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Traditional mortgage backed deals and more innovative transactions from the likes of Canary Wharf have put sterling's structured finance market on the map. UK banks and corporates have endorsed the flexible and innovative funding options that securitisation offers - and most have chosen to bring their deals in the local currency. But as supply in the asset backed market looks set to break new records, some concerns have been noted

Until recently, for international houses to even think of competing with UK banks in the long dated sterling market was simply not cricket. But the rules are changing, and non-UK banks these days are showing little respect for conventional roles in this strategically important market. The picture may dismay traditionalists, but even the UK's strongest batters seem unable to prevent international houses - with their beefed-up sterling teams - from picking up business

The UK's leveraged loans market has seen rapid growth over the last five years. Banks can now underwrite over £1bn of debt for a single deal. Lending banks have avoided the trouble afflicting equity and bond markets, and are looking forward to a continuing supply of deals. But the market has been driven by LBO activity, supported by the aggressive private equity sector, where losses are now being reported

The sterling market is under threat from the euro market, which has gained the confidence of international vanilla borrowers and even threatens to compete at the long end of the maturity curve once it gains liquidity. But a more immediate challenge to sterling is posed by its domestic investors, whose insistence on restrictive covenants is turning away potential borrowers

When Glas Cymru approached the sterling market to raise finance for its Welsh Water acquisition, it became clear that its innovative deal could offer rare security to water sector investors more accustomed to shouldering event risk. For the 90 or more institutions that took part, it was an irresistible opportunity, despite the complex 12 tranche structure. With £1.9bn raised, Glas Cymru's work is done for now, but observers are already asking themselves: will the structure catch on to transform the sector?

As those who recall activities of the heroic "architects of value" from Bankers Trust will testify, from a European perspective the UK was where it all began. As recently as 1997, UK borrowers still accounted for 40% of the high yield market in European currencies. By the middle of 2001, their share had been whittled down to 23%.

Despite a pro-euro Labour government returning to power in early June, the outlook for sterling has rarely been brighter. 2001 has seen the total volume of outstanding sterling denominated non-gilt bonds outstrip the government market - an incredible advance within a relatively short space of time for a market that, according to most investors not so long ago, would become more or less sidelined by the new euro market

"What we are hearing from institutions in the UK is that they are increasingly looking for liquidity," says Bob Curry, director, global debt at Dresdner Kleinwort Wasserstein in London. "Issuers looking to raise, say, £100m might well be penalised in terms of pricing unless it is a tap issue or an investor driven private placement. Investors generally see £200m as the minimum size for liquid issues these days, and issue sizes of £300m or £350m are now being achieved by a range of companies rather than just household names, which is great as far as the sterling market is concerned."

Aside from the expansion in issuance of fixed rate corporate paper this year, an important segment of the sterling sector which is also growing rapidly is the market for retail price inflation (RPI) and limited price inflation (LPI) linked bonds, although the market remains small relative to the index linked government bond sector. "As there is still no more than about £4bn or £5bn of index linked corporate bonds outstanding this means that pension funds are still allocating most of their funds on the index linked side to gilts, whereas on the fixed rate side they have a much larger allocation of corporate bonds," explains Paul Stanworth, an institutional investor strategist at the Royal Bank of Scoland. "People have been surprised by how much demand there has been for index linked corporate debt but against the background of FRS17 is it not difficult to see why demand has been so strong."

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Canadian Export Development Corp., a government-owned agency with more than CAD20 billion (USD12.8 billion) in assets, plans to sell reverse dual currency structured notes for the first time as a way to capitalize on the broadening market in Japan for structured products. The agency plans to sell the products to raise capital, according to Chad Buffel, portfolio manager in Ottawa.

Swiss alternative investment consultant Noble Investments is considering opening offices in Asia to exploit the relatively untapped alternative investment markets in that region. The consultant and alternative investment structurer liases with fund managers and investors to offer bespoke products, such as guaranteed products, which are often structured using over-the-counter derivatives, according to Patrick Aregger, partner in Zurich. The timing will depend on the growth of the alternative investment arena. Mauro Gerli, partner in Zurich, said, "If a pension fund calls tomorrow we will start tomorrow." Aregger added, "we will grab opportunities." Both declined to put a timeframe to the plans.