The European securitization market is dead, or on its knees. That, at least, is a widely held perception. No less an authority than European Central Bank president Mario Draghi said so, and it’s become a truism of European policy making, whether in discussion about Capital Markets Union, or the “simple transparent and standardised” securitization rules.
But it’s a lot less dead than it appears, and the market only has itself to blame for the misleading impression.
This year, for example, has seen three landmark trades which ought to underline how useful securitization can be to help banks deal with legacy assets. Towd Point 2016-Granite 1 placed £5.88bn of notes to investors, ultimately allowing private firm Cerberus to take a big slice of Northern Rock’s portfolio off the hands of the UK government. Hawksmoor Mortgages 2016-1 financed the £3.4bn acquisition of an old portfolio from GE’s UK arm, while Swancastle Ltd took a legacy £1.5bn second lien mortgage book from Barclays and placed it in the market.
The first two trades, though publicly announced, were placed to small clubs of investors, with large chunks of the deals locked up before they even hit the screens. The third, though, was never announced at all, was listed in the Cayman Islands (where the only way to inspect a prospectus is to visit), and plastered all over with non-disclosure agreements.
All of these moves made sense for the issuers and syndicates involved — the sterling market struggles to deliver size much over £500m, so giving big accounts plenty of time and guaranteed allocation was a good idea.
But it hurts the market. Fund managers across asset classes might want a look at these bonds, especially against a backdrop of low yields elsewhere, but what’s the point in tooling up with specialist ABS analytics and making the case to the investment committee if then you are never shown the deal?
Similarly issuers looking to re-enter the market, or use securitization for their own non-core assets, have a higher bar to clear if the market is opaque and private. Towd Point and Hawksmoor did at least release pricing levels — but who knows if those levels are public market clearing levels, or simply a reflection of where one or two giant buyers are interested?
The balance sheet CDO market is even worse, in some respects. The term “CDO” still scares investors, banks and regulators alike, but the market has huge potential to recapitalise Europe’s laggard banks.
At a conservative count, European balance sheet CDOs have hedged the risk from portfolios totalling €26.6bn this year, but you’ll not find that information anywhere public. Some investment banks keep track of the market for their own use, and some issuers scatter information across their annual reporting, but a curious investor wondering whether there’s a buying opportunity there, or a regional bank’s treasury team mulling a deal has nowhere to even begin looking at the market.
Now, balance sheet CDOs are specialist and difficult investments — the riskiest parts of loan portfolios, hedged synthetically and cash collateralised, and with correlation risk to boot — but they shouldn’t be beyond the wit and ambition of experienced money managers of many stripes.
If bond funds can make sense of additional tier one, tranched corporate credit shouldn’t seem that terrifying. Yet without years of experience in the market, they’re unlikely to even be shown a deal. If they are, then they will lack price comparables or public reporting from other deals — and will struggle to convince their own management that they’re not being ripped off.
Arranging banks, bankers, specialist investors and even journalists benefit from the lack of transparency. Expertise, advice, specialist structurers and syndicate teams are all more valuable in a quasi-private market (and so is news), but that doesn’t mean it’s helpful to the overall development of the industry.
Securitization has been on a relentless PR drive since the crisis, with industry and regulatory efforts to present it as a comprehensible, straightforward, easy-to-use capital markets product. That’s won some traction in Brussels, as demonstrated by the Capital Markets Union agenda, but it still has to win over the hearts and minds of issuers and investors, beyond the market specialists that have kept it going since the crisis.
Transparency over collateral is a battle that’s already largely been won. Most European deals report to the European Datawarehouse, offering detailed loan-level data in a standard format, while most UK deals offer similar disclosure to obtain Bank of England repo eligibility.
But transparency over execution is just as important when it comes to bringing more participants back to the market. While every issuer might have their reasons to keep things private, it’s slowing down the revival of securiitzation.