European ABS Market: Signs of Recovery, Growth and Evolution

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European ABS Market: Signs of Recovery, Growth and Evolution

June 2021

While strong issuance so far this year has given rise to expectations that the European securitization market’s recovery could accelerate in the second half, 2021 is not just a rebound story.

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Investor demand and regulatory change are also driving new developments and innovations, say BNY Mellon’s Paul Crossley, senior business development principal, EMEA, and Michela Sperandio, head of business development, Italy.


Stronger than expected economic growth, supported by fiscal and monetary stimulus measures and the rollout of vaccination programs, has been a key driver of the recovery in securitization markets since the beginning of the year.  


Issuance activity through the first and second quarters has been healthy, and with a good-looking pipeline of deals, new sales of European asset-backed securities could hit €75bn in 2021 – up from €68bn in 2020 – according to S&P Global.


For that to happen, UK and European economies, together with investor confidence, will need to continue to strengthen, supported by large-scale fiscal and monetary stimulus measures, such as the European Central Bank’s €1.85tr Pandemic Emergency Purchase Programme.


The ECB recently announced that it plans to extend this program to at least March 2022, which is exactly what investors want to see.


It is this type of financial support that has boosted investor appetite this year, and to levels we have not seen for a long time. This was especially evident in the first quarter when investors bought €23bn of ABS, up from €19bn in the same period in 2019. What’s more, we also saw 47 publicly listed transactions to the end of March, which is a sharp rise from 36 during the whole of last year.


Asset-Class Revival


Issuance so far has been dominated by residential mortgage-backed securities, where there has certainly been a surge in buy-to-let and non-conforming RMBS, especially in the UK, and partly driven by non-bank lenders, which do not have access to the large government funding schemes.    


One deal in particular that highlighted this trend was non-bank mortgage originator Lendco’s £303m securitization of a portfolio of new UK BTL loans under Atlas Funding 2021-1. The deal was not only Lendco’s first, but also a landmark transaction for this growing asset-class in public and private deals.


It’s not all about RMBS, though. There has also been robust issuance in commercial mortgage-backed securities and across auto, consumer and credit card securitizations, and we expect to see this continue in the second half. We also expect to see increasing activity in non-performing loans.


Indeed, once the insolvency moratoria, payment holidays, employment protection schemes, and central bank liquidity support measures begin to unwind, we expect to see a big increase in European NPLs through 2021 and 2022. As this emerges, we would expect to see an associated rise in NPL securitizations, particularly from Italy and Greece, but also from other European countries.  


Green Growth and Social Expansion


Securitizations related to environmental, social and governance factors have been rising in recent years as structured finance investors increasingly consider sustainability as an important factor in investment decisions.


Interest seems to have certainly moved up another level this year, and we expect it to keep rising.


There’s also a lot of regulatory change in this area, especially around what information securitization originators disclose on sustainability risks and impacts.


In fact, European supervisory authorities will, in November, publish guidance on a harmonized disclosure framework for securitizations referencing sustainability issues, which is a huge development for the market.


Up until now, many of the ESG-related securitizations have focused on the environmental side, financing everything from energy efficient homes and electric vehicles, to photovoltaic projects


This interest and activity will continue to grow, but what’s also interesting and important is that we are beginning to see expansion into the social side. In the UK, for instance, we saw the first couple of social UK RMBS transactions earlier this year, and would anticipate further expansion of this trend throughout European markets.


The first Italian social ABS transactions, backed by publicly guaranteed loans to SMEs, are already being structured and should emerge later this year.    


Italian Real Estate Opportunity


Due to recent regulatory changes we expect an increase in Italian real estate securitizations. One of the main developments has been to allow for the securitization of proceeds deriving from the ownership of real estate and registered movable property assets.


As such, rather than having loans related to real estate, a special purpose vehicle can actually buy an asset, such as a hotel, and receive as collateral the proceeds from ownership. The result is that securitization has become an even more attractive route to invest in Italian real estate assets alongside Italian real estate funds.


The latest structures regarding real estate securitizations would also benefit for the exemption of certain corporate taxes for the SPV and for the application of the 239 Law regime in relation to the withholding tax for interest payments made to certain categories of non-Italian resident investors.


The Italian real estate securitization market is still small, but we see big potential for it to grow.


Contact our EMEA Corporate Trust team for assistance with your securitization transactions.


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