A glimpse into Global ABS 2022
Amidst a backdrop of worldwide political instability and economic uncertainty, the securitization industry gathered for another edition of the Global ABS conference. Although market conditions are challenging, participants identified opportunities in some asset classes and market segments. While the current regulatory framework has not yet stimulated as deep and liquid a securitization market as anticipated, it is ultimately seen as the panacea for unlocking the full potential of securitization as a funding tool. We set out below some of the key items discussed at the conference.
- The EU Securitisation Regulation so far has not stimulated public securitization activity as far as was hoped. In particular, there has not been an increase in the number of transactions that meet the "simple, transparent and standardized" (STS) requirements;
- A review of certain aspects of the securitization regulatory framework could make securitization an even more attractive funding tool. Among other aspects, participants highlighted the need to address the proportionality of the reporting templates (especially in private markets, where investors can generally obtain the necessary information directly from the relevant originator) and the need to clarify and review the jurisdictional scope of the EU Securitisation Regulation (in particular considering that its application to third-country securitizations creates a competitive disadvantage for EU investors in those third-country markets);
- Review of the prudential framework for securitizations remains a relevant topic on the regulatory agenda alongside ESG disclosure, with some participants advocating changes to the Solvency II and liquidity coverage ratio frameworks as key areas of reform;
- On a positive note, so far there has not been a significant level of post-Brexit regulatory divergence with the EU. This consistency has been welcomed by market participants.
Non-bank lending, fintech, specialty finance and new asset classes
- Non-bank lending and investment platforms (often using new technology) continue to gather significant attention from investors;
- The use of technology applied to capital markets issuances - e.g. DLT, including blockchain - is also a key feature of today's markets, with a drive towards standardization and digitalization. Many market participants are conducting experimental trades whilst stock exchanges have been seeking to accommodate new types of products;
- However, this is still a highly fragmented market, and its outlook varies across jurisdictions and sectors. In the medium to long term it is likely that there will be increased internationalization and market integration;
- There are considerable opportunities in a “stagflation” environment, although “institutionalization” of funding sources is still a predominant feature of these transactions, in particular as fintech projects scale-up;
- Numerous challenges subsist, including the limited track record of certain disruptor entities or of transaction structures, although an improvement around data collection and analysis (including through the use of artificial intelligence) may bridge this gap by allowing improved benchmarking, easier rating and more attractive pricing.
- Participants have highlighted the increased presence of non-bank lenders in the trade receivables finance space, often assisted by technology;
- Corporates of all sizes are increasingly using trade receivables securitization and other forms of receivables finance as part of their financing toolkit.
- Performance over the last 12 months, particularly for consumer asset classes, has been particularly strong, possibly due to state support to mitigate the effects of COVID-19. Default rates are expected to rise and the housing market is expected to slow down, despite near-record employment levels;
- Current wider market conditions and outlook remain challenging due to interest rate increases and the Ukraine conflict as key drivers in the short term and, in the long term, de-globalization and climate change;
- In the prime segment, RMBS was singled out as being less affected by market volatility than other asset classes such as consumer ABS. However, despite the uncertain market conditions, ESG securitization, auto lease securitization, covered bonds and trade receivables have continued to perform strongly and corporates may be inclined to turn to ABS to help ease the effects of discontinuation of governmental COVID-19 assistance schemes;
- In relation to auto ABS, the emergence of new solutions as an alternative to car ownership and leasing pose new challenges for securitization, including in terms of tax treatment. Additionally, the tapering of the European Central Bank's purchase programs may influence the volume of auto ABS transactions.
- ESG is certainly a hot topic for market participants and regulators alike, and the main discussions have focused around applicable frameworks, disclosure and transparency;
- Several market participants are actively working on the implementation of ESG principles in securitizations and considering how securitization can drive the transition into a green economy. However, challenges still exist, mainly around the scarcity of green assets to securitize and the uncertainties of developing frameworks and regulations.
A sizable book of NPLs is currently being held by European financial institutions;
- The NPL market has different characteristics across jurisdictions:
- Ireland, Spain, Portugal, Cyprus and UK have maintained their status as active jurisdictions for NPL transactions, whilst the French NPL market has been viewed as an “emerging” market with the potential to become one of the largest in Europe;
- Eastern European transactions tend to be smaller in size, with transactions in Croatia, Slovenia and Austria featuring “aggregated” portfolios benefitting from individual servicers’ expertise;
- Italy and Greece benefit from public state guarantee schemes that make it possible for sellers to effectively increase the rating of securitizations by which they dispose of their NPLs, and also are characterized by a multitude of medium and small bank originators, a liquid real estate market and a more developed legal framework for NPL creditors. Specifically, in Italy, there has been an increased focus on unlikely-to-pay exposures, which may also be picked up in other markets once the relevant rating methodology has been further developed.
- As a general trend, consolidation and concentration in the servicing sector have been identified as a feature of some of the more established NPL markets;
- NPL activity is expected to increase in the near future, but not to the same levels as seen following the global financial crisis.
Significant risk transfer
- Activity for the first half of 2022 has remained strong and the market is buoyant and growing, with an increasing number of banks using the standardized approach entering the market and new asset classes being used;
- From a supervisory perspective, the ECB is keen to support the use of this tool for capital management;
- The second half of 2022 may bring a decrease in transaction volume due to macro-economic factors (including rising inflation and interest rates) but the market remains optimistic that there is a strong, resilient market for significant risk transfer transactions.
Corporate trust and agency issues
- During the COVID-19 pandemic, virtual meetings allowed market participants to continue operating (as a result of transaction documents allowing trustees to prescribe the method and rules for noteholder meetings) and virtual and hybrid meetings have now become a regular feature of debt capital markets;
- Transition away from LIBOR has been a key area of activity over the last few years, posing some challenges, namely the large volume of transactions and often inquorate noteholder meetings;
- The increasing focus on ESG and digital assets is posing new risks and challenges for trustees and a growing need to adopt robust policies and processes around ESG, and, in the case of digital assets, KYC and protection of assets by trustees;
- The adoption of technology by trustees will be one of the big drivers of this market, with increasing automation of processes (KYC, consents, etc.) and the use of technology platforms to better assist with the running of transactions and the analysis of data;
- Over the next few months, trustees have a role in proactively assisting investors, facilitating restructurings and protecting the position of investors, including through litigation. It is expected that corporate defaults may increase and securitization structures (historically viewed as more resilient to insolvency) may need to be restructured.
Baker McKenzie has published its fully revised and expanded Global Guide to Legal Issues in Securitization. This guide has been compiled by Baker McKenzie lawyers in 33 jurisdictions across the globe. It provides you with an overview of the general legal, tax, accounting and regulatory issues typically relevant to securitization structures.
Given economic, geopolitical and regulatory developments as well as the increasingly cross-border nature of securitization transactions and innovative structures, up-to-date knowledge of securitization laws, practices and structures in various jurisdictions is vital to structure innovative and legally compliant transactions.
We hope that this guide will serve as a useful reference tool for you. Baker McKenzie's wide network of offices allows us to provide consistent, high-quality legal advice in an efficient and coordinated manner. Our extensive securitization experience across multiple jurisdictions means we can provide a seamless, cross-border service in international transactions.
We are here to support your business. Please contact us if we can be of any assistance. The guide is available in PDF.
Click here to download "A Global Guide to Legal Issues in Securitisation"