Out of the wilderness: Securitisations navigate the volatility

The last twelve months have been an unprecedented tumultuous period for the securitisation market, but the industry is starting to show signs of recovery, something which is testament to the sector’s resilience and vibrancy. The rebound in securitisations has also been facilitated by recently introduced of policies, most notably the Simple, Transparent and Standardised (STS) criteria, which form the basis of the EU’s Securitisation Regulation. HSBC Issuer Services reflects on some of the changes that impacted the securitisation industry last year, and explores what the future may hold for the market.

After suffering a 61.7 per cent COVID-19 induced slump in Q1 2020¹ from Q4 2019, securitisation issuances in Europe regathered momentum in the second half of the year, although volumes were still much lower than those recorded in 2019. Industry body AFME (Association for Financial Markets in Europe) noted that EUR194.7 billion of securitised products were issued in Europe last year, compared to EUR220.9 billion in 2019, corresponding to an 11.9 per cent decrease in overall activity.² Arijeet Das, Client Service Manager Securitisation, at HSBC Issuer Services, said around a third of all European securitisation issuances in 2020 were privately placed, well above the market norm of 25 per cent. Nonetheless, he added public issuances did recoup some of their lost ground in the latter half of 2020 and this trend has continued well into Q1 2021. “We had already seen EUR16 billion of public issuances by the end of February 2021. Activity has been very strong this start of the year, although it could be a by-product of the quiet December experienced by the market,” he said.

Das highlighted the UK securitisation market – and in particular RMBS (residential mortgage backed securitisations) – took a significant hit last year. “UK RMBS accounts for approximately 35 per cent of the European public market. In 2019, EUR26 billion of UK RMBS was issued, that dropped to just EUR15 billion in 2020,” he said. The decline in UK securitisation issuances was partly prompted by the Bank of England’s decision to relaunch the Term Funding Scheme (TFS) in response to the pandemic. As this scheme gave banks and building societies access to cheaper funding, many opted against leveraging the secured funding market. However, Das stressed the securitisation market is looking stronger this year, evidenced by the diversity of issuances, ranging from UK RMBS, UK CMBS (commercial mortgage backed securitisations), Irish BTL (Buy-To-Let), Spanish CMBS, together with German and Italian autos. Moreover, he said investor demand had been strong, with coverage ratios in the 3.5 ~ 4 times range for many issuances. “Whether this positive trend continues into 2021 remains to be seen, it will be determined by the economic recovery in the aftermath of COVID 19 and further government support,” he explained.

Introduced as part of an EU-wide effort to galvanise capital markets, the STS is having a positive impact on rejuvenating securitisation activity inside the EU. Under the STS requirements, originators, sponsors and issuers must retain a 5 per cent net economic interest in securitisation transactions, and investors have been instructed by regulators to conduct comprehensive due diligence to check that this is being done. It also requires originators, sponsors and securitisation special purpose entities to disclose transactional information in a reporting template developed by the European Securities and Markets Authority (ESMA). In order for a securitisation to be designated as STS, it will need to meet all of the requirements outlined in the Securitisation Regulation. There are strategic advantages for securitisations if they become STS-eligible. Firstly, credit institutions and investment firms with exposures to STS issues benefit from reduced capital charges under the Capital Requirements Regulation. An STS market standard could also help stimulate wider investor interest in the asset class.

STS issuance volumes have certainly increased over the last 12 months. According to AFME, STS issuances topped EUR35.9 billion in Q4 2020 – the first time quarterly STS issuances surpassed 50 per cent of total issuance volumes.³ In 2020 as a whole, STS issuances accounted for 39.7 per cent of the total annual issuance amount, an increase from 2019 when they comprised 33.3 per cent of all issuances.⁴ "The STS regulations have become more established, which is why we are seeing an increasing number of transactions obtain the STS designation, particularly in the autos (Germany, Spain) and RMBS (France) spaces. The STS regulation is a positive development as it provides investors with an additional degree of comfort that deals are being structured to a high regulatory standard, which in turn will help attract a broader investor base. However, the stringent due diligence requirements may pose barriers for smaller institutions," said Das.

Garyfalia Leledaki, Director at HSBC Issuer Services, agreed that the STS rules were now viewed positively by the market. The industry was able to navigate these early teething issues, which was made possible by the development of robust reporting tools by providers such as HSBC. “Our analytics team has been proactively supporting clients with ESMA’s technical reporting requirements. Despite some of the provisions being quite complex, we have been able to help clients efficiently prepare the required templates and meet their reporting obligations, by utilising market leading software. We also follow all of the ESMA regulatory updates so that our clients’ templates remain compliant and they are kept fully informed of any changes to the requirements,” added Jason Bond, Head of Issuer Services Analytics at HSBC.

Together with the rest of the financial services world, the securitisation industry is embracing ESG (environment, social, governance). Das said ESG securitisations were gaining momentum, citing several recent deals including Yorkshire Building Society’s social UK RMBS deal – Brass no 10 plc. “It will be exciting to see whether more ESG securitisations come to market over the coming months,” he added. ESG securitisations have been boosted by several factors, including growing investor appetite but also EU regulation. For example, the EU’s soon to be published Taxonomy will outline what constitutes an economically sustainable activity and this clarity should help accelerate inflows into green securitisations. “If all conditions are met, green securitisations could play an important role in helping to achieve the EU’s 2030 climate and energy targets by financing deals and investment in low-carbon assets. However, there is still more work to do to help make this market more attractive and user-friendly for investors,” says Leledaki.⁵

The onslaught of COVID-19 forced the entire securitisation industry to digitalise, something which was vital in ensuring operational resiliency at the beginning of the pandemic, said Leledaki. HSBC has indeed strengthened its infrastructure to simplify the operational aspects on Securitisation transactions to increase efficiency and transparency. “The focus for us now is on technology and ensuring that our clients can access transactional data and reports seamlessly remotely from the office, be it from their laptop or their mobile devices. As new client requirements emerge, we need to support them, and this can be done through innovation,” she added. In 2020, HSBC Issuer Services launched a new securitisation mobile-friendly Investor Reporting portal, which allows European debt issuers and investors to monitor data on their securities and portfolio holdings in real-time. Bond said this easy to access reporting tool had been well-received by the bank’s clients and market participants, not least because so many of them are currently working remotely. “Supporting clients through continued investment in technology – such as the addition of a market insights module to our Investor Reporting portal – will mean clients can sign up to access fresh content on key market trends and topics, and will receive alerts when new articles are published,” said Bond.

With LIBOR set to be ultimately demised by year end 2021 across all markets and the industry starting to transition to alternatives interest rate benchmarks such as SONIA in the UK and SOFR in the US, HSBC is updating its systems and processes to be market-ready for its clients. “We are currently working on a number of deals transitioning from LIBOR to other interest rate benchmarks. As a testament to our business-readiness, our teams have successfully supported transactions referencing SONIA on the UK covered bond market and others using SOFR in the credit card space, such as Newday, one of the first UK transactions to reference SOFR instead of LIBOR for its USD note,” says Leledaki.

The bank has also been expanding its capabilities to support a wide range of emerging bespoke asset classes beyond traditional classes to accommodate evolving client needs. For instance, as an experienced service provider on the market, the Issuer Services team has been supporting complex restructures and refinancing through the critical roles of trustee and agent.

Amongst the trends HSBC anticipates to continue to emerge in 2021, Non-Performing Loans (NPL) are shaping to grow further. “We are expecting an increased volume of NPL deal flow as consumers and SMEs recover from the impact of the pandemic, with attention in commercial real estate NPLs,” says Leledaki.

After the volatility of 2020, the European securitisation market is enjoying a rebound as issuer and investor confidence gradually returns. Underpinning the success of the industry will be robust service providers able to offer a comprehensive range of agency, cash manager, trustee and account bank roles across asset classes and regions at all market conditions, while also investing heavily into technology systems and are ready to adapt according to client needs. “One of the main attractions of HSBC to clients is our strong credit rating and vast balance sheet size, a strategic aspect when choosing an account bank partner and a paying agent for executing high-value payments, which is even more important at times of uncertainly such as the pandemic. Given the current volatility, it is vital that clients engage with strong counterparties when carrying out deals,” concluded Leledaki.