Over the last 12 months the apparently unstoppable momentum of the global securitisation industry has suffered a major jolt. The immediate cause lay in the sub-prime segment of the US home equity market, but the ripples have spread out to affect other jurisdictions and market sectors.
The US sub-prime housing meltdown certainly caused uproar in both the securitisation and equity markets, as sub-prime lenders succumbed to margin calls and saw lines of credit evaporate. As a result issuance has fallen, and monoline wrapping has made a return – a change from the previously ubiquitous senior subordinate structure.
This new-found interest in their product from home equity issuers has certainly been a benefit to financial guarantors, under pressure from spread tightening and new market entrants. However, the monolines' problems will need more than this – and a little spread widening – to be resolved.
The US CDO market, long a natural buyer of subordinate ABS securities, has also been forced to shift gear as the US sub-prime housing market collapse eroded the arbitrage between cost of collateral and selling a deal. Investors, still laden with capital, have shifted strategies and have purchased CRE deals and cashflow-backed offerings, but a return to short-term stability in the ABS markets may rekindle mezzanine ABS issuance.
Outside the US, the initial fears of contagion from the US sub-prime turmoil affecting the UK non-conforming sector proved unfounded. But while some players view the two markets are structurally very different, others believe it is only a matter of time before the UK non-conforming sector is hit, like the US. Certainly the wider spreads on recent deals suggest that investors are in a stronger position now.
But in terms of issuance volumes, it is the UK credit card ABS sector that has suffered much more than RMBS, and for reasons unrelated to US sub-prime. The UK card sector has been battered by a multitude of problems, and as a result, ABS issuance has dropped from highs of around £8bn in 2005 to virtually nothing in 2007 year to date. However, the majority of market participants are confident that from the second half of 2007 things will improve.
On the regulatory side, an important development has been the new tax regime for UK companies involved in securitisations that was introduced by Parliament last December. The permanent regime, which replaces the temporary regime created by Finance Act 2005, facilitates the setting up of UK-based SPVs, and is likely to be used for UK securitisations. We look at the details.
In the Asia-Pacific region, the report profiles two very different markets – Australia and India.
In the case of Australia, investors are offered a market that may be predictable and even bland, but is generating issuance volumes unmatched by any other country in the Asia-Pacific (ex-Japan) region. Moreover, nothing looks likely to stop this supply dominance in the near future, especially given the continued overwhelming investor interest, including from Europe.
The Indian market is at a much earlier stage of development, but a new Bill to allow the listing and trading of securitised debt instruments should help to stimulate the securitisation market. However, regulators will also need to ease some restrictive regulations and expand the investor base if they really want the market to be a viable funding source for the country’s huge infrastructure funding needs.