Euro ABS growth still hobbled by regs angst
Regulatory issues over the past year have been a drag on what could have been achieved in the European ABS new issue market, with teething issues surrounding the introduction of the new Securitization Regulation, due to kick in January 2019, potentially contributing to a dip in issuance at the start of next year, said panellists speaking at Global ABS on Wednesday.
While issuance volumes are expected to marginally up this year, the true bell-weather of a thriving ABS market is measured in the level of distributed issuance, noted Greg Branch, partner and chief investment officer of London-based SCIO Capital, and that figure is likely to remain subdued. Industry figures for 2017 show that around half of all tranches are still being retained.
There was broad agreement that the credit cycle is in the latter stages – roughly eight years in from the previous trough – and that potential headwinds may come from the universe of corporate credit, with the rise in the number of single B rated issuers – roughly two thirds of the market – less able to withstand periods of stress.
Although low interest rates have provided cheap funding, “companies are more levered than before” cautioned Andrew South, managing director, global fixed income research at S&P Global Ratings, adding that investors should be aware that the overlap of credit names in CLO transactions from the same CLO manager could be as high as 70%.
It may be an opportune time to take a defensive stance, selling “the stuff you don’t understand” to reduce exposure to spread duration, while country risk should now be a key consideration, according to Branch.
ABS is still attractive, noted Rob Ford, portfolio manager at TwentyFour Asset Management, citing positive ratings upgrades for a product that naturally de-levers.
The spreads on offer are five to six times higher than pre-crisis levels and even in in ABS purchase program eligible products, it is two or three times higher, so the market is probably not overheated, Ford said.
He cautioned that concerns regarding the withdrawal of support from the European Central Bank’s ABS purchase programme should not to be overdone as the volumes are a ‘drop in the ocean’ compared to its covered bond programme. The “market is much safer now”, Ford said, citing improvements in lending guidelines and regulatory initiatives.
The ABS purchase programme has not tried to ‘crowd out’ other investors, mentioned Beatriz Sotomayor, principal portfolio manager with the European Central Bank. She added that the buying activity is focussed on buying alongside other investors to ensure that the investor base broadens for ABS.
The ABS purchase programme is to be reviewed in September and is ‘still a long way away from portfolio sales’.
In the near term, the new Securitization Regulations might lead to a drop in issuance volumes at the start of 2019 as market participants grapple with implementation issues, panellists commented. However the long list of items to ensure compliance with due diligence could be an opportunity for fund managers, TwentyFour’s Ford opined.
The set of due diligence hurdles is high, and some investors may be tempted to offload those tasks – and still participate in the ABS market – by engaging fund managers with the know-how and infrastructure in place.
Market angst regarding the implementation of ‘simple, transparent and standardised’ (STS) regulations will be looked at, and the regulatory authorities ‘will find a way’ to have an easier STS market in the future, said Christian Moor, policy expert , securitization and covered bonds and market risk at the European Banking Authority.
On the issue of transparency, disclosures have helped investor confidence with better access to data, swap contracts and amendments to deal documents, said Sottomayor. These have also helped sponsors and originators understand their data requirements.
But at least one panellist had some reservations. “I’m not a big fan”, said Branch. “The measures may have gone overboard”.