The asset backed securities market now covers a broad array of instrument-types, bond market sectors and underlying collateral pools, including credit cards, auto loans, mortgages, leases, trade receivables, bank loans and more exotic assets and future flows. Bonds securitized on such collateral are now issued in most domestic and international bond markets, in the US, Europe and Asia. And alongside the bond markets, there is now a huge market in asset backed commercial paper, worth $500 billion in the US alone. A handful of firms are active participants across these markets and sectors, including Salomon Smith Barney, Morgan Stanley, Lehman, Chase, Deutsche and Merrill, alongside this year’s winner CSFB, which has had a particularly successful 12 months putting it high in the league tables.
“One of the aspects which distinguishes us is that, with large presences in all these capital markets, it is a matter almost of indifference to us as to where we execute deals for clients. We’re not going to push Euromarket deals simply because that’s where we are,” says Joseph Donovan co-head of asset finance, Americas, at CSFB. He mentions as an example of this approach the global mortgage bond programme CSFB arranged for St George Bank. Australian banks have been growing assets very rapidly over the last two years as low interest rates and a booming domestic economy have fuelled a huge growth in mortgage borrowing. Australians are taking retail deposits out of banks and investing in the securities markets. The result is a big funding gap. “St George felt it needed to expand beyond the domestic investor base and felt it had to access the off-shore market with a mortgage programme,” recalls Donovan. “It had executed European deals but now wanted the widest possible distribution.
We structured a global mortgage programme that is SEC registered and also allows access to the Euromarkets, enabling the bank to generate price tension between investor bases: the holy grail for ABS issuers.” It wasn’t easy. “Getting an Australian mortgage programme SEC registered was no small task,” says Scott Ulm, head of structuring, Europe at CSFb, “but it really worked in creating competition between investors.”
CSFB sees asset backed securities as part of a customer service. It is less inclined than some other investment banks to use its own balance sheet to accumulate collateral and then sell on securitized bonds as a principal.
While it does a reasonably large flow of deals for its parent bank, securitizing the loan book and other credit exposures through bonds and short-term paper conduits, this is for pure balance sheet management rather than arbitrage. The group focuses on devising deals and structures with broad applications for clients, rather than chasing exclusively large trophy transactions such as whole company securitizations. The firm has done such blockbuster deals in the past, including as part of the financing for building the Stade de France in Paris, but suggests that they are not common enough to build an entire business around. Donovan says: “As much as we love the high margin pieces of business, you have to execute large amounts of flow business in all markets. Investors won’t be there unless you have regular product for them.”
Extending issuer’s investor bases is a key aim. The financing arms of the leading American car companies are big clients. “We recently developed a bullet maturity structure for GMAC to sell securitized auto loans,” says Donovan. “That was a new development for US issuers which have amortizing pre-payable collateral. Creating a bullet maturity profile was driven by these clients’ need to access different markets. We did a similar deal for Ford this spring.”
In future CSFB expects that the growth of credit markets in Europe will provide a stimulus to ABS issuance, as credit investors struggle to build the analytical infrastructure to cope with following a range of industries. Ulm contends: “The essence of securitization is that it allows an investor to buy a product that he’s not an expert in.
The unique advantage of the asset backed market is that it provides an economy of analytics. If you need individual analysts covering telcos, manufacturers and so on …that’s a lot of analysts.” He argues that European investors which can understand the structure risk of mortgage-backed bonds should more easily be able to understand the portfolio dynamics of bonds securitized on credit portfolios.
