After the rollercoaster: a reflection on recent securitisation market developments
Mid last year, everyone was bracing for a macroeconomic nightmare. Gloomy visions of a deep global recession haunted the securitisation industry. Deals were put on ice. In the UK, the short-lived Liz Truss government triggered market chaos. Shockwaves hit Europe’s ABS managers as pension funds scrambled for collateral. Luckily, it was a storm in a teacup. And with the New Year came new perspectives. In recent weeks, the securitisation market has found new momentum, says Thomas Docters van Leeuwen, Director Alternative Credit, DCM Syndicate ABN AMRO, who is cautiously optimistic about today’s market reality.
How did last year’s securitisation landscape look like from your point of view?
A lot has changed over the past 12 months. We initially saw a very limited supply in securitisation. The absolute low point last year was the UK government under Liz Truss and the consequent jump in 10-year British government bond yield by more than 100 basis in a week (and from 2% tot 4.5% in 6 weeks). This sent shockwaves through the US and European bond markets. ABS managers saw a lot of outflows from pension funds which needed to buy collateral. Fortunately, the market stabilised quite quickly afterwards, even though that did not immediately lead to a significant revival of ABS markets.
To what extent did “Trussonomics” have a knock-on effect on the European ABS market?
We also saw selling in euro assets, a lot of widening in euro deals and at one point the euro market was paralysed. Clearly the UK was hit hardest, with UK pension funds facing the biggest challenges with respect to their collateral obligations. UK ABS asset managers were therefore considerably impacted by outflows. And being substantial owners of UK ABS securities, they saw the greatest turmoil. However, European pension funds and insurers were also affected. European asset managers have UK pension funds as investors. All those participants also own Euro ABS assets that they could sell to manage their outflows. The spill-over effect into the Euro market was quite evident.
But that was a short-lived crisis?
Yes, Sunak came into office in late October, swiftly stabilising the UK situation. Then, in mid-November there was an unexpected CPI print in the US that was better than consensus. The markets breathed a sigh of relief and that triggered the recent turning point. Since then, we’ve seen equity markets move really strongly to the upside, and bond markets have also been very active. Company numbers have been quite strong, consumer numbers have been robust, and everyone is hoping for a soft landing. Obviously, there are still uncertainties. Particularly the recent revival of higher CPI prints in Europe and the huge surprise in the US non-farm payrolls last month give food for thought about where we are with inflation. How long will this be present? How high do rates need to go? These questions still hang above the market.
As we know, the securitisation market follows with a bit of delay. For euro products it was still slow at the beginning of the year. There were several sterling deals in January. However, since February the euro securitisation market has been taking off like we haven’t seen in two years or so. For the past weeks, considerable volumes of euro products have been put to market and investors have been eager to pick it up. That is very positive.
What about interest rates?
Rates have impact on the securitization market in various manners. Obviously, we have seen last year that rising rates can cause general market softness that can also impact the ABS markets. In addition, interest rates impact the refinancing market. Will sponsors still call their trades when the refinancing cost is higher? And are banks picking up the slack? We have seen last year that call risk is becoming a more relevant item again. Even though we also have seen that banks are willing to use their balance sheets and stand behind the right trades. A third effect is into the underlying loan market. In niches where the margins are tight, like Dutch mortgages, we see that players who depend on securitisation financing are have difficulty ramping up production. That will likely have a negative effect on the amount of securitisation paper on offer six to eighteen months from now.
How does the securitisation market look today?
Despite rising interest rates, the market is performing very well. I think if we knew we were over the peak of interest rate rises, the securitisation business would really be off to races. In a declining rates environment, as we had for a long time until last year, then you can make gains from a neutral position. That would be helpful for supply. Also, it will be interesting to see if the phase out of TLTRO will have a measurable effect on securitisation volumes in the longer run.
Has the market changed in any way?
Today’s market participants do look at certain assets in a different way. In times like this with high inflation, investors often see consumers as a more vulnerable group. So, consumer ABS, is not the easiest market. Having said that, even those transactions have been very well bid recently despite the premiums for the current times we live in. However, by contrast, RMBS and Auto ABS can both be considered “easier” asset classes at this point in time.
Has the securitisation market become more optimistic?
Definitely. Across the board we hear that deals are being well-bid and investors have already had in-flows into their portfolios and are eager to spend. We also hear from the investor community that they expect this sentiment to continue throughout the year. They are expecting to invest more funds going forward. This is particularly positive because we see the ECB retreating from its ABS asset purchase programme. It’s good to see commercial investors instantly picking up that slack, which is clearly evidenced by the strong orderbooks we have seen recently.
Is this a sign that the market is normalising after quantitive easing?
That’s quite possible. A lot of market participants see the end of ECB asset purchases as a positive development. Also, we should be aware of the fact that there is a structural shortage of supply in Euro ABS. This makes me quite convinced that the market can work well without ECB support.
Looking ahead, how do you see the future of European securitisation?
The European ABS market remains a bit of a niche asset class. Car loan ABS, the classic asset securitisation market, seems very stable. I’m sure it will continue to be part of the financing means for the big car manufacturers and leasing companies, especially with the pivot to electric vehicles opening opportunities for green ABS. RMBS is interesting. On the prime side the market has been diminishing as covered bonds prove to be a better financing tool for banks. It is therefore mainly the non-bank platforms and smaller banks which have been using RMBS recently. It will be interesting to see in the longer run if RMBS can make a big comeback and also here I will be keen to see if the phase out of TLTRO can cause a revival of prime RMBS on the side of the banks. Although I think we will also need to see a firm repricing of deposits before that happens.
Are there any other significant trends?
The CLO market has been growing in terms of funds available. It will certainly continue to grow if the M&A market becomes fully functional once again, which I’m sure will happen. Once it does, CLOs will finance those deals. And personally, I think it would be really interesting to see if new asset classes in the securitisation industry such as SME ABS can start to play a role. If banks are further retreating from the smaller SME space, one can imagine this becomes a place where non-bank lenders start to play a more relevant role. If that happens, securitisation would be a sensible financing tool.
What will you be looking for at this year’s Securitisation Event?
It’s always pleasant to touch base with all the industry players. Although many people at the event are part of the furniture (like me!) it’s always interesting to meet new players, hear about new regulations, deals and, especially, innovations.
For more information or tickets, visit the eventpage of the Securitisation Event 2023.
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