European securitization trends 2021: leasing, non-performing loans and ESG opportunities multiply
What are the main emerging securitization trends in Europe in 2021? Intertrust Group Capital Markets Specialists Cliff Pearce, Anne Flood, Helena Whitaker, Ellen Chislett, Arno Vink and Salvatore Rosato Share Their Views
At the start of the Covid-19 pandemic, underwriters of underlying assets to be securitized faced uncharted territory. Over a year later, these assets can be scrutinized much more precisely, giving originators and investors a clearer picture of credit quality.
We looked at securitization trends in the main European financial centers. Overall, we find the picture encouraging. If asset valuations in areas such as residential real estate continue to rise and developing trends such as green mortgage products take off in earnest, 2021 could prove to be a pivotal year for securitization.
Ireland: NPL and CLO on the rise
The Irish Special Purpose Vehicle (SPV) securitization market has grown by more than 9% in the past year, despite Covid, with secured loan bond (CLO) transactions being a key growth driver. Of the 4,579 securitization vehicles declared in 2020 in the euro area, 29.8% were domiciled in Ireland.
The country is now recognized as the first domicile jurisdiction for SPV CLOs following changes in the VAT legislation in the Netherlands, which saw the migration of the majority of Dutch CLOs to Ireland.
We are also seeing new opportunities in the non-performing loan (NPL) market. As banks across Europe start deleveraging their books after the pandemic, we expect to see securitization of those loan books through Irish issuers from SPV.
Additionally, non-bank lending continues to grow, with many alternative lenders establishing loan origination platforms in the jurisdiction.
United Kingdom: ESG to create new opportunities
The pandemic has evolved in UK capital markets. Opportunities are more diverse among small and medium-sized enterprises (SMEs). New territories and products include green mortgages, social housing programs, and the Covid Business Interruption Loan Scheme (CBILS).
Many of them are on the periphery of traditional structured finance, so the skills and knowledge of the team are easily transferred to other asset classes, such as insurance-related securities (ILS ).
We also expect the prevalence of artificial intelligence (AI) associated with consumers’ environmental, social and governance (ESG) choices to have a significant impact on credit underwriting in the UK.
Jersey: transactions on cryptocurrency transactions flock
Jersey’s deal flow remains sparkling, with cryptocurrency transactions and securitization structures – welcome after two quiet years – both playing their part.
The island is seeing a resurgence of interest in private market products, such as Protected Cell Companies (PCCs). Customers from Switzerland and Lichtenstein in particular are looking for actively managed certificates in Jersey.
Family Offices and banks in these markets are won over by their streamlined and repetitive structures that can be deployed with identical documentation. Transactions are often small, tailor-made and done for a reasonable price.
Netherlands: buy-to-let attracts foreign originators to mortgage-backed securities
Dutch Residential Mortgage Backed Securities (RMBS) and related rental space are attracting interest from foreign parties and private fund-backed financial institutions (NBFIs) looking for yield.
Meanwhile, warehouse finance is attracting Citibank, which debuted in RMBS in the Netherlands last year. The deal brought together a full stack of € 213 million mortgages from three different originators. Other players who have issued a number of portfolio transactions in the buy-lease space include Dominvest, RNHB backed by CarVal, De Nederlandse, Nestr and Casarion, according to a report by Global Capital.
Luxembourg: multi-jurisdictional mandates and multi-compartment structures are gaining popularity
With 29.3% euro area securitization vehicles in 2020 domiciled in Luxembourg, it remains one of the region’s hot spots. Many transactions are channeled through the country’s pan-European private equity structures through flexible securitization laws that are suitable for multi-jurisdictional vehicles.
Advisors considering Luxembourg are of course looking for competitive and sensitive prices, as well as multi-compartment cell structures for their clients who, increasingly, are NBFIs sponsored by private funds.
We have also recently witnessed the repackaging of existing bonds issued by non-European entities in Luxembourg, RMBS and the securitization of German automobile and equipment leases. We expect these deals to become a larger trend.
The initiators and investors of another developing but complex securitization product, supply chain finance, are still testing the waters given its short maturity (between 60 and 120 days). The multi-compartment structure, governed by Luxembourg law on securitization, offers a high level of protection to investors and represents a valuable risk mitigation factor for such complex transactions.
Snapshot: pan-European trends creating new asset classes
If we were to pick two trends that will have the greatest pan-European impact on the securitization market, we would highlight ESG and growing investor appetite along the credit curve. Policy-driven green initiatives will create new asset classes.
Once a separation between traditional and green pricing emerges, we expect more green bond issues to hit the market as well as private equity funds dedicated to the green securitization opportunity.
Intertrust Group recently won the SPV Administrator of the Year award at the European Securitization Awards from Global Capital
Why Intertrust Group?
Intertrust Group is at the forefront of securitization regulation in key markets such as Luxembourg, Ireland, UK, Netherlands and Channel Islands.
We have on the ground securitization experts in the main financial centers with backgrounds in traditional and alternative financing structures.
Our experts listen to emerging asset classes (including green mortgages, supply chain and enterprise value finance and NPLs) and the needs of NFBIs to structure them to appeal to a pan-European investor base
We can help clients meet growing KYC reporting requirements in multi-jurisdictional products