Enthusiasm runs high among those investors and financial service companies poised to exploit the economic opportunities of a unified Europe.
The buying power of nearly 400 million people will soon be brought together into a single market, and European financial institutions will benefit from the underlying strengths of a combined market.
In this environment, asset securitization, a financing tool already experiencing slow but steady growth in the European market, will be fully embraced by those who realize its advantages.
Once the barriers to a single market fall, the financial services companies that succeed will do so by tailoring innovative services and products, already widely accepted in the American market, to the special needs of the European market. This merely follows a well-established trend first evidenced over 20 years ago.
Potential Benefits
Savvy European banks and investors are beginning to realize the potential benefit3 of asset securitization. Although there are political, economic, and legal factors delaying greater growth in this area, the potential to increase the volume of asset-backed securities transactions in Europe will become a reality over the next three to five years.
Tremendous political diversity in Europe hinders progress in some respects, but governments are slowly agreeing to the main tenets of the Maastricht treaty, the primary document of European economic unity.
The rejection of the treaty by Danish voters in a recent referendum surely serves as a setback to European convergence, but the political and economic forces behind the drive to unite will not disappear.
Unification Issues
The European economic market is converging for both practical and regulatory reasons. The globalization of the world economy, due largely to a deluge of technological advancements, has forced countries to abandon their insular approaches to finance.
Both messages and money can be sent at lightning speed around the world; and - with capital markets operating in Tokyo, London, New York, and elsewhere - trading can occur around the clock. National borders are, for all practical purposes, disappearing for global traders. In addition, regulatory convergence set in motion by EC bodies, such as the European Parliament, have encouraged the market's harmonization.
Legislation currently being implemented at the national level is based on the ideas and goals of centralized EC institutions, giving them de facto regulatory powers in individual nations.
Big Picture Promising
Although economic planners have encountered a few stumbling blocks here as well, such as disagreement over the number of hours in the proposed work week, these are a small part of the overall picture.
The changes occurring across the ocean will eventually make it easier for both European and American issuers of asset-backed securities to tap into an extremely liquid capital market.
We are already seeing an increased interest in cross-border alliances among European businesses and between U.S. and European businesses, and the freedom of cross-border portfolio investment will inevitably follow.
The restrictions currently in force prohibiting a German pension fund from investing in the bonds of a British corporation, for instance, are obsolete in light of international mergers and acquisitions that blur the strict definitions of a company's homeland.
Harmonious Movements
A shared European Currency Unit, or Ecu, will no doubt come to pass eventually, despite a reluctance on the part of a few countries to abandon their present currency.
A central bank, which will probably be located in either London or Frankfurt, and the harmonization of national banking regulations are other longer-range implications that will enable the unification of the European economy to come about with relative ease.
Much work, however, re mains to be done to harmonize regulations in anticipation of securitization. A review of accounting principles in various EC countries reveals regulations that seem encouraging for asset securitization.
Legal Considerations
In reality, though, there has been no concerted effort across Europe to adopt a model, as we have in the United States, based on true sale and transfer of assets, and other accounting and legal considerations, essential to the development of the market - with one exception: the United Kingdom.
In Spain, for instance, a judge - completely at his or her own discretion - may backdate a bankruptcy to a date which he or she considers to be the real date of insolvency.
In other words, a judge could rule that the bankruptcy really began years before the actual bankruptcy filing and every asset transaction during such retroactive period would be void. Recently, the Upper House of the Cortez passed specific legislation to address this problem and it is expected to become law in the new future.
Securitization to Date
Even before national governments and EC institutions have been able to remove all of these impediments, many European countries have already entered the field of asset securitization with European and American financial partners.
Monoline insurers from the United States entered the scene only a few years ago, and at least one American bank has a sizable conduit financing European trade receivables.
Fueling the growth of securitization is the desire of European corporations to access capital markets directly and reduce their reliance on medium-term bank funding.
While there are still a handful of triple-a rated insurers and banks in Europe, increasing capital pressure on the others means that many banks recognize that securitization will become a real tool to maximize return on equity and a way to comply with mandated capital ratios.
Residential Focus
To date, residential first mortgage loans are by far the asset most securitized in Europe - particularly in the United Kingdom - although auto receivables are becoming more common, and commercial property mortgage loans comprise the curitized in Europe.
There have been other products securitized in France, but these are not true securitization because the banks are permitted to hold the subordinate debt in the issue.
As European institutions become more accustomed to this new form of security, many are beginning to consider other assets, including credit cards, lease receivables, trade receivables, corporate debt, and agricultural mortgages.
Growth in the Industry
As already indicated, the legal, accounting, and regulatory impediments to asset securitization currently vary from country to country. However, those countries that encourage assset-backeds have seen remarkable growth in the industry in the past year.
Issuance of asset-backed securities in France, for example, increased to to equivalent of $1.7 billion in 1991 from about $1 billion in 1990.
Among the EC nations, France's growth in securitization in terms of asset mix was among.the most balanced, and once the Fonds Commun de Creances regulation is liberalized as expected, a host of other asset types will likely enter the market.
Spain's volume of asset-backeds, although lower than France's and small in relative terms, has experienced even greater growth, jumping to about $226 million in 1991 from $70 million in 1990.
Also in 1991, the Spanish government introduced regulatory changes greatly facilitating the securitization process for corporation in that country. As a result, the volume of both mortgage and nonmortgage assets is expected to grow rapidly in 1992.
U.K. Leadership
Great Britain leads the EC in the volume of asset-backed issuance with the equivalent of $5.5 billion in 1991, up from about $4.4 billion in 1990. Among those was the first asset-backed securitization backed by second-lien residential mortgages in the country.
Last year also marked the successful entrance of two automotive finance companies - Nissan U.K. and Ford - into the British asset-backed market. Auto receivables now constitute appoximately 14% of all asset securitization in the United Kingdom.
Expanding the Market
Many of us are expecting an even wider array of European asset types to be securitized in the future. Service contracts, utility receivables, and boat receivables are all widely used in the United States, and municipal obligations have been securitized in France.
An important step in the development of the asset-backed market in Europe is the education of investors. Institutional investors are not sufficiently familiar with most asset-backed securities, and they remain extremely hesitant to invest in a security based on an asset structure they do not understand.
Innovative Products
Once comprehension of the products spreads throughout the investment community, demand for them will grow. Perhaps retail investors, who traditionally have not shown any interest at all in asset-backed securities, will become players in the industry as well.
As European investors, banks, and financial experts become more familiar with asset securitization, the number, as well as the variety, of transactions will continue to grow. Already American firms are assembling innovative and secure asset-backed products for European banks and mortgage bankers.
The monoline insurers, careful not to make the same mistakes as some U.S. banks made in the international market, are making every effort to develop the market while only insuring those asset-backed products that carry risks as low as those insured in the United States.
The need and the opportunity certainly exist, but market education is absolutely crucial if U.S. financial institutions hope to encourage the expansion in this sector. With a little patience and a lot of persistence, asset securitization will in due course become as vital a part of the EC economy as it is in the United States.
PATRICK H. O"SULLIVAN Senior Vice P Financial Guaranty Insurance CO.
Patrick H. O'Sullivan joined Financial Guaranty Insurance Co. in early 1990, bringing with him more than 20 years extensive experience in the banking and financing industries.
As senior vice president and managing director-international, Mr. Sullivan is responsible for managing the operations of FGIC's European and United Kingdom representative office.
He began his career in 1971 at Arthur Andersen & Co. in Dublin, Ireland. In 1975, Mr. O'Sullivan joined Bank of America in London. In 1983, he was named chief financial officer of U.S. Wholesale Banking in Los Angeles before being named president of BankAmerica World Trade Corp. Mr. O'Sullivan then moved to manage the corporate bank at Bank of America-Frankfurt and, in 1987, moved to run BA Futures Inc.-Europe.
Prior to joining FGIC, Mr. O'Sullivan was executive director at Goldman, Sachs & Co.
Mr. O'Sullivan holds a bacholor's degree in business studies from Trinity College, Dublin, and a master of science degree in accounting and finance from the London School of Economics and Political Science. He is also a chartered accountant.
