ABS market has cause for optimism in 2014

“Next year will be better than the last” has been the securitization mantra since the 2008 financial crisis. While the refrain may have grown weary as few signs of a market revival have emerged in Europe, they have reason to hold out hope for 2014 when regulatory reprieve could begin in earnest.

  • By Joseph McDevitt
  • 01 Oct 2013
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Securitization has not been allowed to help plug the lending gap left by Europe’s deleveraged banks, which has hurt small businesses, consumers and homeowners. But now policy makers and central banks seem finally to have realised the part securitization can play in easing the flow of credit in Europe. It is not before time and it means the seruritization market has something to look forward to in 2014.

Over the last couple of years the ABS market has used initiatives such as the Prime Collateralised Securities Initiative to show it does not deserve its maligned status. Now regulators realise it may be possible to regulate high quality, simple securitizations that perform a useful economic function differently from more complex instruments based on arbitrage, excessive leverage or maturity transformation.

The result has been far more conciliatory tones from the European Commission and European Central Bank. The ECB, which held €337.9bn of retained ABS at the end of the first quarter of 2013, has lowered haircuts for senior tranches of securitizations from 16% to 10%, and lowered the rating requirements from two triple-A ratings to two single-A ratings for six classes of ABS. These changes came into effect on October 1.  

Now the Basel Committee may be looking to make changes to its securitization capital framework, which was released in December 2012 and caused much consternation among securitization specialists. Stefan Ingves, head of the Basel Committee on Banking Supervision, has said that securitization risk weights would need to be reviewed next year. It was the first public comment from a Basel official since the proposal came out. 

The stance may have been influenced by an ABS working group that has devised an alternative approach to calculating securitization capital charges, dubbed the Arbitrage Free Approach. It uses the basic principle that a securitization should not incur a higher capital charge than that of the underlying assets in a securitization, as the risk exposure remains the same.

Whether the regulators will adopt this approach exactly is not clear. But it has probably helped persuade the Basel Committee that the approach it unveiled in December needs to be tweaked at the very least.

The ABS market needs a strengthened bank bid, especially for the senior tranches of deals. The lack of senior buyers has created difficulties in the European CLO market, for instance, where the small handful of triple-A players have gained disproportionate influence in the pricing and terms of deals.

Many central bankers also want to see a functioning securitization market before the ECB begins to wind down its largesse in a couple of years. The ECB cannot indefinitely provide cheap long-term funding, which puts an extra onus of revitalising public markets — including ABS. All of this suggests next year really could be better than the last.  

  • By Joseph McDevitt
  • 01 Oct 2013

GlobalCapital European securitization league table

Rank Lead Manager/Arranger Total Volume $m No. of Deals Share % by Volume
1 BNP Paribas 10,542 20 17.55
2 Bank of America Merrill Lynch (BAML) 6,103 21 10.16
3 Citi 5,130 13 8.54
4 JP Morgan 4,681 6 7.79
5 Morgan Stanley 4,137 11 6.89

Bookrunners of Global Structured Finance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 81,261.11 236 11.54%
2 Bank of America Merrill Lynch 66,433.81 187 9.43%
3 Wells Fargo Securities 57,637.40 170 8.18%
4 JPMorgan 53,570.42 158 7.61%
5 Credit Suisse 45,349.30 117 6.44%