Asset-backed securities from the Iberian Peninsula have proved popular with European investors. A recent transaction, the first to be backed by auto leases and loans, and to combine a securitisation framework from Portugal and Spain, indicates that the market is still developing.

Asset-backed securities originated out of Spain and Portugal have become increasingly popular with European investors over the past couple of years, as they have sought to add diversity to their portfolios.

Spreads have tightened by around 10bps on triple A-rated Spanish and Portuguese residential mortgage-backed securities (RMBS) over the past two years, as regular issuance and a better flow of information has helped broaden the investor base.

Banks and leasing companies have also done regular auto loan and consumer loan deals. And in Spain, loans to small and medium-sized enterprises (SMEs) have developed as an important asset class.

Around €8bn of these SME deals are expected to be sold in the last four months of 2004.

In Spain, the commercial banks and savings institutions do a mixture of securitisations, covered bonds (cedulas) and hybrid, structured cedulas that are pooled together and sold via a securitisation vehicle.

Preference for cedulas

The biggest Spanish banks are among the strongest and best capitalised in Europe, and are content to sell cedulas, where the mortgage cover pool remains on balance sheet. And with spreads at only 9bps or 10bps for floating 10-year offerings, cedulas still offer better pricing than RMBS, though RMBS spreads have tightened steadily over the past 18 months to around 16bps, depending on the tenor.

“We have looked at both possibilities, and will consider issuing RMBS in the future, but cedulas hipotecarias are cheaper than RMBS,” says Rafael Garcés, head of funding and securitisation at Caja Madrid. “Though we do not obtain capital relief if we issue cedulas, we are well capitalised, so at this stage we prefer to continue to issue cedulas hipotecarias.”

Caja Madrid is rated double A, and has 2000 branches across Spain, with a concentration in the Madrid area. It has been a big beneficiary of the very strong growth in mortgage lending in Spain in recent years.

Caja Madrid is also a leading player in lending to SMEs, and has securitised these loans via the Fondo de Titulización-Pequeńas y Medianas Empresas (FTPYME) offerings. In these deals, the government guarantees one tranche, which is structured to double A before adding the guarantee and becoming Triple A, while the remaining tranches are unguaranteed.

This year, the government has allotted a total of e1.8bn in guarantees, and with 11 deals in the pipeline, the guaranteed portion will total around 20%. Last December, Caja Madrid made a e500m FTPYME offering, in a deal co-led by Caja Madrid and Lehman Brothers. This year, it will join other institutions in a multi-seller deal.

Clubbing together

Multi-seller transactions are quite common in the Spanish market, with groups of institutions clubbing together to get access to the capital markets, either via structured cedulas hipotecarias, RMBS or FTPYME offerings.

“RMBS deals are more often single seller transactions, but small Spanish financial institutions without access to the capital markets group together on structured cedulas, and get a trustee to issue the covered bonds,” explains Juan García, analyst at Fitch Ratings in London.

“RMBS is the leading asset class in Spain, followed by structured cedulas, and then FTPYME, and there are also a few auto loan or trade receivables deals.”

“The rating of a covered bond can only be two notches higher than the senior unsecured rating of the originator,” adds Arturo Miranda, vice president in the securitisation group at JPMorgan in London.

“Highly rated Spanish institutions can easily issue double A or triple A covered bonds, but smaller institutions do not have a high enough standalone rating, so they repackage cedulas into a securitisation vehicle, provide additional enhancement in order to achieve a triple A rating and together do large, liquid covered bond offerings.”

Varied aims

“Different institutions may have different goals in tapping the same market,” says Juan Pablo Coma, director in the structured finance department at SG Corporate & Investment Banking (SG CIB) in Madrid.

“Smaller institutions tapping the RMBS market are typically looking for capital relief, and usually sell the bonds to raise funding. Large institutions might also place the bonds to achieve capital relief, or alternatively keep them on balance sheet and use them for liquidity purposes at the European Central Bank,” he says.

“The biggest and best capitalised Spanish institutions could do either RMBS or covered bonds, but cedulas are the cheapest funding source. For equivalent tenors, there could be a gap of 7bps to 8bps in terms of funding costs between RMBS and cedulas.”

Typically, around 20% of any offering might be sold domestically, with the other 80% placed across Europe, though the interest from Spanish institutions is on the increase, and may be trending upwards to around one-third.

The guaranteed tranches are viewed as sovereign paper, carry a zero risk weighting and may be priced at only a few basis points over Euribor. The structured triple A tranches were typically sold at around 25bps early last year, but during 2004 have tightened to below 20bps.

Mid-way point

“The SME sector offers diversification away from RMBS, and is a mid-way point between the consumer and corporate sectors; previous deals have been performing quite well, so there should be a lot of interest in the upcoming deals,” says Sriram Soundararajan, structured finance analyst at Lehman Brothers in London. Thus, in spite of the large amount of FTPYME paper in the pipeline for the final quarter, he expects a positive reception.

Meanwhile, RMBS investors are also looking for diversification around Europe, to balance their vast holdings of UK or Dutch RMBS, and Spanish issuers have benefited here too.

“The UK sets the benchmark for the rest of Europe, and we have seen master trust issues denominated in euros being priced as tight as 15bps,” says Mr Miranda. “The tightest Spanish RMBS we have seen at 16bps, and there is usually a 1bp or 2bps premium.

“That differential has become smaller in recent years, as availability of information has improved and supply has increased, allowing more European investors to get to know the Spanish market,” he says.

In April, there was a €472m  RMBS offering from Valencia Hipotecario, led by JPMorgan, with the triple A tranche yielding Euribor plus 18.5bps.

And in May, Bancaja did a €690m mixed residential and small commercial property offering under the name MBS Bancaja 1. This was led by JPMorgan and SG CIB, and the triple A tranche was priced at 17bps, while the triple B tranche yielded 84bps.

Portuguese scene

Portuguese RMBS have also been a favoured asset class with European asset-backed securities (ABS) investors over the past two years, and were one of the asset classes which benefited most in 2003 from a wave of demand from investors looking for diversification. Last November, Caixa Geral de Depósitos did its first ever RMBS offering, the Nostrum Mortgages deal.

This met with very strong investor demand, with the mortgage portfolio being viewed as of exceptionally high quality, with low loan to value ratios and a long seasoning period on the loans. The triple A bonds were priced at a 21bps spread.

Also late last year, there was the Lusitano deal from Banco Espirito Santo, and the Magellan Mortgages transaction from Banco Comercial Portugues.

“In Portugal, the large banks such as Banco Espirito Santo have become repeat issuers in the RMBS market, and are well accepted names among European RMBS investors,” says Mr Coma. “There have also been consumer loan offerings in Portugal, and new asset classes such as SME loans are being considered.

At time of going to press, Banco Espirito Santo was working on another RMBS offering, but there is something of a wait-and-see attitude among issuers at present, since the Portuguese government is working on a law allowing covered bonds backed by mortgages.

“All the large Portuguese issuers of RMBS are studying the upcoming legislation on covered bonds, and are looking at what may be the most cost-effective way of raising funding, and also at its cost efficiency in terms of capital ratios,” says Pedro Benites, managing director in structured finance at Banco Finantia in Lisbon. “The new legislation has been circulated among the financial community, and we expect that it will be finalised soon.”

Auto-backing

Consumer loans and auto-backed paper have also been done out of Portugal, including the e136m BMORE Finance auto deal led by Deutsche Bank in April, for Banco Mais, and the €214m LTR Finance Number 5 offering in July for Banco Finantia.

“LTR Finance 5 was the first transaction backed by auto leases and loans to combine a securitisation framework from Portugal and Spain,” says Mr Benites. “The triple A tranche priced at 20bps, and it was well received by European ABS investors looking for diversification.” The leases and loans were originated by companies in the Banco Finantia group, and the offering was lead-managed by Banco Finantia and HSBC.

Overall demand for ABS remains very strong within Europe during 2004, and this wave of liquidity has led to a one-way movement on pricing over the past 18 months, with steady tightening. The signs are that offerings from Spain and Portugal will continue to be well received by European investors over the next 12 months.

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