Breadth of issuance should mark real progress, not modest increase in volumes
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Last year’s revival in the European securitisation market was notable more for breadth of issuance than volume – the €75bn–€80bn placed was flat to 2012. The fully fledged return of CLOs and CMBS, as well as renewed activity in the peripheral sector, were significant developments.
In 2014, the core products of Dutch and UK RMBS (some UK non-conforming supply is expected against a smattering of prime issuance) and auto ABS will nonetheless continue to dominate, though structured finance will still struggle to overcome price competition from other markets.
“Banks that were historically active issuers of securitisation may not be convinced by the current relative value of issuance versus covered or senior bonds if funding is the sole objective,” said Allen Appen, head of FIG DCM EMEA at Barclays.
But a seller’s spread disadvantage works in a buyer’s favour. “The market provides some relative value plays, especially versus unsecured and covered bonds, which should draw investors in,” said Daniel Pietrzak, co-head of structured credit at Deutsche Bank.
And of course the ABS banker’s pitch has never solely been about price. “What is encouraging is a potentially significant move towards reliance on securitisation to manage balance-sheet pressures,” said Appen.
Getting seniors interested
European ABS is still fighting an uphill battle against official sector’s apparent disapproval. Basel, EIOPA and EBA suggestions at the end of 2013 show some policy easing towards securitisation, but the sector remains at a disadvantage versus covered bonds – a fact that remains a sore topic for the ABS community.
“There is still lots of regulatory uncertainty,” said Jim Ahern, global head of securitisation at SG. “The regulators are defining our product as illiquid, which will have a negative impact on both trading and investment in the product for banks and insurers.”
Restricting liquidity for banks will also affect their ability to ramp up lending.
“When the regulatory regime is fully implemented the European banking system may struggle to meet the needs of an expanding economy. Economic expansion will require incremental credit transmission, and a fully functioning European securitisation market could potentially fulfil that [role],” said Appen.
The SME sector, which drives Europe’s economy, and related securitisations have received some support from the ECB and are expected to feature in 2014, but their format and even investor base remains uncertain.
Standardising SME securitisation could be tricky given the variety of loans types (size, sector, whether they are secured by real estate, etc).
Granting European RMBS more reasonable capital and liquidity treatment would promote its use as a source of funding to free up bank lending capacity, which in turn could flow to SMEs, Ahern said.
Spanish issuers were regular securitisers, and are anticipated to feature in 2014, but not all in public format. “I do expect more periphery activity as spreads have come in appreciatively, but some of these will be private transactions,” said Ahern.
Transactions from Italy, Ireland, Spain and Portugal were all sold in 2013 and these countries are expected to be represented again in 2014.
CMBS issuance is expected, too, given the 2014–2015 maturity timetable for legacy deals, as are infrastructure and whole business deals.
CLOs should see a continued resurgence once regulatory issues such as Volcker are ironed out.