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Skip Navigation LinksHome :: Back Issues :: Securitization: any flavour but vanilla

September 2000

Securitization: any flavour but vanilla


The European securitization market used to be characterized by small, esoteric deals rather than the large standardized issues dominant in the US. Things are changing, but not towards the US model. Strategic securitizations to finance M&A, synthetic structures and deals to cover non-performing loans are fuelling investment banks’ enthusiasm for the market. Michael Peterson reports




Take a look at the volume of asset-backed bonds issued recently and you could be forgiven for dismissing securitization as the runt of the international capital markets litter. According to Capital Data, some $27 billion-worth of European asset-backed bonds were issued in the First half of 2000, roughly a quarter of the volume of European corporate bonds issued in the same period. And unlike corporate bond issuance, asset-backed volumes have not grown since last year.
       

But in securitization, volume Figures can be deceptive. Look instead at the frantic efforts of investment banks to build up a securitization capability and it is clear that something dramatic is happening in the world of asset-backed bonds.
The biggest move came in May, when Credit Suisse First Boston poached a highly regarded team of 15 bankers from BNP Paribas. The previous month Merrill Lynch had recruited seven securitization specialists from Deutsche Bank. Schroder Salomon Smith Barney, DLJ and ABN Amro are among the many Firms that are quietly staffing up.
Ready for take-off
These investment banks are convinced that securitization is reaching the point of take-off outside the US. Pressure on banks' funding costs and returns on equity are spurring ever more Financial institutions to use the tools of securitization to manage their balance sheets better. New laws are easing the use of securitization in countries as far apart as Italy, Japan and Chile.
In Europe, the previous sporadic use of securitization - to Finance pub acquisitions, Film rights or other unusual cashflows, for example - is giving way to something a little more predictable. "Up to 12 months ago the European securitization market was esoteric," says Maarten Stegwee, head of European securitization at Credit Suisse First Boston, and leader of the group that recently Fled from BNP Paribas. "Deals came to the market occasionally and they tended to be small in size. Now securitization is happening in more countries. There are more repeat issuers and the commodity side of the business is growing."
The deal Flow may be picking up, but the pattern of securitization in Europe is still quite unlike that on the other side of the Atlantic. In the US, standardized deals backed by residential mortgages, auto loans and credit cards predominate.
In Europe the breakdown by assets is quite different and the structures used are much more varied. According to Merrill Lynch strategist Alex Batchvarov, residential mortgages account for around 42% of asset-backed securities in Europe. But the other two big European categories make up only a tiny proportion of issuance in the US. In Europe commercial mortgages back 18% of all issuance and collateralized loan obligations account for nearly a quarter of the volume.
The simple difference between the two markets is that Europe has a collection of still quite different legal systems, whereas the US is much more homogeneous. As a result, the hardest part of the job of a securitization banker in Europe is thinking up structures to suit each jurisdiction.
"In the US the top 15 issuers account for something like 90% of the volume," says Stegwee. "That means the business is primarily driven by distribution. Here we don't have the same volume of repeat issuers such as credit card companies. The European market is still more about structuring and corporate Finance."
And few people believe the European market is going to turn into a mirror image of the US market any time soon. "The European securitization market will remain different from the US market," says Scott Ulm, head of structuring at Credit Suisse First Boston in London. "It will be driven by different factors. In some ways the US market is becoming more like Europe, rather than the other way round. For example, we are beginning to see more securitization for strategic reasons in the US just as we do in Europe."
M&A-driven
This use of securitization to Finance acquisitions is what everyone in the market is getting most excited about. Only a handful of these deals have been completed, but every investment bank sees corporate Finance as the big deal-spinner of the future. "For the First time securitization has become a real competitor to funding an acquisition through a bank deal or even an IPO," says Paul Salama-Caro of Citibank/Schroder Salomon Smith Barney's securitization group.
Most of the acquisition-related deals completed so far have been done in the UK. In deals dubbed operating company or whole company securitizations, all or most of a company's income is used as collateral to fund its buy-out. The technique has been used to buy UK pubs since the mid-1990s.
It is a practice that is starting to spread to continental Europe and beyond. Nomura's e400 million securitization of wine stocks for champagne producer Marne et Champagne in January is perhaps the best known example. A number of other transactions, notably one from Telecom Italia, are reported to be in the pipeline.
Such deals are a long way from the traditional US template of issuing standardized deals in high volumes. "Deals such as operating company securitizations are feeding off the growth of M&A in Europe," says Salama-Caro. "These are deals designed to solve problems so you have to approach each deal individually."
Stegwee at CSFB sees telecom companies as increasingly important users of the securitization market. "Telecoms companies are trending towards single-A ratings," he says. "Their cost of funding is increasing all the time. But they have high-quality cashflows from telephone bills which they can securitize."
The other industry most frequently mentioned in connection with corporate-Finance securitization is utilities, where low share prices and high-quality cashflows suggest a trend towards greater leverage. But ships, shopping malls and airports are also promising candidates for whole company securitization.
"If there's a predictable, securable cash Flow, it can be securitized," says Bob Liao a vice president of the Citibank/Schroder Salomon Smith Barney's securitization team. And then, there is the banking sector. The other type of M&A-driven securitization that has been in vogue in the past year is very different from these whole-company securitizations. Italian banks have embraced securitization with increasing enthusiasm in the past couple of years as a method of ridding their balance sheet of bad loans. Non-performing loan securitization does nothing to help a bank raise funding at an attractive cost, since by definition the assets involved don't yield strong cash Flows. But it does allow an institution to draw a line under its bad-loan problems and put a value - ratified by the rating agencies and the market - on the amount of money it expects to recover from its bad debts. This has helped to make banks more attractive merger partners as the consolidation of Italy's banking industry gathers pace.
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Dear Sirs, In view of what seems to be happening internationally with banks at the moment, I was wondering if you could advise me. If one of my cheques is returned marked ‘insufficient funds,’ how do I know whether that refers to you or to me?

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