Hopes grow for revival of European securitization market in 2014
A Damascene conversion in some regulatory circles in favour of securitization, as a means of boosting the real economy, has heartened market participants, but regulatory hurdles remain, including the liquidity coverage ratio. While continental European issuance has demonstrated growth, there are grounds for cautious optimism that 2014 will see the securitization market, from CLOs to RMBS, spring back to life.
It was supposed to be the year that delivered, if not the rehabilitation of securitization as a source of funding, at least a resolution to its regulatory limbo.
Yet 2013 delivered none of the clarity over the treatment of securitization by Basel III, Solvency II or the liquidity coverage ratios (LCR) that bankers, corporate treasurers and even many politicians have been crying out for.
The regulators’ pronouncements can become self-fulfilling prophecies: if assets are included in the LCR, the market response is positive, but if negative, investors stay away creating a vicious circle.
The European Banking Authority is still making unfair comparisons between securitized products, such as RMBS and covered bonds, concluding the former is illiquid and the latter liquid. This is despite the fact liquidity in covered bonds also dried up during the financial crisis, but was restored due to ECB support, says Richard Hopkin at the Association for Financial Markets in Europe.
Nevertheless, market players remain upbeat, convinced the flawed methodology and questionable conclusions will not be the final word on the matter.
The attitude of policymakers towards securitization has been transformed, and with it expectations about the role it has to play in the revival of the European economy, says Ian Bell, head of the PCS secretariat at Prime Collateralised Securities, an independent group that campaigns for the rehabilitation of the asset-backed securities market.
“I am cautiously optimistic about Basel III and Solvency II,” says Hopkin. “Things seem to be moving in the right direction and the level of engagement has been very good. The Basel Committee in particular has been very attentive to what industry has had to say and this has led to constructive discussions.”
Material progress is unlikely before the tail-end of 2014 at the earliest, says Bell, with markets not picking up until the ECB withdraws its funding mechanism for banks, and that is unlikely to happen before the asset-quality review, due in Q3. It is therefore easy to picture it being 2015 before finalized regulation is in place.
However, a little clarity could come earlier than that, say some analysts. The ECB is very aware of cliff risk, the possibility of the funding environment collapsing when the ECB – and Bank of England – support is withdrawn, says Salim Nathoo, partner and head of the securitizations group at Allen & Overy.
The ECB is therefore working hard to encourage banks to demonstrate its plans for adjusting to life without central-bank money before that reality kicks in, which is likely to increase interest in securitization programmes.
Still, with a reshuffle of personnel in the European Commission and Parliament in the spring, after European elections, it is hard to predict the political climate around securitization in the second half of 2014.
“We are starting to see greater regulatory fatigue now and this is making people more pragmatic,” says Nathoo. “People are looking for ways to work around the uncertainty and there is a greater emphasis on the interpretation of regulation, as well as the regulation itself.”
Irrespective of the regulatory timetable, there are grounds for cautious optimism about issuance in the European securitization markets in 2014. The Funding for Lending and LTRO schemes have undermined issuance, while many banks have had sufficient funding in place to meet their needs, but these factors should ease to varying degrees in 2014.
It was a particularly tough year in the UK RMBS market, usually a dominant component of European securitizations. But this has been partially offset by a relatively strong year for Dutch RMBS, which in 2013 has been bigger than its British counterpart.
If you look at Europe ex-UK, the picture for 2013 looks much better, says Andy South, head of European structured finance research at Standard & Poor’s Ratings Services. Investor-placed European securitization issuance excluding UK auto ABS, credit card ABS and RMBS has been about €51 billion year-to-date, compared with only €32 billion in 2012 year-to-date, an increase of around 60%.
The UK housing market has been relatively lively, with strong prices in London finally complemented by modest gains elsewhere in the country and the help-to-buy scheme giving lenders fresh impetus to lend. This should increase the supply of UK RMBS.
“Next year we expect to see an increase of approximately 15% to 20% in the European RMBS market, with the UK seeing the greatest rise and re-establishing itself as the largest market,” says Annabel Schaafsma, associate managing director at Moody’s.
“With the lack of issuance from the large lenders in the UK resulting in overall issuance being so low in 2013, it will not take much to ensure issuance levels in 2014 are higher than the year before.”
In other areas there have been encouraging signs of things picking up. This year saw a rare French credit card ABS, Master Credit Cards Pass Compartment France. European CLO issuance, absent for four years, started to pick up in 2013, including for SME loans in the periphery, such as Berica PMI Srl, from Banca Popolare di Vicenza.
“It has been a year for firsts – at least since the crisis – and rarities, so that is very promising,” says S&P’s South.
Allen & Overy has seen an uptick in business in CLOs, infrastructure finance and CMBS, which might bode well for those asset classes in 2014, says Nathoo.
Sources of demand seem slightly more diversified than in recent years, making Europe look a little more like the US, says South. Where banks have historically accounted for 60% to 70% of demand, with real money taking up the rest, this year the reverse has been true in some deals.
This bodes well for securitization, delivering on its promise to disperse risk throughout the system, rather than merely shunting it between banks. It also mitigates the impact of regulation aimed at the banks, such as rules governing risk retention and higher capital charges for securitized products.
Despite still-modest supply, many investors are upbeat, especially the smaller players that can afford to make allocations to relatively small deals. Although supply is limited, the quality of deals has been relatively good, says Laurence Kubli, co-manager of the Julius Baer ABS Fund.
Wide spreads make such assets attractive to investors, with the sophistication to do their own analysis of deals, adds Matthias Wildhaber, co-manager of the Julius Baer ABS Fund, but it is not only returns that are attracting investors: with talk of Fed tapering continuing, investors are drawn to floating rate products, which will be protected, or even fare better, in an environment where interest rates are rising.
The securitization market, it seems, is slowly but surely springing back to life.