European securitization dares to believe in a market revival
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European securitization dares to believe in a market revival

Detail of the Sagrada Familia church in Barcelona, Spain

'Bullish' Global ABS delegates revel in Barcelona's sun while macro risks lurk

Delegates at Afme and Invisso’s Global ABS 2024, which was held this week, were daring to believe that their market could be on the cusp of a revival, with market participants offering overwhelmingly positive notes on topics from regulation to collateral performance.

“[The conference] is as bullish as it’s been for years,” said one delegate.

He thought that the strong conditions in the public markets seen so far this year were driving the optimism, with orders having piled up for most issuers and primary spreads having moved considerably tighter.

“The base case is [that] we just grind tighter,” another delegate said.

Indeed, at the traders’ roundtable on Tuesday afternoon, Colm Corcoran, executive director at Santander, said ABS had “underperformed” the broader rally in credit spreads, paving the way for spreads to move tighter still.

UK prime RMBS looks to be particularly good value, panellists said.

The first deal of the year from Lloyds landed at 55bp over Sonia, while recent comparable trades have printed as tight as 48bp. In contrast, the primary market tightening in UK buy-to-let paper has been far sharper — coming in from 110bp to around 85bp over the same period.

That 7bp tightening on UK prime new issues “doesn’t seem like an awful lot”, Corcoran said, adding that the paper “looks compelling versus other things”.

“If I were a treasury book, I’d be all in on prime RMBS,” Janet Oram, head of ABS at USS, told the audience at an investor roundtable on Wednesday.

An audience poll at that panel showed that those in attendance thought CLOs offered the best relative value in structured finance, with prime RMBS coming in second place.

Macro risks lurk

Still, perhaps scarred by the experience of recent years, panellists and delegates were quick to temper their predictions with warnings that risks continue to lurk. Rate cuts failing to materialise and the potential for the conflicts in Ukraine and the Middle East to escalate consistently came up.

On the opening panel of the conference, Owen Muller, director at NatWest, warned that spreads could be reaching their limits, partly due to “political uncertainty” caused by upcoming elections, particularly the US presidential election on November 5.

Other delegates said the UK general election on July 4 posed less risk because there is little uncertainty around it and candidates are less likely to disrupt the market. According to bookmakers, Labour are likely to win. Paddy Power’s odds on a Labour majority were 1/40 on Thursday morning, while a Trump presidency was at 8/11.

Recent spread tightening had been driven by the technical of supply and demand within ABS, conference attendees thought, with M&G’s Joseph Rice saying on the investor roundtable that his firm had seen inflows from both new and returning investors.

As such, the market seems more insulated from the performance of other asset classes than it did last year, though some worried that so-called “fast money“ was behind some of the recent tightening, which opens the risk of spreads widening quickly if investors begin to sell.

“I worry about how sticky some the money that has come into ABS is going to be,” Oram said.

Diversifying issuance

If conditions remain constructive, delegates and panellists expected more asset classes and more issuers to come to market, such as Europe’s first ever data centre deal, which priced in May.

Panellists on the traders’ roundtable thought the new asset class offered investors diversification and an attractive yield. Barclays’ Eric Huang said he thought investors should pay attention to the deal, while more broadly his desk was focused on idiosyncratic assets.

Miray Muminoglu, managing director at Lloyds, highlighted the number of new issuers, mentioning Molo, Equifinance, Capital on Tap, and Haydock, all of which have priced inaugural deals since the start of last year.

On the same panel as Oram, KKR’s Anirban Ghosh predicted that assets which have been securitised in the private markets could appear in the public markets. Two examples were football financing and solar loan receivables.

More assets coming to market means “opportunities for investors”, said NatWest’s Muller.

Regs belief

As well as buoyant public markets, the optimism among Global ABS attendees came from a belief that European securitization regulation is about to be reformed for the better.

On Wednesday, Afme published a paper titled “EU Securitisation back on track”. It outlined a five point plan to ”revive the securitisation market in the EU”. The paper called for:

  • Increasing risk sensitivity within the bank prudential framework.

  • Reviving demand from the insurance sector by adjusting Solvency II calibrations.

  • Adjusting the treatment of securitization within the Liquidity Coverage Ratio.

  • Introducing proportionality for investors conducting regulatory due diligence.

  • Fine-tuning regulatory reporting requirements and simplifying STS criteria for both traditional and synthetic securitizations.

The annual tradition of an obligatory regulation discussion on every panel was continued this year. But, as PCS chief executive Ian Bell said, “the difference is the setting in which the arguments are being deployed”.

With the EBA’s Roberta De Filippis telling the conference that the development of the cash market is at the “top of our agenda”, some panellists even suggested that there may be no need to discuss the regulations next year.

That might be far-fetched, but progress by next year should mean the conversation has moved on. As one delegate said, after Bell and De Filippis’ panel, “If this doesn’t bring change, I don’t know what will.”

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