By Olivia Thetgyi
The retention of securitized products in Europe has skewed issuance patterns. Merrill Lynch researchers estimated that 97.5% of the €600 billion ($835.33 billion) of European structured finance securities issued last year was retained. This year, the vast majority of issuance will also be retained, market commentators have said. With so little new paper actually finding its way into investors' hands, what makes its way into the primary market no longer reflects true demand. "Issuance is a reflection of both access to the [repurchase agreement] facilities themselves and the banks' interpretation of how much liquidity they need," said Gareth Davies, head of European ABS research at JPMorgan. Even then, however, the patterns of issuance are murky.
One such major repo facility was the Special Liquidity Scheme the Bank of England launched on April 21 last year. The scheme, which closed at the end of January, lent out £185 billion pounds ($297.02 billion) in exchange for £287 billion ($460.84 billion) in illiquid securities, most of which are residential mortgage-backed securities or residential mortgage covered bonds. U.K. issuance in the beginning of the year, therefore, should be front-loaded to take advantage of the scheme before it closed, Davies noted. However, U.K. RMBS for 2009 so far actually comes up short at ?9.51 billion ($13.25 billion) at the beginning of the year, compared with ?29.65 billion ($41.3 billion) for the same period last year. Whether that captures the rush in the beginning to take advantage of the SLS is hard to tell, he said.
Another major factor affecting issuance this year is the tightening of criteria for collateral eligible under the European Central Bank's repurchase agreement program. On Feb. 1, the ECB raised the haircut for all asset-backed securities to 12% from a range of 2-12%. In addition, in January the central bank announced that ABS issued on or after March 1, 2009 would have to have a AAA rating at issuance, and that the A rating would have to be retained over the deal's lifetime. "We should see a slight fall in the amount of bonds being presented to the ECB," Davies predicted, as a result. Year-to-date, issuance of ABS is already down from where it was last year for most of the major issuing jurisdictions: Spain's issuance is down to ?3.01 billion ($4.19 billion) from ?6.08 billion ($8.44 billion) over the same period last year, while France and Germany are also lower, albeit to a lesser extent: ?3.80 billion ($5.30 billion) from ?4.2 billion ($5.85 billion) and ?2.98 billion ($4.15 billion) from ?3.89 billion ($5.42 billion).
Commercial mortgage-backed securities are one of the sectors where issuance is up across the board. Some countries that did not see any issuance in 2008 here came to market this year, and others that had little issuance last year did more. Germany has rocketed ahead of last year's figures at ?9.49 billion ($13.21 billion) from a mere ?77.85 million ($108.44 million) last year. In the U.K., CMBS issuance has risen to ?4.29 billion ($5.97 billion) so far this year from ?284.39 million ($396.06 million) the year before. And France has ?559.15 million ($778.86 million) of issuance and Italy has ?663.30 million ($923.86 million); both countries had not seen any issuance in this sector as of this time last year. "We're getting to the point now where if you've securitized everything else, then you can securitize commercial loans," Davies said. He noted that the banks' largest holdings are in RMBS, and surmised that repurchase agreement schemes may be relatively more stringent on CMBS because of the smaller number of underlying assets, unlike the more granular RMBS.