Is this the time to buy Spanish MBS?
Spain’s securitization market grew by more than 35% last year, driven by demand for more, and more flexible, mortgage credit. Specialist investors are now hoping that issuers can be persuaded to sell first-loss exposure to this risk. This comes, though, as concerns grow about the potential fallout from a seemingly unsustainable house price boom. Louise Bowman reports.
AS NEXT BIG things go, first-loss sales of ABS transactions have been some time coming. Although changes to regulatory and accounting rules in Europe have long been a driver for banks to sell equity exposure, the market has only really picked up steam in the past year. One of the problems is supply – many banks have been far slower to come to the table than the specialist investors now piling into the sector would like (see Funds list to ease first-loss sales, Euromoney May 2006). UK non-conforming, German, Dutch and Portuguese lenders were first off the blocks, and the market’s sights are now firmly on the rest of Europe as a potential source of business.
In securitization terms, continental Europe is dominated by Spain, where issuance of secured bonds has skyrocketed in recent years. It is therefore no surprise that investment banks have wasted little time beating a path to the door of Spain’s RMBS issuers, extolling the virtues of first-loss sales. Spanish banks have traditionally enjoyed a highly favourable 8% risk weighting on first-loss exposure, but the hope is that Basle II and IFRS accounting will offer them incentives to sell.