Goldman Sachs adding staff to European business
Goldman Sachs Group Inc. says it's adding staff to its European asset-backed securities business as the bank prepares for a resurgence in the $305 billion market that shrank more than 40 percent over the past four years.
New securities will be generated as hedge funds and private equity firms seek to repackage debt as they enter the direct lending market, according to Simone Verri, who is co-head of financial institutions group financing at Goldman in London. Investors buying bad loans from the region's banks will also want to securitize the assets, he said.
"We have invested a lot in this opportunity by hiring more people, especially for ABS structuring," said Verri, a partner at the New York-based investment bank. "The specialty finance players and quasi-banking sector could use ABS to fund loan origination and that's a very attractive commercial opportunity in the medium term."
Oaktree Capital Group LLC, the biggest distressed debt investor, and New York-based KKR & Co. have raised direct lending funds in Europe as banks retreat from the market because of new capital regulations. Financial firms will offload more than 100 billion euros ($125 billion) of loans this year after they restructured their balance sheets because of the European Central Bank's asset quality review and stress tests, according to PricewaterhouseCoopers LLP.
Lenders create asset-backed notes by bundling individual loans such as mortgages, auto credit and credit-card debt into tradable bonds.
"Buyers of loan portfolios need financing and they can get that either from an investment bank or eventually via selling ABS backed by these loans," said Verri. "This could be an important development as non-performing loan disposals will improve banks' balance sheets and risk capital."
ECB President Mario Draghi has put asset-backed bonds at the center of his plans to stimulate the euro-area economy because the securities allow the transfer of risk from banks to investors, which may encourage lenders to offer more credit to companies. The central bank will buy the notes as part of a plan to expand its balance sheet by as much as 1 trillion euros.
While the program signals the ABS market has been rehabilitated after being blamed for worsening the financial crisis, its impact on bank lending will be limited, said Verri.
"Many European banks are capital constrained, so I don't see the ECB's ABS purchase program necessarily as a game changer," said Verri. "It doesn't address capital needs and therefore it doesn't necessarily unlock credit origination."