6/23/2025
There’s often a bit of post-Barcelona lethargy in the first week back from the conference.
I certainly didn’t help my own recovery by putting an offer in for a house and biting off more than I could chew in the latest Freshly Squeezed Podcast (which you can listen to here).
The hope now is that we’re all back at our desks and well-rested, ready for a final push before Summer holidays begin in earnest.
However, this week could mark the start of a tumultuous few months ahead. The US launched targeted strikes at Iranian nuclear facilities over the weekend, and while the market response has so far been muted, the unfolding geopolitical situation is anything but clear.
As a friend said to me today, it wouldn’t be surprising if primary supply continued on as normal in European ABS but some issuers may opt to wait a little longer in search of geopolitical clarity. But as I’ve written ad nauseam in this newsletter, it’s surprising how resilient credit markets have been in recent months, so don’t count out a “keep calm and carry on” response.
Nevertheless, how the market responds in the coming days could define the outlook for the rest of the year.
One deal priced last week, Nationwide’s Silverstone Master Issuer Series 2024-1’s £500m Class 1As. They landed at a discount margin of 47bps over Sonia, which is level with Virgin Money (Clydesdale Bank)’s £300m Lanark Master Issuer – the tightest prints for UK Prime RMBS of the year to date.
It’s yet another via the “Stock and Drop” method, whereby a £1.5bn transaction is first launched on a fully retained basis (the “stock”) before periodically being re-marketed and offered to investors at an opportune moment (the “drop”).
A further sign that the market is heading for the aforementioned keep calm response to geopolitical issues was the marketing of BMW’s latest French Auto ABS, Bavarian Sky French Auto Leases 5 on Monday morning.
Just the AAA tranche is offered, and the deal size is not yet confirmed but the provisional pool is static and totals €467m.
Elsewhere, last week also saw a UK Prime RMBS debut from Newcastle Building Society, the lovingly named, Hadrian Funding 2025-1. IPTs are now out on the single AAA tranche offered. That’s at mid-50bps over Sonia. Howay the lads!
Specialist later life lender LiveMore is also out with its second edition of Exmoor Funding. It’s not a reverse mortgage, just to be clear for those interested in ERMs. (If you are interested in ERMs – check out ARC Ratings’ methodology, here).
And finally, Bank of America’s CMBS, the £267m Taurus 2025-3 UK is also in marketing. According to Concept ABS, the portfolio primarily consists of single-let mid to big-box logistics and industrial assets. Expected pricing is this week.
Meanwhile, last Tuesday also saw the publication of the European Commission’s proposals to reform Securitization.
Much of the proposals were already leaked a couple of weeks ago, but the Commission’s addition of a consultation on targeted amendments to the Liquidity Coverage Ratio (LCR) rules was unexpectedly also published.
So, the overall reaction is that the proposals are as AFME said in a statement “a step in the right direction”. However, there are a number of issues which the market is taking umbrage with, particularly on the Securitization Regulation (SECR), as opposed to the prudential framework.
One is the introduction of heavier sanctions on investors who do not meet due diligence obligations. This proposal has particularly irked market participants. It was mentioned in AFME’s statement and by numerous panelists at Global ABS. Under the proposals, National
Competent Authorities (NCAs) would have the power to fine institutional investors who did not fully meet their obligations on due diligence, under Article 5. The fines could be a percentage of the investor’s global turnover. AFME has called it “disproportionate” and says it will discourage new investors from entering the market.
AFME is also concerned about broadening the definition of public securitization and requiring private transactions to report to EU securitization repositories. For more information, you can read AFME’s statement here.
One interesting point that may have gone under the radar is that the European Banking Authority (EBA) is to lead the securitization sub-committee of the European Supervisory Authorities (ESAs, made up of the EBA, ESMA and EIOPA).
This is significant because it has long been felt that the EBA is perhaps the most sympathetic to securitization reform.
Prudential Framework changes
The big change on the prudential side is that the capital requirement risk-weight floors are set to be replaced by risk-sensitive formulas, which are intended to be more proportional to the risk of the of the underlying pool.
The p-factor is also set to be reduced for senior positions, particularly those that qualify as STS or as the newly proposed “resilient” securitizations.
There are a couple of concerns that are worth highlighting, however. Firstly, the introduction of a new concept in the form of “resilient” securitizations is adding yet more complexity at a time when both the market and policymakers have been talking about simplification. AFME said the costs of complexity should be “countered by appropriate capital benefits impacting a meaningful proportion of the market”.
For more information on that, see my earlier newsletter, here.
LCR Consultation
One of the biggest issues since the EUSR came in has been the LCR treatment. With the consultation out, there’s plenty to consider. There is no move up to Level 2A, but as PCS said in a statement (here), that is not the be-all and end-all for the market.
The proposals suggest some rather material adjustments:
1) It’s no longer just AAA securitizations that are eligible. AAA all the way down to A- is to be allowed.
2) It must still be senior STS tranches, but if you get the “resilient” label, the haircut is reduced from 25%-35% down to 15%, which is what the Level 2A haircuts are.
And 3) There’s also no longer a WAL maximum or asset class restriction.
So, all in – it could have a truly meaningful impact on the market.
Impact on SRT
The proposals of course effect the SRT market, which has been something of a beacon of hope for securitization in recent years.
I saw a note from Alantra with initial thoughts on the proposals and its impact on SRT. On SRT specifically, the bank said: “The reform builds on recent successes with Significant Risk Transfer (SRT) transactions in corporate and SME loan portfolios and seeks to extend these benefits to a broader range of asset classes, thereby supporting balance sheet growth. It aims to increase the capital efficiency of securitisation by reducing the capital requirements for retained senior tranches. It also closes the gap in treatment between the SEC-IRB and SEC-SA approach.”
Alantra also did some “Initial modelling” tests, and said the results were “encouraging”. It estimates that under conservative assumptions, an IRB mortgage portfolio could achieve roughly 65–75% regulatory capital relief through SRT, with a cost of capital as competitive as corporate SRTs.
“This represents a step-change improvement in capital efficiency for low RW assets, made possible by the reform’s RWA reductions on senior tranches,” the note said.
Alantra also provided a handy example of how the changes could impact a transaction. I have highlighted the difference in capital release.
That’s all from me this week. Please do subscribe to the mailing list (here), I’m hoping to send the first mailshots out next week.
And don’t forget to listen to the podcast either (here). It was so painful to edit and create that I honestly don’t know if I’ll ever do a
Barcelona special ever again!
Have a great week
Tom
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