Regulation, as expected, features heavily on the Global ABS agenda – but any enthusiasm about the progress made is tempered by the fact that it could have been better. Esoteric asset classes, such as marketplace lending where some issuers are planning their first forays into the securitisation market, and NPLs have been discussed alongside the more traditional sectors. And there is more of that to come on Wednesday and Thursday.
Adding to that is the topic of quantitative easing, how the strategy runs off the and the impact it has on ABS. There was a consensus that the ABS purchase programme could have been handled better, but its phasing out and impact on spreads and new the approach to new issuance remains to be seen.
Considering recent developments in the area of simple, transparent and standardised (STS) securitisation, the current state of progress was discussed on one panel – and just how much work remains to be done in terms of regulatory technical standards and implementing technical standards. There are 14 in progress and three sets of guidance, according to Katie MacCaw of Baker Mckenzie.
But, as Max Bronzwaer, executive director & treasurer at Obvion said, more progress has been made in the last three or four years than hoped. Go back a decade, as the financial crisis unfolded, and it seemed that regulators, politicians and supervisors were happy to let the market die.
Better treatment for STS under Solvency II has been welcomed, but the fact that ABS still incurs a relatively higher capital charge than covered bonds and other asset classes has disappointed market participants. And little has been done to encourage insurance companies to invest in mezzanine tranches, according to Simon Lewis, chief executive of AFME during the opening remarks.
STS comes into effect in 2019, and that will be a crucial year for the market, said Bronzwaer, no matter now imperfect or perfect it turned out to be.
There are other factors, which had been flagged as warning signs, but for which no desirable solution has yet been found. When asked whether Brexit would be a counter weight to STS in 2019/2020 Ben Bates, CEO of EuroABS, said it was troubling that there was no third country recognition. Essentially the market would end up split into two and hermetically sealed and neither system would recognise either other as the UK left the EU. And in terms of meeting data requirements, this would mean requiring at least one repository in the UK and in the EU.
New NPLs undermine progress
The disposal and securitisation of non-performing loans (NPLs) has been much-debated of late. But the view is that while the market has come a long way, it has not been enough, according to Michael Huertas, partner at Dentons Europe.
The ECB has been the driving force behind the NPL reduction, but the framework has been built on Irish and Spanish experiences. All the tools for the market are there, he said, but there is a discord between banks, lawyers and the ECB and that banks were not moving fast enough.
Comments by Amo Chahal of Deloitte echoed this. He said, for instance, that NPLs and non-core loans exceeded EUR2trn in 2009/2010. But that tally remains around the EUR2trn mark because of new loans falling into the NPL category despite the extent of workouts. Where these sorts of loans sit has changed though. In 2010 large chunks were in the UK and Ireland, but they have been the most aggressive in their disposals, such as UKAR, Lloyds and RBS in the UK and NAMA in Ireland.
But there are still large volumes and large NPL ratios in Southern Europe, where Spain and Italy dominate. In Spain, however, SAREB has been selling loans and this has led to banks following suit.
And, of course, in Italy there have been some high profile NPL sales and securitisations.
As David Bergman, head of structured finance at Scope Ratings said, the market could be divided into bad loans, unlikely to pay loans, and reperforming loans, and the middle category could be the most interesting as they had the potential to return to performing.
New entrants eye marketplace ABS
As with NPL deals, there has been growing focus on the marketplace lending sector in recent years where ABS deals have begun to emerge in the UK.
Daniel Bartsch, co-founder and MD of Creditshelf GMBH, said that Continental Europe was 2- to 3-years behind the UK but was witnessing strong growth. In Germany there is a wide belief that the market is well-banked. There are close to 2,000 institutions covering the market but they are targeted in the way they cover SMEs. This left a gap in the market as banks shied away due to capital constraints and lending not being as profitable.
But there are also moves for roles to switch. Sachin Patel, of Funding Circle, while saying the firm would continue to focus on SMEs, highlighted cases in the US of the industrial loan charter. And Zopa has made clear its intention to set up a bank.
He warned, however, that by taking the banking route firms had to be confident to originate other assets to diversify their offerings.
But there is growing interest in securitisation. Bartsch said that demand was evident from both sides, and while Continental Europe was behind the UK it would not take long to catch up as it was a bigger economy.
He cited the cases of Funding Circle's ABS deals, and said that his firm was working on a transaction but smaller in size. There was already evidence in Europe, such as CrossLend, which had an efficient platform to securitise single loans.
Christian Faes, chief executive and co-founder of Lendinvest, said securitisation plans were subject to a matter of scale, and that his firm was moving closer to preparing an ABS. He said the firm has equity provisioned against the loan book, which meant they had skin in the game.
QE – A good idea but badly executed
The tapering of the QE programme was discussed on more than one occasion on the opening day, the view being that the purchase programme had the least effect on ABS taking into account volumes purchased as a proportion of the asset class, according to Alexander Batchvarov of BAML's research team.
He said that since the purchases were reduced to EUR30bn the relative weight of ABS had increased, but one thing that was unclear was the extent of the ECB reinvesting proceeds. He said the potential for ABS was EUR7bn in 2018, but doubted it would be done.
Gordon Kerr, head of ABS research at DBRS, said the TLTRO also needed to be taken into account as it extended a couple of years past the purchase programmes. Participation in the TLTROs was dominated by Spanish and Italian banks, and unless these markets were back on track he saw being it difficult for the ECB to remove that form of QE. Batchvarov also referred to TLTRO, saying that as long as it still existed there would still be retained issuance. It remains cheaper than public securitisation.
But there are some supporting factors for the ABS market against a back-drop of QE tapering. Vasundhara Goek of Morgan Stanley's research team said the ABS purchase programme volumes had been underwhelming, and the impact of its removal on the ABS market would be limited.
The last ten years had seen net negative issuance of ABS, she said and ABS being a floating rate product experience less volatility in spreads. However, if the unwind was timed alongside political risk events the impact could be more severe.
Mark Hale of Prytania Asset Management said the confidence in gradualism was understandable, but the markets had to think about tail risk. “No central bank has successfully deflated a bubble, they usually burst," he said.
But the question about whether the winding down of QE would boost the public ABS market had to also consider whether banks needed the funding, panellists said.
And there were broader opinions about the programme being introduced to boost markets being a hindrance, rather than a help as intended.
Ope Agbaje of Neuberger Berman said the market had hoped that the ECB's endorsement (by buying bonds) would have led to less punitive treatment but it did not, even in the recent Solvency II update. Spreads have been tightened by the ABSPP, but supply is lower, and investors are having to look at more riskier assets. Overall, the ABSPP has been a problem, she said.
It was a view shared by Neil Calder of the EBRD. He described the start of the ABSPP as timid given it was in asset classes that did not need the support, such as Dutch RMBS and autos. It would have helped in Spain and Italy in terms of the provision of mortgages. He said it was “a good idea but badly executed."