The quest for securitization

It all started off cordially enough. In May Deutsche Bank kickstarted the market for German mortgage-backed securities, with a Dm1.4 billion ($800 million) securitization of residential mortgages originated by its commercial banking division. Then, in late July, Deutsche Bank returned to the market with what it claimed was the first ever securitization of German corporate loans. But was it?

Although Deutsche Bank was widely reported as having issued the first German collateralized loan obligation (CLO), Dresdner Bank has cried foul.

In April, Dresdner Bank securitized Dm2 billion of its corporate loans through an asset-backed commercial paper and Euro-MTN conduit, Silver Tower, a fact rather lost in the blaze of publicity surrounding Deutsche Bank's term securitization.

Deutsche Bank won't be complaining. But even though Dresdner Bank is well known for not liking the limelight, it is unlikely to be amused. A CLO issued through the commercial paper markets is never going to attract the same attention as a CLO placed with bond investors in the public markets, but that won't stop Dresdner Bank feeling a little hard done by.

The contrast between publicity conscious Deutsche Bank and Dresdner Bank's more retiring figure is a diverting, but minor footnote to what is set to be a scintillating opening chapter to the story of bank securitization in Germany.

It is expected that the pages will virtually write themselves, given that Germany has one of Europe's largest potential markets for bank securitization, but has had to wait a long time for the necessary regulatory framework.

In fact, a small number of bank securitizations have been done in the past. Rheinische Hypothekenbank, the specialized mortgage bank belonging to Commerzbank, securitized some its residential and commercial mortgage loans in 1995, and Citibank securitized consumer receivables of its retail banking subsidiary. These deals went ahead on the basis that a lack of regulatory approval is different from outright proscription. But authorization was needed from the banking supervisor, BAKred, if the market was not to be still-born.

The legal go-ahead from BAKred was finally given in May 1997, and there is now a lot of catching up to do. Germany's share of European mortgage-backed and asset-backed issuance last year was a mere 0.1%. What activity there was came from car loan-backed transactions. In comparison, bank securitizations gave the Netherlands a 16.6% share of European mortgaged-backed and asset-backed new issuance last year. Given the much larger size of the German economy, it is clear that if the market for asset-backed securities developed to the point it has in the Netherlands, the volume of deals from German issuers could be very large indeed.

Twelve-month hiatus

Very few German banks will admit to working on securitization programmes, but there is a clear groundswell of preparatory activity. "At the beginning of the year I was estimating that around Dm10 billion worth of deals would be completed in 1998," says a securitization head who prefers not to be identified. "I now think volumes will be far in excess of Dm20 billion."

Future securitizations are likely to include a broad range of assets, from further residential mortgage-backed deals, to housing loan and commercial real-estate-backed securities to more CLO transactions and securitizations of consumer loans.

How many deals will reach fruition in 1998 is difficult to estimate, since the lead times for asset-backed transactions are notoriously long. Last year, for example, several German banks drew back from securitizations because of difficulties in developing the right systems. That was one reason for the 12-month hiatus between legal authorization and the first asset-backed transaction. In addition, Deutsche Bank was initially expected to come to the market towards the end of last year. The defection of part of its securitization team to WestLB set plans back considerably.

The success of its mortgage-backed deal must therefore have been particularly sweet for Deutsche Bank. Housing Assets Underlying Securities (Haus) 1998-1 was not only a German landmark, it was a milestone for European securitization markets as a whole. As the first continental European mortgage-backed offering to include an unrated tranche, and also the first to include interest-only tranches, Haus 1998-1 set the European investor base for asset-backed product a new test, one it passed with flying colours.

The offering was registered under 144A, but the placement of the higher-risk tranches was not dominated by the US market as might have been expected.