European securitisation suffers blow

Sarah Davidson

August 22, 2012

The report Economic Woes Hurt Securitization Issuance And Credit Quality In Europe finds that investor-placed securitisation issuance in Europe totaled €44 billion in the first seven months of 2012 – down about 10% from the same period in 2011.

Standard & Poor’s credit analyst Mark Boyce said: “We believe European securitisation issuance could end 2012 lower than last year, as banks tap central bank programs for a greater portion of their funding needs.

“At the same time, banks’ private sector funding costs remain high, and consumer confidence is still low, further depressing new lending growth.”

In S&P’s view, the decline in issuance is partly down to banks in the European Economic and Monetary Union meeting 80% of their 2012-2014 debt redemptions through the European Central Bank’s three-year long-term refinancing operations (according to the Bank of International Settlements).

Other factors include depressed underlying lending volumes, given renewed economic sluggishness in the region, weak consumer sentiment, and higher bank capital requirements.

As the report points out, UK residential mortgage-backed securities (RMBS) continue to dominate this market, accounting for about 45% of securitisation issues in the first seven months of 2012.

By comparison, issuance of auto asset-backed securities totalled about €7 billion in the seven months to July–about 15% of overall issuance in the period, with Dutch RMBS and UK credit card ABS each adding about €5 billion.

Two market bright spots are the emergence of US investors as significant buyers of European securitisation paper and the arrival of the Prime Collateralised Securities labelling initiative.

US dollar-denominated securities accounted for about 25% of investor-placed issuance in the seven months to July, compared with about 30% for full-year 2011.

The PCS initiative, meanwhile, aims to identify securitisations that conform to certain standards of quality and transparency, with the potential to secure preferential regulatory treatment.

On the regulatory front S&P sees two major developments shaping the future of European securitisation over the longer term.

First the extent to which structured finance instruments will be accounted for as liquid assets in calculating the liquidity coverage ratio stipulated in the Basel III rules for banks.

Second, the treatment of securitised products within the Solvency II Directive that imposes capital requirements on insurers.

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