Standard & Poor’s said in a report published today that some of the contributing factors to the near-total depletion of investor-placed issuance in Europe are gradually beginning to abate.
Rationalization of the investor base, changes in accounting treatment for some structured finance holdings, and government support for financial institutions have lessened the threat of forced sales and mark-to-market volatility among structured finance securities. Positive economic indications suggest that—in some sectors at least—the threat of significant further deterioration in credit quality is easing.
The rating agency believes that recent secondary market rally—demonstrated by significant tightening of securitization spreads—suggests some renewed investor appetite. As a result, the cost of securitization as a funding tool may be decreasing to a point where originators might once more find it economical or strategically desirable. This is further substantiated by the fact that some originators have already placed a handful of transactions with investors, rather than retaining them, as was more common since late 2007.
But analysts warned that signs of a rebound in the securitization market could still prove short-lived.” In our opinion, the European economic recovery is likely to slow during 2010, and while secondary spreads have tightened recently, higher volumes of primary issuance could put that trend under pressure,” explained analysts at S&P. “We also believe that other funding sources may continue to hold more appeal to originators for now. Finally, the effect of evolving regulatory requirements on originators and investors remains uncertain.”
The current position in the European structured finance market therefore remains complex and uncertain.
Still the agency stressed that many of the contributing factors that caused investors to retreat from the market in the past two years may be showing signs of recovery. The detailed characteristics of future transactions may differ from those of the past, but the fundamental techniques of securitization, when used appropriately, continue to have the potential to benefit both originators and investors—and, by extension—household and corporate borrowers.
“While we believe there are likely further collateral losses to come in outstanding structured finance transactions, the effect of weaker fundamentals on their ratings has been relatively mild in many European sectors,” said analysts.
In fact, so far, most ratings have performed largely as intended, given the current economic environment. According to S&P, of the 4,478 European asset-backed securities (ABS), commercial mortgage-backed securities (CMBS), and residential mortgage-backed securities (RMBS) ratings outstanding in mid-2007, only 10 (0.22%) had defaulted by mid-2009. Only 0.05% of bonds rated investment-grade in mid-2007 defaulted over the period, compared with 1.90% of speculative-grade bonds, demonstrating that these ratings have acted as a relative measure of creditworthiness.
The rate of downgrades has also been relatively modest at the higher rating levels. For example, 96.8% of bonds that were rated 'AAA' in mid-2007 were still rated 'AAA' (or had been redeemed in full) by mid-2009. However many ratings still remain on CreditWatch negative.