The simplicity and transparency of two new structured issues -- from Tesco (TSCO.L - news) in June and Land Securities (LAND.L - news) this week -- have ended a two-year drought in supply in ABS.
This has raised hope ABS, used by companies and banks to offload risk on mortgages and property from their balance sheet, may return to favour after being tainted as a major contributor to the U.S. subprime crisis.
The deals have also drawn demand from real money investors, after the former major buyers of ABS, including structured investment vehicles (SIVS), conduits and hedge funds, were forced out of the market during the credit crisis .
While the floodgates for new issuance are not expected to reopen immediately, there is scope for similar fixed-rate, single tranche issues due to strong demand and increased confidence among issuers, experts say.
"It shows that sterling investors have appetite for simple structured transactions, with an underlying credit they are comfortable with and can assess," said James Cunniffe, at HSBC, who managed the Land Securities' Sceptre issue.
"Clearly property is the most straightforward to do, but you might see similar government project infrastructure or government contract issues and maybe this can also be replicated in Europe," he added.
Other structured transactions to re-emerge in the past month include those from utilities Yorkshire Water and Electricity North West, which were also managed by HSBC.
HUGE POTENTIAL
ABS are backed by a wide range of assets including auto loans, commercial and residential mortgages, and credit cards. In their prime, ABS helped drive a massive expansion in credit, were more complex, and backed by thousands of underlying assets.
Few predict those types of deals will return. For now, ABS will remain a niche market.
"Any corporate with a good rating today will be able to raise money this way, but they have to be investment grade and at least single-A to triple-A rated," said Barry Osilaja, European director at Jones Lang LaSalle Corporate Finance.
The Sceptre deal was triple-A rated, while Tesco Property Finance is rated A-.
Ed Panek, ABS Specialist at Henderson Global Investors, said the Tesco and Sceptre deals represented "the first steps towards opening the new issue market, but are not the sparks to get it roaring back to life."
Nonetheless, with recent reports showing less than 12 percent of banks are willing to lend more than 25 million pounds to new commercial property buyers, funding through commercial mortgage-backed securities (CMBS) could prove an attractive alternative. (Full story).
"There's a huge potential to raise money in the way Land Securities has demonstrated because of the security of the government income," said Alex Dawson, head of public sector at Knight Frank, referring to the Sceptre deal, which is backed by government rent.
Tenants have negotiated shorter leases of 15 years or less in recent years, but there is still a significant amount of UK government-tenanted offices on 20- to 30-year leases that are suited to new CMBS, property analysts said.
"Land Securities, British Land, and a lot of other property investors have in their accounts buildings which are let out to the government on long leases, so there are a lot of other places where this could be done," said Knight Frank's Dawson.
NEXT TEST?
The next leg up for the ABS market may well be the take-off of UK government-guaranteed residential mortgage-backed securities (RMBS).
The two-part UK programme, which came into effect in April, is open until October. So far no UK banks have made use of the facility, but there talk that a deal could come in September.
"The next steps are likely to be the government guaranteed UK RMBS deals expected in the third quarter. It will be another good step if they are well received," said Panek.
The success of those deals will not be who issues them, but how the issues perform in the market, he said.
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