The Broadgate centre in London, where many of the world's leading investment banks are housed, is frequently the source of news. Recently, it made the news itself.

British Land, the UK's second biggest property company, said it would launch a £1.54bn asset-backed bond securitised on the rental income of 12 properties at Broadgate, whose tenants include the European Bank for Reconstruction and Development. It will be the biggest European property securitisation bond ever, beating the previous record, a £555m deal for sites at Canary Wharf.

Property-related asset-backed securities (ABS), including mortgage-backed bonds, accounted for 55 per cent of total offerings in the first quarter, according to Merrill Lynch. Overall issuance totalled a record $18.9bn, compared with $13.8bn for the same period a year earlier, and is forecast to reach a record $57bn for the full year.

"The European investor base is growing exponentially as people get more comfortable with the credit structure and relative value between different fixed-income securities," says Tamara Adler, head of ABS at Deutsche Bank. Europe still pales beside the global ABS leader, the US. The gulf could widen if the latest show of ingenuity from American issuers comes off.

Several US states have hinted they might try to gain some of the $206bn in payments from US tobacco companies following successful litigation sooner than they otherwise would under the 25-year staggered payment plan. They would securitise future payments from the settlement and use the monies to pay for healthcare.

In Europe ABS is used primarily by property companies, mortgage banks, consumer finance groups and others with strong "underlying receivables" such as rental payments. These receivables are used to repay investors who buy the bonds. The instruments are an attractive tool of balance-sheet management because they permit companies to maintain as well as increase their business without using fresh capital, currently an expensive option.

They also allow companies to remove assets such as equipment leases and car purchase loans from their balance sheets, releasing regulatory capital previously put aside as a provision against default.

In a busy first quarter of European issuance, renewed liquidity and demand helped risk premiums, or spreads, on ABS to tighten from the wide margins induced by the Russian crisis, says Merrill Lynch. This helped issuance rise sharply as investors - free from year-end budgetary and other constraints linked to euro conversion - took advantage of the cheapness of structured credits.

"This buoyant investor appetite underscored the dramatic tightening in European ABS and mortgage-backed security (MBS) spreads over the first quarter from their near historic highs at the start of the year," says Alexander Batchvarov, senior ABS analyst at Merrill Lynch.

Taking its lead, MNBA, a US credit card issuer, last month launched the first euro-denominated ABS by a US issuer, a E750m offering secured by credit card receivables. The issue was keenly studied by other US issuers as they contemplate whether finally to enter the euro-denominated market. It came against a background of paltry issuance of non-European ABS denominated in European currencies. Before MNBA, there were just three issues, all Japanese, totalling $900m in the first quarter compared with $3bn in the first quarter of 1998.

The pan-European investor base that has emerged with the euro has seen demand focusing on ABS products issued by larger and well known institutions. Issuance is likely to be fuelled by several factors, say bankers.

These include: some large one-off transactions, especially in the collateralised loan obligation sector; sharper focus on the euro-zone by investors outside the sector looking to diversify their fund base; broader asset classes including student loans; re-evaluation of social service receivables - such as the plan by Italy to issue bonds backed by future social security payments to help reduce its budget deficit; and an enhanced regulatory environment, as in Germany, leading to more transparency and a better informed investor base.

One notable area of expansion has been in insurance-related securitisation, with bonds issued against future income streams from life insurance and pensions polices.

The arrangements are not dissimilar from "catastrophe bond" structures, the securities used as an alternative to traditional natural disaster reinsurance. There were two major catastrophe bonds issued in the first quarter. Bankers expect strong growth prospects to be constrained only by the market's conservatism and the current low price of traditional cover.

Elsewhere, there has been a property-related deal in Hong Kong, the largest ever outside Japan, and a spurt of MBS issues in Australia.

Japan continues to consolidate its position as the largest market outside the US. Japanese ABS issuance in the first quarter reached a record $6.9bn, up 195 per cent year on year. Full-year issuance of Japanese ABS domestically and in Europe is forecast to total $15bn. Japanese issuance has tended to be non-Yen denominated but bankers say one positive effect of the deluge of ABS is a big expansion in the investor base.

One test of the market was the bankruptcy, last autumn, of Japan Leasing, the originator and servicer of several securitised lease portfolios. The fall-out was contained, showing the strength of the market.

Issuance has been confined to traditional sectors such as car loans, equipment leases and consumer loans, though the first bid to launch a Japanese MBS collapsed. Among factors driving the issuance is a wider investor class, including, for instance, the influential post and telecoms ministry, which said it would invest more of its massive savings in domestic ABS.

Bankers say Japan's recession and credit crunch should make ABS an even more viable option for issuers wanting to diversify funding sources. This trend will continue given the problems experienced by poorly rated companies trying to raise corporate bonds.

The immediate cause behind the first quarter pick-up was the deadline for the end of the financial year on March 31, when banks were under pressure to post capital adequacy ratios in line with global standards.

These balance-sheet pressures have forced banks, whose troubles lie at the heart of Japan's troubled economy, to up the ante on customers - such as the lending arms of manufacturers, the most active issuers of ABS - to repay loans.

errill Lynch argues that Japanese issuance this year has been driven by more "fundamental factors" than the calendar - such as auto-loan lenders' funding needs. There were no similar spurts during 1997 and 1998 year-ends, says Mr Batchvarov. "Our pipeline estimates suggest strong issuance in the rest of the year." The supply surge also comes against a background of regulatory changes in Japan making issuance less cumbersome.


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