The crowded halls of the new and - many hoped - temporary home of this year's European Securitization Forum/Information Management Network Global ABS gathering held in London last week could serve as a testament to the still-strong interest in securitization.
Market players said they felt encouraged by the hopeful buzz in the exhibit hall, some of the most positive chatter the market has heard in months.
It's true that while European primary issuance has yet to get off the ground, at least regulators are now on securitization's side. With a broader understanding of how securitization functions and a general belief that the process is integral to the functioning of the economy, the sentiment across the panels was greatly optimistic. There was also interesting debate on what's needed to keep the market moving forward.
"Investors have so far stayed away, and the market is still very illiquid with distressed assets that do not reflect the credit quality of the underlying loans," said Marc Nocart, co-global head of securitization at Societe Generale. "The question is how do we get out of this?"
Government involvement seems to be the path to progress. The European Central Bank (ECB) and the Bank of England have clearly paved the way toward kick-starting primary issuance, and speakers at one of the panels said that implementing a Term ABS Loan Facility (TALF)-like solution shouldn't be too far off the radar for these central banks. To be certain, the ECB announced finalized details of its direct purchase covered bond program last Thursday.
"It's clear at least that securitization is here to stay for a while longer. If the ECB ever plans to be repaid, then the ABS market needs to revived," said Mark Lewis, global head of structured capital markets at Unicredit.
Nico Trautwein, head of transaction management at Commerzbank AG, said that the steps the regulator has taken in the last 12 months in amending the Capital Requirements Directive (CRD) are positive, specifically the 5% retention rule that requires issuers to retain 5% of the securitized products they originate. "Originators were taking risks on balance sheet in order to securitize; this 5% rule mitigates this and is a valuable amendment to the regulatory treatment of ABS," he said.
The concept of investors having a skin in the game, which essentially is what the 5% rule brings into play, sounds ideal. However, Sanjeev Handa, global public markets at TIAA-CREF, said that implementing these types of rules could bring about disadvantages such as what has happened in the CLO arena. "The 5% sounds good but may have unanticipated effects," he said. "CLO managers were required to retain the equity piece in deals, and that has now had effects on what the bondholders can do in the current market environment."
Robina Barker-Bennett, head of structured products at the Bank of Scotland, said that investors need to realize that what has ultimately been affected is subprime-related paper, although deals that are presently working are those that were used as an additional funding source that gave banks their skin in the game. "Where it went wrong is when the securitization machine and fee generation overtook a funding need and structures were developed solely for the purposes of fees," she said. "What's clear is that we can't suddenly go back to where banks are funding themselves only through deposits. They need securitization as an additional funding alternative."
Trautwein said that the amendments also give direction to investors on what they are expected to do in terms of stress test requirements, and they will essentially put the market in a position where it has sophisticated buyers that aren't as
over-reliant on ratings.
The uncertainty regarding ratings is in itself a major obstacle to the revival of the market. In a perfect world, panelists said that investors would be better quipped to understand the risks based on their own analysis, but in reality it's likely that even with the lessons learned some investors will continue to look for ratings as guidance. "Controlling of rating agencies is part of bringing back confidence," said Dirk Bergander, CEO and managing director of Collineo Asset Management. "Investors have less confidence in ratings and what they mean."
The key to move forward is to keep structures simple; adding complexity to the product would make it harder to sell. Barker-Bennett said that the information provided to investors needs to be sufficient to get them comfortable. "The issue is that the quantum of information is difficult to get into a format for it to make sense, but standardized reporting should help," she said. "If we can get that information to investors in a format that really shows what is going on, we can guide them for what they really need to look out for."
Handa said that the industry needs to reframe its expectations and be conscious of investors, which may require a risk premium for new issues, particularly since buying on the secondary market provides better deals. "The secondary market is providing levels that the new-issue market cannot compete with, and there are still more sellers of paper than there are buyers," he said. "There needs to be better equilibrium for pricing to improve, and that will take time."
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