Asset-Backed Sales May Drop to 10-Year Low in Europe (Update1)
By Neil Unmack
Aug. 11 (Bloomberg) -- Sales of asset-backed bonds, which finance everything from home loans to offices, water companies and pubs, may fall 83 percent in Europe this year to 65 billion euros ($98 billion), the lowest since 1998, Deutsche Bank AG said.
A year after the start of the credit crisis, the asset- backed debt market remains stagnant as investors stung by subprime losses demand record-high yields, damping sales. The European Central Bank took the unprecedented step Aug. 9 last year of offering banks unlimited cash to ease a liquidity squeeze and lenders are increasingly using asset-backed bonds as collateral to borrow.
Banks created about 253 billion euros of asset-backed bonds so far this year, compared with 378 billion in all of last year and a peak of 470 billion euros in 2006, according to Deutsche Bank data. Of the securities issued in 2008, less than 30 billion euros were sold to investors, Deutsche Bank said.
``The overwhelming bulk of securitizations have been designed solely for the purposes of accessing central bank liquidity,'' analysts led by London-based Ganesh Rajendra wrote in a report published on Aug. 8. Creating and keeping bonds to borrow from central banks ``has become a de facto substitute for capital market funding for many banks,'' the analysts wrote.
Mounting losses resulting from the collapse of the U.S. subprime-mortgage market have caused money-market funds to stop buying asset-backed commercial paper and forced funds such as structured investment vehicles to unwind holdings, driving up yields. The U.S. market for commercial paper, or short-term IOUs, backed by assets such as mortgages shrunk 40 percent from its peak in July 2007. A basis point is 0.01 percentage point.
Investors demand about 163 basis points more than benchmark rates to buy the highest-rated bonds backed by U.K. mortgages, according to Lehman Brothers Holdings Inc., more than 10 times the spread of a year ago.
This year should mark ``the very trough'' of asset-backed bond sales, the Deutsche Bank analysts wrote. About 45 billion euros of the securities were sold in 1998, the report said.