European securitisation reaches highest levels

Demand from investors seeking higher investment-grade yields drove the issuance of European securitisation to its highest level last year, according to the latest quarterly report from the European Securitisation Forum (ESF). Issuance reached €319.6 billion in 2005, up 31.1% from the previous year’s level of €241.2 billion.

The retail mortgage-backed securities (RMBS) market remained the biggest, accounting for some €142.6 billion of transactions, but a slower housing market – particularly in the UK – was blamed for a 5% loss in market share to 44.7% since last year. Issuance of collateralised debt obligations (CDOs) grew by 85.6% to €46.8 billion; and commercial mortgage-backed securities (CMBS) was the best performing market, more than doubling to €37.7 billion.

While the report said tighter fiscal policy and anticipated interest rate hikes at the European Central Bank (ECB) this year might hurt growth as spreads narrow, the lower minimum capital requirements under Basel II to offset risks taken out against higher-grade securities should bolster the take-up of CMBS and CDOs as banks implement the new capital adequacy rules.

“Markets are continuing to anticipate the lower capital requirements for senior tranches of securitisation and CDO transactions when Basel II is implemented,” said Rick Watson, managing director and head of the ESF in London. “In addition, credit performance remained generally good [so] the combined effect resulted in an attractive spread environment and continuing need by investors to put their money to work.”

Fourth quarter issuance volume also established a new quarterly record of €135.7 billion, with 85% of transactions in the period coming before the ECB raised interest rates in the eurozone by 25 basis points on December 6, its first rates rise for 18 months.