European ABS market – signs of recovery, growth and evolution
While strong issuance so far this year has given rise to expectations that the European securitization market’s recovery could accelerate in the second half, 2021 is not just a rebound story. Investor demand and regulatory change are also driving new developments and innovations, say BNY Mellon’s Paul Crossley, senior business development, principal, EMEA, and Michela Sperandio, head of business development, Italy.
Stronger than expected economic growth, supported by fiscal and monetary stimulus measures and the rollout of COVID-19 vaccination programmes, has been a key driver of the recovery in securitization markets since the beginning of 2021.
Issuance activity through the first and second quarters has been healthy and with a substantial pipeline of deals, new sales of European asset-backed securities could hit €75bn in 2021 – up from €68bn in 2020 – according to S&P Global.
For that to happen, UK and European economies, together with investor confidence, will need to continue to strengthen, supported by large-scale fiscal and monetary stimulus measures, such as the European Central Bank’s €1.85tr Pandemic Emergency Purchase Programme. The ECB recently announced that it plans to extend this programme to at least March 2022, which is exactly what investors want to see.
It is this type of financial support that has boosted investor appetite this year, and to levels we have not seen for a long time. This was especially evident in the first quarter when investors bought €23bn of ABS, up from €19bn in the same period in 2020. In addition, there have been 47 publicly listed transactions to the end of March, which is a sharp rise from 36 during the whole of last year.
Issuance so far has been dominated by residential mortgage-backed securities, where there has been a surge in buy-to-let and non-conforming RMBS, especially in the UK, and partly driven by non-bank lenders, which do not have access to the large government funding schemes.
One deal in particular that highlighted this trend was non-bank mortgage originator Lendco’s £303m securitization of a portfolio of new UK BTL loans under Atlas Funding 2021-1. The deal was not only Lendco’s first, but also a landmark transaction for this growing asset-class in public and private deals.
It’s not all about RMBS, though. There has also been robust issuance in commercial mortgage-backed securities and across auto, consumer and credit card securitizations, and we expect to see this continue in the second half of 2021.
Indeed, once the insolvency moratoria, payment holidays, employment protection schemes and central bank liquidity support measures begin to unwind, we also expect to see a big increase in European non-performing loans (NPLs) through 2021 and 2022. As this emerges, we would expect to see an associated rise in NPL securitizations, particularly from Italy and Greece, but also from other European countries.
Green growth and social expansion
Securitizations related to environmental, social and governance (ESG) factors have been rising in recent years as structured finance investors increasingly consider sustainability as an important factor in making investment decisions.
Interest in ESG-related securitizations has certainly moved up to another level this year, and we expect it to keep rising.
A growing number of regulatory changes are anticipated in this area, especially around the information that securitization originators must disclose on sustainability risks and impacts.
In fact, European supervisory authorities is expected to publish guidance on a harmonised disclosure framework for securitizations referencing sustainability issues in November, which is a significant development for the market.
Until now, many of the ESG-related securitizations have focused on the environmental side, financing everything from energy efficient homes and electric vehicles, to photovoltaic projects
This interest and activity will continue to grow, but what is also interesting and important is that we are beginning to see expansion into the social side. In the UK, for instance, we saw the first couple of social UK RMBS transactions earlier this year, and we would anticipate further expansion of this trend throughout European markets.
Italian real estate opportunities
The Italian real estate securitizations market is expected to benefit from recent changes to the Italian law 130/99 (the Italian Securitization Law), which provides for the securitization of proceeds deriving from the ownership of real estate and registered movable property assets, carried out pursuant to article 7.1(b-bis) of the law 130/99.
In our opinion, this will make securitization an even more attractive route to invest in Italian real estate assets alongside Italian real estate funds.
From a tax perspective, recent tax rulings indicate that these structures would be exempt from certain corporate taxes for the special purpose vehicle and would also benefit from the applicability of legislative decree no.239 of 1 April 1996 in relation to the withholding tax for interest payments made to certain categories of foreign investors.
The Italian real estate securitization market is still relatively small, but we see significant potential for it to grow.
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