The European Securitization Market in 2007/8
Presentation by Deutsche Bank Global Markets Research
January 2008
Ganesh Rajendra
William Davies
Conor O‘Toole
Ivan Pahlson-Moller
Managing Director
+44 20 7545 2082
Director
+44 20 7545 2569
Vice President
+44 20 7545 9652
Associate
+44 20 7547 2877
Genesis of the crisis and its full potential reach
Institutional term money
Ret
ail m
ney
mo
P
C
AB
s
SIV
Fund Managers /
Insurance Cos
its
ndu
o
/C
Bank
s
one
y
‘D
Ma yna
rke mic
tF ’M
un on
ds ey
CDO
Managers
Investors
Structured
Finance
Market
CMBS
CLO
Monolines
Ba
nks
NonBa
Lend nk
ers
Hou
se
cred holds
–
it ca
rd, a mortga
g
uto
loan e,
s
Lev Loan
Managers
ial
merc
Com tgage
Mor uits
d
Con
d
cte ate
e
l
t
s
Se l-Es orp
a dC
e
R te
la
Re
e
stat
al e ty
e
r
l
cia
per
mer rs, pro s, etc
m
o
C vesto , pub
in anies
p
com
LBO / HY
corporates
2
Lenders
Borrowers
Re-visiting some key European-related crisis milestones
Northern Rock seeks
emergency central bank funding
Bear Stearns Funds
meltdown – the first
high profile casualty
ABX falls precipitously
Feb
Apr
Paragon spells
out financing
challenges,
rights issue to
follow
IKB’s conduit fails to roll,
bank is rescued.
Australian lender RAMS
succumbs to funding
crisis
June
Leveraged loan
prices fall
dramatically
UK non-conforming and CLO
spreads among the first sectors
to suffer the US contagion
July
Super-SIV
announced
Aug
Sep
Oct
BNP freezes
money market
funds
ABCP investors shun
conduit and SIV
programmes
Nov
Dec
Monoline model
comes under
intense scrutiny
Cheyne SIV – the
first to enter
enforcement
3
Sharpest fall in UK
commercial property since
1990, slowest growth in
house prices for 9 years
2007 can be characterized by the dramatic repricing of
all financial credit …
The systemic repricing of all structured or leveraged credit risk extends from ABCP and
interbank to term markets for bank debt as well as securitised products. Relative to
comparables however, structured finance price action is no worse
14
Spread widening multiple
12
10
8
6
4
2
BBB
BBB Lev.
AAA Lev.
BBB Prime
AAA Prime
BBB Non-
AAA
AAA Non-
Corporates
Loan CLO
Loan CLO
RMBS
RMBS
Conf. RMBS
Structured
conf. RMBS
Covered
Bonds
Source: DB Global Markets Research, DBIQ
4
AA Financials
… with the structured finance market losing a significant
chunk of its investor base …
Estimates of primary market distribution, 2007
AAA
Real
Money &
Others
Bank
BBB
Real
Money &
Others
SIV
18%
9%
Conduit
15%
25%
Treasury
15%
Corporate
Treasury
Conduit
5%
18%
Bank
Treasury
10%
Money
Market
Fund
Money
Market
Fund
35%
50%
Source: DB Global Markets Research
5
… leading to a sharp fall in primary volumes
Primary structured finance volumes in 2007 fall 3% vs 2006, the first decline in issuance
since the inception of the securitisation market in Europe
Primary securitisation volumes
Profile of deal flow post-crisis
OTHER ABS
AUTO & CREDIT CARD
CDO
CMBS
RMBS
Y-o-Y change in quarterly volumes
300 EUR bn
250
150%
Other ABS
reportedly
placed
28%
100%
200
50%
150
0%
100
Bank issued
ABS retained
-50%
50
Securitisation
of warehouse
-100%
0
H1
H2
2004
H1
H2
2005
H1
H2
2006
H1
(legacy)
H2
assets
16%
2007
Source: DB Global Markets Research
6
for repo
purposes
56%
The run on structured (and bank) finance has taken an
early toll on asset prices …
Asset markets in which securitisation played an influential role in marginal funding
experience immediate price weakness in the wake of the structured finance squeeze
Selected European House Prices
25%
Commercial Property and Leveraged Loan Prices
y-o-y growth %
102
20%
100
15%
98
10%
96
5%
94
0%
92
-5%
UK
Spain
Dec-06=100
UK commercial property
European leveraged loans
90
Ireland
-10%
88
2003
2004
2005
2006
Nov-06
2007
Source: . IPD, S&P LCD, Nationwide, permanent tsb, DB Global Markets Research
7
Jan-07
Mar-07
May-07
Jul-07
Sep-07
Nov-07
… but credit and ratings performance remains largely
stable, for now
UK RMBS
Up
80
70
60
50
40
30
20
10
/down-
Rating actions
Ratings drift (rhs)
grades
European RMBS
Up
150%
120
100%
100
/down-
0%
80%
60%
40
-50%
40%
20
20%
-100%
-20
-150%
Up
grades
20
15
10
5
Rating actions
Ratings drift (rhs)
CDO
Up
120%
50
40
100%
30
80%
20
60%
10
40%
-5
-10
-10
20%
-20
/downgrades
Rating actions
Ratings drift (rhs)
120%
100%
80%
60%
40%
20%
0%
-30Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07-20%
-15Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-070%
Source: DB Global Markets Research
0%
Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07
CMBS
/down-
120%
100%
60
Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07
25
Ratings drift (rhs)
grades
80
50%
-10
-20
30
Rating actions
8
Upgrades in 2007 continued to be fuelled by de-leverage,
downgrades were increasingly due to credit weakness
Upgrades
Downgrades
Other Consumer
ABS
UK Prime RMBS
10%
8%
CMBS
Prime RMBS
Other ABS
24%
11%
UK Nonconforming
RMBS
18%
8%
Other Corporate
ABS
Public Sector
2%
CDOs
12%
European Prime
34%
UK Nonconforming
RMBS
ABS
CMBS
11%
22%
600
SME CLO
10%
16%
700
German Mezz
Other CDO
250
No of
Upgrades
14%
No of
Dow ngrades
200
500
400
150
300
100
200
50
100
2002
2003
2004
2005
2006
2007
2002
Source: DB Global Markets Research
9
2003
2004
2005
2006
2007
The current state of the structured finance market
The run on the securitisation market and all its constituencies has taken a severe toll on
demand technicals and pricing as well as primary deal flow. Credit fundamentals have
remained largely immune to this technical meltdown, however, but for how long?
Spreads &
Pricing
ƒ Spreads driven to unprecedented wides across all sectors
Demand &
Liquidity
ƒ Sharp contraction in investor base given unwinding of ABS ‘carry trade’
Primary
Volumes
Credit & Asset
Performance
ƒ Price discovery characterizes secondary trading
ƒ Offer-side liquidity only given scale of ready or forced sellers
ƒ Significant fall-off in volumes as securitisation platforms alienated by the
sharply higher cost and reduced availability of funding
ƒ Deal flow limited to warehouse clearing exercises and repo-based
(retained) financing by banks
ƒ Credit or payment behaviour stable for now in most sectors
ƒ But run on structured finance has taken toll on asset valuations in
selected real estate markets
10
Price performance compared across asset classes
Senior AAA bonds have been disproportionately impacted by the crisis given the
technical dislocation in demand. Sectors perceived as most credit vulnerable at this
stage of the cycle have also underperfomed
AAA
180
BBB
bp
700
160
2007 tight
140
2007 end
500
Historic w ides
100
2007 tight
600
2007 end
120
bp
Historic w ides
400
80
300
60
200
40
100
20
Credit Card
Prime MBS
SME CLOs
ABS
CMBS
Lev loan
Non
Credit Card
CDOs
Conforming
ABS
Prime MBS
SME CLOs
CMBS
Lev loan
Non
CDOs
Conforming
MBS
MBS
Source: DB Global Markets Research
11
Structured finance may underperform in any foreseeable
recovery, in our view
70
bp
60
AAA RMBS
AA Financials
ƒ Liquidity or
‘complexity’
premiums may be
re-established
50
40
ƒ Asset overhang
given ready sellers
may hinder recovery
30
20
ƒ Fundamental credit
weakening likely to
come to the fore
Source: DB Global Markets Research
12
Sep-07
May-07
Jan-07
Sep-06
May-06
Jan-06
Sep-05
May-05
Jan-05
Sep-04
May-04
Jan-04
Sep-03
May-03
Jan-03
Sep-02
May-02
Jan-02
Sep-01
May-01
Jan-01
Sep-00
May-00
Jan-00
Sep-99
May-99
Jan-99
10
Sizing up the asset overhang risks
Estimate of Outstanding Market by Investor Type
We estimate that these
disenfranchised investor
constituencies have liquidated
(or brought back onto balance
sheet) c30% of European ABS
assets to-date, meaning that
around 50% of holdings –
netting expected redemptions
– are still positioned to be sold
SIV
7%
Conduit
14%
Real
Money
Money,
Bank
Treasury &
Market
Funds
17%
Other
62%
Source: DB Global Markets Research, CPWare, Lipper Feri. Moodys
13
The collateral credit outlook, post-crisis
Weakening economic backdrop and generally highly
levered borrowers, exacerbated by (sometimes
material) refi-related risks given the current liquiditystarved, costlier funding market. The structured
finance squeeze also bears considerable impact on
asset prices and lender viability, adding further layers
of risk to the credit outlook
Euro non-prime
Leveraged
loans
Spanish SME loans, UK
commercial mortgages
mortgages
More benign economic conditions, borrowers
generally not over-geared. Front-end credit
supply, borrower payment behaviour and
therefore asset price direction is fundamentally
less exposed to structured finance
Euro commercial
mortgages
Dutch mortgages
German mortgages &
SME loans
UK & Spanish prime
mortgages
Euro auto loans
UK non-conforming
mortgages
Most
Credit vulnerability to the structured finance shock
14
Least
Consider that securitisation has played a significant role
in a number of European asset markets …
Use of securitisation in funding of outstanding assets
80%
Note: Estimates only. Use of securitisation in funding of
recent marginal asset production likely to be higher
60%
40%
20%
Source: DB Global Markets Research, based on various sources
15
mortgages
UK buy-to-let
Spanish SME loans
mortgages
Australian prime
UK prime mortgages
Spanish mortgages
Dutch mortgages
mortgages
UK commercial
mortgages
Portuguese
loans
European leveraged
mortgages
UK non-conforming
0%
… with many lenders adopting structured financedependent business models
S e c u r it is a t io n a s % o f t o t a l lo a n b o o k f o r s e le c t e d
100%
E u r o p e a n p u b lic ly - q u o t e d f in a n c ia l c o m p a n ie s
80%
60%
40%
20%
Source: Company Reports, DB Global Markets Research
16
RBS
Barclays
Lloyds TSB
Bank of Ireland
Banco De Sabadell
Bankinter
Alliance & Leicester
Banco Pastor
Banco Espirito santo
HBOS
Bradford & Bingley
SNS Bank
Abbey National
Aareal Bank
IKB
Standard Life
Intermediate Capital Grp
Northern Rock
Paragon
0%
However, most structures are built to withstand collateral
deterioration, but there may be a few exceptions
Typical senior AAA hard credit enhancement
Typical junior BBB hard credit enhancement
14%
35%
12%
30%
AAA at closing
BBB de-levered 2yrs
10%
25%
8%
20%
Source: DB Global Markets Research
17
UK Prime RMBS
UK Credit Cards
Dutch RMBS
Spanish RMBS
UK BTL RMBS
Euro Non-Prime RMBS
Conduit CMBS
German SME CLOs
UK Non-Conf RMBS
Spanish SME CLOs
Lev Loan CLOs
UK Prime RMBS
Euro Auto Loans
Spanish RMBS
Dutch RMBS
German SME CLOs
UK Credit Cards
Euro Non-Prime RMBS
0%
UK BTL RMBS
0%
Conduit CMBS
2%
Spanish SME CLOs
5%
Lev Loan CLOs
4%
UK Non-Conf RMBS
10%
Euro Auto Loans
6%
15%
-5%
BBB at closing
AAA de-levered 2yrs
The sharp retrenchment in front-end liquidity and
potential payment shock weighs on UK mortgages
Weakening affordability and higher defaults
RICS net balance of surveyors reporting higher prices
Loans approved YoY change
House price 12mth chg (RHS)
60%
CML (market-wide)
repossessions
Court orders made
0.8%
0.7%
30%
40%
25%
20%
20%
0%
15%
40%
35%
UK master trust unsold
repossessions
Mtge pymt. as % earnings
(rhs)
0.6%
0.5%
30%
25%
0.4%
20%
0.3%
15%
0.2%
10%
Source: CML, RICS, DB Global Markets Research
18
1H 07
1H 06
Sep-07
1H 05
Mar-07
1H 04
Sep-06
1H 03
Mar-06
1H 02
Sep-05
1H 01
Mar-05
1H 00
Sep-04
1H 99
Mar-04
1H 98
0%
1H 97
0.0%
1H 96
0%
1H 95
-60%
1H 94
5%
1H 93
0.1%
1H 92
5%
1H 91
-40%
1H 90
10%
1H 89
-20%
1H 88
Selected sectors in the headlines (1)
The UK housing market slowdown
The fall in UK commercial property values has been
dramatic yet credit performance remains stable for now
Maturity profile of European conduit CMBS loans
3%
18
2%
EUR bn
16
14
1%
12
N ov -0 7
S e p-0 7
J u l-0 7
M a y -0 7
8
4
-3%
-5%
10
6
-2%
-4%
M a r -0 7
J a n -0 7
N ov -0 6
S e p-0 6
J u l-0 6
M a y -0 6
M a r -0 6
-1%
J a n -0 6
0%
N ov -0 5
Selected sectors in the headlines (2)
UK commercial property capital values
2
0
All Property
Retail
Office
Industrial
Source: IPD, S&P
2008
19
2009
2010
2011
2012
2013
2014
2015
2016
The financing squeeze amid likelihood of higher defaults
may pose risks to the leveraged loan market
18%
European leveraged loan CLO credit trends
Default rate %
CCC %
WARF
16%
2350
2.0%
WARF
CCC
14%
2275
12%
1.5%
10%
2200
8%
2125
1.0%
6%
2050
4%
0.5%
Actual
Baseline forecast
Optimistic
Source: Moody’s, DB Global Markets Research
ec
-0
9
Nov-05
D
ec
-0
8
D
ec
-0
7
D
ec
-0
6
D
ec
-0
5
D
ec
-0
4
D
ec
-0
3
D
ec
-0
2
D
D
D
D
ec
-0
1
1900
ec
-0
0
0%
ec
-9
9
2%
1975
ec
-9
8
D
Selected sectors in the headlines (3)
European speculative-grade default rate
Pessimistic
20
May-06
Nov-06
May-07
0.0%
Nov-07
Securitisation primary volumes to fall sharply
In the crisis aftermath, we expect primary volumes in Europe to fall by 45% to EUR 250
billion in 2008, with downside risks to this forecast
Historical primary volumes by asset class
500
450
400
350
300
Our forecasted sector contribution to growth in 2008
EUR bn
Other ABS
RMBS
Auto & Credit Card ABS
0%
CMBS
-10%
CDO
RMBS
-20%
250
-30%
200
150
-40%
100
-50%
50
-60%
2000 2001 2002 2003 2004 2005 2006 2007 2008
(F)
Source: DB Global Markets Research
21
CDO
CMBS
Consumer
ABS
Other ABS
Our expectations for the post-crisis primary vintage
Reflecting the recent de-risking in the securitisation market, we expect enhancements in
collateral underwriting and a ‘dumbing-down’ of structural templates
ƒ Better asset selection in terms of borrower status and quality
Collateral
ƒ Lower leverage, more conservative payment terms
ƒ Tighter structures in terms of eligibility criteria, risk hedging, substitutions, etc
Structure
Bond
Profiles
ƒ Simpler, less heavily tranched structures, with fuller de-linkage from seller
ƒ Shorter-duration floaters, less use of call (refi-based) options
ƒ Long-dated fixed selectively to tap traditional corporate investor base
22
Identifying relative value opportunities in the senior …
Selected Senior AAA Current Spreads (Offer-Side, Indicative)
160
bp
UK non-conf
140
120
Spanish RMBS
Spanish SME
UK Buy-to-let
100
German Mezz SME
Euro non-prime RMBS Conduit CMBS
80
Lev Loan CLO
Aussie RMBS
UK Credit Card
60
German SME
UK Prime
Dutch RMBS
W AL
40
1
Source: DB Global Markets Research
2
3
4
23
5
6
7
… and subordinated markets
Selected Junior BBB Current Spreads (Offer-Side, Indicative)
550
UK non-conf
bp
500
450
Lev Loan CLO
Euro non-prime RMBS
400
UK Buy-to-let
Spanish SME
Spanish RMBS
350
Conduit CMBS
300
250
German SME
UK Credit Card
UK Prime
200
150
Dutch RMBS
W AL
100
2
Source: DB Global Markets Research
4
6
24
8
10
12
Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned
lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. [Ganesh Rajendra]
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