ABS impatient for recognition from regulators

With the backing of the European Central Bank and Bank of England, who are putting pressure on rulemakers to loosen their treatment of securitization, there is hope that this could be a pivotal year for the market.

But bankers sat on a panel entitled “The Make or Break Year for Securitization: Deciphering the Myriad of Regulations” struck a frustrated tone late in the day on Tuesday.

James Hewer, structured finance partner at PwC, summed up the mood, saying he needed to see “more action and less words” before he would predict a dramatic revival in issuance levels.

There has certainly been a discernible spring in many Global ABS delegates’ step this week. Numbers are up, and more importantly investor numbers are up, which bankers feel this year is to do with more than just the return to the beachfront location in Barcelona.

However, a quick poll of delegates showed how far there is to go. Asked what was the make or break year for the asset class, around half of respondents chose the “every year it is next year” option, compared to around 20% who said 2014.

Conference delegates also voted “lack of coordination among rule makers” as the chief barrier to an expansion of the market, while three quarters of them said regulation was a bigger drag on more robust securitization issuance in Europe than market conditions.

The problem, said Frank Meijer, head of ABS, covered bonds and mortgages at Aegon Asset Management, was that regulators have simply not recognised the level of education and effort required from ABS investors now compared to before the crisis.

“You have to actually prove that the originator keeps risk, you have to have models in place and proper data for stress testing, you have to involve risk management and senior management at your organisation,” he said. “You have to do a lot of things before you are actually allowed to invest in ABS.”

“That is a big change, but so far I haven’t seen that change reflected in any capital charges. I would love to see some rewards for investors’ work. If you buy triple-A CLO paper, five years, you have to hold 60% capital. I would say it’s overdone.

Gordon Kerr, structure finance research at DBRS, was asked who he saw as the natural buyers of the product going forward, in light of the regulations that have now been either passed or proposed.

“Based on the regulations just about no-one,” he said, drawing laughter from his fellow panellists.

Securitization is designed to appeal to a broad range of investors, he added, but regulation tends to be focused on the senior investors of various asset classes and there should still be a place for other investors like hedge funds.

“There is potential for new investors but if we continue to regulate away our investor base we will struggle to bring back high quality securitizations,” he said.