The SPV market has rocketed in the past five years and now has a 14% share of the MTN private-placement market. Investors are feeling more comfortable than ever with the product and many top banks are stepping up their focus on the sector. Issuance in the financial repackaged market was just over $1.6 billion in the first half of 1995, which made up 4% of the private-placement market. The total debt raised through SPVs in the first half of 2001 was almost $20 billion. Investors realize that SPVs offer more flexibility than traditional MTNs. According to Alex Haidas, global credit derivatives at Deutsche Bank, they have three main advantages for the investor. He says: "They offer the credit risk that the investor asks for; they offer a tailored, structured solution with an enhanced yield; and they can be issued in any jurisdiction that the investor chooses." But banks have had to work hard to raise awareness of the product in the investor community and allay unfounded suspicions about the credit-worthiness of the product. Goldman Sachs has leapt from seventh place in terms of number of trades executed off SPV programmes in 2000 to second position in the first half of 2001. Patrick Street, at the bank's financial repackaged group, says: "There was a learning curve. The market had to educate investors as to the simplicity of the product and the additional investment opportunities that as a result can be offered in a standard note format." And Stephanie Sfakianos, Euro-MTN and CP marketing at Deutsche Bank, explains the product: "The word repackaged says it all really - you are taking a product that doesn't meet your investor's criteria, and repackaging it into a saleable form that is precisely what the investor wants." Over 40% of SPV issuance in the first half of 2001 was in yen and Japanese investors have played an instrumental role in driving the financial repackaged market forward. Dealers agree that much of the yen issuance is due to the stripping of convertible bonds. JPMorgan hired Desiree Fixler for its financial repackaged desk three weeks ago as part of its increased focus on the market. Fixler says: "There is almost no corporate bond issuance in Japan as most new issues are in the convertible bond market. A significant portion of the repackaged yen issuance, accordingly, is the stripped-convertible bond business." Investors with currency and structure restrictions have driven the market in the past, and the market has grown alongside the credit derivatives market. The race is now on as SPVs become an important business and banks are rushing to integrate their financial repackaged groups with other fixed income products. Deutsche Bank is leading the way and has done so for several years, although CSFB, Goldman Sachs, JPMorgan and Merrill Lynch are serious market contenders. But Deutsche Bank can by no means feel complacent. Haidas, at Deutsche Bank, says: "Our competition understands the business plan, but never really treated it as a proper business. Goldman Sachs has been catching up a lot this year. When Deutsche Bank started out five years ago JPMorgan was a big player in the market." JPMorgan is also making a bid for pole position in the market. It is concentrating its efforts on building up its financial repackaged group. Fixler, at JPMorgan, says: "As one of the strategic businesses at JPMorgan, we are focusing on this product with a view to establishing more flexible programmes and improved repackaging capabilities." And the bank expects the financial repackaged desk to work in tandem with the MTN trading desk. Fixler says: "MTN trading desks and repackaging desks have traditionally been separate businesses. We hope to take a holistic approach to bridge that gap and provide optimal issuer and investor services." And Street, at Goldman Sachs, is confident that Goldman Sachs is also well placed in the market. He says: "Our volumes continue to grow at a significant pace - we have already surpassed last year's totals both in terms of volume and number of transactions. SPVs are core to our credit derivatives business. They enable a much wider investor base to access and benefit from relative value opportunities available in the credit markets." So with banks turning their attention to this sector, volumes in the SPV market can only grow. Haidas, at Deutsche Bank, says: "For the future we expect continued growth. In the past growth has been exponential, but this will now level off. We will gain more investor acceptance though." And Sfakianos, also at Deutsche Bank, corroborates this view. She says: "Acceptance of SPVs will increase in the Euro-MTN market if experience in the US ABCP market is anything to go by. The comfort factor that investors will have with SPV trades in the longer maturities could also grow exponentially." This could mean that investors are more attracted to the structured product tailored to their needs, rather than buy a traditional issuer's paper and meet the issuer's levels. But Haidas, at Deutsche Bank, doesn't believe that SPVs will reduce issuance from other MTN issuers. He says: "It is creating more demand for secondary paper and more liquidity in the market. There is a little bit of cannibalization between SPV issues and MTNs, but both markets are growing at a healthy pace."
August 10, 2001
