Current new issues are being structured more conservatively as, for example, issuers must now hold a minimum percentage of their securitised assets on their own balance sheet for the entire term, and they must ensure greater transparency.
Since the financial crisis investors also have become more sophisticated, analysing transactions more rigorously rather than relying on ratings agencies only. This has led to a reduced number of debt-financed market participants, such as banks, in the ABS market.
Demand among institutional investors remains high, due to the attractive returns and robust structures of the asset class. Asset-backed securities also offer a good hedge against interest rate risks, as 95% of all European asset-backed securities have a variable coupon that is linked to Euribor. Spreads are currently still higher than they were before the crisis.
For example, investors now receive a premium of 80 basis points on Dutch RMBS (residential mortgage-backed securities) versus Euribor, whereas before the crisis it was only 11 basis points.
Opportunities for investors exist in both new and existing issuances including commercial mortgage backed securities and leveraged loan collateralised loan obligations, which are difficult to analyse and often trade well below their nominal value.
European securities have proven to have lower default rates than their US counterparts. In Europe between 2007 and 2012 only 1.5% of the securities went into default, while in the US it was 18.4%.
The European market for asset-backed securities has shrunk considerably since the financial crisis, and this trend is likely to continue. The drop in volume is due to stricter bank lending criteria as well as the reduced demand by consumers for car loans and real estate.
New issues in Europe so far this year have amounted to €67bn, still markedly lower than in 2007 (€325bn). We expect the volume of issues in 2014 to stay at this level.
