Synthetic CDOs lead growth in European securitisation, says Moody’s

Collateralised debt obligations (CDOs) saw the greatest volume of growth in the European structured finance market in 2002, said ratings agency Moody’s in a report today. Last year, issuance rose to €182 billion, an increase of 42% on the total in 2001, with synthetic transactions representing 96% of the deal volume. And Moody’s expects the pattern to continue this year.

Static synthetic transactions remained dominant in the market, said the report, ‘2002 Review and 2003 Outlook for Europe’s structured finance market’. But the market also expanded rapidly in managed synthetic products, which are more flexible due to their potential to cushion investors from downgrade movements.

The year also saw the first hybrid cash/synthetic deals. These combine a reference pool of credit default swap exposures with a pool of purchased cash bonds. A number of index-linked transactions also came to the market, which were inspired by investor demand for liquid notes referencing a portfolio of corporate credits.

Moody’s views this rate of growth as a good indicator for the year to come, predicting ongoing strong growth for this asset class in 2003. The rating agency foresees further innovative synthetic deals, managed deals, convergence of cash and synthetic markets, and more negative credit migration.

Overall the European securitisation market continued to exhibit strong growth in 2002, but the rate of growth slowed in comparison with 2001. Issuance volumes for European securitisation in 2002 increased to €346.7 billion, up 29% on 2001. This was considerably less than the growth rate seen during 2001, where issuance volumes surged 60% from €168.4 billion at the end of 2000. But Moody’s said last year’s growth beat expectations.

“In the light of the world economic crisis, a record number of corporate downgrades and defaults, and a weakening of the larger banks’ credit strength, it is impressive that the European securitisation market has continued to flourish to the extent it has,” said Judit Seymour, a senior analyst at Moody’s and author of the report. “The 29% growth, which outstripped Moody’s own prediction of up to 20% growth from last year’s report, shows the durability, resilience and adaptability of the European market.”

Moody’s predicts the volume of issuance for European securitisations as a whole will increase by up to 15% during 2003. Alongside CDOs, commercial mortgage-basked securities, which grew 40% in 2002, are also expected to drive growth in this year.