - Colonnade 1998-2 - provided that market conditions are acceptable. This issue is set to be larger in an effort to improve its liquidity
Another MBS deal is being planned for launch to market in late October (again with the proviso of receptive bond markets) structured by Bear Stearns, DNIB and ING Barings for the Stad Rotterdam group.
The deal will involve the securitisation of four mortgage classes - municipal mortgages, ordinary mortgages, life insurance related mortgages and savings mortgages.
The issue size is expected to be Dfl 700m and will be sold as a public term transaction. The facility should be awarded a triple A rating from Moody's and Fitch IBCA.
In the Netherlands, there is a wide universe of mortgage providers including banks and insurance companies.
The insurance companies, as a result of the full deductibility on tax for mortgages, offer interest only mortgages, and offer savings products alongside.
For insurers, the provision of these mortgages serves as an entry point for selling savings products. With the approach of the euro zone there may be a reappraisal of this cross marketing technique and a consequent separation of mortgage financing from savings products.
If the insurers retreat from mortgage provision there may be an increased concentration of mortgage assets among a smaller universe of providers - which in itself may spur further use of securitisation as a balance sheet management tool.
But within the Dutch market there is scope, and appetite, for more than just MBS transactions. Asset classes such as credit card receivables and retail share lease financing are also supported.
This year has seen the continuation of a trend for credit card receivables transactions originated by US companies aiming to tap into the strong domestic investor appetite for these assets.
Four large credit card receivables backed securitisations have been issued since 1996 - the Chase Credit Card Master Trust Series 1998-1 Dfl 500m euro-fungible transaction; the Dfl 750m MBNA American European Structured Offerings No 1 issue secured on credit card receivables originated by MBNA; Master Credit Card Trust II issued in 1997; and the 1996 Batavia Credit Card Corp Ltd Dfl 700m offering.
The Dutch asset-backed market has even proved flexible enough to fund increased share ownership among the population. Bank Labouchere has launched two transactions for its subsidiary Legio-Lease over the past year.
The vehicles, Lease Assets Backed Securities (LABS) I (Dfl 400m) and II (Dfl 1.2bn), parcel loans provided to private individuals in the Netherlands. The clients then use the loans to buy blue chip equities on the Amsterdam stock exchange. Legio-Lease holds the stock as security until the loans have been repaid.
LABS II was launched in April and split between a Dfl 300m tranche 'A' bond and a Dfl 900m tranche 'B' bond. Tranche 'A' matures in January 2001 and carries a 4.5% coupon and tranche 'B' with a coupon of 4.75% matures in October 2002.
The Dutch market also has its share of asset-backed CP conduits. There is a fair amount of business for CP conduits buying trade receivables," says ING Barings' Best.
"Although this is overwhelmingly in the US market this may change with the introduction of the euro when there should be a much deeper and more liquid Euro-CP market."
With the removal of spot forward hedging costs from the price of issuing asset-backed CP through bank sponsored conduits, Dutch sellers should be able to achieve better terms all in. If this does happen then it is likely that there will be a migration away from the US CP market towards Europe.
But several factors will need to be addressed if the level of Dutch securitisation issuance is to continue to grow.
"The market will have to be developed," says Rob van den Berg, senior vice president at DNIB.
"Corporates will have to give more consideration to issues such as return on equity and from this more securitisations should be expected."
Equally, with the introduction of the euro and the development of a wider investor base there will need to be a greater emphasis on rating agencies.
"Ratings will play a more important role once the euro starts," says van den Berg. "There will be investors from outside Holland who will need to be able to judge the quality of the seller."
Yet before all this happens, there will need to be clarification of the legal framework surrounding the true sale of assets to SPVs. The problem has been addressed successfully for mortgages but for other classes the discussion continues. EW