Expectations for an effort to rebrand Europe’s securitization industry, making it more acceptable to regulators and investors, are decidedly mixed.
The initiative from the Association for Financial Markets in Europe (AFME) and the European Financial Services Round Table (EFR) to award a stamp of approval to securitizations meeting criteria for quality, transparency and standardization was all the buzz at the ABS Global 2012 conference, which is being held this week in Brussels.
The AFME and EFR formally launched the Prime Collateralized Securities (PCS) at the conference today, announcing the hiring of Ian Bell, the former head of European securitization at Standard & Poor’s, to lead the project and disclosing new details about how the process will work.
The PCS label will be applied to the senior portion of securitizations that meet specific criteria for best practices. These deals also need to be rated by at least two rating agencies.
The first PCS-labeled deal is expected to come to market in the third of fourth quarter of 2012.
Although some conference participants were optimistic about the potential for this product, others said its ability to revive the market’s fortunes will be limited by its regulatory treatment and liquidity.
Fabrice Susini, global head of securitization at BNP Paribas, said in a press gathering at the conference that there’s more to rebranding than simply changing the name of the senior tranche of deals. The effort must represent “the best practices and aspects” of securitization offerings, putting them “back on track and presenting them again to the market,” he said.
Separately, in his opening remarks at the conference, Susini said that PCS is a product that allows the market to leave “behind the headlines and its shortcomings.” He called it a “clear example” of efforts to strengthen the ABS market.
Other participants said that providing a seal of approval for the senior tranches of securitizations could create a benchmark, driving spreads of subordinated tranches tighter. The label could serve as a benchmark for non-PCS transactions as well.
Many are also hoping PCS willl gain favor with regulators, allowing the authorities to get comfortable with securitized products again. Supporters of PCS also think that these offerings can revitalize securitization, particularly in countries where issuance has fallen.
However, Robert Plehn, head of asset-backed solutions at Lloyds Bank Wholesale Banking & Markets, said that the success of PCS in jumpstarting the European markets will be limited by the higher capital requirement imposed on ABS by both Solvency II, which applies to insurance companies, and CRD 4, which regulates the European banking sector.
Keynote speaker Nadia Calvino, deputy director general at the European Commission directorate general internal market and services, said she agrees in principle with these types of initiatives. But, she said that PCS should be transparent and there should be appropriate management of any conflicts of interest.
The PCS initiative, which was started in 2010, is aimed at increasing the funding for assets that can drive economic growth, including residential mortgages, auto loans and leases, credit cards and loans to small and medium enterprises (SMEs). For now, certain assets, including CMBS, CDOs, synthetic securitizations, re-securitizations, and residential mortgages that do not meet certain criteria, are ineligible.
The predefined best practices criteria are based on quality, transparency and simplicity and standardization.
The PCS label will be assigned by the PCS Secretariat, which will also be responsible for ensuring the quality of the securitization and withdrawing the label when called for.
Bell, PCS’s newly appointed head of Secretariat, explained that issuers will apply to the PCS Secretariat for a label on their securitization in exchange for a fee. He said the Secretariat will appoint firms with extensive experience in documentation review, auditing and checking to assist it with determining whether a securitization satisfies the PCS eligibility criteria. There will be no conflict of interest because the firms performing the review will not be the issuing banks, Bell said. The Secretariat hopes to be able to complete a determination of a deal’s eligibility within five days of the submission of documents.
The label can be granted to both existing deals and those that are still being put together. Thus even transactions that were issued before the PCS initiative was launched can benefit from the rebranding.
The label is not meant to replace credit ratings. But, like credit ratings, this designation can be withdrawn in instances where a deal no longer meets the best practices standards.
There are still a few aspects of PCS that have yet to be worked out. Bell said the project’s sponsors still have not determined how they will inform investors that a deal is eligible for the PCS label.
Also, the PCS have yet to determine how highly rated the senior tranche of a deal must be to be eligible for the label. Another participant at the conference pointed out that downgrades of the sovereign ratings of Greece and some other countries limit the ratings that deals issued in these markets can obtain, potentially disqualifying them for the PCS label.