Last week our team attended the AFME IMN Global ABS 2021 conference in London and the TSI Congress 2021 in Berlin.
We provide a brief summary of our main observations regarding sustainability, the securitisation disclosure framework and non-performing loan securitisations.
On the positive side, the European ABS collateral performance has largely recovered from the Covid-19 downturn and the performance has been strong and much better than was feared in early 2020. While some increases in problem loans are still expected, the widespread use of payment holidays has generally not translated into surging default and losses. Credit spreads of European ABS are back to pre-Covid levels and often below their long term average.1 The industry has adjusted to the securitisation regulation and the framework is working reasonably well overall. Better disclosures about sustainable finance and environmental, social and governance (ESG) standards are much talked about and will continue to impact and evolve the ABS market. Good ESG data are still missing from loan tapes, but dedicated data solutions exist from Fitch, S&P, Refinitiv and others. Surprisingly, a major car manufacturer and leading issuer of auto ABS claimed that it was technically impossible to report the CO2 emissions for each car model despite being fined heavily for an emission scandal several years ago.
On the negative side, issuance volumes in the European ABS market are still disappointingly low with a view that the ABS market continues to operate below its potential to support the real economy. For example, according to Afme, the issuance of European SME securitisations stood at only EUR 2.0bn in the first six months of 2021. The treatment of ABS for liquidity by banks or capital by insurance companies is viewed as punitive detering important investor groups. Significant risk transfer (SRT) transactions continue to play an important role for European banks to manage their credit risk and regulatory capital, but the definition of what constitutes SRT and how to treat synthetic excess spread features still requires clarification.
The securitisation disclosures based on ESMA templates that came into force in September 2020 have not been received well by the industry due to their complexity and lack of demand from investors. Investors and rating agencies appear to ignore the content of the reports and simply check their existence for regulatory compliance. The disclosure requirements for private securitisations are deemed unfit for purpose by the industry. Supervisors take a more positive view as standardized data help them monitor the market. The industry views the burden of producing ESMA reports for bilateral warehouse facilities as unjustified. The ESMA reports do not cover important information relevant to lenders such as historical vintage curves for arrears, defaults and losses. In addition, supervisors have criticized that many securitisations including most CLO and NPL securitisations are deemed private which means that their disclosure reports are not delivered to a securitisation repository.2 Many securitisations are deemed private as they lack a prospectus despite being distributed to two or more investors, having public credit ratings, and despite benefitting from public sector guarantees in the case of Italian and Greek NPL securitisation issued under the GACS and HAPS schemes, respectively. Private securitisations can obtain the STS label (simple, transparent, standardized) while there is no formal verification of the quality of the exposure-level data which for public transactions is conducted by the securitisation repository. Afme reports that until August 2021 STS notifications have been given to 308 private securitisation out of a total of 533 STS notifications.
NPL securitisations continue to play an important role in Italy and Greece to help banks reduce their stock of (pre-Covid) legacy non-performing loans thanks to the government guarantee schemes. On the NPL panel at the German TSI Congress we debated whether banks should be investing in the senior tranches of NPL securitisations. The senior tranches (without government guarantees) can achieve investment grade ratings and attractive returns on capital. However, the rating stability of Italian NPL ABS has been disappointing for transactions issued before 2019 and there is an expectation that the Italian government will have to pay out under some GACS guarantees eventually. The panelists were clear that the large volumes of NPL ABS in Italy and Greece would not have been possible without the asset protection schemes. The ESMA disclosures for NPL securitisations are burdensome, but do offer some important additional information compared to traditional servicer reports like fully updated loan tapes. However, several data fields about projected recoveries, expenses and servicing fees are missing which means that to our knowledge most investors continue to rely on the traditional servicer reports.
1 AFME Securitisation Data Report Q2 2021
2 Joint committee report on the implementation and functioning of the securitisation regulation (Article 44) 2021
For more information about regulatory securitisation disclosures and NPL securitisations visit nplmarkets.com/en/research.
