Market updates and sector developments

AFME has published the results of a survey undertaken to examine bank treasuries’ asset allocation drivers in relation to securitisation. The results of the survey demonstrate how various regulatory constraints prevent bank treasuries from fully utilising securitisation as part of their liquidity stress buffer. 

Of the 25 respondents to the AFME survey, 80% invest in securitisation in general and 80% of those invest in securitisation for High Quality Liquid Assets (HQLA) purposes. A key finding of the survey is that reduced appetite for securitisation for HQLA purposes is predominantly due to regulatory constraints, such as haircut levels, LCR eligibility criteria and limited eligible asset availability. 

The survey also highlights that the sovereign debt crisis, Covid-19 and the UK’s Liability-Driven Investment (LDI) crisis are all recent liquidity stress events which affected respondents’ HQLA books. Additionally, mixed views on the liquidity of the European ABS market were expressed - likely driven by a recognition that on one hand, lack of supply and a reduced investor base create a shallow secondary market, while on the other hand, an investment grade floating rate product can be a strong source of liquidity in certain stressed scenarios, such as the UK’s LDI crisis when ABS proved to be very liquid. 

Finally, respondents cited a number of factors that would facilitate future investments in ABS, including: better treatment of securitisation under the LCR; increased issuance; better return on regulatory capital; and a larger investor base. 

AFME has long advocated for the revision of the treatment of securitisation under the LCR and has cautioned against drawing definitive conclusions about market participants’ appetite for securitisation based solely on the current (low) levels of investment activity. The association argues that the LCR - which forms a critical part of the EU securitisation prudential framework - can play a key role in assisting the restoration of the EU securitisation market, if properly calibrated.  

In other news…

CLO good practices report released
IOSCO has published its final report on good practices in the leveraged loans and CLO markets, reflecting the results of a public consultation launched last September (SCI 14 September 2023). The organisation says it has been following the evolution of these markets, including significant shifts in market practices that emerged during the ‘low-for-long’ interest rate environment. In its analysis, IOSCO has focused on examining the impact of fewer and looser covenants on investor protections, whether there is adequate transparency in these markets and the scope for potential conduct-related issues to arise.

As such, the final report describes in detail 12 good practices that are designed to support market participants in their decision-making when operating in the leveraged loans and CLO markets. These practices are grouped into five themes: origination and refinancing based on a sound business premise; EBITDA and loan documentation transparency; strengthening alignment of interest from loan origination to end investors; addressing interests of different market participants throughout the intermediation chain; and disclosure of information on an ongoing basis.

ECAF acceptance for Scope’s ABS ratings
The ECB has accepted Scope’s ABS ratings in the Eurosystem, after last November’s recognition of the rating agency as a new external credit assessment institution (ECAI) in the Eurosystem Credit Assessment Framework (ECAF). This recognition included sovereign, corporate, financial institutions and covered bond ratings. However, the application process for ABS followed a separate, specific procedure, which has now been completed.

The complete technical implementation of Scope’s ratings by the ECB is expected shortly, making them eligible for monetary purposes. The rating agency says the move creates a more diversified and competitive rating landscape, enhancing the stability and performance of European financial markets and in particular supports the European securitisation market.

ECAF aims to harmonise credit assessment standards across the euro area, ensuring consistency and fairness in how collateral is assessed. With ECAF accreditation, Scope’s credit ratings can be used to fulfil credit quality requirements of marketable assets that are eligible as collateral in Eurosystem monetary policy operations.

Golub, Nassau team up
Nassau Financial Group and Golub Capital have entered into a strategic partnership, whereby Nassau will receive a US$200m minority non-voting common equity investment from Golub Capital. Nassau and Golub Capital will also enter into a long-term investment management agreement that will provide Nassau’s insurance subsidiaries with access to Golub Capital’s middle market direct lending strategies, through tailored capital-efficient solutions. The arrangement provides capital to support Nassau’s growth strategy, including through organic growth and acquisitions, and further strengthens its balance sheet.

With this transaction, Golub Capital will be the largest minority equity holder in Nassau, following investments from Fortress Investment Group in 2023 and Wilton Reassurance Company and Stone Point Credit in 2021. Nassau was founded with an initial capital commitment along with subsequent growth capital provided by Golden Gate Capital, which remains Nassau’s majority controlling equity holder.

The transaction is expected to close in 2H24 and is subject to customary closing conditions, including receipt of regulatory approvals.

Corinne Smith