Europe’s securitization sector must move beyond comparisons to the market heyday when focusing on its nascent recovery, panelists said Tuesday at a packed morning session at the Global ABS conference in Brussels.
The market peak of 2006 and 2007 had been “unsustainable”, according to Ganesh Rajendra, managing director of asset-backed securities research at the Royal Bank of Scotland, who said gauging the current pickup in activity against the market boom of 2006-07 is unhelpful.
“We’ve gone past that—you could argue that the ’06-’07 model is broken,” he said during the session called “Assessing The Relative Value of Securitization In Today’s Funding & Investment Environment.” “If recovery is measured by ’06 and ’07, that’s the wrong way to measure it.”
With potential placed issuance volumes reaching about €150 billion ($216.4 billion) in Europe, this equates to roughly 25% of the 2006-07 peak, according to Robert Plehn, managing director and head of securitization at Lloyds Banking Group. “If we assume that the leverage buyers aren’t coming back, that’s almost reaching an equilibrium,” Plehn said. Rajendra added, “Compared to ’06 and ’07, if you take the leverage side out of the market, the market has almost fully recovered.”
The reality of Europe’s ABS sector is a now smaller market, added Will Howard Davies, head of ABS at PIMCO. “Ganesh hit the nail on the head. The market is in a midlife crisis, but still trying to go to Ibiza for the weekend,” Davies quipped.
Delegates heard that volumes year-to-date of placed issuance is up 35% year-on-year, though European securitization remains focused on the most defensive, safe assets of prime, residential mortgage and auto ABS, according to Rajendra. He noted the combined volume makes up around 85% of issuance compared to 45% in 2007.
But a strong positive is a greater number of U.S. and Asian investors looking to invest in European ABS. Plehn said many smaller U.S. investors who don’t have European offices but still have the analytical prowess to scrutinize deals will be vital in broadening the sector beyond the vanilla assets of U.K. and Dutch RMBS and German auto ABS.
A U.K. bank syndicate head speaking to TS on the sidelines agreed, “Keeping those investors involved while there’s less U.S. issuance, and U.S. spreads are tight is extremely important.”
Still, a major concern for European structured finance is the amount of deals still being retained as collateral with the European Central Bank program. “This year there has been €300 billion ($432.9 billion) of retained securitization—that’s enormous,” Rajendra said. “Effectively it’s the use, or misuse, of securitization technology to create a liquidity drip-feed for a still-ailing banking sector.”