EU ABS must prove it's up to the fight
Market needs to handle abundant supply and maintain momentum with change on the horizon, or face being knocked out
The kids are back at school, summer's over, the bank holidays a thing of the past, and September is once again shaping up to be hectic in the capital markets.
However, for the European securitization market, this month is a chance to prove itself. If navigating the market is a boxing match, then this is a punch that European securitization really can not afford to miss.
Because after a few volatile years — probably something of an understatement — there is a sense that the market has finally hit calmer waters. Credit Suisse's demise and the US regional banking crisis are fading memories, while rising rates at least give the semblance that the economy is under control.
In addition, the European securitization market has been boosted by more specific factors. For one, sterling covered bonds appear less attractive, some say by around 20bp, than prime UK RMBS. Unstable interest rates are also helping to nudge investors back into the market because European ABS is almost exclusively floating rate, providing that extra bit of security.
The end of central bank funding programmes is also expected to work in securitization's favour. With big name lenders unable to rely on a central bank gobbling up huge chunks of its deals, diversification will be a much more important theme, as one banker told GlobalCapital following the sensational return of Lloyd's Permanent Master Issuer shelf in May. Indeed, as they said at the time, diversification should lead many back into securitization.
And to an extent it has already started. Another prime UK RMBS, this time from Santander UK, kicked off the autumn rush last week, while more are expected. A further five auto deals are already in the pipeline, including two from bellwether issuer BDK, in addition to the nine already out that are set to price in the coming days.
Last week, a syndicate banker said investors were "fully engaged" and while it is inevitable that buyers can afford to be picky with so much supply, it is crucial that the market remains fully open into October with conditions so ripe. With so many elements appearing to go this long-neglected market's way, if investors were full after just a couple of weeks, it would cast a heavy and ill-timed shadow over European securitization that could well leave it on the ropes.
If this window proves to be little more than a flash in the pan, then many interested onlookers — like big banks yet to return to the market or newly interested politicians — could assume the market is doomed, with simply not enough depth to function at any meaningful level.
For years, leaders in the market have banged the securitization drum to no avail. Instead, it has felt like blow after blow that has left the market struggling to get to its feet.
But meaningful change could be on the horizon in the guise of regulatory overhaul. Expected reforms to the UK securitization regime are still unknown, and radical changes at the EU level remain a number of years away still. But the market has received small but welcome amendments of late that are beginning to build optimism within the market.
Back in May, another banker told GlobalCapital that the Financial Conduct Authority, the UK's financial markets regulator, was already taking a more constructive approach than its European colleagues. And in June, sources expressed relief as the EU came to a welcome compromise on proposed output floor calculations in the significant risk transfer sector — a rare occurrence, in some market participant's eyes.
A big counterattacking hook is going to be necessary to prove the securitization fight shouldn't be stopped. A manic September with heavy supply and investors still peckish will prove this market has more than a puncher's chance of being a useful funding tool for European economies. Anything else might be the low blow that some have been expecting the market to be on the wrong end of since 2008. But there is an opportunity there for the taking.
And as the irrepressible Rocky Balboa once said: "Every champion was once a contender that refused to give up."