Raising funds through the securitisation of assets and their revenue
streams has been popular in the US for many years and, after a false start
in the late 1980s, has been growing steadily in Europe since 1996.
From a base of less than $10bn in 1995, the market expanded to $143bn by
2000 and 2001 appears certain to exceed last year's total.
UK sub-prime mortgage lenders such as Kensington and igroup were at the
forefront of securitisation's European rebirth. In the last few years, the
word has spread and we are seeing what was traditionally a sub-prime market
begin to feature large repeat issuance by prime lend-ers such as Abbey
National, Northern Rock and the Bank of Scotland.
The UK has retained its dominance as the major centre in the European
market. UK deals accounted for nearly half of total European issuance in
2000 but other European countries such as France, Germany, Spain, the
Netherlands and Italy are also emerging as strong markets.
A virtuous circle is now developing in the sector. Increased familiarity
and diversity of supply is leading investors to raise their exposure to
securitisation and the resultant increase in liquidity is encouraging other
originators to enter the market, often with innovative new asset classes.
This increase in supply is in turn stimulating further investor demand.
Another important influence is the intensifying competitive pressure and
the relentless squeeze on operating margins being seen in the financial
services sector. Using securitisation to move assets off the balance sheet
is one of the simplest ways to release funds that are tied up by regulatory
capital requirements, facilitating growth without requiring further capital
This can help maintain shareholder value and return on equity in the face
of adverse market conditions.
To understand what the future might hold for European securitisation, it
is useful to draw some comparisons with the more mature US market. Probably
the most significant differentiating factor is the relative simplicity of
the US residential mortgage market – large volumes of “vanilla” mortgage
products with a common structure and similar characteristics.
Simpler forms of securitisation require large pools of homogeneous assets
and US residential mortgage-backed securitisations (RMBS) may be completed
quickly, simply and in large numbers. Residential mortgages form the
largest asset pool suitable for securitisation. RMBS has been the backbone
of the market on both sides of the Atlantic.
Europe, in contrast, has developed many different varieties of mortgage
products. Some of this diversity is legislative but much is cultural, such
as the widely varying profiles of owner occupancy throughout the Continent.
Even within countries, residential mortgages do not always conform to a
simple, homogeneous pattern. In the UK alone we have diverse products such
as cashback, low starts and flexible mortgages that capture a material
proportion of the market.
Historically, the European market has also been fragmented by currency
differences. Exchange rate risk has hindered cross-border transactions,
greatly reducing liquidity in smaller countries. With the advent of the
euro, this issue is becoming much less important and Emu is likely to prove
a major stimulus to growth of securitisation.
The European market is likely to remain fragmented for the foreseeable
future, though. Some factors, such as EMU and the gradual removal of
restrictions on cross-border consumer transactions, are removing complexity.
Others, such as the increasing financial sophistication of consumers, are
driving lenders to introduce ever more sophisticated and diverse products.
If European securitisation is to continue to grow in importance, it must
adapt to the marketplace and not wait for defragmentation.
The signs are that this is happening. The past few years have shown a
trend to securitise ever more diverse and sophisticated asset classes
through increasingly exotic vehicles. Recent whole business securitisations
deals have shown that the market is no longer confined to the traditional
mortgage and asset finance sectors.
An example of diversification was the first securitisation deal in the UK
of a purely sub-prime automotive portfolio, closed in March this year.
The originator, consumer car dealership Yes Car Credit, obtained
£108m and £20m mezzanine funding from the Royal Bank of Scotland.
This financing facility will enable Yes Car Credit to open more branches
and fund the majority of the finance contracts generated within the group,
resulting in a substantial increase in business activity.
As the market continues to diversify, the quality of pre and post-issuance
information available to investors and the ratings agencies will assume
ever more importance.
Historic data is needed to support analysis of the performance of the
assets to be securitised. Without this information it is impossible to
structure a deal in the most effective manner, possibly resulting in higher
interest margins, increased credit enhancement costs or a lower advance
Information requirements do not end when a deal is completed. Investors
and ratings agencies expect to receive regular, detailed information on the
post-issuance performance of securitised assets.
Typically, the information that an originator must produce to support a
securitisation will include an analysis by quarter or month from inception
of historic default rates, subsequent recoveries and prepayment rates.
It will also be necessary to provide a detailed analysis of key portfolio
characteristics and performance trend data to enable monitoring triggers to
be set. Post-securitisation, this information must be periodically updated
and all trigger events must be continually monitored.
In the fragmented marketplace of Europe, the availability of high-quality
performance data in a standardised format is critical to securitisation's
future. In recognition of this, the European Securitisation Forum recently
issued minimum standards for post-issuance reporting which should apply to
all European securitisations.
Although compliance may be onerous, particularly for smaller originators
with less sophisticated information systems, the development of these
standards is an important milestone in the market's maturity and is
essential to its future success.
We are confident that securitisation will continue to increase in
popularity in Europe over the next few years. Some of this growth will come
from existing sources but the market will continue to diversify into new
asset classes with distressed and high-risk loans offering particular
As confidence increases, growth will also come from those smaller
financial institutions which are able to overcome the technological hurdles
needed to present perf- ormance data to investors.