Asset Backed Securities: a practical guide for investors.

This guide is an introduction to ABS, presented from the point of view of the investor. It proposes a breakdown in simple notions, which enable a partial reading.

I. What is an ABS?

ABS (Asset Backed Securities) are experiencing strong growth on the capital markets. These financial instruments enable companies to raise capital using the securitisation method described below.

1. Securitisation

Securitisation is a way for companies to raise capital and consists in using one of the company's financial assets to guarantee a security issued on the capital markets.

Let us take the example of an industrial manufacturer with an average credit rating, who is experiencing difficulties in obtaining financing from banks. This manufacturer has sold capital goods to customers with a strong credit rating. The idea behind securitisation is to structure a financing package backed by these high quality trade account receivables. In this way repayment no longer depends on the manufacturer, but only on the customers' ability to pay for the goods.

A company is created for this purpose (SPV or Special Purpose Vehicle). The manufacturer (the Seller) sells the portfolio of trade account receivables (the underlying asset) to the SPV. The SPV then refinances this purchase by issuing rated securities, with repayment of these debts depending on the customers' (the final debtors') ability to pay.

2. ABCP, MBS and ABS

Securities issued using the securitisation method are called "Term Deal?' if they are offered to the markets as a long-term bond and "Conduit? if they are short-term.

a. ABCP

Conduits are mainly refunded by issuing commercial paper. These securitisation programmes, known as Asset Backed Commercial Paper (ABCP) accounted for a total outstanding of more than USD 500bn in the US in 1999, (i.e. more than a quarter of the US commercial paper market).

b. MBS

Term deals where the underlying assets comprise mortgage loans are called Mortgage Backed Securities. These represent a highly specific market and are mainly traded on the US domestic market. MBSs are generally fixed rate and their risk is principally linked to early repayment of the underlying mortgage loans. More than USD 400bn MBSs were issued in the US in 1999.

c. ABS

ABSs are all the Term Deals which do not fall under the MBS category: unlike MBSs, ABSs are mostly floating rate notes and principally carry a credit risk. In 1999, approximately USD 350bn of ABSs (excluding MBS) were issued.

3. Fast-developing

Since 1996, ABSs have accounted for one of the strongest growth segments in the capital markets and are also developing outside of the US (issuance volume on the European market was USD 75bn in 1999).

On the whole, this trend can be explained by increasing pressure from shareholders, which leads more and more companies to deconsolidate financial or property assets in order to optimise their Return On Equity (ROE).

In the same way, information on ABSs is increasingly available and transactions are progressively standardised, leading to more transparency.

Finally, ABSs are often sold as variable rate securities, and benefit enormously from growth in the credit market, while offering an attractive means of diversifying investments, especially in Europe.

4. Market segments

Each securitisation is, to a large extent, characterised by its underlying asset. According to this criteria, the ABS market can be divided into several segments.

US household debt (around USD 5000bn) represented the first pool of securitisable assets which gave rise to MBSs and to the main ABS categories, according to the type of asset: Credit Cards, Home Equity Loans or HEL (consumer loans secured by mortgages), Auto Loans, and Student Loans.

The "Credit Card" type of ABS has experienced steady growth over the last ten years and account for the most mature and standardised segment of the market, with USD 50bn of new issues in 1999. US consumer loan organisations do not dispose of a large amount of capital and securitise their outstanding credit card debt heavily: they turn to the markets several times a year and each time sell a portfolio of around USD 1bn of outstanding on thousands of individual debtors over the entire US.

Since 1996, the increase in ABSs has been greatly helped by CLO, CBO and CMBS securitisation types: to maximise their capital, financial institutions have proceeded with a large scale deconsolidation of their loan portfolios (Collateralised Loan Obligation or CLO), security portfolios (Collateralised Bond Obligation or CBO), or commercial property portfolios (Commercial Mortgage Backed Securities or CMBS). By way of example, the volume of CBOs and CLOs issued worldwide in 1999 was almost twice the volume of "Credit Card" type ABSs issued.

II. 5 STAGES IN EVALUATING AN ABS

The main difficulty faced by an investor lies in evaluating the offered security within a reasonable time frame. This section suggests a method of breaking down an ABS into its five component parts: underlying asset, credit enhancement, cashflow mechanics, legal structure and links with the seller.

A. Stage 1: Underlying Assets

In a securitisation, the analysis of the underlying asset is crucial: whether the issued securities are repaid depends in the first instance on its strong or weak performance. The main points to study are: the quality of the final debtors, the monitoring of the portfolio the maturity of the receivables, and finally how these loans were set up.

1. Debtors

It is possible to distinguish between securitisations where the final debtors are individuals, and those which have companies as the final debtors. Risk linked to a portfolio containing many hundreds of thousands of US households' consumer loans can be seen as purely statistical and strongly linked to the economic environment, whereas a portfolio of, for example, twenty company loans needs to be analysed debtor by debtor, since each one accounts for a larger proportion of the underlying asset.

The credit risk of securitisations backed by individuals is little correlated to securitisation backed by companies.

2. Reporting

When a transaction is set up, credit rating agencies require frequent reporting, following a predetermined set of criteria, to assess the development quality of the underlying asset. For household consumer loan portfolios, global statistical data is enough to describe the portfolio (net yield rate, geographical distribution of debtors). Conversely, ten office blocks will need detailed asset- by-asset reporting (vacancy rate, description of the tenants, rents).

The Diversity Score is a standardised indicator to measure the diversity of a corporate loan portfolio: if for example, a portfolio of 200 loans has a score of 50, this means that the portfolio is equivalent to a hypothetical group of fifty loans to uncorrelated companies. This calculation, made by credit rating agencies, is based on the correlation between different economic sectors.

3. Maturity

To fully understand an underlying asset, a distinction needs to be made between long-term and short-term assets: in order to be refunded by a long-term bond, a portfolio of 30-day commercial debts should be renewable. This means that with the repayments, the SPV will buy new debts from the seller over, for example, a five year reinvestment period.

On the contrary, a portfolio of 15-year mortgage loans does not require a reinvestment period. This portfolio is referred to as static: it does not change during the course of the transaction and is amortised with each repayment. A static portfolio has the advantage of being completely transparent from the beginning of the transaction.

For a renewable portfolio, agencies safeguard against a deterioration in quality of the original portfolio by imposing stringent criteria on reinvestments. The more short-term the asset, the greater the turn-over, which in turn makes for more dynamic structure management, thus guarding against a deterioration in quality by adding superior quality investments.

4. Origination

Origination covers the entire process for setting up a new loan. In most cases financial assets are created during the day-to-day business of the seller: consumer loans, syndicated loans to leading companies, and trade account receivables following the sale of capital goods. By studying the procedure for granting loans (circulation of the credit profile, scoring method), it is possible to see how the final debtor's credit risk was calculated and checked by the seller. The more selective the origin, the easier it is to get an idea of the underlying asset.

The origination is more important when the transaction includes a reinvestment phase in new assets, due to be generated at a later date. Certain ABSs, of the "Future flow" type, are securitisations of future receivables which do not yet exist: for example, an oil company can securitise income in dollars, received in exchange for expected oil sales over the next two years. To take this extreme example, the securitised portfolio is only described by the asset creation procedure, i.e. a description of the oil selling process.

B. Stage 2: Credit Enhancement

To optimise refunding costs, securities sold on the market are generally awarded a high credit rating from credit rating agencies: for example AAA, the highest rating, means that there is only a slight possibility of default on the security. It is rare to find an underlying asset in a securitisation which has sufficient quality of its own, to obtain this rating. A portfolio of several thousand debtors will inevitably contain some defaults in payment.

Credit enhancement is a means of absorbing these defaults, in such a way that they do not affect the quality of issued securities. The more the security benefits from credit enhancement, the less the risk of default. In a transaction comprising several risk profiles, the senior tranche is the one with the most credit enhancement.

1. Methodology

A credit rating assesses the ability of issuers to withstand worst case scenarios. Therefore, to designate an AAA rating to the senior tranche of an ABS, the credit rating agencies demand that the overall structure is able to withstand a worst-case increase in defaults in the underlying portfolio, without the senior tranche being subject to default.

For a diversified portfolio, historical statistical data (standard deviation) can be used to predict worst-case scenarios: for example, to obtain AAA status, the SPV should be able to fully repay senior debt obligations, even if the underlying asset experiences a sudden default on payment equal to [4] times the annual loss rate, the highest over the last [5] years. These scenarios are even more relevant given that a reliable database exists, which is the case for US consumer loans. If the credit rating agency does not have access to reliable historical data, this does not imply that the AAA rating cannot be achieved, but simply that the agency insists on a larger multiplier coefficient.

This statistical approach is generally complemented by an asset by asset approach, paying particular attention to debtors with a substantial concentration of debts or debtors with a high risk profile. This approach is used with CLOs where the underlying asset is comprised of loans to final debtors, rated by agencies or scored by the seller bank. In this case the credit rating agency demands a worst-case scenario which takes the form of a simultaneous default of all debtors who account for more than [1%] of the portfolio, as well as all debtors with a rating below [BBB-].

Finally, the credit report level required to obtain AAA status, depends on more qualitative data, which in turn depends on the nature of the assets and more generally on the technical and legal securitisation environment.

All credit rating agencies have teams of analysts specialised in structured finance, and follow market developments with the publication of increasingly standardised quantitative and qualitative methods. However, the agency still examines each transaction on an individual case basis, with a due diligence visit to the seller, to guarantee reliability of the credit rating.

In order to withstand the worst-case scenarios predicted by the agencies, a securitisation structure can use several credit enhancement techniques. The main ones are, subordination, excess spread, cash deposit, and guarantee.

a. Subordination

To finance a portfolio of 100, the issue will be composed of a rated tranche of 92 (senior tranche). The remaining 8 will be financed by a non-rated subordinated tranche, that is, repayable only after other senior debts have been repaid in full. Therefore, the subordinated tranche absorbs the first losses on the underlying asset, up to 8, without the senior tranche being affected (see Exhibit 2).

In addition to the senior tranche (often called "Class A") and the most subordinated tranche (sometimes incorrectly referred to as "Equity"), the structures often contain several intermediary tranches ("mezzanines"), called Classes B, C, D, according to their subordination level. Each of these classes can be split into several tranches of different maturities (for example tranches A-1 and A-2 of class A), however, the level of risk remains the same.

b. Excess spread

This is the spread between the yield of the underlying portfolio (for example Libor+1.00%)and the interest payable to holders of the rated tranches (for example Libor+0.10%). In theory, providing all goes well, residual flow surplus is paid to the holder of the most subordinated tranche in payment for risks taken (in our example 0.90%p.a.). However, this payment depends on whether the structure is performing well: in the event that the performance of underlying assets fails below a predetermined level, the Excess Spread is used to repay the rated tranches, and in this respect, represents an additional credit support (see Exhibit 2).

c. Cash deposit

On the whole credit rating agencies require the seller to pay a cash deposit to the SPV, repayment of which is ranked the same as the most subordinated tranche. The SPV will then reinvest this amount in liquid financial instruments rated A1+/P1 (for example treasury bills), which can then immediately be cashed to pay the holders of the senior tranches, if necessary. Certain structures sometimes allow for part of the Excess Spread to pay the Cash Deposit (see Exhibit 2).

d. Guarantee

Certain structured transactions use credit enhancing guaranteed by a third party (a bank, an insurance company): in case of default, the guarantor is substituted for the issuer of the security and is obliged to repay. US insurance companies, generally rated AAA (the monolines) expanding in financial insurance: they insure payment of a security on a specific date, which is also ranked AAA, by the insurance company. In general they only insure risks already considered as investment grade (i.e. of minimum ranking BBB-/Baa3): for a securitisation, if the underlying asset has a lower average ranking, it needs to be upgraded by other means to BBB status before the monoline will guarantee it, and accord the security a AAA rating. For example, a BB portfolio will have a credit enhancement using a subordinated tranche in order to achieve a BEB rated senior tranche: this tranche will be guaranteed by the monoline.

C. Stage 3: Cashflow Mechanics

The SPV's only source of income is the flow of payments from final debtors related to the underlying asset. Payments originating from the redemption in capital of debtors are entered in the accounts as principal collections. Interest collections include the interest paid by debtors, but also, overdue penalties and operating costs (particular case: the trade receivables do not bear interests, however, a receivable with a value of 100 to be received in 3 months, will be sold 99 to the SPV, which enable to consider in principal and 1 in interest).

The allotment of incoming payments is set out in full in the legal documentation. It is important to understand the principles of payment allocation as the order of subordination of the various tranches depends on this.

1. Reinvestment

If the structure is rechargeable, the period of reinvestment needs to be analysed separately from the period of repayment. During the initial phase, principal collections are reinvested in new eligible assets in order to ensure the consistency of the quality of the underlying.

During this phase, and similarly, during the phase of amortisation, interests and fees collections are mainly allocated to the interest payments of securities in the order of subordination of the various tranches.

2. Repayment

After the reinvestment phase, if there is one, and otherwise from the outset, principal collections are used to repay the different tranches.

When the underlying asset consists of a large number of debtors, principal collections are daily. These amounts are placed by the SPV in highly liquid A1+/P1 rated assets, in preparation for payment, to take place on a coupon due date (usually monthly or quarterly).

A security to be repaid on a pre-determined date is known as a Hard Bullet: if the security is not repaid on this date, this constitutes a default. Unlike standard bond issues, the Hard Bullet is very rarely used in securitisation operations.

The Soft Bullet (see Exhibit 3) is one of the two most frequently employed repayment methods: all principal collections are placed in one of the SPV's accounts. Only when there is sufficient capital in the account will the A tranche be repaid, in one instalment. Subsequently, the process of accumulation will continue in order to repay the B tranche afterwards, then C, and so on.

A Pass-Through type redemption is one where principal collections are fully repaid on the next coupon due date to holders of class A securities, and when these have been repaid in full, to holders of class B securities. This method is generally used when the rate of principal collections is slower (for example, long-term assets) in which case it would be uneconomical to accumulate the reinvested amounts in low-yielding instruments while awaiting a bullet payment.

Some structures make use of Controlled Amortisation. which is a type of Pass-Through repayment. However, if payment in principal is greater than expected over a certain period, a specific amount is retained in the structure. This enables smoothing of the repayment profile to make it as linear as possible.

3. Rapid amortisation

Throughout the entire life span of the transaction, the quality of the structure is monitored by regular reports submitted to credit rating agencies. Each indicator in the report has a threshold level (a Trigger). If this level is reached it triggers a further sequence of allocation of flows so as to maintain the quality of the rated tranches.

If triggering takes place during the reinvestment phase (see Exhibit 4), this phase will come to an end, and the amounts paid in principal will be used to repay bondholders in a pass-through mode (to avoid to retain cash in the structure). At the same time, the Excess Spread will no longer be paid to holders of the lowest ranking tranche, but will be used to repay holders of rated tranches. As a general rule, all amounts received will be used to repay the tranches as fast as possible.

4. Repayment date

The Expected Maturity is the most likely repayment date according to simulations carried out on the structure. When securitisation takes place, the effective repayment date of securities may differ from the expected maturity without constituting a default clause. The legal cut-off date for repayment of securities is said to be Legal Final. On this date, if securities have not yet been repaid, default is declared and the structure is liquidated to cover securities which are as of yet unpaid, according to the predetermined order of payment.

The first factor causing deviation between the expected and actual repayment date is the variation in the rapidity of repayment of debtors in relation to the original scenario. This risk is important for MBSs, and investors generally have a chart linking expected maturity to the early repayment rate of underlying debtors. On the other hand, this is fairly unlikely in the case of a short-term asset (such as credit card receivables), or when the underlying debtors do not possess an early repayment option (such as syndicated corporate loans to businesses). Securitisations of long term assets often incorporate a Clean-up Call, i.e. the possibility of liquidating the structure when the outstanding falls below 10% of initial value.

The second factor contributing to uncertainty hinges on early repayment should an emergency procedure be triggered. This scenario appears under extremely precise circumstances, and depends on legally predetermined trigger targets. To date, early repayment has never affected standard ABS categories such as credit cards. If the emergency procedure is triggered, this indicates abnormal deterioration of the underlying, which is better than a default. In general, triggers apply to averaged figures, to avert the triggering of early repayment by an insignificant poor performance over a month.

For each transaction, repayment risk should be examined in each individual case. However, a distinction is being made with increasing frequency between pure credit products such as ABSs, where uncertainty is reduced by a maximum, and MBSs where repayment risk is an important factor in price mechanisms: CMOs (Collateralised Mortgage Obligation), securitisations of MBS portfolios, are transactions which offer investors high profit profiles by exerting a leverage effect on the repayment rate of underlying debtors.

D.Stage 4: Legal Structure

ABS transactions are often given outlandish names, ranging from the name of a flower to an unpronounceable sequence of letters. This name refers to the legal structure which issues the securities and which has been created specifically to this effect.

1. Special Purpose Vehicle (SPV)

The securitisation structure is a company specifically created for this purpose, whose assets consist of the disposed underlying asset and which is refinanced by issues of securities. Some countries benefit from legal securitisation structures; as in France (Ponds Communs de Creances (FCC)). However, most securitisations are issued by offshore vehicles which side-step the restrictions of domestic legislation. (The laws ruling FCCs have recently been relaxed, showing increasing resemblance to Anglo-Saxon style SPVs).

SPVs are established in Jersey, in the Cayman Islands, and in Delaware, for technical reasons: ease of registration, absence of the need for a physical board of directors, reduced costs, and uniformity of structure. The use of tax havens is not motivated by the desire to hide from the domestic legislator: the practice of offshore securitisation is widely recognised by most major states, as in any case, the operation must be approved by the local authorities, which decide on the deconsolidating nature of the structuring (i.e. the possibility of off-balance sheet accounting for the seller).

2. Master-Trust

This is a super SPV, which can be re-used for several consecutive transactions, by issuing individualised series (for example "serie 98-1" represent the first transaction in 1998 for this seller). Each serie is backed by the same underlying receivables pool, and each time the seller carries out a new securitisation, he add underlying assets to the total portfolio. Collections in principal and interest is allocated pro rata in each series.

Each series then has its own cashflow mechanics and amortisation profile. The use of a universal structure enables amortisation of fixed costs, but above all, the constitution of an extremely large and diversified underlying portfolio developed over consecutive operations. This technique is mainly employed by credit card institutions which frequently turn to the markets for financing: some Master Trusts contain over 30 series.

With the exception of the underlying asset, each serie may be analysed in financial terms as a separate SPV. However, some Master Trusts establish solidarity between series: if a serie defauts, the Excess Spread of another, stronger serie may be used to support the weaker series.

3. Documentation

The SPV is legally independent of the seller: when the SPV is established as a company, its ownership is established by a symbolic company capital held by the Board of Directors. In the majority of cases, the SPV is established as a Trust, which means that the company's capital is maintained and managed by a professional Trustee, who acts in the interest of bondholders.

Although independent, the trustee does not have total freedom of hand, as each event which takes place during the company's life is clearly stipulated in the legal documentation: cash management, allocation of flows, third-party default and so on.

The most important legal document relating to off-shore structured financing is the Security Trust Deed, which clearly lays out the circumstances of default and the way in which the Trustee should liquidate assets for distribution to bondholders.

As everything is legally predetermined, one aspect of the SPV is known as "Bankruptcy Remote", which means that it can only be liquidated by the Trustee. This aspect is what makes securitisations longer-lasting than certain companies, whose financial strength may be abruptly undermined, for example, by a court case or embezzlement by a director.

4. True sale

The most important legal aspect of securitisation is the quality of asset transfer from the seller to the SPV. As a general rule, credit rating agencies require a True Sale, which means that once the underlying has been disposed of, it is wholly possessed by the SPV. For example, should the seller default, his creditors no longer have any right to the underlying assets and have no right on the SPV. This principle clearly establishes that there is no direct seller risk.

The True Sale aspect is validated by a legal opinion given by the firm of lawyers having set up the initial legal framework. From time to time, securitisation operations make use of an intermediary SPV which intervenes between the seller and the issuing SPV so as ensure that disposal and decorrelation with the seller is as complete as possible.

5. Default

When a securitisation operation is set up, the main objective is to avoid as far as possible the risk of default on tranches with the highest ratings. Default follows an early repayment event, if all overcollateralisation resources have been exhausted. Default clauses are defined precisely in the legislation, being objective events (for example, the non payment of interest on rated securities for over seven days) which authorise the liquidation of the structure. In the case of an SPV set up as a trust, the trustee recovers possession of the assets and is responsible for their liquidation for distribution to bondholders according to the order in which the tranches are subordinated.

E. Stage 5: Links with the Seller

In the majority of securitisation operations, asset disposal is a True Sale, which clearly indicates that the quality of the underlying portfolio does not depend on the quality of the seller. Even if the seller remains involved in the operation, back-up measures are implemented so that the structure is able to withstand straightforward default by the seller. It is not unknown to see AAA rated securitisations whose seller is close to liquidation.

1. Servicing

In general, the seller wishes to maintain a business relationship with final debtors. As such, he remains the Servicer, which means that he continues to manage the receivables on behalf of the SPV (collection of receivables, administration). In many cases, the end debtor is not even aware that his debt has been securitised. In most cases, the seller retains the most subordinated tranche, which serves as motivation to pay back as much as possible of the amounts due to the SPV: each dollar of lost payment is endured by the seller, as the subordinated tranche absorbs all initial risks.

Structures generally allow for a certain level of deterioration in the quality of the seller (for example, downgrading of his rating to below BBB), at which point a Back-Up Servicer takes over. This replacement will quickly come into effect if there are few debtors or if they are clearly identified, such as bank CLOs whereby the majority of debtors are major corporates known throughout the financial community. On the other hand, for individual portfolios involving hundreds of thousands of debtors, the Back-Up Servicer is named at the beginning of the transaction, and regularly receives the necessary computer files so as to be quickly operational, if necessary.

2. Commingling 

As a general rule, the seller collects the receivables on his own account. The end debtor may have two receivables, one securitised, the other not, but he will discharge both directly to the seller. The next day, the seller pays back to the SPV the amounts paid to the order of the securitised receivables. This presents the risk of Commingling, i.e. the risk that the accounts of the seller will merge with those of the SPV.

This is a contained risk, as, in the event of the occurrence of the slightest anomaly, or deterioration of the seller's financial strength, the SPV maintains the right to notify the end debtor that amounts due should be paid directly to the SPV.

3. Swaps

In most cases, ABSs give exposure to underlying credit without enduring foreign exchange or interest rate risk. Where necessary, underlying interest is transformed by the SPV into the rate and the currency of issue via a swap. Credit rating agencies generally require the rating of the counterparty of the swap to be at least Al+/Pl. When the seller is a highly rated financial counterpart, the bank will often provide the swap. For the holder of senior equity, the risk on the counterpart of the swap is extremely indirect: before loss can be recorded, the counterpart of the swap must default despite his high rating, the replacement cost (mark-to-market) of the swap must be positive, and the mark-to-market must be higher than the level of overcollateralisation of the senior tranche. This indirect risk is often further reduced by the existence of a trigger, which obliges the SPV to reassign its swap (i.e. change counterpart) as soon as the counterpart falls below Al+/Pl.

III. WHY PURCHASE ABSs?

Despite the increasing standardisation of transactions and amount of available information, the purchase of an ABS still requires a little more analytical effort, in order to understand the structure, than a plain vanilla security.

However, more and more investors are creating dedicated teams, specialising in ABSs and credit products in general. This trend may be explained in a generalised fashion by the following reasons, diversification, financial strentgh, stability, recovery rate, standardization, liqudity, and return.

a. Diversification

ABSs provide a means of diversifying a portfolio into low risk products offering exposure to a diversified portfolio.

b. Financial strength

The hypotheses of credit rating agencies are extremely conservative and depend for the most part on extremely objective and quantitative criteria. Unlike companies, SPVs are not as sensitive to subjective and volatile criteria, such as corporate image.

c. Stability

Overcollateralisation is a dynamic element: the structure adapts to maintain the same risk quality. Unlike corporates, the security is not sensitive to unexpected dramatic events, such as the departure of a key member of staff or poor strategic choices.

d. Recovery rate

As the underlying assets are diversified, clearly identified and lodged as collateral in the best interest of holders of the securities, rating agencies judge that the recovery rate for holders in case of default (which remains theoretical) is extremely high.

e. Standardisation

Increasingly, securitisation and ABSs in particular are becoming standard forms of structured financing, and information about them is more and more widely available. This enables enhanced visibility when drawing comparisons between transactions.

f. Liquidity

Securitisation has become a big industry: in the US in 1997, 50% of domestic US issues (excluding T-bills) took the form of securitisation. Liquidity is increasing in the major segments such as ABS Credit Cards and financial CLOs, where the issue volume of USD 45bn is constantly increasing. Even during the credit crunch in October 98, credit cards have remained actively traded assets (Exhibit 6).

g. Return

With equal ratings, ABSs generally provide interesting margins for long term investors. In addition, the new asset classes offer spread narrowing potential: for example, in tandem with the development of this market segment, spreads on credit cards have narrowed by around 80bp since 1992 (Exhibit 6).

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Exhibit 1. ABS Issued in 1999

CARD     15%
CBO/CLO  25%
CMBS      7%
OTHERS   14%
AUTO     14%
HEL      25%

USD assets

TOTAL ABS $350 Billion

Note: Table made from pie chart

OLIVIER MELENNEC is in charge of the European ABS distribution group at SG London. Between 1995 and 1998, he was managing Certain Funding, a USD 5 billion arbitrage conduit, dedicated to ABS purchase. Previously, he spent six years in the Capital Market division as a senior sale and strategist on interest rate derivative products. Olivier graduated from Ecole Nationale des Ponts et Chaussees, Paris in 1988.