A SECURITISATION COMEBACK GATHERS PACE IN EUROPE
DURING the global financial crisis, Europe’s securitisation market effectively shut down. But since January there has been a flurry of new issuance, across an ever-widening array of asset classes, some of which had been dormant for years.
While the early stages of recovery in 2010 were marked by a narrow focus on transactions backed by German auto loans, and Dutch or prime UK mortgages, 2011 has seen the return of deals backed by UK credit cards, Italian mortgages, French, Dutch, and Spanish auto financing, and even commercial real estate.
So, is it back to business as usual, or has the market fundamentally changed? After all, many commentators count US securitisation among the causes of the financial crisis. The widespread re-pricing of risk across financial markets since 2007 means newly-issued senior securities now pay a spread of about 100-150 basis points, compared with under 10 basis points at the height of the boom.
Credit enhancement – a measure of the underlying collateral losses a securitisation bond can withstand before suffering a loss itself – is now generally higher. Also underway are numerous regulatory and central bank initiatives to heighten transparency and the quality of information provision to investors.
These measures should all help further strengthen a market whose credit performance has in any case mostly proved resilient through the downturn. For example, the credit quality of securities backed by prime UK residential mortgages has held up well, despite a 25 per cent peak-to-trough house price decline and unemployment remaining elevated since mid-2009. No such securities that Standard & Poor’s rated “AAA” have defaulted to date. As another example, since mid-2007 the default rate on over €1 trillion in original European securitisation issuance backed by loans to consumers has been only 0.06 per cent.
While the broadening basis of the market’s renaissance is encouraging, it may be a little early to call a full-blown recovery. Investor-placed issuance in 2011 looks set to be modestly higher than last year’s volume of €75bn, but a long way short of the €500bn peak in 2006.
However, securitisation has now been tested and proven an effective complementary funding technique for many financial institutions. Even many sceptics concede that the principles of securitisation – if properly regulated – remain sound, and that credit performance has mostly been resilient. As the economic recovery continues, and as lending institutions slowly wean themselves off official sector support, securitisation’s comeback will likely strengthen further.
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