Scope Ratings received the European Central Bank's Eurosystem Credit Assessment Framework (ECAF) approval in December 2024, becoming the first European rating agency whose ratings allow debt to be used as collateral in the central bank's monetary policy operations. It is currently the only full-service European rating agency, rating debt issued by banks, corporate entities, and sovereigns, as well as project-finance and covered bonds, and structured finance. Competing against five rating agencies from North America, Scope's bylaws state that it must remain a European company, but more importantly it seeks to incorporate Europe's uniquely fragmented legal and market structures into its analysis.
"What's important for Scope is that it's a European rating agency," said David Bergman, head of Structured Finance at the rating agency. "We have developed our methodologies to account for both the EU institutions and also the regional variations."
Bergman recently discussed with Asset Securitization Report (ASR) how Scope sets itself apart from other rating agencies as well as key developments in the European structured finance market.
ASR: How does Scope account for differences in the European market?
Bergman: For example, some years ago, the North American rating agencies introduced local currency ceilings for some countries with weaker finances. However, the currency is the same, the euro, so it's a bit strange to have a local currency ceiling. They were trying to address the problem of transferability risk when, for example, countries introduced capital controls. So we analyzed these controls and the transferability and convertibility risk in a stand-alone analysis, rather than saying the bonds can never reach higher than BB, as some rating agencies said about Greece some years ago.
ASR: How might accounting for those differences apply to structured finance?
Bergman: Thirty-year, fixed-rate mortgages have been the hallmark mortgage product in the U.S. In Europe, the products vary widely by country, so we have to consider these regional differences when analyzing RMBS pools.
ASR: Are RMBS pools concentrated in a single country?
Bergman: In theory you could pool mortgages from different countries, and there was one in 2007 that was two thirds Italian mortgages and one third German. But it's never happened since, because if lenders must repossess properties, the local laws and regulations apply, and they differ. So it's very rare that you would mix RMBS.
ASR: Does that apply to other asset classes?
Bergman: That applies also to consumer asset-backed securities (ABS), CMBS, and some SME (small and medium size enterprise) ABS. What you can mix is CLOs. The underlying companies can be in different countries, although there is usually a majority concentrated in the U.K., France or Germany, and then smaller concentrations from Southern Europe.
ASR: How would you describe the European securitization market today?
Bergman: It was very vibrant before the Great Financial Crisis (GFC), and until two years ago it's been range bound, generally between €80 billion and €100 billion each year. In 2024 it was €120 billion ($94.8 billion) and last year €160 billion—growing but clearly a lot smaller than the U.S. market. Before, a lot of banks were doing securitization as a technique, to go to the ECB for liquidity and funding; not really for [funding different] markets. Collateralized loan obligations (CLOs) have grown at a more consistent rate since the GFC; last year was a record in terms of volume, and this year could be also.
ASR: Why do you expect CLOs to sustain growth?
Bergman: M&A activity is picking up, so there's more formation of leveraged loans, and also there's likely to be more demand due to regulatory changes.
ASR: Who is providing that demand?
Bergman: That question touches an Achilles Heel for a long time. After the GFC, many investors disappeared and insurer capital treatment changed so they can't buy 'AAA' bonds. Insurers are less than 1% invested in European ABS today compared to closer to 10% in the U.S. On the senior pieces we have banks, and on the mezzanine tranches American and even some European asset managers. But the number of European investors is not big.
The Draghi report (The Future of European Competitiveness) that came out in September 2024 recommended more European securitization, and at the moment there's a concerted push by the regulators. In the last six months we've seen proposals from the European Commission, European Parliament, and European Council—basically the heads of state—a process that normally takes years. Their speed has been surprising, and they even announced the goal of issuing the regulation by year-end.
ASR: What are its goals?
Bergman: Hopefully this would make the European capital markets a bit more integrated and also increase the size, so investors could buy more securitizations and other securities, rather than U.S. or European government bonds. The proposals have been very well received by the market and are quite bold
ASR: How would you describe the current European securitization market from a credit standpoint?
Bergman: Most asset-backed securities (ABS) in Europe pool auto and consumer loans that are typically equivalent to prime loans. The U.K.'s non-conforming market has shown significant increases in arrears or defaults, but the loans in those deals were generally originated before the GFC and their loan-to-value (LTV) ratios are quite low. So the losses there have been low.
The CMBS market is marginal, around €10 billion, and mostly concentrated in the U.K.
ASR: Last year, Scope rated a Vantage Data Center securitization that funded four data centers in Germany and another one funding two U.K. data centers. How does Scope view data-center deals from a credit perspective?
Bergman: We've rated the only two data center transactions done outside the U.S. so far. We've also rated several project finance transactions for data centers under construction, and we've rated several private deals. There are five or six transactions that are reportedly being worked on at the moment, so there will be more.
The Vantage deals were typical ABS data-center structures, with very highly rated tenants holding long-term contracts used to secure the funding. Coming back to the jurisdiction issue, there is talk now about getting more scale by doing a cross-border transaction, and then there's the issue of whether to use an ABS or CMBS structure.
ASR: Any final thoughts on the European ABS market?
Bergman: One positive thing we've seen with European securitization in light of today's uncertainties and wobbly markets is that during the Liberation Day period, European ABS spreads didn't move that much, and demand was still there. So it seems like it's a product that, at this moment, is slightly less volatile than the rest of the market.
