As the European securitization market begins to stir from its long slumber, it’s tempting to think that 2023 will bring a return of steady issuance flow and a generally more tranquil environment.
The signs are that dealmaking will be easier and spreads will tighten somewhat, but challenges remain. Nevertheless, mistakes that might have been forgiven last year probably won’t be this time around.
The challenges of war in Europe, rapidly rising inflation, higher interest rates and an energy crisis are things that most market participants under 40 would haven only experienced in a textbook. Perhaps unsurprisingly, deals didn’t always go to plan as market conditions dramatically changed last year.
One banker told GlobalCapital of clients and competitors in the CLO market haggling over a couple of basis points shortly after war broke out in Ukraine. The potential investors didn’t budge, and the client continued to play hardball, saving the deal for another day. When the client eventually returned to the market in the autumn, they were forced to stomach around 80bp wide of the original levels being offered.
There were also plenty of deals that were caught out in the cold as windows of opportunity for public issuance were often fleeting. Some transactions were pulled, others took unusually wide levels.
There were a couple of events where an issuer and their banker might have felt that they were guilty only of having rotten luck, issuing just as Russian tanks cross the border into Ukraine or before former UK prime minister Liz Truss tested her A-level economics dissertation in the real world.
However, following the market’s initial shock at the war in Ukraine, the direction of travel was clear. An energy crisis was imminent, and inflation was going to rise sharply.
Many issuers were being told to bring deals sooner rather than later instead of waiting for a return to normality. Many times, those calls fell on deaf ears.
Today, market conditions look promising with most research houses predicting increased public issuance in 2023. Rabobank's ABS researchers said in a report they expect to see a "timid rebound" on primary market supply driven by slightly less volatility and tighter spreads culminating in a 15% year-on-year improvement.
However, threats in the market are still lurking, with the state of the UK economy and housing market a particular concern in RMBS. Meanwhile, Rabobank's report said collateral performance will deteriorate slightly as recessions across Europe take hold.
In the European securitization market, another banker told GlobalCapital they expect the main difficulties to lie in the rhythm of activity. Much like last year, it will be volatile. Public market issuance will have windows of strong supply lasting only a couple of weeks at a time before the flow of deals stops abruptly.
Clearly, the problems that plagued the market in 2022 haven't gone away. But bankers and issuers are battle-hardened, and learned hard lessons to get to this point. However, sympathy will be in short supply if bankers and issuers can't showcase the agility required to get through difficult conditions this time around.
As a former US president tried to say: fool me once, shame on you. Fool me twice, shame on me. European ABS must be ready for bumps in the road this year even as conditions improve.