1. Market Trends
- A pervasive theme of 2023 has been the 'choppiness' of markets, given the prevalence of high-interest rates across central banks globally.
- Many investors have been less willing to invest in asset-backed securities (ABS), which are perceived as more complicated or risky, compared to risk-free government debt which often currently offers high yields of over 5% per annum.
- In the short term, key factors that will influence the European ABS markets in H2 2023 and in 2024 are the number and extent of remaining rate increases, rising default levels, and how long the current high interest rate environment will last.
- In the long term, key factors influencing the European ABS markets are the slow growth rate and the lack of competition in Europe compared to the US and China, as identified in Lord Jonathan Hill's keynote speech. He noted the importance of an 'honest debate' regarding economic growth, risks, and the trade-off between competitiveness and conservatism.
- Market participants are concerned that the investor base in European ABS markets is too narrow, which is a direct contrast to the US market. Opening up the market to a wider investor base would likely lead to greater liquidity and better execution, thus driving demand. Regulatory reform is required in order to achieve this.
- Despite the volatility, certain asset classes are proving increasingly popular, with higher transaction volumes. In particular, there is a lot of market activity involving Fintechs, specialty finance and trade receivables transactions, and a welcome focus on ESG.
2. Private Securitisation
- Participant polls demonstrated frustration with the current reporting templates, expressing a preference for either dropping reporting requirements for private securitisations entirely or for regulators to switch to a single simplified template for all types of private securitisation.
- It was noted that for most private securitisation transactions, the only investors are the arranging finance provider and the sponsor or an affiliate, who will both already possess a good understanding of the transaction and have a direct relationship with the originator. Accordingly, a lot of this reporting is not providing added benefits to investors.
- Additionally, participants are often confused by the requirements to comply with regulators in multiple jurisdictions, which adds complexity to transactions. There is a desire amongst participants for regulators to align their requirements across jurisdictions, such as in relation to transaction summaries.
3. Green Asset-Backed Securities and New Asset Classes
- While green bonds and loan issuances have grown strongly, there has been a relatively low number of green or sustainable ABS transactions so far.
- Participants differed in opinion on whether 'green' labelling should relate to the use of proceeds of the securitisation funds or if it should relate to the nature of assets in the securitised portfolio, with the majority opinion / direction of market travel being in favour of the former.
- Following last year's discussions of innovation in relation to non-bank lending, fintech, and speciality finance, this year identified residential solar panel ABS and consumer/SME loan securitisation as key growth areas.
- Additionally, Buy-Now-Pay-Later (BNPL) was touted as an important asset to look out for in the coming 12 months - we predict a dedicated panel on this in 2024!
4. European Securitisation
- CLOs in the European securitisation market have been affected by the market conditions and equity arbitrage has been weak.
- In the UK mortgage market, deposit-funded institutions have been out-bidding securitisation-funded competitors.
- The absolute high-interest rates are impacting volume for securitisation funders. For instance, the two-year swap rate is currently above 5% and securitisation-funded originators are needing to pass on rates of above 7%.
5. Consumer Regulation
- In the consumer space, increased regulation is starting to come into force or is being contemplated over the coming months and years.
- There was a mix of opinions as to whether such regulation would help increase unsecured consumer ABS issuance. It was considered that too much regulation would be problematic, but that regulation is generally required to get more issuers to the ABS market. Therefore, regulators, as always, would need to strike a delicate balance.
- In the UK, a new consumer duty for new products takes effect in July 2023, and there is a consultation on the regulation of BNPL products that have a lifespan of less than 12-months. Additionally, the UK Consumer Credit Act is being tightened.
- Similarly, in Europe, EU lawmakers have reached a political agreement on a Consumer Credit Directive (CCD 2) to replace Directive 2008/48/EC.
6. What's Ahead
- Participants predict that the next 12 months may see the consolidation of non-bank lenders, fintechs, or even banks acquiring platforms (such as Barclays' acquisition of Kensington).
- Many new entrants are thinly capitalised - given the increased borrowing costs, access to funding may become challenging and could lead to further consolidation within the market.
- The upcoming regulation in the UK and Europe may be contributing to the volatility experienced in markets. There will likely be a period of the markets getting used to new or updated regulations before the market eventually settles.
- Although there was a difference of opinion as to whether the forthcoming consumer regulation would help increase unsecured consumer ABS issuance the general consensus among participants, analysts, and regulators was that there would be long-term growth in the market.
- Generally, there was a debate as to whether the market would become more balanced in the future, with increased public issuance balancing out private securitisations. This will likely be affected by the regulatory changes to reporting templates.
- Overall, attendance at the conference was high, productive meetings were held and new transactions are coming to market. The expectation is that some asset classes will continue to thrive over the coming year.
Further resources and information
Baker McKenzie's Global Guide to Legal Issues in Securitisation covers 33 jurisdictions across the globe. It provides an overview of the general legal, tax, accounting and regulatory issues typically relevant to securitisation structures.
Given economic, geopolitical and regulatory developments as well as the increasingly cross-border nature of securitisation transactions and innovative structures, up-to-date knowledge of securitization laws, practices and structures in various jurisdictions is vital to structure innovative and legally compliant transactions.
Click here to download "A Global Guide to Legal Issues in Securitisation".
For additional resources, please click here to visit Baker McKenzie's Banking & Finance News & Updates page.
Baker McKenzie's wide network of offices allows us to provide consistent, high-quality legal advice in an efficient and coordinated manner. Our extensive securitisation experience across multiple jurisdictions means we can provide a seamless, cross-border service in international transactions.
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