“In a perverse way, it would be good for the [asset backed] market to have some kind of credit event because deals are currently pricing on top of each other. No-one is taking account of structure. We should hope for some kind of limited credit event that will sharpen up our analysis again.” These strong remarks from Mike Nawas, global head of asset-backed securitisation (ABS) at ABN Amro, sum up the state of the securitisation market.
The market is enjoying a bull run with spreads tightening to the point where those for structures could even move inside the spreads of bonds for equivalent corporates.
But, as with every peaking market, there are critical questions: will growing demand from investors allow the market to continue upwards or will it come crashing down to earth exposing poor structures, lax disclosure and wildly optimistic pricing?
At the industry’s annual pow wow, the Global Asset Securitisation conference, in an, at times, rainy Barcelona in June, both views were in evidence.
Andrew Burgess, head of ABS at Gulf International Bank, says: “Sometimes we have been introduced to a complex deal and we have asked for more information. The reply comes back that the information could be provided but that the deal is closing and is four times oversubscribed anyway. Last year we were asking for information in a standardised format but, because of the state of the market, the industry is moving further away from that.”
Vernon Wright, CFO at MBNA Corp, thinks that the biggest risk to the industry is poorly structured transactions. “It’s critical to know who the issuer is, who the trustee is, how the deal is set up, who is the servicer and will they be around in three years’ time,” he says.
There are also worries about fraud. “The big issue we see is a potential fraud that could wipe out portfolios and affect spreads across the market,” says Greg Medcraft, global head of securitisation at Société Générale.
It’s all rather gloomy stuff for a market that is booming. But then boom talk makes for a rather dull affair. On a more positive note, Kurt Sampson, managing director of Standard & Poor’s, does not see a crash as inevitable. “Demand is growing and there is an appetite among investors for paper across the credit spectrum.” He points to the recent decision by French money market funds to increase their securitisation allocation from 15% to 25% of portfolios, and to legal reforms in Germany, as well as the True Sale Initiative that may open up potentially the biggest securitisation market in Europe. These are signs, thinks Mr Sampson, that Europe’s securitisation market has further to grow.
Brian Caplen
