Norwegian Auto ABS Passes PCS Test

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Santander Consumer Bank's Bilkreditt 3, a Norwegian auto ABS, this week became the first deal to be tagged with the prime collateralized securities (PCS) stamp of approval.

The PCS criteria was designed as a way to label European top-tier deals that fulfill certain criteria outlined by securitization industry groups; such as meeting specified reporting standards; involving assets directly tied to the “real” economy and holding at least two ratings. In addition, only senior tranches are eligible.

Sectors specifically mentioned by the groups behind PCS, which include Association for Financial Markets in Europe and the European Financial Services Roundtable, are European auto loans and leases, residential mortgage loans, loans to SMEs, consumer loans and credit card receivables. On the other hand, CMBS, CDOs, synthetic securitization, resecuritizations, and some residential mortgages are excluded.

Ian Bell, the former head of European structured finance at Standard & Poor’s oversees the project. Association for Financial Markets developed the program.

“These criteria seek to capture some of the aspects of securities that are indicative of simplicity, asset quality and transparency and reflect some of the best practices available in the European securitization market,” Deutsche Bank analysts said in a report published today.

They said that existing and new deals that meet PCS criteria can apply for the label. The issuer pays a fee irrespective of whether it is finally granted the label or not.

The PCS label can be withdrawn if a deal no longer meets criteria or reporting standards fall short of expected quality.

But, there is some disagreement as to what direct impact the quality label will have in improving liquidity in the market.  In a report last June, Fitch Ratings said that initiative could bolster investor confidence in European securitization, because it could help securitized debt achieve more favorable treatment under capital and liquidity rules.

“The principal benefit of PCS would be in demonstrating to regulators that a category of security exists that explicitly excludes sub-prime-type assets,” Fitch said. “A partial pull-back from the overly conservative approach of Solvency II, in the form of lower charges for PCS securities, might then mitigate the overall impact of the regulation.”

On the other hand, Deutsche Bank analysts said that for many European jurisdictions, the eligibility requirement and vetting process may be hard to meet.    



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