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The Glamour of Cannes Can't Stop the Fade of Securitization
Asset Securitization Report--SourceMedia (June 9, 2008)
There was no red carpet laid out for the thousands of industry players that made it out to the Palais des Festivals et Des Congress in Cannes, the new home of Information Management Network's and European Securitization Forum's (ESF) Global ABS conference.
But despite the current market environment, the industry managed to muster some cautious optimism on the European market's recovery.
"I think that those of us who are here are just trying to make head or tails of what it is investors want, but we are hoping that some business gets generated this week - it would be a good sign for the market," a sell-side source said.
Those who were in attendance enumerated the specific ways in which the market will change, although most believe that the value of securitization still exists because it serves as a vital risk transfer tool.
"There are no guarantees about when the market will come back but it will," said Rick Watson, managing director of the ESF in his welcome address. "The market made sense before the turmoil and it will make sense after. We as an industry need to listen, lead and communicate."
One change that will occur is transforming the market from a seller's to a buyer's market. "Put yourself in the shoes of investors," Watson said. "Will there be price stability that investors need?"
But Watson also warned that over simplifying securitization could also bring unwanted consequences. "As securitization involves complex cash flows, if you simplify structures too much, you may end up complicating what comes out to the investor," Watson said. Investors are likely to want plain vanilla structures under current market conditions, avoiding complexity altogether.
Watson said it was important to achieve a balance between simplification and producing sound deal structures. "Some investors can handle complexity but some are not set up to deal with it so we need to take account of that," he added.
Issuers will have to begin approaching the market from a cost benefit perspective. Accounting incentives, in many instances, still exist because leverage is still a big issue and, to the extent that deals stay on balance sheets, they create leverage. "It's definitely an issue that institutions can't ignore," Watson said.
Kevin Ingram, a partner at Clifford Chance who led the opening panel at the conference, believes that the market has seen its worst month and it's likely that things will continue to improve going forward.
"What we have to understand is that what's happened is a total re-pricing of a 10-year cycle and it hasn't been just personal to the securitization market," said David Basra, head of securitized and real estate markets at Citigroup who was also a panelist.
Ganesh Rajendra, managing director and head of securitization research at Deutsche Bank said, "People need capital and this market is about providing capital." He added that, when compared to how other segments of the financial markets have weathered the dismal price performance of recent times, pricing within the securitization market has proved resilient.
Over the coming months, panelists on opening day said they expected to see the emergence of a more normal market and - over the medium to long term - securitizations will prove resilient. But it's unlikely that the market will ever see the volumes of 2006 and 2007.
Instead, there will likely be sporadic use by issuers who can pay the price and much of the activity will be driven by non-mortgage issuance like auto-backed deals structured on the shorter end. There will also likely be good demand for balance sheet CLOs from strong originators. Mortgage issuance will remain limited, although these assets will continue to be used in securitization to access the Bank of England sponsored special liquidity scheme and the European Central Bank sponsored Repo program.
On the long end, covered bonds will continue to grow. " Investors want simplicity, they want products that are easy to explain and covered bonds can achieve this," said Philippe Tromp, managing director for Europe at the Financial Services Authority (FSA).
Panelists said that they do expect a couple of bumps on the way to recovery. For one, they believe the potential for false selling exits. Secondly, European credit performance has been relatively robust and it's likely to begin to deteriorate. Panelists still think that structures would by and large hold up to credit deterioration and that they will serve as another testament to securitizations.
"The role of ABS will take on a more text book like definition, a way for non-banks to access the capital markets, as opposed to being what it had become - a mainstream funding tool," Rajendra said.
However, anyone over reliant on securitization will find it hard to access liquidity. This is the case for U.K nonconforming lenders who have been forced to shut their doors to new lending.
Players now are more willing to accept that regulations are needed to keep the market in order. The key is to strike a balance that allows the market to self regulate responsibly and also allows regulators to input directly on market developments. This year, the conference held several panels hosted by regulatory representatives across the European Union that discussed the many initiatives that are currently underway.
"It looks like we may be entering a long period of over regulation where everything we do will have to be looked at and that just slows developments in the market," said a conference attendee. "But it's our own fault."
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