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Syndication: More work for less reward

The recent contraction of liquidity has changed the landscape.

Despite the weakened credit environment brought about in part by the deterioration of the US sub-prime market, primary supply in the European ABS market has continued unabated. However, the sub-prime contagion into other sectors, combined with nervousness brought about by recent LBO headlines, is responsible for a drop in liquidity, and subsequently in demand, for structured product.

Consequently, the process of syndication is changing. "In a seller’s market, it is much easier to build a book," says Chris Pink, head of structured products distribution at Wachovia. "When you have a difficult market, the process becomes more delicate, the burden greater."

Prime European triple-A RMBS are now printing wider by 3 to 5 basis points – which for a five-year average life means borrowing costs have risen by between 5bp to 7bp. Fortunately for them, most large issuers are not big takers of liquidity during the summer months. September will be a different story, however, and this will have significant consequences for both borrowers and investors. In the past few years, the strength of the markets has meant that investment banks have been willing to take on more risk if issuers have demanded it. As liquidity falls, not only will new issues become far less well subscribed than borrowers might have become used to, but the banks might be more wary of buying deals directly before selling on that risk to investors.

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