The first shoots of recovery in the asset backed securities (ABS) market are at last beginning to show, however in a marketplace where you would least expect. Among the tree-lined avenues of Austria’s capital city, Vienna, there is a hive of activity within the offices of its investment banks that would make any structured financier in London or New York, green with envy.
The only problem is that the deals being struck are, for the moment, exclusively within the private arena. The public market, like the UK, US and Western Europe, is still awaiting its first meaningful transaction. But this shouldn’t detract from what is becoming a capital markets success story in Central and Eastern Europe (CEE), with Austria as a convenient hub and a market underpinned by conservatively priced, uncomplicated deals, supported by secure and unfussy asset pools.
Georg Feldscher, head of strategic portfolio management, Raiffeisen International, drops into conversation that he’s halfway through originating the securitisation of Polish leasing receivables denominated in Zloty, for private placement. The Russian and CIS market too, with a series of quick-turnaround private placements, is proving a good source of business for structured finance houses with strong networks in Central Europe and further East.
 | “One Moscow transaction took us a mere six weeks to complete from start to finish, compared to a typical six to nine month deal time,” explains Andreas Schmidt, head of securitisation at RZB. |
Comments made in February by Moody’s Investors Service called correctly the positive sentiment that hovers over the ABS market in emerging Europe and Russia/CIS. And even against what is now a worst case scenario in the developed markets, there is plenty of untapped liquidity in the pipeline elsewhere. Moody’s found that only 22 transactions representing €6.1bn (£4.64bn, $9.35bn) of ABS issuance came from the emerging markets in 2007, including the first ABS transaction in both the United Arab Emirates and the Sultanate of Oman. In other words, a number of originators are still sitting on money, and in Russia and CEE especially, these markets
provide ample collateral over the medium term to reignite ABS globally.
Russia, more than any other market, is likely to be this year’s star ABS performer, albeit starting with private deals. Last year, despite a total of three publicly-rated transactions, including one car loan securitisation with an issuance volume of €677.5m, expectations of total issuance hitting the €5bn barrier were dashed following the global liquidity crisis that began in earnest in June. This means financings due to emerge in fourth quarter 2007 should come to market this year, but won’t be reflected in published volume data.
“Underneath the visible layer of public bond issuance, an increasing number of banks have been steadily working on new transactions and the pipeline continues to grow,” Mr Feldscher explains. “At the moment investor appetite is there but it is low volume and private placement-orientated. We have to cut back our expectations though the public markets will recover in time.” Mr Feldscher has warmed to Russian car loans, mortgages, and Polish and Czech small loans over the last twelve months, as a way of diversifying his portfolio and “creating sufficient variety”.
Between 2003 and 2007, around €8bn had been issued in securitised notes in emerging Europe, with Russian ABS (68 per cent of total issuance) originated by mainly local banks outweighing issuance in the other three major ABS markets of Kazakhstan (9.5 per cent), Poland (7.8 per cent) and the Czech Republic (7 per cent).
Spread/collateral
Curiously, the very two fundamentals that, pre-credit crisis, hindered the emerging ABS market in its attempts to shake off its image as a risky investment – the credit spread and the underlying collateral supporting the transaction – could now be working in its favour.
“The region (Russia/CIS) is well-placed once the recovery starts,” believes RZB’s Mr Schmidt. “If the underlying market, assets and products are already fairly standard, as they are here, and cash flows are transparent but generating enough spread and return, then investors will return,” he says.
Issuers of ABS in the Russia and emerging Europe have always a paid a higher premium than in the developed markets, as investors demand compensation for taking out greater risk exposure. For example, a car loan ABS rated single-A and issued out of Moscow would pay 70 basis points more than its equivalent in the US. However, re-pricing in the US ABS market has seen a widening of the spread and pricing is now steeper compared to CIS deals. Mr Feldscher adds: “I think the gap or premium will disappear as investors realise that the assets in CIS or emerging Europe deals are good quality, clean and non-toxic. The ABS products we offer are more reasonably priced because of the simplicity of the structures and transparency of the conduits involved.”
Mr Feldscher’s nod to ‘transparency’ within the ABS structure is an important point but of greater significance is his reference to the relative simplicity of a deal conducted in Russia, versus a US deal. He explains: “When you have a very competitive market, like Western Europe, leading to tight pricing, then there is a need to offer more products to maintain profitability which will be re-leveraged further, you then get a complicated and over-leveraged situation for investors and issuers. So, in our case, why have complex products for an uncomplicated, early stage, market?”
A €293m ABS, originated by the Russian subsidiary of Raiffeisen last year and backed by a pool of new car loans, actually achieved tight pricing, with about a third of the capital structure priced at 95 basis points over Libor. This was the tightest pricing level achieved in a Russian ABS to date, with one rating agency in its pre-sale report pointing to “strict underwriting criteria and more rigorous background checks on the potential borrower” as conducive to the pricing structure.
Stable market
The consumer credit and housing markets that provide the majority of asset pools in securitisations (credit card receivables, car loans and commercial and residential mortgages) remain at the immature stage of development in emerging Europe, something which again might work in the market’s favour. For example consumer credit is based around prepaid cards and charge cards, so a pool of low risk assets and a steady stream of payments.
The housing market in the region is also under-leveraged, with mortgage to GDP ratios low compared to developed markets. “We don’t need to artificially create a market here,” argues Mr Schmidt, pointing to the dislocation in the US subprime mortgage market, perhaps the polar opposite to emerging Europe’s less-developed housing base.
This summer, and most likely during one of the big industry events such as in Cannes in June, bigger deals will be struck, adds Mr Schmidt. “Investors are sitting on funds and currently investing in low risk sovereign paper. But this is not where they will make the sort of returns they want. We are working on private deals now but the public market will return in the second half of 2008.”
Though details are as yet undisclosed, two deals struck last month, one by Volkswagen (car loans) and the other via GMAC RFC (residential mortgages), are proof that market makers are willing to compete in structured finance, despite wider spreads. “These originators are willing to pay a higher premium to demonstrate that the market still exists; it’s a promising start,” he says.
SIMPLER PRODUCTS AND GREATER TRANSPARENCY REQUIRED TO SPARK GERMAN RECOVERY
Germany was once one of Europe’s largest securitisation markets until the credit fallout. Unlike neighbouring Austria however, where the deal flow has been maintained through cross-border ABS in emerging Europe and Russia/CIS, it relies on domestic origination and this has tailed off significantly since 2006.
According to the European Securitisation Forum, issuance in 2006 tallied €38bn with the commercial mortgage backed securities (CMBS) segment accounting for half of all activity. By the end of 2007, total issuance had collapsed by 50 per cent, to €18bn. At one stage towards the end of 2007, spreads on triple-A CMBS tranches widened from 16 basis points to 125 basis points, leaving issuers the option of paying more to raise capital, or consider alternative funding sources.
“The market is turning to more traditional conduits for refinancing,” explains Nicolaus Trautwein, head of securitisation at Eurohypo, the German bank and ABS issuer. “Lead times are longer for ABS, especially CMBS, and new deals are taking forever to materialise,” he says.
Small business loans and real estate property have driven German ABS volumes in the past, but declines in the former and volatility in the latter mean these can no longer be relied on to sustain liquidity.
Michael Jung, CEO at Vivacon AG, a German property portfolio investor and manager, believes the shift from securitisation to more esoteric funding channels in recent weeks is the market’s way of adapting to difficult circumstances. “I’m shocked how the market has developed and changed dramatically. We’ve not being able to access the capital markets so looked to private deals and Islamic finance instead, as necessity is the mother of invention,“ he adds. Syndicated deals are also being mooted to plug the funding gap.
Dr Kurt Becker, head of credit research at the Dortmund-based Collineo Asset Management, a CDO, ABS and mortgage backed specialist, expects securitisation will take the form of smaller, less complicated, transactions. “It could take four years for the market to recover but when it does, it will be more stable,” he believes.
And Germany is no different to the UK, the Netherlands, Spain, or Italy (Europe’s top tier securitisation markets) in that the future will be about simpler products, greater transparency, and a tighter underwriting of deals. “There is a flight to quality,” reckons Jean Hoffman, CMBS structuring at Lehman Brothers, “yields were already high in Germany’s property market so a potential drop is not so bad. Germany is well positioned to take advantage of the recovery.”
