Bloomberg News

Asset-Backed Bond Issuers Plan Quality Label to Lure Buyers

September 28, 2011

(Adds analyst’s comment in fourth paragraph.)

Sept. 28 (Bloomberg) -- Issuers in the $1.3 trillion market for European asset-backed securities want to introduce minimum standards as soon as next year to make the bonds blamed for the credit crisis more attractive to buyers.

The Association for Financial Markets in Europe and European Financial Services Round Table lobby groups are working on plans to label asset-backed notes that reach certain standards as Prime Collateralized Securities, according to two people familiar with the matter. A PCS working group, which also comprises investors, is scheduled to meet today to discuss the timing for the project and how to get better regulatory treatment for the debt, said the people, who declined to be identified because the discussions are private.

The industry groups are working on the quality-assured brand after issuance in the asset-backed securities market in Europe tumbled by more than 80 percent since its pre-credit crunch heyday. Sales stalled in 2008 after bonds linked to U.S. subprime debt slumped, prompting investors to shun the hard-to- value securities.

“In principle it’s a good initiative, but the implementation is very complex because of the different market practices in each European country,” said Alexander Batchvarov, the London-based head of structured finance research at Bank of America Corp.

2012 Label

The PCS label would be designed to take account of new and existing regulation, said the people. Deals would need at least two triple-A credit ratings and reveal enough information about the underlying loans to be eligible for the liquidity operations of the European Central Bank and Bank of England, the people said. The ECB, BOE and European Investment Bank have been consulted on the plan, according to the people.

The lobby groups plan to have firm proposals ready for approval by their members by year-end with new and existing ABS deals able to get the PCS label by early 2012, said the people. They expect about 80 billion euros of PCS-approved issuance by 2014.

The quality tag will be available for bonds backed by residential mortgages, small- and medium-sized company loans and consumer loans, the people said.

“To make this initiative work it’s key to get the ECB and BOE to give the labelled issues better treatment in their liquidity operations, or to persuade the European Commission to require less capital for banks and insurance companies that buy these bonds,” Bank of America’s Batchvarov said.

PCS Plan

AFME and EFR hired Bishopsfield Capital Partners Ltd., a structured finance advisory firm, to compile a business plan for the PCS project, said the people. Alex Evans, an external press officer for Bishopsfield Capital, confirmed the company’s appointment while refusing to comment further.

Rick Watson, a managing director at AFME, confirmed the group has hired a consultant to explore the project while declining to comment on the specifics of the talks. Sebastian Fairhurst, the Brussels-based secretary general for EFR, declined to comment.

AFME was formed in November 2009 through the merger of various industry groups including the London Investment Banking Association and the European division of the Securities Industries and Financial Markets Association. EFR is a group of chairmen and chief executives of major banks and insurance companies.

--Editors: Paul Armstrong, Andrew Reierson

To contact the reporters on this story: Esteban Duarte in Madrid at eduarterubia@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net


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