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The spread of Securitisation

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&#39s total.

UK sub-prime mortgage lenders such as Kensington and igroup were at the

forefront of securitisation&#39s 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&#39s

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&#39s 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.


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