New optimism in the securitisation market as we await Europe’s action

There is a buzz of positive sentiment on the European securitisation market, thanks to encouraging remarks from Europe’s finance chiefs, says Thomas Docters van Leeuwen, Director Alternative Credit, DCM Syndicate ABN AMRO. But that still has to be translated into concrete action from the regulators, he adds. Docters van Leeuwen will moderate of the discussion panel “The Role of Liquidity and Securitisation in a Changing Mortgage Market” during the Securitisation Event in Amsterdam on March 25.

How was the securitisation market for you in 2024?

Deal flow picked up through the year, which was certainly positive. I was personally struck by the seasonality, with September in particular being highly active. The sheer amount of supply caused spreads to widen to some extent. That was particularly the case with senior tranches, whereas mezzanine tranches were still well bid across the board. This was all against a backdrop of a softness in corporate bonds, which itself seemed to be triggered by a softness in French and German government bonds over the summer.

Was there an obvious reason for the September peak?

The market is always busy in September; however, I think all parties wanted to have their transactions settled ahead of the US election in early November, so the 2024 market was particularly cramped in early autumn.

Did last year’s market hold any other surprises?

Well, thanks to the Draghi Report, securitisation is no longer the least popular kid in the classroom! I’m joking of course, but there is clearly more optimism in the market, thanks to the apparent change in sentiment. It seems that, for now, there is a collective sigh of relief blowing in the securitisation market. However, there is always a risk that too much is being made of the mentions last year of securitisation by both Draghi and Christine Lagarde.

You think the securitisation market optimism may be overblown?

Not necessarily, but perhaps we’re hoping for too much. I am personally convinced securitisation is an important tool for an eventual Capital Markets Union because it is a means to fund the economy, away from bank balance sheets; be that through a sponsor who acts as a non-bank lender, or if it is made possible for a bank to provide loans and divest them through securitisation. However, Europe must now back up its flattering words on securitisation. There must be concrete action. The legislation on securitisation must be given more flexibility.

What do you mean by flexibility?

There are still a number of questions: will the bureaucracy be decreased? How complex will it be if institutions want to provide loans and fund them through securitisations? How difficult (or easy) will they make it for bank and non-bank to issue and for investors to buy those notes? Also, how expensive will the EU make it to invest in securitisations? Some relief was provided to insurance companies by lowering the solvency requirements for a securitisation position, but we need more of this to make a difference for the market as a whole.

You think it might be all talk and no action?

I would not go that far. It’s absolutely positive that there are clear signals that securitisation is getting more verbal support in Europe’s higher echelons. But we also need to see clear policy initiatives that make it more attractive to both issue and invest in securitisations. Bank treasuries are also an important investor in securitisations, I would certainly like to see a change in the regulations to make that more attractive. This is on ongoing process, but the climate is certainly right for positive change to fund Europe’s future with securitisations as part of that toolbox.

In Europe securitisation is mainly used to finance housing, cars, and consumer loans: are there other possibilities for European securitisation?

We are already seeing the first European data centers being financed through securitisations, which is very interesting. The banking market is very enthusiastic on financing digital technology, but the pipeline just keeps on getting bigger! This forces the banks to access capital markets in order to spread their risk. This is the hard asset side of technology which I believe can be helped greatly through a broader acceptance of securitisation as an excellent tool to finance European innovation. Also, the stellar inaugural French equipment lease trade of early February showed that investors are open to different asset classes and new sponsors. It is very positive to see this potential in the market and the willingness on the buy side to push this market ahead.

What else caught your eye in 2024?

The SRT market continues to gain momentum. This didn’t start last year, but it seems to be undergoing a flywheel effect, particularly in terms of the sharp increase in the number of large asset managers which now have an SRT strategy in place, often including a team and a firm to manage the deals. The sheer volume of transactions being executed among Europe’s major corporate institutions and the modest spreads being paid, clearly reflect a high demand for these assets, which is very positive. It’s also interesting to see that there is clear growth in synthetic SRTs which had a questionable reputation back in the day, and now work very well as a solution to provide banks with real capital.

So, the European securitisation market is healthy?

Absolutely! It is also curious to see that the north-south axis has flipped. By that I mean that we have seen the southern European market gain momentum and nowadays it seems that the southern European banks, by offering a little more risk, are creating a very positive backdrop for their bonds. Offerings from Spain, Italy, Portugal showed that the historic divide between what we used to call core and peripheral Europe is less clear now. If you want to see growth, look to the south where the sun shines!