How to revive the European securitisation market

What role can a revived securitisation market have in financing the real economy in Europe? Kevin Ingram, partner and specialist in debt securitisation at Clifford Chance, says increasing the volume and depth of issuance in the market is crucial.

Report: High-quality securitisation for Europe—The market at a crossroads

Europe needs stronger capital markets to serve the real economy and fill the funding gap cause by regulatory constraints which affect banks’ lending capabilities the Association for Financial Markets in Europe (AFME) has said in its new report. The report goes onto describe how to revive the European securitisation market, which could help unlock long-term financing and fuel growth.

Is there already a relaunch of the securitisation deal in the European market or do you think these reports will be the impetus to get things moving again?

There has been political and regulatory recognition for some time in Europe that securitisation can have an important role in financing the real economy. These reports help to both provide greater detail of the case for securitisation but also look to identify impediments to the development of safe and viable securitisation markets. There are securitisation transactions being done in Europe—there are just not enough of them and increasing the volume and depth of issuance in the market is crucial.

Do you think the proposal on risk weighting will encourage the market?

Yes. It would not only make securitisation a more attractive investment for regulated investors but it would also be an important signal that regulators do not regard securitisation instruments unfavourably compared to other similar types of secured investments.

Do you agree this will add impetus to boost the market?

Insurance companies should be key investors in asset backed securities as the secured nature of the cashflows and the tenor of the instruments should be consistent with their liability profiles as typically long term investors. The key issue for insurance companies is that investment in asset backed securities (ABS) is not uneconomic in terms of capital cost compared to other forms of similar investments. Increasing the involvement of long term non-bank investors such as insurance companies would certainly be beneficial.

Do you think that regulation has hampered securitisation deals in the last few years? And do you think the AFME’s step 5 will be achievable in practice?

It is undoubtedly the case that regulation—and the uncertainty caused by the prospect of regulation—has been a significant factor in depressing issuance volumes over recent years. A single set of mutually recognised global standards and consistent regulations is the right aspirational goal but is unlikely to ever be fully realised. However, that is what policymakers, regulators and the industry should work toward and use as one of their benchmarks of success in creating safe and viable securitisation markets. I feel more optimistic than I have for some time that there is both recognition of the problem and a drive towards better co-ordination between regulators.

Are there any specific legal issues that lead managers, originators and issuers need to be aware of as they take steps back into the market?

There are always legal issues to consider around securities transactions and securitisation is not immune. Entities need to evaluate securitisation transactions fully with appropriate advice before they enter into them. It is clear that market players are more conscious of legal risk and undertake more comprehensive evaluation than was typically the case in the run up to the financial crisis.

In realistic terms, how do you see the market developing in the next six to 12 months?

It will be busy. In Europe I see the continued use of securitisation techniques around portfolio sales and acquisitions as European financial institutions continue to de-lever through asset disposals. I also expect there to be more primary issuance of traditional ABS from large commercial banks as they re-enter the funding market to supplement or replace other forms of funding. Investors will continue to hunt product and yield which will mean there will be space for infrequent issuers and more esoteric transactions. Partly as a result of the shortage of supply of securitisation instruments, there will continue to be strong growth in managed collateralised loan obligations and the commercial mortgage-backed securities market will make some comeback. Infrastructure and project bonds will be encouraged by politicians and other policymakers. Growth and product mix will not be consistent, but the general trend will be to increase ABS issuance on the back of a more benign regulatory environment and strengthening economies.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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