As European banks continue to de-leverage in accordance with post-crisis capitalisation targets, funding gaps are appearing across the EU economy which pose a significant challenge to capital intensive industries including the aviation sector.
Welcome news for Ireland’s global aircraft lessors is the renewed regulatory focus on the securitisation market which promises to herald a more targeted and risk-sensitive framework for securitisations based on the guiding principles safety, standardisation and transparency. Such reforms should assist to address the current mismatch between regulatory capital treatment and underlying risk and ultimately facilitate greater ease of access to source of funding for global aircraft lessors.
On 14 October 2014, the European Banking Authority (the “EBA”) published a discussion paper in response to the European Commission’s call for submissions as part of an on-going consultation on the creation of a safe and stable securitisation market in Europe (the “EBA Discussion Paper”).
Since 2007, when European issuances to third-party investors peaked at €477.6bn, 'crisis stigma' has resulted in a steady fall-off in demand for securitisation. This is due to the high number of defaults and losses sustained by certain classes of securitised assets, in particular the sub-prime RMBS products, CDO products and CMBS products. The financial crisis showed that the poor performance of some products was largely attributable to a list of recurring factors such as loose underwriting standards, excessive leverage, maturity transformation and deliberately opaque structuring. While recent forays by aircraft lessors into debt capital markets are encouraging, there remain significant barriers both regulatory and otherwise that continue to impact on the market for securitisation by both investors and originators.
The EBA Discussion Paper criticises the current 'one-size fits all' regulatory approach to securitisations and calls for a distinction to be drawn between 'qualifying securitisations' and other securitisations.
The regulatory definition of a 'qualifying securitisation' follows a two-stage enquiry: firstly, as to whether a securitisation transaction satisfies the three-pillars of simplicity, transparency and standardisation and secondly, to establish that the underlying assets meet a minimum level of credit quality. A 'qualifying securitisation' would then attract a lower risk weighting, relatively speaking, than its non-qualifying counterpart. Minimum credit quality of the underlying assets is necessary to ensure that simple, standard and transparent securitisations are not used to finance excessively risky underlying exposures. It is also intended that the identification of 'qualifying securitisations' will lead to reduced reliance on external credit ratings by regulators and market participants.
Since 2010, ratings agencies have changed how they assess certain types of risk and asset classes leading to significant disparities between the levels of capital charges imposed and underlying risk. The consultation on securitisation will close on 14 January 2015 and the EBA is expected to provide its final technical advice to the Commission in mid-2015.