Some of the first European securitisations were executed in
Sweden in the early 1990s, and asset backed professionals expected
a healthy stream of business from the region's banks, many of which
were burdened with non-performing property loans. But since 1994
there have been only four international term deals.
In the last 18 months, however, the market has come back to life.
Local arrangers have structured some innovative domestic financings
- and in Sweden at least, the big commercial banks are starting to
SCANDINAVIA'S DEMOGRAPHIC AND economic fundamentals have not
given securitisation an easy ride. The region has some 24 million
people - but split between four states, so that the pools of
classic securitisable assets like mortgages and consumer loans are
The great majority of these assets are controlled by well established banks with easy access to cheap funds, which have yet to feel much pressure to increase returns - or by state owned institutions. The banks also lend liberally to industrial companies on generous terms.
There are institutional obstacles, too - Denmark has a strong domestic mortgage bond market, while Swedish banks can obtain reliable, cost effective refinancing for home loans with uncollateralised domestic bonds.
Nevertheless, the housing sector, both public and private, has produced significant structured financings in Sweden and Finland, and there are signs that the Swedish asset backed market is on the brink of a new expansion.
"In the last few months a lot of the big banks have started saying they are considering securitisation," says Fredrik Månsson, head of structured finance at Öhman, a Swedish investment bank. "Every one of them has begun to ask itself what it could do to increase returns for shareholders. The advent of the euro will step up the pressure, as well as making ratings more important - banks will try to raise long term funds at triple-A levels."
Månsson believes the first securitisations of corporate and consumer loans may emerge from Swedish banks this year, and a mortgage backed deal following soon.
Asset backed issuance from banks will probably develop more slowly in the other Nordic countries, but Richard Hopkin, a director in Deutsche Bank's European securitisation group, says: "Shareholder value is really taking off in Europe now, and sooner or later all the Scandinavian banks will have to think about securitisation."
The first deal from a Finnish bank may not be far off, following the merger between Merita Bank and Sweden's Nordbanken. "Swedish banks are not allowed to own property, apart from their own premises, and Merita has a huge real estate holding which will be wound down over the next few years, probably using securitisation," says Månsson.
Commercial property owners and developers across Scandinavia are showing a lively interest in structured finance. Norway, blessed with ample liquidity and low leverage throughout the economy, has so far resisted the entreaties of asset backed bankers - but Peter Fredell, chairman of Swedish securitisation boutique Fredell & Co, says: "Several Norwegian property companies have circulated proposals to leverage their assets, and I would be surprised if they didn't become deals."
Fredell & Co has a mandate from a listed Danish company which is redeveloping an urban commercial site - likely the first public Danish securitisation apart from bond repackagings. The company plans to raise Skr1.6bn, using a two stage financing technique for property development which Fredell & Co first used in Sweden last year.
To finance construction or refurbishment, the developer sells the building to a special purpose company, which issues a short term certificate secured on the property. When the building is complete, the certificate is refinanced with a longer term rated bond, backed by the lease.
Fredell & Co used the technique in February this year to finance refurbished premises for Stockholm's stock exchange and options market. The Skr320m deal was sold to pension funds and insurance companies at a margin of 40bp over Stibor - banks had offered to lend to the project at 200bp to 250bp over.
"A lot of the big Swedish institutions are selling their offices to get them off balance sheet and raise capital," says Fredell. "SE Banken has sold all its offices, and Telia and Förenings Sparbanken have asked for tenders. This is a big market, and the principal finance teams from London are trying to pick portfolios to securitise."
Öhman claims the prize for launching Sweden's first commercial mortgage backed security. Last year Securum, a state company which was originally set up to clear bad real estate loans originated by Nordbanken, sold a complex of administrative and light industrial buildings to an SPV.
The vehicle sold a Skr440m 15 year domestic bond, backed by the lease on the property. The tenant is Celsius, the defence company which is 50% owned by the Swedish government. The index linked lease is structured to allow Celsius to buy the property, but the company intends instead to keep it off balance sheet, refinancing each securitisation with another one.
"The demand from investors was tremendous - the deal was two or three times oversubscribed," said Månsson at Öhman. "Interest rates are low, so there is a great appetite for creditworthy assets which offer a yield pickup."
Securitising Sweden's residential property debt presents greater challenges. The first transactions backed by mortgages and loans to owners of multifamily apartment blocks - nine deals launched in dollars and kronor by SE Banken between 1990 and 1994 - all used offshore vehicles, because any Swedish registered company which owns property loans is classified as a credit institution, and has to be adequately capitalised.
Fredell & Co also used an offshore vehicle when it advised on the first multi-family loan deal for municipal housing companies. St Erik Securities No 1, sold in dollars and kronor by ABN Amro and ING Barings, parcelled loans for three municipal companies owned by the City of Stockholm.
St Erik and a follow-up deal the next year called St Göran demonstrate - as do SE Banken's bonds - that residential property backed securities work in Sweden.
But Simon Best, a director in ING Barings' securitisation group, says: "Ever since the property crisis, securitisation in Sweden has laboured under an association with financial distress, and the absence of a framework for domestic SPVs is still a psychological barrier."
Controversy over whether the Stockholm municipal deals were cost effective has also contributed to the impression that the Swedish government is opposed to securitisation.
"It is absolutely wrong that the government is not enthusiastic," says Månsson. "They have not produced any legislation to help securitisation yet, but that is partly because they have been fully occupied cleaning up the financial crisis, and partly because deals have been able to go ahead using other jurisdictions."
The Swedish Ministry of Finance has been considering a proposal for a law on securitisation since 1994, and market participants are still confident that it will take shape, but no one is yet putting a date on that.
More fundamentally, many Swedish mortgages are inherently difficult to securitise, because the lenders often allow exemptions from underwriting standards. In a bid to stimulate the market, Öhman has tackled this problem by launching its own centralised lender, Bokredit.
The venture began lending in late 1995 through a collaboration with Posten, the Swedish postal service, which has marketed Nordbanken mortgages for many years. Insurance company Salus Ansvar has also begun to offer Bokredit mortgages, and in the autumn customers will be able to apply for a mortgage via the internet.
"We have an automated underwriting system which ensures that underwriting standards are rigidly followed," explains Månsson, who is Bokredit's managing director.
Mortgages are processed directly into a securitisation portfolio and approved by Moody's and Standard & Poor's via e-mail. Bokredit has securitised every two months since November 1996 through UBS's US commercial paper conduit Mont Blanc - all but Skr300m of the Skr1.5bn loans it has written are now off balance sheet.
"The conduit is an interim solution," says Månsson. "When we have built up higher volumes we will launch term deals in the domestic market, to save on the swap cost."
The same concept of immediately securitisable underwriting loans lies behind Houses in Sweden AB (Hisab), a collaboration between Fredell & Co and state owned mortgage bank SBAB.
Hisab began last year refinancing debt for municipal housing companies which own multi-family apartment buildings. The programme has since added private sector multi-family owners and some commercial real estate - a total of Skr3bn in loans.
Each borrower chooses a portfolio of properties which meets Hisab's collateral criteria. Fredell & Co then takes the proposal to rating agencies for assessment - the pool has to justify a triple-A or double-A rating. Once the provisional rating is obtained, SBAB issues a warehouse loan and becomes the properties' legal owner.
The first securitisation, Hisab 1, has been ready for launch since January and Hisab 2 is already on the blocks. ABN Amro was mandated to lead Hisab 1 in April, but so far investors have not been prepared to buy the Skr1.04bn deal at the required level. "We want a tight price, which means we have to come when the market is favourable," says Peter Fredell. "SBAB is not in any hurry - this kind of lending is their core business."
Finland's multi-family sector has generated two high profile international securitisations. The Housing Fund of Finland parcelled loans to finance social housing developments and acquisitions in the Fennica 1 and 2 deals, launched in 1995 and 1996.
Fennica 3 was due for launch in June, but lead managers ING Barings and Postipankki had to postpone the deal two weeks before launch when the EU imposed a temporary freeze on new approvals of SPVs in Dublin's International Financial Services Centre. The FIM2bn bond should now emerge after the Scandinavian holiday season.
Like Finland, Denmark has one regular issuer - Collateralised Mortgage Obligations Denmark A/S, an SPV set up to repackage Danish mortgage bonds. "The vehicle is owned by a trust, which will consider proposals for deals from anyone," says Christian Hyldahl, head of structured products at Unibank Markets. "The problem is that we are the only bank involved so far - we are hoping other banks will start to structure these deals, to build up the market and improve liquidity."
CMOD has issued seven repackagings, which offer investors a slightly lower coupon than the underlying mortgage bonds, in return for a bond tranched to provide more narrowly defined maturities than the amortising, prepayable collateral.