Macroeconomic backdrop in focus

Thus far, 2022 has experienced some turbulent and choppy market conditions. Although poor performance has not yet affected the securitisation sector, the consensus – at least, in evidence during AFME and IMN’s Global ABS conference last month – is that uncertainty prevails and investor sentiment is predominantly focused on the macroeconomic backdrop.

During this period of market dislocation, the theme of regulation appears to have moved to the forefront - taking over from last year’s overarching ESG agenda and considerations. Ifigenia Palimeri, md at Moody’s, noted: “I do not think there is a shift. However, the main difference compared to last year is the macro environment. Given the current uncertainties, people are discussing regulation more closely as one of the elements that may bring new investors to the market.”

Key regulatory aspects discussed at Barcelona included disclosure requirements for public versus private securitisations, jurisdictional scope and the need for improved treatment under both LCR and Solvency 2 rules. When asked what the biggest regulatory issue is for the securitisation market, one panelist at the conference bluntly noted: “Solvency 2, because clearly that is where the money is.”

Market participants further highlighted that the prescriptive nature of regulation in the European securitisation market compared unfavourably to the more clement approach enjoyed by the covered bond market.

Meanwhile, regarding issuance, an important point in the current rising rate environment is the re-pricing of risk. Palimeri observed: “Regarding new issuance, it will depend if non-bank and specialised lenders will originate. As they are re-pricing the risk, this will impact volumes.”

She added: “There is uncertainty on what will come to the market, depending on where spreads will end up. Issuance will inevitably depend on where spreads stabilise.”

Indeed, the traders’ roundtable panel at Barcelona highlighted the not-so-rosy picture impacting spreads. Discussing the pronounced widening down the capital stack and lack of liquidity, one trader revealed the current market trend: “We clearly prefer defensive, long-positioning for now.”

Finally, in terms of ESG, panelists agreed that many changes are still needed; notably, better standardisation, transparency and widespread use of ESG frameworks. Overall though, the dominant feature of the debate remains the fact that there is not enough ‘green’ or ‘social’ collateral available to securitise.

Vincent Nadeau