Whilst there is optimism amongst issuers and investors, the asset-backed securities (ABS) market is going through a number of changes.
The first quarter of 2019 saw a drop in ABS issuance, predominantly due to the new EU Securitisation Regulation, LIBOR/SONIA changes and – of course – continued Brexit uncertainty. However, we saw the primary market pick up in the last few weeks of the second quarter, particularly in the UK and the Netherlands.
With more deals in the pipeline, there is now a sense of cautious optimism amongst many issuers and investors. I recently attended Global ABS 2019 in Barcelona, which was their most well-attended conference since the financial crisis. A number of big UK deals were marketed there, and industry participants were bullish about new players, such as marketplace lenders. These developments have given the market a somewhat steady pulse.
In terms of credit quality and structure, the securitisation market is in a good position, but some market players did fret over the possibility of a sudden liquidity crisis when the market turns. There was a feeling that there is a lot of money that could go away very quickly and that there isn’t a sufficient secondary market to absorb large outflows.
A raft of regulatory changes
There’s also a concern that the impact of the EU Securitisation Regulation could slow the industry pulse down to a worrying beat. Many market participants say they are fatigued by the amount of regulatory and policy requirements that have been placed on them in 2019. They are having to deal with the new Securitisation Regulation, which introduces the long-awaited rules for issuing simple, transparent and standardised (STS) transactions and things like the SONIA switchover.
The European Securities and Markets Authority (ESMA) has acknowledged that implementation of the Securitisation Regulation will be difficult, given a number of uncertainties and the lack of a transition period for the regulation.
Further, while the regulation went into effect at the beginning of 2019, ESMA’s regulatory technical standards have not yet been adopted by the European Commission. If the Commission does adopt them, the European Council and European Parliament will be given a non-objection period, creating further delay. Market players don’t expect the regulation to enter officially until late this year and so are in a holding pattern that could ultimately affect issuance and investment.
A simpler, transparent and standardised future?
STS products are a new category of security. They have fewer regulatory requirements and qualify for lower capital charges and are therefore more attractive for banks and other investors.
But for products to qualify as an STS security, they must capture, interpret and make public large volumes of technical data. This creates considerable challenges for investment managers, collateral administrators and originators. They must ensure that new issuance hits the ground running in terms of speed to market, compliance with the regulation and investor buy-in.
Most do agree that STS will become the standard in ABS and that the market will continue to grow steadily. We’ve started to see an upswing in deals issued as STS-compliant. Some asset classes, such as RMBS and Auto loans, were already familiar with the ECB purchase programme’s stringent requirements, so the impact hasn’t been too much of a shock. However, there are other asset classes that won’t be considered as STS but will still have to meet more stringent reporting requirements under the new framework. This includes collateralised loan obligations (CLOs) and other private transactions.
An eye on new trends
Some at the conference were less focused on regulatory developments, pragmatically saying let’s deal with it and then look for the opportunities provided by emerging trends.
Non-performing loans (NPL) in Southern Europe, particularly Italy, Portugal and Greece, are still piquing people’s interest. The region is back to offering more favourable risk/reward scenarios. In Greece, for example, it’s anticipated that there will be a number of deals involving both US and European investors. In June 2019, Greece’s Piraeus Bank announced that it had teamed up with Sweden’s Intrum to set up a platform to service its EUR 27bn bad loan portfolio.
Another trend gathering pace is marketplace lenders using securitisation techniques to fund their businesses, with investors keen to profit from the lower loan origination at fintechs such as Zopa and Funding Circle. Younited Credit recently issued the first-ever marketplace lending securitisation in Europe and was able to complete EUR 156m financing with a triple-A rating for its senior notes. One to watch as we approach a new decade.
Team up with TMF Group
We are one of the largest independent administrators of structured finance entities in the world. Our team can support ABS, mortgage-backed securitisations (MBS), CLOs and much more. We’re well-placed to help you comply with the new EU Securitisation Regulation.
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