Asset Backed Securities: $30 Billion And Counting

Common in the U.S., they're now sweeping across Europe

To American bankers, the dauntingly named asset-backed securities are as commonplace as a home mortgage or a credit-card bill. They're also lifesavers. During the early 1980s, troubled U.S. lenders found a way to raise capital by "securitizing" their receivables--basically, bundling the loans and turning them into a new class of assets that can be bought and sold. The technique was a roaring success, and such securities in the U.S. today are estimated to be worth more than $1 trillion.

Now, securitization is taking off in Europe. Britain's NatWest Markets, a subsidiary of National Westminster Bank, is completing a huge $5 billion deal backed by 200 of NatWest's corporate loans in 17 countries. Last month, in Germany's second-ever securitization, Deutsche Bank offered $321 million of assets backed by Volkswagen auto leases. As interest rates fall throughout Europe, the extra yield available on asset-backed securities has made them attractive to insurance companies, pension funds, and money-market funds.

And in Europe, as in the U.S., such securities are lifesavers. Banks face tightening margins, and governments eager to trim budgets as monetary union approaches can no longer pour capital into sick institutions. Some state-owned banks in France and Italy are already insolvent. So securitization meets a serious need.

CREATIVE BURST. Already, the European activity is impressive. Some $30 billion worth of asset-backed securities have been issued this year alone, up from $7 billion in 1995. Early this year, Morgan Stanley & Co. structured a $6 billion deal backed by a portion of consumers' electricity bills at four Spanish utilities forced to mothball their nuclear reactors at great cost. Morgan also did a $4.05 billion deal for Ireland's troubled GPA Group, securitizing the cash flow from airplane leasing. In France, state-owned Credit Lyonnais and Morgan Stanley teamed up for the biggest securitization ever. The troubled bank made an $8 billion loan to a government agency similar to America's Resolution Trust Co., which in turn used the securitized loan to bail out Credit Lyonnais.

Even in stodgy Switzerland, where it is against government rules to securitize mortgages, Union Bank of Switzerland Chief Executive Mathis Cabiallavetta recently hinted that securitization will become a major business for European banks over the next three to five years.

Europe is making up for its lateness in this market with a burst of creativity. London-based SBC Warburg has come up with a blueprint for securitizing the equity in a home, instead of the debt. It plans to try to capitalize on the $1.3 trillion worth of British housing wealth that has no mortgage on it. Lenders will offer homeowners no- or low-interest mortgages. In return, homeowners give the lender 75% of any equity appreciation when the house is sold. The lending bank can sell off the securitized, low-interest loans to investors, who will get a guaranteed rate on the funds plus the prospect of some hefty returns should housing inflation accelerate.

So far, Warburg has signed up Bank of Scotland to market the mortgages. If the concept catches on in Britain, Warburg may try it in the U.S., which has a $6 trillion pool of nonmortgaged housing stock. The birthplace of asset-backed securities could see a flood of new merchandise on the market.

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