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European securitization is having a great year. Notable has been the number of new issuers coming to the market, with three more this week alone. Before the Global ABS conference in Barcelona in June, LiveMore, with retirement interest-only mortgages, and Vantage, with data centres, brought new assets to the market.
But for all the positivity, the demand for deals remains constrained. Coverage levels this year may have impressed, but in the scheme of capital markets getting a €1.2bn book on a €750m trade isn’t that wild.
There is also the question of who is buying the paper. Having a few extra hedge funds in the mezz cashing in on attractive relative value is fine, but it doesn’t add to the depth of demand or stability of the market.
For securitization to realise its potential, regulatory change is needed that unleashes new buyers.
Insurers are natural buyers, but their scope to play in the EU market is limited by Solvency II. The UK’s new solvency regime came into force at the end of last month, patriotically titled Solvency UK. It offered some minor improvements but is hardly a game changer for securitization.
Meanwhile, Liquidity Coverage Ratio eligibility rules are curbing bank treasury demand. Onerous due diligence requirements can even put off asset managers.
All those sources of investment are naturally aligned with securitization and would be stable sources of cash, adding to the efficiency and resilience of the market.
There is no chicken and egg situation here — it has to be investors first. Adding more issuers to the market might mean a couple more funds and some larger allocations. But without regulatory change, nothing dramatic will open the doors to a bigger buyer base.
That means issuers who want to depend on the market at scale will have to look elsewhere. Celebrate the new issuers, but remember that boosting the number of investors is what really counts.