European issuance of securitised bonds is expected to reach a new record this year, although this will depend on the continuing health of the UK housing market, the European Securitisation Forum said in its annual survey.

But even if house prices weaken, there is little threat to existing mortgage-backed securitisations because of the relative maturity of the underlying portfolios, Standard & Poor's, the credit rating agency, said in a separate review.

Securitisations involve transferring parcels of assets into a special purpose vehicle that issues bonds paying interest from the assets' ring-fenced cash flows. Mortgages, credit card payments and pub revenues are among the most popular collateral used.

The volume of securitised issues is expected to rise 12.1 per cent this year to €255bn (£197bn), the forum survey showed. Growth forecasts from respondents ranged from 10 per cent to 16 per cent.

The market continues to benefit from historically low interest rates, improving credit quality and growing liquidity, the forum said. The appreciation of the euro also helps deals priced in the currency while reducing funding costs.

In 2004 the credit quality of securitised bonds showed "impressive stability," said Simon Collingridge, in charge of monitoring ratings of European structured finance deals at S&P. More than 97 per cent of securitised bonds rated by S&P maintained their rating or underwent an upgrade.

Upgrades outnumbered downgrades for the first time in five years in 2004, with the residential and commercial mortgage-backed sectors performing most strongly.

Collateralised debt obligations (CDOs) - which group underlying bonds, loans or credit default swaps - staged a dramatic improvement, S&P said. CDOs and commercial mortgage-backed transactions are forecast by the forum to be areas of particularly strong growth this year.

"CDOs have built a substantial following as investors become comfortable with the CDO structure and as issuers further develop attractive CDO products that are broadly acceptable in the market place," it said.

S&P said a growing number of CDOs - known as CDOs-squared - were themselves based on asset-backed securities. The commercial mortgage market, meanwhile, is recovering in the low interest rate climate, the forum said.

S&P reported a growing interest by property owners and managers in using securitisations as part of their funding strategy.

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