Global Head of Capital Markets, GroupView bio
Global Head of Capital Markets, Group
Cliff is responsible for building Intertrust’s unique global offering of capital market solutions. He has over 20 years’ experience working in the Capital Markets for a number of top tier banks including Greenwich Natwest, Bear Sterns and most recently Bank of America Merrill Lynch, originating and delivering structured finance transactions to a wide range of clients.
Cliff’s recent experience includes term ABS transactions for the primary markets, fund finance, senior secured asset backed lending facilities for a range of asset classes, whole loan sales of mortgage and loan portfolios including performing and non-performing loans, managing legacy asset positions and ABS and high yield bond broker.Close
As was the case across the wider financial markets, the COVID-19 pandemic has had a significant impact on European asset-backed securities (ABS). However, the asset class has shown its resilience amidst these tough economic conditions and offers the potential for interesting new opportunities in 2021.
European issuance had been increasing in the years leading up to the pandemic, with volumes exceeding €100 billion in 2018 and finishing just below that level in 2019, according to research from JP Morgan and Bloomberg.
Last year started well. Volumes were up in Q1 and spreads tightened, with a good volume and variety of new issuance allowing investors to put their cash to work. The relative value of ABS, when compared with other fixed-income securities, led to a rather healthy tranche oversubscription in key areas.
Then the lockdowns hit, significantly affecting primary issuance during the second quarter. Risk assets were repriced and many senior European ABS were sold off. Market sentiment picked up in the middle of the year, with optimism derived from both unprecedented quantitative easing from central banks and declining COVID-19 infections. This ushered in unseasonably high summer ‘catch-up’ issuance and a busy end to the year, with December strong for residential mortgages as people looked to get trades done.
All in all, the market was down 10-20% for most of the year and weathered the storm more strongly than expected, though auto loan ABS were particularly impacted with consumers acting cautiously. The first two months of 2021 have also been slightly down as consumer confidence recovers, but it’s expected to pick up as the year progresses.
ABS market boosted by swift government support
The recovery across asset classes has been impressive, supported by swift policy responses from Europe’s governments and central banks. While the recovery in European ABS has been more gradual than that in corporate and sovereign bond markets, this can be explained by the lack of direct benefit from central bank asset purchases in ABS relative to other areas.
When it comes to stimulus packages, different countries applied different rules. In Spain and the Netherlands, for example, borrowers have had to prove loss of income to be granted payment holidays on interest on their mortgage loans. In these countries, payments holidays were limited, and arrears ran up to 2%.
In the UK, meanwhile, banks granted payment holidays to anyone who requested one, leading to concerns that the system was being misused, and there are lingering fears about potential default rates. Payment holidays were granted to large parts of UK residential mortgage-backed securities (RMBS) portfolios, in some cases up to 40% of the collateral pools, depending on the collateral type. Added to this, in the Spring Budget, Chancellor Rishi Sunak announced that the stamp duty holiday on house purchases has been extended for a further three months, a move likely to generate a further rise in buy-to-let (BTL) mortgages.
Although payment holidays remain a concern for some, today’s ABS structures have ample credit protection that should avoid payment disruptions on ABS tranches, especially at the investment-grade level. European ABS, therefore, offer a liquid solution to fixed income investors seeking to increase yield without greater credit risk.
The European ABS market is bolstered by its strong technical backdrop, keeping spreads low and favourable for issuers. It’s important for fund managers to not lose touch with the international investor base, which will be looking to put record dry powder, standing at over $2.5 trillion, to use.
One thing to be aware of is the growing signs that European regulators are pushing ABS markets to incorporate ESG-style reporting and considerations. The current lack of independent, third-party ESG scores for ABS makes it difficult to include explicit ESG targets in investment objectives, but fund managers should look to incorporate an ESG framework in investment decisions.
ESG factors are fast becoming key considerations in most sectors – and ABS is no exception. Market and regulatory drivers will continue to pick up the pace, and firms need to consider their approaches to embedding ESG frameworks into investment and organisational practices.
Client interest will vary depending on the underlying assets; for example, energy efficiency credentials for real estate, the impact of emissions targets affecting demand for aviation and similar assets leveraging non-renewable resources, social factors influencing retail or consumer-based assets, and governance standards monitoring regulatory compliance as multiple directives are proposed across jurisdictions. ESG measures seek to assess things like issuance demand, credit risk, and asset performance amongst others and inform investment objectives.
Partnering with Intertrust Group
We’re pleased to announce that we’ve been nominated in the GlobalCapital European Securitization Awards 2021, for both Trustee of the Year and SPV Administrator of the Year.
Intertrust Group is the world’s leading independent security trustee in the European ABS market. This means that our expert and experienced team can support your debt financing transactions including debt capital markets, asset finance, structured finance and ABS transactions free from any conflict of interest.
Regulatory requirements are becoming increasingly complex, especially when SPVs are involved. The regulatory landscape, with both the obligations and opportunities it brings, will evolve at pace – and ESG is a market game-changer. The best solutions require a bespoke approach, which we can provide by drawing on our in-depth knowledge of European regulatory systems and our client-focused service delivery model. We’ve been at the heart of market firsts – whether a new asset class or new structure – and can help you to navigate the complexities.