Normally, the last day of a grueling business conference is poorly attended. Many participants check out early and either head to the airport or get an early start on a long weekend.
But IMN is expecting a full house for the third session of its Global ABS forum in Barcelona Thursday.
The final keynote address will be delivered by Paul Tang, the EU Parliament member who shocked the region’s securitization industry last week when the parliamentary monetary affairs committee he sits on proposed increasing the amount of “skin in the game” for asset-backeds, by four-fold, to 20% from 5%.
The proposal, although considered unlikely to ultimately pass, is a byproduct of efforts by policymakers to create standards for deals that could qualify for less onerous capital requirements if they are “simple, transparent, and standardized.”
Tang, an economist and left-of-center Labour Party member from the Netherlands, said last week that the 20% rule should apply to all European transactions, regardless of whether they comply with the proposed framework.
"The European market was surprised by how off-message this report comes across as compared to the wider EU agenda on promoting securitisation,” said Stuart Axford, a partner in the structured finance practice area of London law firm Kaye Scholer. "In particular, the 20% number seems to have been plucked from thin air."
Axford, who is attending the conference himself, says that he and other attendees are anxious to hear Tang’s address. “People have been trying to rearrange their flights to make this,” he said.
The plan appears to face long odds of becoming the new benchmark, but market observers like Axford worry the months-long debate over the proposal will itself have a chilling effect on the securitization market.
In both Europe and the U.S., regulators have adopted rules requiring securitization sponsors to keep a 5% interest in their deals in an effort to align their interests with those of investors. The idea is that this will discourage the kind of risky lending that contributed to the 2007-2008 financial crisis. The rules have proven particularly problematic for managers of collateralized loan obligations, which do not originate the loans that they securitize and have little capital of their own to put to work.
The European standards have been in place since 2011. The U.S. rules take effect in December, although many domestic CLO managers began making their deals compliant as early as last year to assure investors the portfolios could be safely maneuvered through their reinvestment periods after 2016.
Increasing risk retention to 20% is a game changer; it would require the manager of a $500 million transaction to hold on to $100 million of notes. Axford says that this would kill off the European CLO market, which only kicked back into gear in 2013 following a long post-crisis lull. Euro CLO 2.0s have built up over €41 billion in assets under management, according to Thomson Reuters.
The Loan Syndications and Trading Association, a U.S. trade group with some European members, has criticized the proposal as an “obviously unworkable number.”
Year-to-date, European CLO issuance is at €5.6 billion through 14 transactions, slightly behind last year’s pace of €7.1 billion through 18 Euro deals at the same junction.
Another proposal that would make life difficult for U.S.-based participants in the European market is a requirement that originators of European securitization be regulated by the European Union.
That could be just as much of an obstacle for US-based CLO managers as a 20% risk retention requirement, since it would eliminate one of the primary ways that U.S. managers comply with Europe’s risk retention rules.
The EU-regulated designation would also likely bring securitization of trade receivables to a halt, as many banks and corporations use unregulated entities to get short-term debt financing imports or exports off their balance sheets, according to Axford.
Tang is likely to get an earful.