Securitization markets in Europe

This page updated regularly deals with securitization developments in Europe. If you know of any links or developments and would like to share the same, please do write to me.

Market developments in First half of 2003

Securitisation markets continue to grow in almost all countries in Europe. While traditional stronghold countries have seen further growth in volumes, the interesting fact is that it has begun generating interest in new countries within Europe.

Asset classes in Europe are as diverse as Europe itself. From death bonds (securitisation of funeral fees by Dignity, a UK-based funeral operator) to securitisation of inventories, Europe has tried more asset classes than any other region in the World. Europe can easily be said to be the securitisation laboratory of the World.

In the first half of 2003, total issuance added up to Euro 14.9 billion, up from Euro 12.9 billion the same period last year. Italy has emerged as the lead player this half, taking more than a majority of the total.

The graphic below shows contributions of different European countries in first half 2003 volumes (Source: Standard and Poor's special report dated 23 July 2003):

Market developments in year 2001- 2

There has been impressive growth in securitization issuance from Europe in 2001 and 2002. The growth data are captured in our news reports from time to time.

A recent Standard and Poor's research notes several developments in the European market:

• New jurisdictions have entered the arena with the U.K., France, and Germany having been joined by Italy, Spain, The Netherlands, Portugal, Ireland, and others in embracing securitization.
• A market once dominated by residential mortgages and consumer assets has expanded to incorporate government assets, nonperforming loans, whole-business assets, commercial real estate, and CDOs of every color.
• The market has witnessed increasing acceptability of the lower rated classes. In 1995, only two classes, representing 5.26% of all classes issued, were rated 'BBB' or below (see table 2). In 2001, this had increased to 148 (27.56%).
• Investor-base has expanded.
• Secondary market activity has also grown.

In terms of asset classes, in 2001, for the first time, the issuance of CDOs outpaced RMBS. Europe has been traditionally an RMBS-dominated market.

For more recent market information, please check this link leading to European Securitisation Forum

The graphic below shows European securitisation by asset classes:

The position for the year 2001 is as follows:

The following graphic shows European securitisation issuance upto the third quarter of 2001:

The figure below gives the securitization volume in various countries in Europe in 2000. As can be noticed, UK retained its place as teh largest contributor to volumes, but Italy made rapid strides and overtook UK.

An interesting feature of the European market in operating business or whole business securitization - see for more on our page here. There were 15 whole business securitizations in Europe in 1999 which went up to 30 in 2000. A number of these transactions were pioneered by Guy Hands of Nomura Securities - see our story in our newsletter for May 2001.

United States as the birthplace of securitisation? - Any European may proudly claim that securitisation originated not in the United States but in Denmark - a mortgage credit system has existed in Denmark for over 20 years now. There is also pfandbrief market in Germany which is a secondary mortgage market, but the Danish mortgage trading system is very close to the US concept of pass throughs.

Although a form of securitization has been in existence in the German and Danish mortgage markets for a long time, securitization in the modern sense onlv emerged in Europe in the mid- 1980s with the issuance of the first LT. K. mortgage-backed securities.

The one-time snail's pace of the market in Europe is now evolving into a viable and rapidly-advancing sector. The number and value of European issues in the ABS market will likely jump in 1999, as a result of recent favorable regulatory changes, and particularly the introduction of the Euro.

According to estimates by Moody's Investors Services, annual issuance of European MBS/ABS was less than $10 billion until 1996, when it jumped to $30 billion, then further increased to $45.4 billion in 1997. Volume for 1998, however, was about the same as 1997, at $46.6 billion, as the flight to quality towards the end of 1998 to a dramatic widening in ABS spreads and reduced issuance to a trickle.

The total outstanding volume of European MBSs/ABSs has been estimated to be about $130 billion, of which perhaps half is MBSs.

In Europe, the previous action in the ABS market had centered mainly on residential mortgages and, to a lesser extent, on the credit card-backed issues that are popular in international ABS circles. Also, it should be noted that in Europe, unlike in the United States, all deals use an ABS-structure, making no distinction between mortgage-backed and asset-backed securities.

For MBSs, the United Kingdom has been the major source of collateral; in fact, until the past year or two, three countries (the United Kingdom, France and Spain) provided the collateral for almost all MBS issues. However, in a sign of the gradual progress of securitization, in 1998 seven other countries were also represented in MBS deals (although the United Kingdom, France and Spain still accounted for two-thirds of the collateral). A notable entry into the MBS market was Germany, the largest mortgage market on the continent in terms of amount of loans outstanding, where three large deals were issued in 1998.

The most significant regulatory change that Europe has seen occurred in May 1998 when German banks were given authorization to securitize their own loans. Regulations have also been improving in France and as a result, a surge in asset-class activity may make a large impact on the already changing ABS volume in Europe.

See the individual country profiles for more on regulatory changes, market conditions, etc.

With Europe representing the largest international market opportunity for increased securitization deals, bankers predict that activity in the region figures to expand--in value and scope--over the next five years. The financial community is extremely optimistic about the prospects of ABS issues after the introduction of Euro.

To quote Lakhbir Hayre , the following factors point to the growing market for securitisation in Europe:

• The introduction of the Euro is expected to have a major impact, because it will gradually eliminate much of the existing sovereign bond markets, shift investor attention to spread products, especially MBSs and ABSs because of their high credit quality, and eliminate currency concerns;
• In the past few years, various countries have made legal and regulatory changes that facilitate securitization (See individual country profiles for more info on this), and this trend is expected to continue;
• Competitive and regulatory pressures on institutions are mounting, leading to more focus on measures such as return on equity and on efficient balance sheet management;
• Gradual improvements in MBS deal information reporting systems and more familiarity with cash-flow characteristics should contribute to increasing investor comfort levels with MBS and ABS products;
• There has been a continuing broadening of the types of assets being securitized - for example, sub-prime mortgages, student loans, soccer receivables, pub leases, and so on.

Commentators lament that there is no equivalent of the US-type Ginnie Mae or Fannie Mae in Europe - so if securitisation markets have to grow, it is solely out of the needs of the savvy issuers and investors.

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