Market updates and sector developments

GACS 2.0 NPL securitisations appear to be better positioned than GACS 1.0 securitisations, both from an asset side perspective - in terms of greater accuracy of original business plans, better collateralisation and healthier performance - and from a structural perspective, in terms of higher levels of conversion rates and hedging status. A new Morningstar DBRS commentary suggests that this gap will be further exacerbated in the coming years as increasing levels of credit enhancement will be observed for GACS 2.0 transactions, as a consequence of faster-than-expected deleveraging, while GACS 1.0 transactions will “keep burning cash into senior items repayments” as they approach the tails of the underlying portfolio.

Across the 31 notes that Morningstar DBRS rates that benefitted from the state guarantee, the weighted-average GACS premium paid since issuance was around 0.9% of the senior note balance – accounting for 1.2% and 0.5% for GACS 1.0 and GACS 2.0 transactions respectively. Since issuance, around €437m was paid by the issuers as GACS fees.

For these transactions, considering the latest business plan gross collections from the last IPD onwards multiplied by the average conversion rate observed (at 70%) as a proxy of the remaining collections allocated to guaranteed senior balance repayment, there are currently around €418m of senior notes potentially not covered at maturity. The aggregate original senior note balance issued in the context of these securitisations amounted to around €14.5bn and, as of the last interest payment date, the aggregate senior note balance had amortised by 59.7%.

“The vicious circle embarked by some underperforming transactions in the GACS 1.0 cluster might result in the state guarantee actually being enforced at maturity,” Morningstar DBRS notes. “However, the potential senior balance not covered according to the latest servicers’ projections will only be a percentage of the amount originally guaranteed. Additionally, potential payments of the guarantor to senior noteholders will be offset by the GACS fees paid to the guarantor in relation to transactions that are performing above expectations and will be fully redeemed at maturity and higher GACS premiums paid by underperforming transactions that will have deleveraged at a slower pace than originally expected, and will allocate increasing amount of collections towards the payment of the guarantee as the GACS fee curves ramp up.”

The GACS premium has been generally anchored to a basket of CDS of domestic issuers with the applicable rating. During the first years of a guaranteed transaction, the GACS premium increases over time according to the expected redemption profile of the senior tranche, before dropping to the long-run rate applicable until full redemption.

In other news…

ESMA adds to calls to revitalise securitisation
ESMA has published a position paper on building more effective and attractive capital markets in the EU. Among the 20 recommendations included in the paper aimed at strengthening EU capital markets is one that calls for a revitalisation of the European securitisation market.

ESMA’s recommendations for a well-functioning capital market focus on three aspects: citizens, companies and the EU regulatory and supervisory framework. The section on the securitisation market highlights the fact that the introduction of the Securitisation Regulation and the STS label has not yet produced “all the expected results”.

As such, the paper states that the European Commission should put forward a proposal aiming to revitalise the EU securitisation market “on the basis of a holistic and comprehensive review of the current framework”. While remaining conscious of potential risks to financial stability and investor protection, such a proposal should particularly look at prudential treatment, due diligence rules for institutional investors, reporting requirements for certain types of assets, the consistency of STS criteria and the supervisory process, according to ESMA. The authority further notes that the ESAs will provide advice to the Commission in this respect in 4Q24.

ESMA says it will continue to engage and collaborate with all stakeholders regarding implementation of the recommendations outlined in the paper.

Corinne Smith