Europe’s asset-backed securities market continues to offer attractive yields for investors, but still faces liquidity concerns and major regulatory hurdles, according to Dominic Swan, global head of fixed-income at HSBC and senior adviser to HSBC CIO. “It is safer than people think, and it has lower default rates than people think,” Swan said during the “Global Market Overview and Outlook” panel discussion at the Global ABS conference in Brussels.
Swan noted the fundamentals of ABS remain attractive, but pointed to the regulatory response to the crisis, which has led to covered bonds and senior unsecured lending receiving more favorable capital treatment compared to securitization. As a result, liquidity is now a major challenge.
But Robert Liao, managing director at Citigroup, said that the sheer volume of AAA ABS being issued is encouraging, noting current volume is enough to fill demand at that level of credit risk. Covered bonds and sovereigns by contrast will struggle to do so, “But yet there’s more liquidity being put there,” Liao said.
Swan agreed. “It’s paradoxical that the same markets with the best credit risk are also the toughest to invest in,” he added. “In a stressed liquidity environment, we need to believe that regulators believe in securitization.”
Chairing the panel, Kevin Ingram, partner at Clifford Chance, said it is surprising that regulators lack confidence in assets, given the amount of regulation that has been placed on certain underlying assets in Europe, particularly residential mortgages.
Fabrice Susini, global head of securitization at BNP Paribas replied, “It’s because some European institutions have suffered dramatically because of their exposure to the products.” Securitization remains associated with the U.S. subprime problem, and Susini said market participants need to show the difference between the way underlying assets were originated in the region and their ongoing performance in Europe.