PAGE 6 Barcelona attendance jumps amid renewed for ...€¦ · SPECIAL DAILY EDITION BARCELONA,...

With new regulatory frameworks in place for securitization in Europe comes another bout of uncertainty for the trajectory of the market. The stunted issuance pipeline in the first half of this year and the delay of the regulatory technical standards (RTS) for STS securitization have driv-en a jump in attendance at this year’s Global ABS conference, drawing 4,100 registrations ahead of the event.

That figure is up from 2018, when 3,830 market participants flocked to Barcelona last June, ac-cording to conference organizer IMN. The number of sponsors this year has also jumped, to 121 com-pared to 114 last year. Conference-goers speaking to GlobalCapital on day one say that the buzz this year is, once again, regulation. Specifically, the new STS criteria, concern about another shot of Brexit volatility and the possibility of divergent

regulatory regimes is giving attendees a lot to talk about at the conference this year.

The implementation of STS was the culmination of years of work by the industry to move the mar-ket towards standardisation and put securitiza-tion back into the good graces of policymakers in Europe. But when it

Quirks of Europe’s new Securitisation Regulation, which came into force this year and is dominat-ing debate at this year’s IMN/Afme Global ABS conference in Barcelona, could leave CLO buyers carrying the can for failures of CLO managers to meet their regulatory obligations.

Nick Shiren, a partner at Cadwalader, Wicker-sham and Taft, said that in a CLO, the issuer itself would be the party that was required to disclose transparency information under Article 7 of the new regulation.

But it needs to source this information from

the collateral manager, who holds all the details of the CLO exposures. The issuer typically also indemnifies the manager against breaches of the regulation, meaning that any penalty applied for breaching the rules would come out of investors’ pockets.

“These are the types of issues investors are very alive to, and which have become a negotiat-ing point in recent deals,” said Shiren, speaking on a panel about issues on the regulatory hori-zons.

Investors have also been heavily split on how to meet the regulation’s

PicturesShots from day onePAGE 19

RoundtableAfme talks hot topics PAGE 8

Yield hunt EU esoteric ABS PAGE 6

SPECIAL DAILY EDITION BARCELONA, WEDNESDAY JUNE 12, 2019

Barcelona attendance jumps amid renewed reg uncertainties

CLO buyers could pay for manager’s disclosure failings

Sonia term rates ‘not guaranteed’ for securitiza-tion, says FCAA spokesperson from the Financial Conduct Authority (FCA) speaking on a panel at Global ABS on Tuesday said that term rates for the Sonia benchmark may be unnecessary, and that overnight rates “are the future”.

“We think that waiting for a forward looking term of Sonia is a mistake,” said Edwin Latter, director of markets and wholesale policy at the FCA. “We don’t think that is necessary for most of the markets to use forward looking term rates.”

He said that a number of market participants have become accustomed to using term rates and that many had become convinced of their necessity for the market to function.

“What you’ve seen, demonstrated by Krishan [Hirani] and many others, is that actually you don’t,” said Latter

Krishan Hirani, senior manager of funding capital markets at Nationwide Building Society, alongside his team, led his firm to become the first issuer to bring a Sonia-linked securitiza-tion to market in April.

“It went as well as it could,” said Hirani. “One thing we were careful of was to keep the conventions in line with what the market was used to.”

Implementing a three day lag was pointed out as a convention which was familiar to investors and proved a key step towards famil-iarising the buyside with the first Sonia ABS.

“STS was absolutely more difficult to get to,” said Hirani, speaking of the ‘simple, transparent and standardised’ regulatory framework. “You can’t get regulation wrong.”

The Bank of England had previously discussed plans to implement

ABS Daily Barcelona

Continued on page 4Continued on page 4

Continued on page 4

Tom BrownMax Adams

Owen Sanderson and Graham Bippart

Crowds flock to Barcelona for Global ABS

GCBARCELONA EDITION WEDNESDAY JUNE 12, 2019

AGENDA 3

08:00

• Registration & Breakfast

08:45

• Hosts’ Opening Remarks

• John Orchard, Chief Executive Officer, Banking & Finance Group; Board Member, EUROMONEY INSTITUTIONAL INVESTOR PLC

• Simon Lewis OBE, Chief Executive, AFME• Damian Thompson, Head of UK Financial

Institutions, NATWEST MARKETS

09:00

• ABS Growth and Liquidity Outlook: How Well Prepared is the Market to Weather the Next Storm?

09:45

• European Securities and Markets Authority Keynote Address

10:20

• Reconciling the Disruptive and Innovative Power of Technology with the Need for Stability and Security in Financial Services: How Digitisation is Rewriting the Play Book as We Know It

11:00

• Refreshment Break in Exhibit Hall Hosted By:

11:30

• Six Months Into the New Securitisation Framework: Implementation and Practical Considerations to Date

12:20

• Delegate Luncheon

13:20 TRACK A

• Marketplace Lending and Securitisation in Europe

13:20 TRACK B

• Synthetic vs. True Sale for Bank Regulatory Capital Relief and Significant Risk Transfer

• 13:20 TRACK C

• STS Costs and Benefits Analysis: The Investor and Issuer Viewpoint

13:20 TRACK D

• The European CLO Market: Sailing into Rough Waters

14:10 TRACK A

• Unsecured Consumer Credit ABS

14:10 TRACK B

• Bank Funding Strategies Post Central Bank Schemes

14:10 TRACK C

• Impact of New Regulations on Conduit Finance Vehicles

14:10 TRACK D

• The CLO Investor and Researcher Roundtable

15:00

• Refreshment Break in Exhibit Hall

15:30 TRACK A

• Non-Bank Issuers: How Sustainable and Competitive is Their Lending Model?

15:30 TRACK B

• European CMBS: A Market Re-Awakened

15:30 TRACK C

• SONIA, SOFR, €STR: The Arrival of Risk Free Rates in the ABS Market

15:30 TRACK D

• European NPLs: An Overview of the Non-Performing Loan Market

16:30

• Women in Structured Finance Networking Reception Commences: Supported by 100 Women in Finance and Vistra

16:20 TRACK A

• ABS Trader and Syndicate Panel

16:20 TRACK B

• UK and Dutch RMBS: New Issuance and Refinancing Projections

16:20 TRACK C

• Comparing Global Risk Retention Frameworks: US, EU, UK, Japan and Australia

16:20 TRACK D

• Spotlight on Italian NPLs: GACS Review and NPL Progress to Date

17:10 TRACK A

• Auto ABS: Is the Sector Stalling Out?

17:10 TRACK B

• Decoding the Real World Applications of Blockchain and Other Emerging Tech in the Securitisation Sector

17:10 TRACK C

• The Annual ABS Researchers’ Panel

17:10 TRACK D

• Greek and Cypriot NPLs: New Government Backed Proposals for NPL Resolution and the Role of ABS

18:00

• Day Two of Global ABS 2019 Concludes

4 NEWSGCBARCELONA EDITION WEDNESDAY JUNE 12, 2019

took effect on January 1, issuers were in no rush to be the first to test the new labelling criteria, and issuance is still lagging by about 30% year over year, according to speakers at an STS panel on Tuesday.

“The idea was that all of this work would have been finalised, but unfortunately there were bigger issues, including Brexit,” said Christian Moor, prin-cipal policy advisor, capital markets union at the Eu-ropean Banking Authority, on a Tuesday afternoon panel. “A lot of the people were re-prioritized… and just started to work again on STS in March.”

The complexities at the committee level within the European Commission also mean that there could

be even more delays than have been predicted. The STS regulation is about “half done”, according to the speakers, but getting all of the RTS documents cod-ified into law will depend on whether or not there are any objections raised by the Committee on Eco-nomic and Monetary Affairs [ECON], whenever it eventually convenes.

“Given some of the more intriguing political par-ties that have thrown themselves into the mix, there is a small but not discountable risk that the ECON committee decides to raise objections,” said Ian Bell, head of third-party verification agent Prime Collat-eralised Securities. “The issue in terms of timing is completely disconnected from the market.”

STS versus non-STS, and the extent to which price tiering will emerge between the two markets, will also be a big theme at this year’s conference. Ac-cording to Bank of America Merrill Lynch director Alison Belille, there has been little evidence so far that investors are pricing STS-compliant bonds any differently than paper that doesn’t carry the label.

Bell added, however, that he could envision a time when the STS market becomes its own asset class, with dedicated coverage similar to covered bonds or other securitized asset classes.

“It would be interesting if it just becomes short-hand for a new asset class… Then the game changes and STS becomes its own creature,” Bell said.

requirements, particu-larly if they’re buying deals from outside the EU.

Securitisation issuers which aren’t EU-regulated, such as US CLO managers, may not comply with the new European disclosure rules, particularly if Eu-ropean buyers are only a small part of the intended audience for the deal.

This gives European investors a difficult choice – stop buying any assets outside the EU at all, require issuers to meet European standards, including new disclosure templates, or take a view that the Regu-lation shouldn’t apply to these issues. If a US issuer meets US disclosure standards, for some investors, that will be sufficient.

“Investors are having to take their own views as to whether they require that full information, includ-ing compliance with the reporting templates, which is very onerous, from US originators,” said Shiren.

“There’s a good argument that the detailed trans-parency requirements do not apply in every case, and should not apply where none of the entities is established in the EU.”

Laurel Davis, vice president for credit risk trans-fer at Fannie Mae, said that the GSE’s $50bn in Cred-it Risk Transfer securities were within scope of the regulation.

“As a US issuer primarily selling to US investors, you would think that there was really no impact of the new EU securitization rules, but actually we started to find that there is quite an impact,” Davis said. “If we look at our issuance, the direct invest-ment from EU investors is relatively small, but what we started to hear from our US investors beginning in the second half of last year was that they had a lot of concern, because they are managing a significant amount of EU money.”

Some investors allocating those funds to Fan-nie Mae CRT bonds need to ensure that the se-

curities comply with EU regulation. Fannie Mae already voluntarily complies with the risk reten-tion requirement by retaining a vertical 5% of its issuances, Davis said, so meeting the new rules meant primarily complying with the due diligence requirements of the Regulation. Working with London-based Integer Advisors, the Fannie found that it already discloses much of what is required, Davis said.

Formatting that data to make it easy for EU inves-tors to find is a more complicated matter. Fannie pro-vides much of the detail EU investors need on their website, including a mapping guide for loan-level data.

In July, Fannie plans to add an ESMA format to its data dynamics tool, which allows investors to run analytics on the data provided. But, Davis said later in the panel, “the ESMA format isn’t really us-able,” even though they will be providing it, due to inherent differences between the requirements and reporting formats of the two jurisdictions.

Nonetheless, Davis said she’s had at least one US investor that manages EU money say it is allocating more money to Fannie Mae because their efforts have made compliance easier. “If it was hard for us [parsing the data and sorting it], it is going to be hard for our investors,” she said.

Though panellists hoped for further statements from European authorities to clarify these issues, for regulated investors like banks, it is likely to come down to a discussion with the responsible local au-thority.

“If investors are not getting essentially the same information in the same fashion in different juris-dictions, but the risk profile of the transactions is similar, there’s going to have to be a very interest-ing conversation with the regulator about that,” said Shiren.

Barca conference-goers seek STS clarity

CLO buyers might hold the bag for disclosure issues

Continued from page 1


FCA doubts need for Sonia term rates

term rates in a statement on May 15, but such implementation could be years away, according to market participants.

Term rates are “almost certainly” going to be implemented alongside Sonia eventually, said John Millward, managing director at HSBC, but which markets will implement them remains to be seen.

“It is very clear from the consultation last year that the overwhelming market majority felt that term rates needed to be restricted to a niche usage, and the rhetoric coming from both UK and US authorities is consistently endorsing that,” said Millward.

Millward outlined loan markets and corporates as potential areas which would need to implement term rates, but said that term rate implementa-tion may not be necessary for the securitization market to continue functioning.

“Are they required throughout the securitiza-tion market? I would say absolutely not, and that has been proven by the recent transactions which have been done,” said Millward.

Rob Ford of Twenty Four Asset Management suggested that the market needs a period of sta-bility before tackling the issue of term rates for Sonia. Ford floated one to two years as an appro-priate timeline for the market to adjust to the new scheme before digesting further change.

“I think the debate on this is long from being over,” said James Grand, partner at Simmons & Simmons. “I think... a lot of the buyside, partic-ularly the corporate world, has not fully focused itself yet on the effect of this transition and how far it will go and the degree of effort that is going to be required.”


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European securitization investors are increas-ingly on the hunt for more esoteric deals, but a lack of supply means that buyers are going to need to get creative with how they source allo-cations, said speakers on a panel on day one of Global ABS.

Energy-related securitizations and market-place loan ABS were of particular interest to the audience, according to a poll during the dis-cussion. However, the supply of paper in both of those asset classes has been disappointing to date in Europe.

“Less than €100bn of supply in ABS is expected in 2019,” said Joseph Lau, managing director and COO of Lord Capital, citing a report from Kroll Bond Rating Agency this week. “So we can’t ex-pect allocations sufficient to satisfy our investor needs. We need to identify alternative methods to extract value from assets.”

One of these methods could entail becoming a direct lender, which Lord Capital has been doing in the US commercial Property Assessed Clean Energy (PACE) sector in the US. However, solar and PACE assets in Europe are hard to come by, with the market for the latter still in the early stage of its development.

“[PACE] would be very difficult in Europe,” said Daniela Francovicchio, senior manager,

structured finance, at the European Investment Fund. “One problem is the lack of standardiza-tion and the different rules applied to securitiza-tion in general. We would like to see support from regulators to develop that market.”

In marketplace lending, the UK is roughly three years behind the development of the US, ac-cording to Etienne Boillot, CEO of Eiffel eCapital SA. Europe, meanwhile, is even further behind. Similarly, this means that firms looking for expo-sure to these assets in Europe should look to take a more direct approach.

“There are lots of businesses that banks don’t want to lend to,” said Boillot. “But the notion that only the people who can’t get a loan are the ones who go to a marketplace lender needs to be tem-pered. You get much better service, a response from the platform and your money in a week. There is no bank that can do that.”

Boillot noted that his firm has exposure to 15,000 small business borrowers.

The appetite for esoteric paper was highlighted in a poll of the audience at the end of the talk. 58% of respondents said that they expect to increase esoteric ABS allocations over the next 12 months, with the main attractions being the diversifica-tion on offer and the longer-term nature of many off-the-run assets.

Despite the official beginning of the Securitisation Regulation in January 2019, there’s still room for market participants to influence the details of the rules – and the European Commission is still re-ceptive to feedback, if only the industry will “raise its voice”, according to Alexandre Linden of BNP Paribas.

“I’d encourage everyone who has an issue with the way the templates are at the moment, either for ABCP or non-ABCP products, to raise their voice, either directly or through industry associ-ations, said Linden, credit portfolio manager in the securitized products group at BNP Paribas. “I think the authorities need this feedback to make it work.”

Linden pointed to pressure from the industry late last year, which helped avert a potential dis-aster for the ABCP market. Details in the disclo-sure templates of the Securitisation Regulation were impossible for certain ABCP transactions to

comply with, and because ABCP is issued so fre-quently, these transactions would not have been grandfathered from the previous regime.

Fortunately, European policymakers listened to the industry, which warned of an abrupt stop to the functioning of conduits in Europe and a big drawdown on liquidity, and scrambled to put a fix in place.

Though disaster was averted, Linden pointed to several issues which still needed solving.

Private deals which are partly funded by con-duits and partly directly on balance sheet – com-mon, when several banks are in a single borrow-ing facility for a client – mean that even the banks funding through their balance sheet must use the same templates as for the conduit banks, which Linden called “not at all convenient”.

He also flagged challenges associated with using the templates for significant risk transfer deals.

Another panellist in the same discussion, Mer-ryn Craske, a partner at Mayer Brown, said that trade receiveables securitizations would benefit from more regulatory certainty as well.

Craske explained that it wasn’t clear whether these deals should use templates designed for corporate exposures, which don’t appear to fit the trade receivables asset class well, or the templates for esoteric assets – also inappropriate, as the deals are routine and rarely considered ‘esoteric’.

“The Article 7 requirements don’t set out exact-ly what has to be provided and how that should be done,” said Craske. “So we’re seeing the origina-tors find this quite challenging.”

The Commission is expected to approve techni-cal standards on homogeneity, capital standards for purchased receivables, and risk retention, in the next few weeks. However, because of the pro-gress of European politics, these are unlikely to become law before the fourth quarter

6 NEWSGCBARCELONA EDITION WEDNESDAY JUNE 12, 2019

Buyers clamour for esoterics, but opportunities are scarce

Market urged: ‘raise your voice’ with European Commission

Angelo Gordon hires ex-Pimco covereds, ABS investorAngelo, Gordon & Co has hired former Pimco portfolio manager Sunil Kothari as managing director, responsible for originating and executing on residential and consumer debt investments across Europe.

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“Sunil is a seasoned executive whose extensive knowledge of European mortgage and asset-backed markets will be key as we grow our resi-dential and consumer debt team outside the US,” said Durkin. “As the local regulatory environment evolves and the pace of central bank stimulus subsides, Sunil’s significant industry and origi-nations experience will support and enhance our international operations going forward.”

Kothari began his career in finance as an asso-ciate at Performance Trust Capital Partners.

“Angelo Gordon has a skilled residential and consumer debt group, and I look forward to working with [Thomas Durkin] and his entire team,” said Kothari.

Before working in Europe, Kothari served as a vice president on Pimco’s US structured credit team, where he focused on consumer ABS and second-lien non-agency RMBS.

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8 AFME RoundtableGCBARCELONA EDITION WEDNESDAY JUNE 12, 2019

Thank you very much for inviting me to this roundta-ble, and for the opportunity to give kick off with some thoughts and observations. I took some time to think about what I would say today, and decided to google the latest news in the area.

I started reading the latest articles with interest. The first one was from GlobalCapital, ‘SEC enforcers swoop on CLO combo notes’. Then I started to read an article from the FT, called ‘Investors flock back to credit product blamed in the financial crisis. Then you had an article in The Guardian on May 2: ‘Black-stone sues RCS owners directly over disputed head-quarters sales’, which concerned CMBS and the value of property underlying it.

There was an article in Risk, saying that the EU’s new securitisation market had stumbled at the first gate due to lack of progress on the technical stand-ards and the lack of a single European supervisor. And then, at least in Reuters, I got the first positive article: ‘Glimmers of light emerge from Europe’s se-curitisation slump’.

So when I read those articles I had two thoughts. My first was: Not much has changed compared to the securitisation markets before the crisis, just after the crisis in 2007 and 2008. My second thought was: ‘Thank God we now have STS in Europe’.

And now let me explain why on the one side I do not believe much has changed.

First, securitisation is still very much perceived as a very complex product, sort of a black box for many stakeholders including large parts of the mainstream media, politicians and to a certain extent by regula-tors and supervisors.

Second, we see that old ‘bad’ products are coming back and being branded as innovations, including ‘synthetic’ arbitrage CDOs, re-securitisations, and sub-prime. Mainly in the US I would say but, still, that’s where the problems started more than 10 years ago. Third, under the brand of fintech technology and market based lending you are seeing new originators or intermediaries entering the securitisation market, some of them not well capitalised, and with an origi-nate to distribute model, which was one of the prob-lems in the crisis.

Fourth some banks, not all, but some banks are us-ing securitisation again or trying to use securitisation at a capital arbitrage tool. I sometimes see deals that claim Significant Risk Transfer, or try to claim SRT, when proposed to the SSM, and I think: ‘Guys, why are you doing this again?’

So a few things look the same as 2007, 2008, but to be fair there are some important differences. I think that the problems and the issues that I just spoke about are contained in certain niches or with certain stakeholders in the market, and haven’t affect the whole market as we saw pre-crisis.

Also, many of these issues are now less in the bank-ing sector, and more in less regulated parts of the market. But you only need a few things to happen, a couple of deals to blow up, and you will immediately have the sceptical media, politicians and policy mak-ers claiming that they were right not to trust securiti-sations, and the damage is done again. So the market must be careful. So now let me explain my second and more positive thought. ‘Thank God we have STS in Europe’. In my view, the STS framework has high-lighted some benefits of securitisation, and for the first time in many years has shown securitisation in a positive light. The message of securitisation’s role in funding the real economy has been very well received in Brussels and has opened many doors.

It has destigmatised the word ‘securitisation’ and has given the market a quality label. And it has obvi-ously substantially reduced capital requirements on securitisation positions, which will make the product economically beneficial to invest in, particularly for banks but also for insurance companies.

In other words I do believe that STS is the best thing that has happened for the EU securitisation market in a long, long time.

I’m therefore very happy to see that this year the market has come to life, with a flow of STS deals.

But when I started writing this, I also thought: ‘What does it mean to be successful’?

When the European Commission published an impact assessment, back in September 2015, exam-ining what a successful introduction of STS regula-tion would look like, it suggested this STS regulation should increase issuances by approximately €100bn to €150bn a year. Looking back at 2015 data, there was approximately €40bn of issuance equivalent to STS, so that means if there was €150bn of STS issuance a year, this objective would be achieved.

But regardless of the potential size of the STS market, I believe the introduction of STS has already proved its value in Europe. Next to the points that I just raised, I believe that STS has bridged the gap to other segments in the securitisation markets, in-cluding balance sheet synthetics and the discussions around NPL securitisation.

Only two or three years ago it was impossible to discuss these products within the regulatory com-munity and certainly not the introduction of potential beneficial regulation to improve the functioning of these segments. As some of you probably are aware, the EBA is working on a number of projects in this area and we will be publishing a few reports around these topics.

Obviously not everything is perfect with STS. It’s very unfortunate that the Commission did not man-age to finalise the technical standards by December 2018, and this has created an additional layer of un-

necessary uncertainty. I do believe that the intentions of the Commission are good and you could definitely see from the letter that they sent to ESMA on the dis-closure templates back in December 2018 that there is a willingness to get things right at the political level.

I’m therefore confident that within the next couple of months this uncertainty will be cleared. I also un-derstand that there are many open questions around scope of publication of the regulation, and the due-dil-igence requirements for investors. I can assure that the ESAs, and the ESAs are ESMA, EBA and EOBA, are currently collecting information of these funda-mental questions and discussing them.

The last point that I want to raise is around the high levels of disclosures via ESMA’s loan-by-loan tem-plates, the transparency requirements via the secu-ritisation repositories and the due diligence require-ments for investors. I understand when originators and investors complain about operational burdens and cost involved in order to comply and that this will slow down the revival of the securitisation market.

However I do see things differently here. I believe that these unprecedented levels of disclosures and transparency might create a wobble in the market in the short term. But in the mid and long run, these requirements will put the securitisation product in a pole position compared to other products. Let me explain that.

First of all, the policy making community and all the regulation is moving much more to evidence-based rule making, and all this data.

Second, the data collection will also help investors to do more risk-based analysis. For example, bank investors will be able to create internal models, cal-culate tranche maturity based on this data, and use SEC-IRBA approaches purely based on external proxy data.

Last but not least, I also believe that the transparen-cy will help the securitisation product and the infra-structure around it to incorporate new developments we’re seeing, such as with the new benchmark rates, and the use of blockchain. I also believe that it’s pos-sible that securitisation could lead the development and set a standard for green loans and green assets going forward. On a final note, I do believe that the se-curitisation as a whole should play a larger role in the financial system than it currently does. It should not only be used as a funding tool for banks, but also as a tool to help banks with the transfer of NPL portfolios and with their capital and risk management.

It’ therefore important that over the next couple of years we continue the already healthy dialogue between regulators, policy-makers and industry and build further on the positive base that STS has created.

Opening remarks by Christian Moor

AFME Roundtable 9GCBARCELONA EDITION WEDNESDAY JUNE 12, 2019

: Many thanks to Christian for that excellent introduction! Is STS indeed the best thing that’s happened to the European EU securitisation market, and what do we think about the €100bn to €150bn a year target?

Marta Zurita Bermejo, DBRS: I think in assessing the impact of STS in 2019, we also need to consider the numbers in 2018, as lots of deals were probably brought forward and we saw more supply in December than usual.

Also, in the first quarter STS had a very positive impact on non-STS assets — during this period we have seen NPLs, we have seen CMBS, and other areas where the activity levels have been higher.

: Any other first STS reaction?

Anna Bak, Afme: I definitely echo what Christian said, if it was not for the framework which is now

in place I don’t think we’d have got to where we are now with the securitisation market.

I’ve now been with Afme for more than five years and since I joined we’ve been working on this project. It’s been a really, really long process

but I think we managed to indicate those aspects of securitisation which are vital in supporting Capital Markets Union, and also to shift those aspects of the securitisation which did not perform well though the crisis.

Matthew Jones, S&P: On that €150bn number, if you’re talking about €150bn of STS we’ve obvious-ly got a long way to go, given CMBS and CLO fall out of scope. I think I’d echo the same comments in terms of we’ve lost a quarter of issuance this year, given that the rules haven’t been in place.

We’ve also observed the EU harmonisation pack-age on covered bonds and the fact that that’s now finally ratified, and it’s still going to take 2.5 years for local authorities to put that into law. I think the same level of transition would have been extremely helpful for this asset class, but it’s encouraging to hear that there’s more focus on evidence-based regulation, because some of the securitisation

Participants in the roundtable were:Marta Zurita Bermejo, head of European business development, DBRS

Anna Bak, associate director, securitisation, Afme

Matthew Jones, head of EMEA structured finance, S&P Global Ratings

Krishan Hirani, head of secured funding, Nationwide

Rob Ford, founding partner, TwentyFour Asset Management

Damian Thompson, head of UK FI origination and solutions, NatWest Markets

Christian Moor, principal policy advisor, European Banking Authority

Nathalie Esnault, managing director, securitisation at Crédit Agricole CIB

Pablo Portugal, managing director, advocacy at Afme

Richard Hopkin, managing director, head of fixed income, Afme

Owen Sanderson, GlobalCapital (moderator)

The new European securitisation regime: the first six months

When GlobalCapital and Afme came together for this year’s annual securitisation roundtable, the topics were similar to last year – but the tone was much more positive.

Nationwide’s pioneering Sonia-linked deal showed the sterling market that investors would buy the new benchmark, and Afme invited the building society’s secured funding head, Krishan Hirani, to share his thoughts and lessons from the deal. Since the discussion in mid-May, the transition has only accelerated, to the point where, as the market meets in Barcelona, it’s unlikely to see a sterling consumer issue without a Sonia coupon.

The new Securitisation Regulation, which came in early this year, has been far from trouble-free – but some of the biggest problems with the rules were solved, and many issuers have already adopted the “Simple Transparent and Standardised” designation. Christian Moor, senior policy advisor at the European Banking Authority, was also able to join us, and offer his thoughts on the future of the market. Further out, we discussed the potential for securitisation, as the market with the closest connection to underlying assets, to help drive the sustainable finance agenda forwards. If that happens, securitisation will have completed the transition from villain to hero – and next year’s roundtable, and Global ABS 2020, should be more positive still.

Anna Bak Afme


evidence that’s been put in front of regulators hasn’t had the same traction it could have done, given that the performance of most asset classes was extremely robust through the financial crisis.

What we’re spending a lot of time on now is thinking about whether or not issuance for 2019 will catch up. Not having the regulations in place has created a bottleneck, so will there be a whole wave of deals?

Krishan Hirani, Nationwide: Overall STS ought to be a positive and should be seen that way. The securitisation market is still shaking off the impacts of what happened during the crisis and it’s come a long way from there. I even think the name of ‘simple, transparent, standardised’, is a particularly good thing to call it, as it promotes the product in the right way.

It may not show immediate results, but over time, it should attract a new investor base that has histori-cally been wary of securitisations, and create a level playing field with the other asset classes.

There’s only been a handful of transactions to date, and that’s had a lot to do with how long it takes to digest these regulations. They’re not easy, they’re not…

Rob Ford, TwentyFour Asset Management: Simple…?

Hirani, Nationwide: The outcome is simple but in terms of going line by line through the regulations, it’s a big job.

From an issuer point of view you want to be meticulous as you go through this. You can’t afford to get anything wrong. And that ties into the lack of supply we’ve seen to date.

There is the carrot of the benefits you get as an issuer from having an STS label on the transaction — from an investor point of view, bank treasuries can get LCR treatment. For other investors you get the CRR capital benefits.

If you compare it to other regulations coming in, which have had quite long lead times, that’s kind of what you would have expected. So the fact that

we’re already seeing deals is almost a testament to the people who’ve been trying to get this up and running.

Damian Thompson, NatWest Markets: Christian, I like the strategic outlook about the almost competi-tive advantage that securitisation could derive from this process. You could see a future where European securitisation is the gold standard for transparency and disclosure in all investable products and that I think would be a quite powerful place for it to be.

But I think we are in an absolutely critical phase and getting to that level of success doesn’t just mean issuers who were already issuing a certain amount per year restarting to issue the same amount per year. This actually means a meaningful transfer of banks’ funding coming into securitisation from other products.

There’s a central bank element of that, with the ECB’s need to exit the market at some point. Does bank funding then become a securitised market? Also obviously there’s covered bonds. I think the core running through this, and we feel quite strongly about this, is the pragmatism of the regulatory approach.

I think there was a very pragmatic approach to the reporting templates at the back end of last year which was critical, absolutely critical. Things could have gone very badly if that sensible approach hadn’t been taken.

But the difference now between a market that revives to €150bn in two or three years’ time, and a market that looks like it did in 2016 and 2017, is about whether issuers are able to have an open, pragmatic, sensible, common sense relationship with the various regulatory bodies involved.

Ford, TwentyFour: Perhaps I could take that to the next level and say, A, I agree, I think it’s the best thing that’s happened and, B, I don’t think that any issuer that can achieve STS going forward will do a deal without STS.

Quite clearly it opens their deals up to the widest possible investor base. Banks, insurance companies, anybody capital-constrained essentially can’t buy non-STS deals, because the cost of capital for the non-STS product is prohibitive.

In order to have that biggest audience, and there-fore the best pricing, major issuers are clearly going to do STS. Which then potentially clears the path for the non-STS product, which is maybe where some of our focus needs to be in the next few years?

I’m not talking about the bad products like resecu-ritisations and synthetic CDOs and the like, but valid products that sit out of scope — markets like CLOs, CMBS, non-conforming RMBS, which deserve some attention and another look.

These shouldn’t necessarily be part of STS, but perhaps STS 2 or something along those lines.

We’ve talked a lot about the difficulties when making investment choices, particularly for investors like ourselves. When investing for bank treasuries, it’s very, very simple. I’m going to look at STS deals because that’s all they can buy. But as a non-capital constrained asset manager, for the most part, I get to pick and choose which deals to look at, and for those mandates, I’ll look at the non-STS products as my first choice. But for the capital constrained mandates I’m going to go straight to the STS market, no doubt about it.

: Christian, what do you think about an STS 2?

Moor, European Banking Authority: Yes, I already indicated that STS has helped to bridge the gap to other securitisation products, and two areas we are currently focusing on are balance sheet synthetics and NPL securitisation.

The Council and the Parliament, through the Securitisation Regulation, mandated the EBA to do an assessment of whether STS criteria for balance sheet synthetics could and should be developed and introduced in legislation. So later this year we will publish a discussion paper on this topic to start the debate with the industry.

On NPLs, some banks in southern Europe still have a large amount of NPLs on their books. I am convinced that NPL securitisation could play a role here to reduce those loans held by banks — but some elements of the Securitisation Regulation cur-rently restrict the growth of this market.

After synthetics and NPLs we could start looking at other securitisation products, for example; CMBS and managed CLOs. However when we did our first assessment back in 2014, though, looking at the default rates of CMBS, the data would not justify any kind of improved treatment. I don’t know what the performance or structures of those products looks like now, but as always we will assess the evidence including market development and performance over the last five or six years to see if it’s justified to intervene or not.

Pablo Portugal, Afme: I wanted to pick up on one of Christian’s comments that this framework puts securitisation in pole position compared to other products. I hope that is the case, because we believe that compared to other fixed income products like covered bonds, securitisation is subject to by far the most conservative regulatory framework, including stringent disclosure and due diligence rules.

The framework is posing short term challenges and it is regrettable that it is not complete yet. But we shouldn’t underestimate the positive signalling from the political sector that the STS label provides.

It is important that the political community remains engaged and monitors how the framework

Krishan Hirani Nationwide


performs in the marketplace. By January 2022, the Commission has to issue a report on the function of the Regulation with accompanying proposals if needed, so that review is an opportunity to consider whether aspects of the framework need to be fine-tuned or reassessed.

Nathalie Esnault, Crédit Agricole CIB: I just want-ed to add something on the long term perspective. STS should eventually be a positive development for the market, no question on that, but the beginning of the year has been quite difficult.

Something we’ve not yet mentioned is verifica-tion, which was not in place until the end of Q1, and subsequently delayed deals because a number of issuers would not go out without third party verification.

The second thing which I think we need to note is the importance of private securitisation, meaning conduit or on balance sheet securitisation, a part of the market which has not been well covered by the Regulation.

Everything was done and written for public trans-actions, and it seems that a number of provisions in the Securitisation Regulation are not very suitable for private transactions. This is something that we need to review, in 2022 or before. A significant part of the market is private. It’s necessary, and it’s not a bad thing.

When the public market is not working, you could still have access to securitisation financing through the private conduit market or banks’ balance sheets.

There are also warehouse transactions, where asset pools can be built up before going to the market, which are necessary to get to the minimum issuance size required for the public market.

Private securitisation is very important for the financing of the real economy. However, this part is not well taken into account in the current regulation.

Moor, EBA: I agree. It is unfortunate the Commis-sion did not publish the technical standards by the end of last year. ESMA and EBA worked very hard and we published the draft legislation in June and

July 2018, with the expectation that by December, the Commission would publish the final legislation, and it would be in place in time for the market to open in January and February 2019.

But unfortunately bigger events happened, including Brexit negotiations, the Commission reprioritised, and this work was basically put on hold for a couple of months. Hopefully you’ll see the Commission adopting most technical standards in the next couple of weeks. However, it will be too late for the European Parliament and Council, so it will be probably more like November or December before these are published in the Official Journal and become legislation.

But you will see the final rules in June or July.I do know that the Commission is very sensitive

to the good work by the EBA and ESMA and that’s why I do not expect too many changes in the final versions. On homogeneity, for example, if anything, there may be a few positive things in there. Market participants will have to live with the uncertainty, but over the next couple of months, all will be clarified.

On the conduit side, I agree that it’s not perfect. If you go back to 2014, EBA consulted on STS term securitisation, and only squeezed in the conduits at the last moment. In addition, there has never been a proper consultation with the industry on how to create criteria on STS for private transactions. I do believe in the review Pablo mentioned, that is one of the issues that we need to reassess.

Richard Hopkin, Afme: If we do get the adoption by the Commission of some of these outstanding standards that we haven’t had yet, will that open up a big flow of pent up issuance in the market?

Ford, TwentyFour: I think it’s already coming, to be honest. There’s only a few deals out there now that are STS but whether the delay is three months, six months, or nine months, in two years’ time we’ll have all forgotten all about it and it won’t make any difference at all.

There’s been a lot of talk about whether there

could be a tidal wave of issuance coming in the second half of this year, and whether that will have an effect on spreads that we wouldn’t have expected if we’d had a smoother transition, which is not really helpful.

But to be fair, securitisation markets have always performed slightly differently from the rest of the credit markets.

At the back end of last year, we saw lots of corpo-rate bond volatility through September, and October, but we got to about the middle of November before ABS eventually capitulated, leading to a very quick catch up through November and December which almost felt like a crash.

If anything, the delay we had restarting the prima-ry market in January and February was marginally helpful, because it meant we didn’t have a deluge of new issuance coming in while the market was trying to recover from a period of significant spread widening at the back end of last year.

Where it is difficult, though, is in the details. I’ve run into a number of decent sized asset manage-ment investors, who are having trouble getting permission to invest in post-2019 deals from their own legal departments. No issuers can give them absolute certainty that they will adhere to the new ESMA standards, because we don’t know what the standards are.

There are investors with money to spend in our marketplace, unable to do so because the legal un-certainty is currently preventing them.

Hirani, Nationwide: There is nothing in these un-finalised RTSs that is an absolute barrier to issuance.

There are either workarounds, or there are views you can take based on what your current thinking is. But it is very dependent on each individual issuer’s compliance, governance and so on to decide wheth-er you can proceed based on what you have in front of you.

One example is on the homogeneity rules. Based on the level one guidelines which are out there, which aren’t going to change, Nationwide was very comfortable based on our pool of prime mortgage assets.

We had a very, very long discussion but we were comfortable that whatever way you slice and dice what could come out, our prime mortgage book is homogenous, full stop. Whereas others may not be able to make the same call, based on what’s out there now.

And the same applies to all the other RTSs which are unfinalised.

Rob’s absolutely right. There are a handful of investors who take the legal point of view that, until these guidelines are fully finalised, because every single RTS isn’t published, they cannot take the risk in investing.

If that’s their legal advice you can’t really argue

Nathalie Esnault Crédit Agricole CIB

Richard Hopkin Afme


with that. There’s nothing as an issuer or a bank you can say to them to make them change their mind.

What we managed to do during our transaction is a lot of educating during the marketing process. There were a lot of investors out there who were thinking: ‘How are you issuing under regulations which aren’t finalised?’

That’s where we come in and say: ‘Actually, they are finalised. All of this isn’t changing. There are a few things here and there which are yet to be de-cided but we meet all of these criteria and therefore what happens next doesn’t matter.’

I think we actually managed to swing quite a few investors towards buying STS when initially they were sceptical.

: And will you be switching some of your secured funding away from covered bonds to STS securitisation?

Hirani, Nationwide: Not as a direct result of this, no. There’s always a relative value discussion to be had. We have a wide range of funding tools avail-able, covered bonds have always been and proba-bly will always be our cheapest-to-deliver funding tool. But if we weren’t able to issue in STS format for whatever reason, that would have changed our funding dynamic significantly, and cut out a lot of our investor base, which would have made it almost unviable to carry on with securitisation.

Thompson, NatWest Markets: But there’s an interesting knock on in the long term effects. If STS means that the treatment under LCR legislation for securitisation changes and more bank treasuries are able to invest in it, liquidity will improve, pricing will tighten and it may become a real competitor on price as well, given that there are other reasons why it does have advantages for issuers compared with covered bonds.

It’s a potentially virtuous circle, but it has to start somewhere.

Ford, TwentyFour: Clearly Nationwide was the leader from the UK, and Obvion was the leader from Europe in bringing those deals. But we’re probably a bit early in the game for people to get their heads around it. If I remember the Silverstone distribution stats, there were actually more asset managers as investors in the senior classes of both the dollars and the sterling tranches by quite a margin.

Hirani, Nationwide: Yes.

Ford, TwentyFour: It was 69% if I remember and maybe higher in the dollars?

Hirani, Nationwide: I think that ties into your earlier comment — this matters for asset managers.

You think that the bank treasuries are going to be the investors to most benefit from this, but actually it’s just as important for asset managers. Approximately one in four investors would not have played if the trade wasn’t STS.

Ford, TwentyFour: But some of those asset man-agers are investing money on behalf of capital-con-strained investors.

Hirani, Nationwide: Absolutely. So we saw orders a lot bigger than we normally would have, and we’ve got to attribute that to STS.

Ford, TwentyFour: Yes. On the other hand, there was a French consumer loan deal recently that had six times oversubscription. And it wasn’t STS at all, albeit was tiny.

Esnault, Crédit Agricole CIB: This transaction was issued by a fintech and it was quite small in absolute terms. We’ve been recently involved in an auto ABS deal in euros and we’ve seen more bank demand. Definitely some banks that weren’t active for a while are coming back because of the new LCR regulation, and their presence is crucial.

Moor, EBA: I also agree, and that’s why the EBA prioritised the use of internal models before other initiatives, like NPLs or CLOs. We realised that bank investors are crucial, and obviously, the sooner banks can use the SEC-IRBA approach with internal models and the long term historical data sets, the better that would be for the market. This will also increase the investor base.

The EBA prioritised what we called the technical standards on the purchased receivables approach, which allows banks to use third party information to build internal models and use the SEC-IRBA. Also, the EBA is finalising a consultation paper around the calculation of the tranche maturity, which again will offer banks a more risk sensitive method to calculate capital requirements. I am aiming to publish the consultation paper by the end of July

: So while we all welcome the stan-dard, is there the right spread between non-STS and STS?

Ford, TwentyFour: There should ultimately be a spread advantage. It’s hard to tell at the moment, because there aren’t very many examples where it’s directly comparable. The Nationwide transaction also had a Sonia-based coupon on it, and so the difference, the basis between Sonia and Libor will also potentially have an effect on being able to easily assess the spread differential.

And it depends on the type of issue. For a prime bank, master trust-type issuer or a large Storm-type deal from Holland, then I would have thought you could see 20bp to 30bp in say the three year maturi-ty. Maybe a bit more in five years.

If anything, what we should end up with is somewhere sitting between… I hate to say this… Between where covered bonds are and then STS and then an equivalent non-STS. Perhaps for the smaller issuers it will be slightly different because I think there could also be a liquidity premium.

: So shall we now turn to Sonia? Krishen, as the Sonia issuer in the room, any chance you can give us some of the lessons from the first deal?

Hirani, Nationwide: I think the lesson is, don’t change anything. If we rewind to when we saw So-nia really start to take off, the SSAs started, and then the banks followed in covered bond format. It got to the place where towards the start of this year, the fact that a covered bond transaction referenced Sonia didn’t matter. It was just a sterling covered bond — of course it’s going to be Sonia.

We hadn’t seen any securitisation though. I think STS had a part to play in there, we just didn’t see that many transactions full stop. Securitisation is slightly different in many ways to other asset classes.

But there was no reason to create another way for securitisation to be different from covered bonds or

Rob Ford, TwentyFour Asset Management

Christian Moor, European Banking Authority


any other asset classes by saying: ‘We’re going to use Sonia but it’s going to be structured in a completely different way from what people know and are com-fortable with already.’

So it was really important for us to bring the same structure of Sonia coupon — i.e. daily compounding with a five day lag, which again the covered market is absolutely comfortable with pretty basic things which people are happy with and can buy. And the feedback we had on our roadshow was that consis-tency was a very important thing.

If we went into something completely different, that might have been detrimental to our transaction, and might have impacted investor readiness to buy a deal with Sonia coupons. Obviously we had to go through various considerations when it comes to our programme, our structure, how does Sonia flow through the liabilities and through the asset side, where the mortgages were swapped to Libor. We had to therefore introduce Sonia swaps on the asset side.

Again, relatively simple solutions. And it works. People are talking about and potentially waiting for a term Sonia which may or may not ever come. But I think the fact of the matter is that Libor’s not going to be around by the end of 2021, and Nationwide absolutely isn’t comfortable issuing a Libor-linked security longer than that date.

So we could have decided to not issue at all, or issue short. But there was a credible sense that Sonia works, so let’s use it. I know now that the market is absolutely okay with it, has adopted it, and we’re al-ready starting to see other transactions follow, again using the same conventions.

Ford, TwentyFour: Can I ask what’s the reversion rate for your underlying mortgages? Are they SVR-based, are they Libor-based?

Hirani, Nationwide: Fixed to SVR. There’s no Libor. We were converting to Libor to match liabilities. We’re now converting to Sonia to match the Sonia liabilities.

Ford, TwentyFour: Most of the bigger banks are probably in the same position. But outside the bank-ing sector, the specialist mortgage lending market is almost entirely linked to Libor resets. And it’s a much bigger hurdle for those guys to get over.

There’s been a deal in the market which has now got a step-up and call in June 22. It’s a Libor-based deal, and it’s going to have one coupon that’s taking the risk that it might not have a Libor rate to fix off. There’s probably a pretty good chance that 2.5 months into the new year of 2022 there’ll probably still be some form of Libor submissions going on, so it’s not a bad bet.

There’s a lot of originators out there who are still originating mortgages today with Libor as

their reversion rate benchmark. They’ve got some language that says they can change the benchmark, and probably the obvious thing is moving to Bank Base Rate.

But it’s not happening yet. I think that perhaps people are holding back, because they don’t have certainty about whether some form of term bench-mark could be out there to replace Sonia. I’ve heard that from a lot of originators that are saying: ‘We want to hang on, we want to wait and see what the market’s going to be’. Because no-one wants to be an outlier.

Thompson, NatWest Markets: Well, I think that pressure will build very quickly.

Ford, TwentyFour: I think it will, yes.

Thompson, NatWest Markets: The transition of covered bonds to Sonia was remarkable. Even for us, who were closely involved in it, it was just remark-able. It went from an innovative to de facto market standard within two or three weeks. Or at least it felt like it.

Ford, TwentyFour: There’s another deal in the mar-ket that’s got a Sonia coupon and it readily admits in its investor presentation that all its underlying mortgages have benchmarks that fall back to Libor. And they haven’t said in any way how they’re going to deal with that. All of the fixed-rate periods on those loans are hedged to Sonia, so that’s fine. But it’s when they get to the reversion date that they potentially run into issues.

Thompson, NatWest Markets: What I was trying to get at, Rob, is in a few months’ time, we could well see a world where all of the large sterling RMBS issuers are issuing Sonia.

Ford, TwentyFour: Undoubtedly.

Thompson, NatWest Markets: So if you’re a spe-cialist lender in that world and you’re still originat-ing with Libor, it’s starting to look increasingly old fashioned.

Moor, EBA: Are Intex and Bloomberg ready now?

Thompson, NatWest Markets: They are now. That was one of the big delays for the market getting going actually, was the infrastructure.

Zurita Bermejo, DBRS: I guess the main thing as well is what’s going to happen with the legacy deals. Who is going to be the contract party taking the de-cision about which other reference rate will we use?

Ford, TwentyFour: What are the rating agencies

going to do when it comes to those legacy deals? Even for those deals that refinance in the next two years, lots of them still have Libor underlying benchmarks on the assets, and they can’t do any-thing about that.

There may not even have language in those loans that allows the originator to change the benchmark. At the time those loans were written, there was no concept that there was going to be a removal of Li-bor. So what are the agencies going to do in terms of asking for extra credit enhancement to deal with the basis between Libor loans and Sonia coupons?

Jones, S&P: Well I think some of those issuers that you’re referring to are having conversations with the regulators now. These types of issues are being put in front of the regulators and they’re being asked to say: ‘Look, help us. We want to do something about this but help us explain to our clients if we are going to reprice them to Sonia, then we need your help in making sure that there’s full transparency about how they do that.’

Hopkin, Afme: It’s a matter of public knowledge that the Bank of England has run a consultation on the possibility of building a term Sonia, and there are sectors of the market which I think are still quite vocal about that, for understandable reasons. But as Damian said, the facts on the ground changed incredibly quickly in covered bonds.

I’m not in the markets but I would fully expect something very similar to happen with securitisa-tions pretty soon. There is a challenge definitely on the asset side of things though, and interestingly that’s one reason that was cited in the eurozone for the decision by the ECB to keep Euribor and empha-sise reform rather than replacement.

Moor, EBA: But at the end of the day the market for Euribor-linked product is just too big for it to be allowed to go away or be disrupted. So I think a solution will always be found.

: Could we hear, maybe from one of

Matthew Jones S&P Global Ratings


14 AFME RoundtableGCthe arrangers, when market conditions might be favourable for a specialist originator to make that transition, given that there’s possibly a first-mover disadvantage.

Thompson, NatWest Markets: You’ve got a range of factors involved — investor acceptance, plus you’ve got the internal constraints around the prod-uct they’re originating that Rob referred to.

Does there come a point where it is very inconve-nient for an investor to buy Sonia from one institu-tion and Libor from someone else?

Secondly, do you get to the point where as an issuer, you look like you’re taking too much risk as to what’s going to happen after the reset?

It’s one thing to have fallback language in your bonds to cover contingencies. Fallback language isn’t great to cover certainty.

If you know something’s going to happen and you haven’t got certainty in the documents as to how the deal’s going to behave in those situations, it becomes increasingly uncomfortable.

Ford, TwentyFour: I think we’ll be quite happy as bond buyers to buy bonds linked to Sonia or buy older or shorter bonds linked to Libor. Right now the vast majority of bonds in the sterling part of my book are linked to Libor and there’s a tradable basis market out there as well.

So I can easily convert the yield on the handful of bonds currently based on Sonia using the basis swap, and tell my investors that’s what the yield is against Libor. At some point, when the portfolio has more Sonia in it I’m going to have to turn the conversion around the other way and tell them what the yield is against Sonia.

Hirani, Nationwide: Just one thing to pick up on. As I mentioned earlier, the structure and method-ology of Sonia is very important, but one thing I didn’t touch on was the operational readiness aspect of this whole transition. As an issuer we’ve had to go through a number of system upgrades, to make

sure that not only can we book the trade, and it will settle, but we can report to management and the accountants are happy with how we’re looking at it. This is probably one of the major barriers to entry in terms of the Sonia market.

We can see from our trade that the vast majority of the investor base is there and it’s ready, and the covered bond markets helped. But there is still a handful of investors who aren’t there. It’s not a ques-tion of if, it’s a question of when they’ll be ready. Every issuer and every investor of varying magni-tude and sizes will have resource they can allocate to that sort of project work, so we need time for that to play out as well.

: Moving on again, could we turn to green securitisation? Christian, you touched on that a little bit in your opening remarks. Could you expand that vision of the future a little?

Moor, EBA: Well, yes, I can give you my personal view on it. There are two things going on with the sustainable finance topic, at the moment.

At the G20, at the Financial Stability Board, at the Central Banks and Supervisors’ Network for Greening the Financial System there are many fundamental discussions going on around climate change and the two degrees target, financial stability, macroeconomic approaches and how these relate to financial risk and stress testing. What should the role of the public sector, central banks, supervisors and regulators be? How much regulation, and how much should regulators and supervisors be involved in this market?

On the other hand, you have a unit at the Com-mission that is already working to drilling down together with industry working groups definitions and standards on taxonomy, disclosure, governance, green bonds in order to stimulate the green finance market.

However, what is lacking, in my opinion, is some kind of framework. Something in between the high-level principles-based policymaking and those things that the working groups at the Commission are working on.

You don’t have detailed aspects in covered bonds. You do not have loan by loan templates. You only have very aggregated information. So covered bond issuers cannot classify loan by loan if an asset is green or not. However at the moment, green bonds are usually defined by use of proceeds and not by the assets backing the bonds.

Thompson, NatWest Markets: But does that risk making green securitisation more difficult rather than less difficult, because it would be held to a higher data standard than any other product?

Moor, EBA: Well, that’s the question. What is the

standard for green bonds going to be? If we are talking about green bonds receiving better regulatory treatment, the standard will be very high. At the moment, though, I understand that the industry is not interested in regulatory criteria and standards. They want inclusive voluntary standards in order to ensure that many products can meet those standards. Which is obviously their choice.

However, I also see that this discussion is a bit all over the place. My worry is that in no time every-thing will be called green, and then what’s the value of green?

There is a lot of work to do in this area. However, I do think with the full data transparency of securi-tisation, the third party verifying, the due diligence that investors are used to doing... Securitisation issuers and investors are very sophisticated and have high levels of knowledge and experience monitoring asset pools. Whatever the green criteria will be in the future, in my opinion, it is important that those criteria are met not only on day one but also during the life of the transaction.

Portugal, Afme: I think this is an area that has been positioned as one of the key elements of the EU’s financial services strategy. Much emphasis is being given to sustainable finance at the moment, not least because it’s seen as one of the areas where Europe is leading the way globally.

But I think there’s not been much discussion around the potential of green securitisation. It’s not something that is commonly mentioned, at least in Brussels, when we are talking about sustainable finance. So there’s an opportunity here for the indus-try to articulate what role securitisation can play in that domain.

Do we need definitions of green securitisation? A definition of an energy efficient loan? A new framework for these products? Or do we leave this to the private sector? I feel there would be a recep-tive audience in the political sector if we can tell the securitisation story in sustainable finance.

We’ve talked about the stigma earlier. That’s been largely removed. I think a growing market for green

Pablo Portugal Afme

Damian Thompson NatWest Markets


securitisations would contribute even more towards the positive story to tell.

Jones, S&P: We’ve done a lot of work with the various working groups that you’ve alluded to, Christian. I think everybody’s agreed on the need for a taxonomy, but for that to be practically applied, I think it’s all about the data that issuers have.

In Europe so far, there’s been two Obvion deals. Obvion has been able to capture the energy certifi-cations of all the properties within those pools. So it is able to articulate exactly the energy efficiency of those mortgages in their securitisations.

But in the handful of covered bonds we’ve seen, they’ve been labelled green on the basis that the properties in the cover pool were all built after a certain date, and building regulations after that date meant that houses could only be built if they met a certain energy standard.

We’ve also been doing a lot of work on what a sustainable project finance infrastructure CLO looks like? Obviously those types of loans are typically longer tenor, lower spread, so it’s going to be harder to find some kind of equity return that makes sense. What does that arbitrage need to look like? Institu-tions like the Bank of England are also looking at developing this market.

Thompson, NatWest Markets: CLOs are an inter-esting market, actually, because I think there could be more pressure there than in other markets. If you look at where a lot of CLO equity comes from, a lot of it has traditionally come from Scandinavia where there’s a lot of focus on these issues.

We’ve certainly spoken to CLO managers recently who are now saying that ESG is now question num-ber two they get from investors.

Ford, TwentyFour: The same in regular asset man-agement mandates as well. It’s not just at the CLO level. Every single RFP that we get now has an ESG question right up front.

STS, actually, has put a fantastic governance frame-work around the way that investor due diligence works, which is a very nice tick when it comes to talking about the G in ESG. But bizarrely CLO man-agers don’t have a similar framework.

We have to do that work when we’re looking at a CLO manager managing a CLO, but the CLO man-ager doesn’t necessarily have to do that work under a regulatory framework when looking at buying a leveraged loan for that CLO.

Moor, EBA: Actually, I just read an article on green bond reporting, which mentioned that more than 50% of all the green bonds that are certified are not doing any post issuance reporting at all.

Just because the issuer says: I will use the pro-ceeds for this or that, if they do not follow it up with

reporting, it does not mean much. If you look at it from a securitisation perspective that would not be enough. That’s why I said that securitisation could be a standard for the rest of the market.

CRR2 has just been agreed, and the EBA received two mandates around ESG. We got one to write a report around disclosure on environmental, social and governance risk, and a mandate to write a re-port around the regulatory treatment of exposures that relate to environment and social objectives. The interesting thing about the latter one is that we need to write this report six years after the CRR 2 regulation comes into place.

In the previous draft, this was two years after. The European Parliament and Council have given us four more years.

I think there is now an understanding that first, regulators and banks need to collect data, implement the governance, have the disclosure in place and only then start looking at the regulatory treatment of green assets and bonds.

Ford, TwentyFour: I do think that’s really import-ant. One of the issues with green bonds is that they typically aren’t expected to yield as much as non-green bonds, and therefore there has to be an incentive for investors in the capital-constrained world to go and buy them.

Jones, S&P: Yes. The Climate Bonds Initiative just published their H2 paper last week which just looked at all the green bond issuance in the second half of last year, and I think there were only two where they could establish this concept of a ‘gree-nium’, which is where issuers priced inside their curve.

Ford, TwentyFour: I think that green Storm deal priced really tight compared to regular Storm deals.

Jones, S&P: To participate in that deal, I understand you had to fill a questionnaire in on your green cre-dentials. I’m not sure how many people were kicked out because of that. But it was quite a nice way that they held investors to account.

Esnault, Crédit Agricole CIB: Another application which is interesting is capital relief deals.

We did a balance sheet deal some years ago. It was capital relief, in the context of our ESG policy. We have reporting in place so we track the capital allocated to a new green project. There’s definitely a number of investors active in this market who are interested in green or sustainable finance. It’s a highly visible way for a bank to show how it is reallocating capital to sustainable finance.

Jones, S&P: To some extent the instrument level

green bond story is going to be surpassed by the focus that investors are going to have on the ESG credentials of the issuers themselves.

Esnault, Crédit Agricole CIB: It’s quite critical, because if the issuer is not right in terms of overall ESG profile, the green bond, or the green RMBS, is not going to be accepted by a number of investors in sustainable finance.

Moor, EBA: That’s why at the end of the day there is a need for some kind of framework. Should it be entity-issuer based? Should the assets or only the bonds be included? What about the level of data disclosure? Duties for due diligence for investors? Monitoring and reporting obligations on use of proceeds? After defining the objective, you need to build a framework in order to guarantee the quality of green bonds.

Jones, S&P: Just to use a couple of examples from the US. We’ve seen an increase in solar ABS in the US, which is a growing industry over there.

Then there are the PACE deals in the US, which is rooted in a tax system which enables cash to flow from the tax authority to the SPV. I think with an exception of a region in Spain, that really doesn’t exist as a framework to promote the development of those types of loans. But the types of products that are being financed by those PACE loans can be seen as having a demonstrable impact on climate change.

: Another big theme this year has been the use of securitisation for NPLs. Maybe Marta, you could give us a health check on the market?

Zurita Bermejo, DBRS: So far we have seen 28 deals happen across Italy, Portugal and Ireland, with more expected this year. I think all of us are waiting to see Spain and Greece, and maybe as well Cyprus, come through in NPL securitisation. I think that when the second wave of NPL sales started in 2016,

Marta Zurita Bermejo DBRS


we internally were debating whether it’s a one-off or whether NPLs are here to stay as an asset class in their own right.

I think they will stay, for two reasons. One is because I think that there’s enough NPLs still in the European banks to guarantee a flow of deals, but also I think that the market participants are different in the different countries. In the case of Italy, all the NPL activity is off the back of the guarantee scheme and coming from the banks.

In Portugal, though, we have seen very recently that it is not just the banks doing their own securi-tisations but also one investor-led transaction with a portfolio from the banks. There’s a question mark over whether this will be the case as well for Spain, but even in Italy we have already rated deals which are non-GACS. So it’s a healthy market, if non-per-forming assets can truly be healthy.

[Since the roundtable on May 14, DBRS has since issued its first public rating on a Greek NPL deal, Eurobank’s Pillar Finance]

: Christian, can you fill us in on the regulatory activity in this area?

Moor, EBA: Two or three years ago I wanted to do something around NPLs, and actually the first move was adding a chapter on NPLs to a discussion paper on significant risk transfer in 2017.

But now I can really start as the new Securitisation Regulation is in place. I think the market will not revive to a level sufficient to help the banks deal with their NPL legacy assets if we don’t solve the problem around NPL securitisation transactions in the Securitisation Regulations.

To take one example, in my personal opinion, the capital calibration is off. It’s wrong. The capital re-quirements for the SEC-IRBA and SEC-SA approaches were calibrated on performing portfolios and not defaulted loans, which have a different risk form the start.

When NPLs are transferred from the banks, those loans usually have have massive purchase price discounts.

After transfer, the expected loss is very low or there is no expected loss. The current calibration is off for that reason, and this is something that needs to be looked at. The reason why capital calibration is so important in my view is because banks will sell the portfolios but might retain a senior tranche.

Another scenario is that banks sell the portfolios to hedge funds or private equity firms, these institu-tions will buy the portfolio leveraged, and they will need bank lending on the senior tranche.

So that capital requirement on the senior tranche in particular is very important to create enough volume in order for banks to transfer the assets out of their balance sheets, and also to

reduce the bid-ask. Obviously, the backstop intro-duced in CRR 2 and other supervisory measures that are already happening will increase the provi-sioning with banks, so banks will be able to sell at a bigger discount without hitting their capital too much.

However NPL securitisation is still not very much discussed in the public space and definitely not in the political world or in Brussels.

Two or three years ago I would not have been able to even discuss this, because NPL securitisation was still seen as the problem and not as a possible solution.

I think the capital treatment is a crucial point that I am looking into and am trying to educate people on, and hopefully fix through a short term and a long-term solution.

The second problem is that the Securitisation Regulation includes a number of articles, for exam-ple around due diligence and on risk retention that might not be helpful for the specific issues around NPL securitisation.

So also there we’re looking at possible solutions.

Thompson, NatWest Markets: Would that need primary legislation or is that something the EBA can do itself?

Moor, EBA: I think in order to fix everything a level 1 change is needed. However, I do think that there are some issues that can temporarily be solved. I am working on it and I hope to publish something later on this year.

Hopkin, Afme: To be fair to everybody involved, I do think when the Level One text was being drafted NPLs were not really at the top of people’s thinking, were they? So I don’t think we should beat ourselves up too much over that.

Portugal, Afme: I think we should be actively informing the policy community about the positive role securitisation is playing in tackling the NPL issues across Europe. The level of NPLs is coming down consistently and I think the securitisation schemes in Italy and elsewhere have been helping there.

Jones, S&P: Italy has dominated the numbers that you just outlined there Marta. If you take out Italy the number’s more like six or seven. I think that’s because what we’ve seen in Italy is the use of secu-ritisation technology to lower capital risk weights for the banks. It’s not a securitisation market in the traditional sense, it’s more of an application of the technology.

You’re not dealing with traditional securitisation investors here, you’re dealing with people that are trying to just get the most efficient disposal for the banks.

Thompson, NatWest Markets: And I think the challenge with that is it’s a very process, servicer dependent market. You can do your diligence in buying assets, but what drives you getting your money back in an NPL transaction is mostly how well the servicer performs through the life of the transaction.

There’s been a huge amount of external leverage come to the NPL market in Ireland and in Spain. It’s largely come from the banking market, and it’s largely coming from the banking market because I think at the moment the bank market is best equipped to do the detailed, transaction by transaction diligence that you need to do to make the right investment decisions.

I think the challenge for securitisation as a commoditised investment product as opposed to a structural technique to package things up, is that I don’t think we’ll bridge that gap of due diligence. Can you ever get to the point where NPL investors don’t have to do that level of face to face diligence on the servicer to satisfy themselves?

Where we have seen successful securitisation of non-performing loans, or re-performing loans, it has typically been in situations where somebody bought the portfolio, they serviced it for two or three years, they developed a very clear track record as to how the servicing was going to work and what the per-formance was like, and then they were able to get good rating outcomes and satisfy investors that the data was there.

But I don’t think that challenge is solved yet. It’s how do we bridge the gap between being a very bespoke and commoditised investment product?

Jones, S&P: Italy’s a great example for that. You look at all the private securitisations that are going on in Italy. They’re by the PE firms that own the special servicer. They’re unlikely to be nterested in buying generic NPL class A, because they’d rather own the whole portfolio and get the benefits of real-ly understanding how to service that portfolio.

Moor, EBA: I think the real reason why it works in Italy is because of the GACS. You don’t follow the capital rules of securitisation, you just have a sover-eign guarantee instead.

What I am trying to work on is to improve the se-curitisation framework, because I think that the real problem is the mis-calibration of capital in senior tranches, and finding a way for banks to invest in them without the need of a government guarantee.

Portugal, Afme: This exchange also reminds us of the importance of explaining why the non-STS sector is important. Hopefully STS will contribute to the market as a whole growing. What we don’t want to see is a new stigmatisation against what is non-STS, which of course includes securitisations of NPLs.

SPONSORED STATEMENT

Q: Fitch has published a handful of unsolicited commentary and ratings over

the past few years. Why do you think that this might be more important from a rating agency perspective as the credit cycle ages?

A: We always call the credit as we see it, whether we are early or late in a credit cycle. But we have

been in the late stages of this current credit cycle for a very long time. As such, we feel it’s important to speak our mind to investors when we have a materially different credit view than other rating agencies. The credit cycle has been really strong for nearly 10 years now. But ultimately, the credit cycle will turn at some point. When and how is not that clear yet. We think it is fair to say that the turn of this cycle will be different than what we saw last time, so we need to be very mindful that we need to be forward looking and conscious of where we are in the cycle.

Q: For the commentary on specific asset classes and issues, what drives Fitch

to publish something for the market? Is it investor feedback, or is it something that Fitch is observing that it feels the need to issue a comment on?

A: It could be a transaction that we have not rated where we have a differing view, or it could be

a sector trend where we think it is important to comment on. Either way, we have an open dialogue with investors. And while their feedback is important, we try to be proactive rather than wait for investors to flag something to us. Waiting until after a deal prices or a sector trends plays out to publish an unsolicited commentary does an investor no favors. Therefore, it is important that we publish our unsolicited opinions at a time when investors can use them to help inform their decision making process. The key with our unsolicited commentaries is that the difference of opinion needs to be material between us and other rating agencies. .

Q: Could you take a bit more about what some of the late cycle behavior that Fitch

is observing across asset classes and what are some of the issues that the rating agency is tracking right now?

A: Our focus on late cycle behavior can be categorized in three parts: 1) Asset type; 2)

Originators: and 3) Structures.First, looking at particular assets; there is unsecured

consumer lending, or marketplace lending as it is often referred to, particularly in the US where we have not rated a deal in over a year. Aircraft ABS is another asset containing a lot of variability in terms of quality and structure. Thirdly, leveraged loans in CLOs .

Loan performance has been adequate thus far for marketplace lending ABS. However, we are seeing credit enhancement decline for some tranches, which is a concern for us because there’s no indication that this performance can be sustained over time, especially for a market as nascent as this one.

Asset quality for some aircraft ABS has been questionable to us and not strong enough to achieve an investment grade rating, most notably in BJETS’ initial securitization from over a year ago. The BJETS transaction was ultimately restructured in part because of investor pushback following our commentary, which we felt was a sign that investors appreciated us saying what they were thinking.

As for CLOs, one deal in particular securitized last year contained what we thought too large of a loan concentration in the technology sector, a risk that would prevent us from reaching ‘AAA’, which we explained in a commentary. We are also focused on erosion in loan documentation and the potential impact that may have on loan recoveries and CLOs. We just published a recovery stress test report on European CLOs.

The other area we look at for late cycle trends across all asset classes is in the originators. We have seen an influx of new lenders come to market in recent years with little performance history, lack of access to traditional lenders or bank financing and a need to rely on the capital markets, most notably in US subprime auto ABS and more so of late with US aircraft ABS. And they are securitizing transactions that we have been much more conservative on, either falling far short of ‘AAA’ in our initial assessments and, in some more extreme cases, not being to be rated at all.

And finally, the third area we look at is the structures of the transactions. We believe there has been some structural creep, and we feel investors need to be very mindful of what structural features can do in a transaction and if it is to their benefit or

not. One notable example was the Elizabeth European CMBS. We could not get to ‘AAA’ on it, not even to ‘AA’ partly because of the pro-rata structure and secondary quality of the assets. Less than a year later, one of the loans in the transaction has seen a loan event of default. So we think that was important to point out, and this is a case where we said something at the time and it is unfolding today.

Q: Is there anything you are looking at in RMBS with regards to the health of that

market or the borrower picture at this late stage of the credit cycle?

A: Regulators and policymakers have been very focused on strengthening underwriting

guidelines and making them prudent for lenders. We are generally comfortable with the underwriting trends and stability we are seeing, particularly for prime mortgages. But that doesn’t mean there aren’t areas to focus on carefully. For example, types of mortgages are changing as the population ages. For instance, in the UK, mortgage types for older people (similar to “reverse mortgages” in the US) have developed and are becoming more of a standard product, and we expect more of that kind of lending being seen in securitizations. We are actively analyzing the risks and explaining that to the market. In the US, more originators are securitizing deals that fall outside of QM (Qualified Mortgage) guidelines. The loan quality is solid in prime non-QM deals, but there are other areas like reps and warranties that give us pause if we feel they are weaker. There is also greater disparity of opinion in non-prime RMBS in the US, which is why we have rated substantially less than some of our competitors.

Fitch Ratings has been an outspoken voice in the market when it comes to calling what it sees as late cycle behavior in securitization. The rating agency has frequently published commentary warning investors on risky trends it has observed in the market. Fitch’s Global Head of Structured Finance Marjan van der Weijden discusses what Fitch is tracking at the late stages of the credit cycle.

Q&A with Fitch’s Marjan van der Weijden

For part two of this Q&A, see tomorrow’s Global ABS daily

Fitch ratings.indd 6 11/06/2019 19:21


18 AWARDS

Guggenheim

Goldman Sachs

Credit Suisse

Fannie Mae

Morgan Lewis

Deloitte

JP Morgan

Credit Suisse

Bank of America Merrill Lynch

Morgan Stanley

Credit Suisse

Wilmington Trust

Kroll Bond Rating Agency

Citi

Morgan Stanley

Santander Consumer USA

Wells Fargo

Redwood Trust

Mosaic

Credit Suisse Asset Management

MetLife

Mayer Brown

Sidley Austin

Morgan Lewis

Kramer Levin

Dechert

Deloitte

Deloitte

Deloitte

Deloitte

Deloitte

FinsightVZOT 2018-A

Verizon Communications, Bank of America Merrill Lynch, Barclays, Citi, TD

Securities

CSWF 2018-TOPCredit Suisse

STACR 2018-HRP1 Freddie Mac, Bank of America Merrill Lynch, Barclays,

BNP Paribas, Citi

CleanFund 2018-1 CleanFund, Credit Suisse

Barings 2018-IIIBarings, Credit Suisse

GlobalCapital held its annual US Securitization Awards dinner at New York’s Metropolitan Club on Wednesday, May 8. GlobalCapital would like to congratulate all of the winners, and thank everyone who took the time to vote and carefully

consider their choices, so that we can be confident that these awards are a true benchmark for performance in US securitization. We hope to see you all again in 2020. GC

US Securitization Awards 2019: the winners

Most Innovative Securitization Bank of the Year

Most Innovative Securitization Deal of the Year

Securitization Bank of the Year

Securitization Issuer of the Year

Securitization Law Firm of the Year

Securitization Accounting Firm of the Year

ABS Bank of the Year

CMBS Bank of the Year

RMBS Bank of the Year

Securitization Research Team of the Year

ABS Trading Desk of the Year

CLO Trading Desk of the Year

ABS Issuer of the Year

CMBS Issuer of the Year

RMBS Issuer of the Year

Esoteric ABS Issuer of the Year

CLO Manager of the Year

Securitization Investor of the Year

ABS Law Firm of the Year

CMBS Law Firm of the Year

Securitization Trustee of the Year

RMBS Law Firm of the Year

Esoteric ABS Law Firm of the Year

ABS Accounting Firm of the Year

CMBS Accounting Firm of the Year

RMBS Accounting Firm of the Year

Esoteric ABS Accounting Firm of the Year

CLO Accounting Firm of the Year

Securitization Technology Provider of the Year

CMBS Deal of the Year

RMBS Deal of the Year

Esoteric ABS Deal of the Year

CLO Deal of the Year

CLO Arranging Bank of the Year

Esoteric ABS Bank of the Year

CLO Law Firm of the Year


PHOTOS 19

CONVERTING DATA INTO MARKET TRUST

THE SECURITISATION REPOSITORY. European DataWarehouse (ED) is the award-winning centralised data repository in Europe for collecting, validating and distributing detailed, standardised and asset class specific loan-level data for Asset-Backed Securities (ABS) and private whole loan portfolios. ED stores loan-level data and corresponding documentation for investors and other market participants.

We offer issuers exclusive reporting channels for ECB eligibility, as well as a specialised website solution for reporting during the transitional period of the Securitisation Regulation. We aim to become the first Securitisation Repository designated by ESMA and we’re ready to help you report with our robust reporting solution, EDITOR, available now for testing.

To learn more, please contact [email protected].

FRANKFURT · LONDON

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