Untitled Document
  
 

Global Bond Markets

In order to understand the role of securitisation in the global capital markets arena, it is necessary to first put things in perspective by evaluating the global bond market structure.

Global Debt Market: Dec 2007

* Includes miscellaneous components
Source: Bank of International Settlements Quarterly Update, Dec 2007 (Outstanding Amount)

The global debt market is pegged at around USD 75 trillion. The domestic debt market dominates with over 70% share of the total debt. In the domestic issues, government issues constitute 47% of the market. In the international issues, financial institutions control about 79% of the market. Increment volumes are given below

Global Debt Issuance

(USD trillion)

Source: Thomson Financial

Due to the sub-prime crisis in the US and its contagion effect on the global markets, institutions have witnessed a decline in the new bond issues in 2007 as compared to 2006. The overall new bond issues in 2007 stands at USD 6.63 trillion, marking a drop of 7% over a period of one year.

Global Securitisation Market

As per Thomson Financial League Tables, of the total issued global debt of USD 6.63 trillion in 2007, securitised products market constitute around 43% share. Global Mortgage Backed Securities (MBS) constitute USD 1.3 trillion (19.6%) while Asset Backed Securities (ABS) constitute USD 1.14 trillion (17%) respectively. Short-term debt that includes ABS and MBS amounts to USD 0.427 trillion (64%). MBS market has declined 11% from USD 1.45 trillion in 2006 owing to the sub-prime meltdown. The effect of the sub-prime crisis has been more predominant on the ABS market that has shrunk 26% from USD 1.54 trillion in 2006. Overall structured finance market has declined by over 18%.

Collateralised Debt Obligations (CDOs) have also witnessed a drop of 12% in issuance from USD 551.7 bn in 2006 to USD 485.7 bn in 2007. The break-up of CDO issuance by underlying collateral is given below:

Source: Thomson Financial, D&B Research

Geographic Break-up of Securitisation Market

The break-up of the global securitisation market on geographical lines is shown below:

Securitisation Market by Geography

(USD trillion)

Source: Thomson Financial

US accounts for over 74% of the global securitisation transactions, Europe contributing 23% while the rest is contributed by Australia and Asia. In 2007, all markets except Europe witnessed sharp decline in securitisation. Asia witnessed the sharpest drop of over 35% in securitisation activity as a result of the liquidity crunch caused by the sub-prime crisis in the US. Australian securitised bond issuance dropped 40%.

Cross-border securitisation volume dropped from USD 600 bn in 2006 to USD 584 bn in 2007.

Securitisation Market in the US

Issuance of Mortgage Backed Securities (MBS) market in the US has witnessed a fourfold increase during the period 1996-2006 of which non-agency based MBS has grown ten-fold. The non-agency based MBS has also been the most affected during the sub-prime crisis. The total outstanding MBS in the US is close to USD 7.2 trillion.

Source: SIFMA, D&B Research

The key participants in the mortgage securitisation programs are the government agency Ginnie Mae and government-sponsored agencies Fannie Mae and Freddie Mac. Ginnie Mae guarantees timely payment of principal and interest payments to MBS investors. Fannie Mae and Freddie Mac purchase conforming mortgages from originators. The government agencies account for about 58% of the outstanding US MBS market of USD 7.2 trillion. The remaining 42% is accounted for by private sector financial institutions. Most of these MBS included securities backed by Jumbo loans, Alt A loans and Sub-Prime loans. Typically jumbo loans are prime loans but are oversised compared to the conforming requirements of government agencies. Alt A loans are issued to borrowers who appear to have good credit but have limited or no income and asset verification. Currently private sector prime loans account for 68% of all private MBS outstanding. Sub-prime MBS is pegged at USD 1.3 trillion or 19% of the entire US Mortgage. It is this segment that is currently experiencing defaults to the tune of 60 – 80%.

Asset Backed Securitisation market has grown at a CAGR of 18% during 1996-2007. The total outstanding ABS at the end of Q4 2007 stood at USD 2.47 trillion.

Source: SIFMA, D&B Research

The break-up of the ABS market is shown below:

Source: SIFMA

Asset Backed Commercial Paper has grown by 22% in the three years from 2004 to 2006, and has dropped sharply by 38% in the last two quarters of 2007 due to liquidity crunch.

Source: SIFMA

European Securitisation Market

The origin of the European Securitisation market began during the mid-1980s with UK mortgages, which was followed in the early 1990s by transactions featuring collaterals from Spain and France. The mid 1990s saw the advent of the corporate ABS market in the UK, which was employed for the finance of social housing and private finance projects.

Despite rapid growth during the mid-1990s, the market did not really take off until 2000. In 2000, the European Securitisation market was barely €78.2 bn and later in end-2005, the market crossed the €300 bn mark. The European Securitisation market has matured significantly over the last couple of years, reaching €496.7 bn in 2007, as compared to €481 bn issued in 2006.

Source: SIFMA, D&B Research

The European market is matured and the economy has seen impressive growth in the recent years. RMBS, CDO markets and CMBS are the leading asset classes in terms of issuance. RMBS continued to be the leading issuance sector with €259.6 bn (52%) of total securitised volume in 2007. CDO issuance totalled €131.7 bn in 2007 where as CMBS was the third largest sector with €47.6 bn in the same period, contributing around 27% to the total issuance. Auto loan backed ABS issuance totalled €14.9 bn in 2007 achieving a growth of 26% over FY06. Issuance supported by multinational collateral is becoming more prominent in the marketplace. Multinational collateral backed issuance totalled €7.5 bn, more than twice the volume in 2006.

Source: SIFMA, D&B Research

Since the origin of the European Securitisation Market, the UK market has been the leading contributor to the this market’s growth story. In 2007, the UK market contributed 47% of the total issuance. The other developed markets of Europe include Spain, Netherlands, Italy and to some extent Germany. The German market pooled in €5 bn in the fourth quarter of 2007. However, 2007 also saw the dawn of emerging markets of Kazakhstan, Denmark and Switzerland.

Source: SIFMA, D&B Research