Market participants expect European consumer ABS spreads to remain flat or tighten in 2021 despite the potential for these deals to reflect economic stresses and rising unemployment, according to CSC and GlobalCapital’s annual securitization pulse survey.
Structural features of ABS transactions are likely giving comfort to participants, with most respondents seeing best value in mezzanine or senior tranches, where credit enhancement and high levels of excess spread can shield them from deteriorations in portfolio performance.
That is true for credit cards and unsecured marketplace lending — the latter still a relatively rare asset class in Europe although increasingly a feature of the private warehousing market — but it is less true for auto ABS, where 25% of respondents in Europe saw best value in subordinated tranches.
That chimes with a revival of issuance at the bottom of the capital structure in recent years, as banks and captive auto lenders have increasingly used auto securitizations as a vehicle for risk transfer as well as funding. Several platforms — such as Mercedes, Santander Consumer Bank and BNP Paribas Personal Finance — now issue equity as well as funding notes, allowing third parties to take exposure to the first loss of auto loan transactions rather than keeping them entirely on balance sheet.
Spreads tightening to pre-pandemic levels (Source: Markit)
Digging into the data by market participant type also revealed some substantial differences in their views.
Underwriters and arrangers appeared to be more bearish on spreads for marketplace lending/unsecured consumer deals than investors or issuers, with nearly half expecting them to go wider in the next year, though survey participants recorded a broad mix of views on widening and tightening.
Many market participants had confidence that supply will increase this year. Some 57% of European market participants expected public European ABS supply, including the UK, to be between $75bn and $100bn for 2021, while 32% expected more than $100bn.
For reference, 2020 had just under €50bn ($60bn) in distributed supply, according to JP Morgan’s ABS research. This is down from totals of just over €70bn for 2018 and 2019 — peak levels for the post-2008 years.
The revival of extraordinary central bank liquidity schemes for banks, as well as disrupted market conditions in the spring and lower origination volumes, have probably pushed distributed issuance down this year compared to the past. In contrast, private warehousing volumes are stronger than ever, given the asset class, originator eligibility, advance rate and rating restrictions of these schemes.
Despite the likely continuation of central bank liquidity schemes and government support, the European market has evolved over the years from a bank-driven market to one driven by specialty finance and fintech issuers. These categories have begun to account for increasing proportions of overall origination volumes, and usually have no direct access to central bank support.
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About the survey:
The data is based on a market study conducted by GlobalCapital during August and September 2020. A total of 180 responses were collected across 31 countries in Europe and North America, spanning mid and senior level executive positions and comprised of four core stakeholder types: issuer/sponsor, service providers, investors, underwriters/arrangers/bookrunners/structurers and other.
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