Buyers clamour for esoterics but opportunities are scarce

European securitization investors are increasingly on the hunt for more esoteric cash flows, but a lack of supply means that buyers are going to need to get creative with how they source allocations, said speakers on a panel on day one of Global ABS.

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Energy related securitizations and marketplace loan ABS were of particular interest to the audience, according to a poll during the discussion. However, the supply of paper in both of those asset classes has been disappointing to date in Europe.

“Less than €100bn of supply in ABS is expected in 2019,” said Joseph Lau, managing director and COO of Lord Capital, citing a report from Kroll Bond Rating Agency this week. “So we can’t expect allocations sufficient to satisfy our investor needs. We need to identify alternative methods to extract value from assets.”

One of these methods could entail becoming a direct lender, which Lord Capital has been doing in the US commercial Property Assessed Clean Energy (PACE) sector in the US. However, solar and PACE assets in Europe are hard to come by, with the market for the latter still very early on in its development.

[PACE] would be very difficult in Europe,” said Daniela Francovicchio, senior manager, structured finance, at the European Investment Fund. “One problem is the lack of standardisation and the different rules applied to securitization in general. We would like to see support from regulators to develop that market.”

In marketplace lending, the UK is roughly three years behind the development of the US, according to Etienne Boillot, CEO of Eiffel eCapital. Europe, meanwhile, is even further behind. Similarly, this means that firms looking for exposure to these assets in Europe should look to take a more direct approach.

“There are lots of businesses that banks don’t want to lend to,” said Boillot. “But the notion that only the people who can’t get a loan are the ones who go to a marketplace lender needs to be tempered. You get much better service, a response from the platform and your money in a week. There is no bank that can do that.”

Boillot noted that his firm has exposure to 15,000 small business borrowers.

The appetite for esoteric paper was highlighted in a poll of the audience at the end of the talk. 58% of respondents said that they expect to increase esoteric ABS allocations over the next 12 months, with the diversification on offer and the longer term nature of many off-the-run assets the main attraction.