Never a dull moment in the securitisation markets
It’s been all change on the Dutch funding and refinancing scene as the ECB retreated and interest rate development reshuffled the pieces on the debt chessboard for banks and platforms. We spoke to head of DCM Secured Debt at ABN AMRO Jan-Joost Leusveld to survey this shifted battleground.
So, what kind of year did structured finance in the Netherlands have in 2023, from your perspective?
I think in terms of issuance size it was a normal year. What was interesting is that we saw new entrants into the RMBS markets, with ASR and ING becoming new sponsors after being absent in the market for many years. Their arrival helped offset a retreat from the market by some non-bank sponsors due to low spreads on mortgages and higher funding costs.
Whas that a notable market change?
Yes, we saw less activity for non-bank platforms in RMBS. The current market is somewhat challenging for them. However, it was also encouraging to see the platform issuances of both Auto ABS and consumer ABS platforms through Qander and Hiltermann offering investors exposure to Dutch borrowers. It was positive to note that Hiltermann has evolved into a repeat issuer. This shows the potential growth of the auto ABS market.
On the consumer debt side, there was a lot of activity from some origination platforms. There was a major transaction from Qander, but because it was a refinancing it was already anticipated. However, I think this increased activity indicates there’s room for the consumer loan ABS markets to grow.
Are these specifically Dutch market developments, as opposed to Europe in general?
In my view the Dutch market is somewhat similar to the UK market, where there has for many years been a lot of issues from non-banks. In recent years, especially on the residential side, buy-to-let platforms, and normal residential mortgage platforms have all been active. But also similar to the UK, two years ago these platforms were competing against large banks that still had to offer 0% interest rates on their deposits when Euribor was minus 0.50%. That made RMBS very competitive against bank deposit funding.
Today things have changed. Some banks have become aggressive in the marketplace as they can offer relatively cheap deposit funding, while RMBS and swap spreads have increased substantially. The non-bank sponsor market platforms are now reinventing themselves and looking for new paths to remain relevant and competitive in a different interest rate market.
Major banks are said to show a clear preference for covered bonds over ABS as a funding source today, would you agree?
Covered bonds for bank sponsors have certainly proven to be more competitive in terms of the spread that they pay. Recently we have seen spreads come closer to one another, especially for smaller banks. Also, the shorter duration and higher coupons of recent covered bond issues has increased the overcollateralization requirements in these programmes. From that perspective, it could very well make sense for some of the smaller banks to also look at RMBS as a funding source.
Why have spreads got closer?
It has to do with interest rate factors, although I must add that I don’t track the covered bond market in great detail. However, the retreat by the ECB, and the relative value offerings whereby covered bonds have to pay up to remain competitive.
Doesn’t it make sense for smaller parties to opt for RMBS?
I think two reasons prevent smaller players from doing more RMBS issuance. Firstly, there’s still a spread differential, but secondly the issuance process is too cumbersome, especially for smaller issuances. I think for RMBS to really become as relevant as it used to be, you not only need to see a smaller differential spread, but the issuance process should be simplified.
Do you see innovations on this front in other markets?
There have been some interesting strategies in the UK. Master issuer programmes, with strategies like the stock & drop, where they already pre-package new issuance for the year ahead, showing that sponsors have become more innovative and engaged. This also reflects the fact that there’s not as deep a covered bond market in the UK.
Could such innovations come over to the Netherlands?
I think it makes sense for larger entities and repeat issuers to contemplate more efficient funding execution strategies.
What puts the brake on increased issuance volumes in Europe, in your view?
First, the capital and liquidity treatment aren’t as beneficial as for covered bonds. And secondly, complex reporting requirements form a barrier. However, there are currently efforts taking place to explore simplification of this framework. If that happened, that would be very positive for the market.
Looking further forward, towards the coming decade. How do you see the Dutch securitization market and perhaps structured finance in general?
I think a key development, which we’ve seen over the past years, and which may only become bigger, is the increased use of securitization as a capital management tool. ECB regulated banks have upward pressure on their risk-weights. This is due to factors such as Basel 3.5 (which introduces a new risk-weight framework for corporate debt) or the TRIM exercises. This artificial raising of risk-weights increases the benefits of transferring that risk through a Capital Relief Transaction (synthetic securitisation). I expect this market to grow and remain very relevant over the next decade.
What do you see as prime criteria for parties to consider this type of risk offset?
I think any book that has sufficient risk weights and a solid track record of performance, may be interesting for an SRT transaction. A key factor is to be able to source a portfolio that has sufficient size to be meaningful. Transactions need sufficient size to be worthwhile, and to obtain enough capital relief to be interesting for the sponsor.
Have other developments caught your eye?
Consumer credit is a very interesting asset class from a risk perspective. And with some of the larger banks retreating from the market, this offers opportunities for platforms. However, it is key to see whether these new market entrants are able to develop sufficient size to remain competitive and build a book which allows for repeat issues. Is there investor demand? Certainly. Can market parties build sufficient size? That will be the challenge.
What do you hope to gain at the Securitisation Event this year?
I attend every year, and for me it’s always about generating new energy, and meeting new people. Making connections is for me as important as the presentations, which are always excellent.
During the Securitisation Event, Jan-Joost Leusveld will moderate the Visionary Panel discussion entitled: “What is the outlook for the Securitsation Market for the next 10 years. What role does The Netherlands have to play?”
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