CLOs and RMBS are seen as the main growth areas in the European securitisation market at present. Drivers include a broadening of the investor base for the former and continued bank deleveraging for the latter.

AFME data for 1Q17 shows that pan-European CLOs led placed European securitisation issuance, followed by UK RMBS and Dutch RMBS. Volumes across these sectors totalled €5.8bn, €2.5bn and €2.1bn respectively last quarter.

One law firm that is ramping up its securitisation presence in Europe is Dentons, which has boosted its teams with a number of hires recently (SCI 17 March) in response to the market's growth. Edward Hickman, partner at the firm, confirms that it is capitalising on growing RMBS activity - particularly in the UK, where it has advised on the UK's first non-performing RMBS since the financial crisis and a recent Skipton RMBS. Elsewhere, the firm advised on Bluestep's recent Swedish RMBS and is advising on the Grand Canal Securities Irish RMBS.

Less traditional real estate portfolios are a particularly fertile area. "We see continued growth in non-conforming and non-performing RMBS and expect to see more, especially in Europe. US RMBS is also growing and there is a lot of focus this side of the Atlantic on US risk retention, and our expertise is being sought on interesting US and European risk retention-compliant structures," Hickman says.

Bank deleveraging is driving NPL securitisation and investors also want to buy loan portfolios, some with distressed assets, and refinance these through the RMBS or CMBS markets. Some buyers are adopting an innovative approach, whereby portfolios are split into performing and non-performing assets, with the performing portion securitised before the NPL portion is securitised.

From a legal perspective, NPLs can be problematic, according to Hickman. "These NPL transactions require a lot of due diligence, and multi-jurisdictional portfolios can prove challenging, with different regulations in each country - which can take a great deal of time."

Furthermore, while investing in distressed assets has yield benefits, the negatives must also be weighed. "Investors in distressed assets can find more yield, but there is greater uncertainty regarding timing and quantum of payments. And the servicing proposition becomes increasingly important for NPL portfolio acquisitions, taking into account local knowledge and local regulatory requirements. Several of the large portfolio buyers have their own captive servicers," comments Hickman.

Meanwhile, Martin Sharkey, partner, joined Dentons from Clifford Chance last year as it continued to expand its CLO practice. European CLO activity may have been dampened by "arbitrage economics" this year, but he believes there is a desire from managers to issue, along with matching investor appetite. He adds that the investor base has widened, with less dependence on Japanese investors and more equity investors entering the market.

Indeed, the buoyant European investor base has influenced the number of CLOs issued with a dual compliant risk retention structure. Sharkey says that while vertical risk retention is naturally dual compliant, many European CLOs utilise a horizontal structure because "the investor base is broad enough not to need US investors at the moment."

Equity investor interest remains, despite increased tightening across the capital stack. Sharkey comments: "Pricing on the debt tranches of CLOs has significantly tightened; for example, a recent Spire deal was about 90bp on the triple-As [see SCI's primary issuance database]. The mezz piece has also come in and despite repricings on the underlying assets, CLOs are still attractive to equity investors. They look at a four- to six-year reinvestment period timeframe and there's plenty of space for assets to price up again in that window."

He adds: "CLO issuance naturally ebbs and flows as it moves with the leveraged loan market and investor appetite, but there has been a plethora of refinancings and resets recently and I'm optimistic that new issuance volumes will pick up later this year as they did last year."

In terms of future growth areas, Hickman expects activity to continue in the residential and commercial mortgage loan markets in Central Europe and suggests that there may also be issuance in more esoteric sectors. He concludes: "We're seeing more European appetite on solar and wind renewable deals. We're also working with a UK firm looking to reinsure insurance risk through the capital markets."

RB