to the end-of-year edition of the PCS Newsletter, keeping stakeholders up to date about market and regulatory developments in the world of STS securitisation and beyond.
As ever, we very much welcome any feedback on this newsletter.
First, we will comment on the European market more generally before turning our attention to the STS market more specifically.
It is looking like 2024 will close with publicly placed European securitisations hitting €140bn, a post-GFC high. This is a big leap from last year’s €105bn and came as a surprise to most. PCS, like many commentators, had thought this year would see decent but unspectacular growth and so an additional €35bn was unexpected. But, scratching the surface, the headline number may be overstating progress. This year saw a considerable number of refinancings. This means net growth was less stellar. This would also explain how, with so much apparent additional supply, senior spreads widened so little, and juniors came in.
The three drivers of growth were, in order:
To note though, in the RMBS category, prime mortgage RMBS did not make up any ground versus buy-to-let and non-conforming (prime added €6bn going from €12bn to €18bn). By the end of 2024 non-prime was still 1.5x the issuance volume of prime RMBS (€18bn vs €25.5bn).
Geographically, the growth in RMBS was mainly in the UK which saw the highest volume of issuance since 2011. Elsewhere, RMBS issuance was broadly flat.
The growth in CLOs was impressive if not entirely surprising. The growth in consumer ABS was unexpected though.
Autos, after a few years of competing with RMBS for the top slot in traditional securitisations, badly let that prize slip from their grasp as issuance shrank from €25bn to €23bn or half of RMBS’ tally.
We deal with placed securitisations since the retained sector is not part, in any meaningful way, of the securitisation market. Indeed, asking policymakers and regulators to remove retained securitisations from the numbers when commenting on the European securitisation market is a long-standing PCS request. However, it is interesting to note that the volume of retained issuance in 2024 halved from 2023. This is likely a sign of the normalisation of central bank monetary policy.
Synthetic SRT transactions are harder to track, being invariably private. However, it would seem that issuance in that asset type was flat to lower in 2024. If that is indeed the case, it is a little surprising bearing in mind the coming into force of the Basel output floor rules in January 2025.
| Asset class | January, 5 2024 | November, 29 2024 |
| Dutch AAA RMBS | 39bp | 45bp |
| Spanish AAA RMBS | 68bp | 73bp |
| UK AAA RMBS | 44bp | 52bp |
| AAA EU Autos | 37bp | 46bp |
| A EU Autos | 120bp | 95bp |
| A UK BTL RMBS | 245bp | 135bp |
Commentary
This admittedly fairly random selection of secondary spreads shows some visible but hardly earthshattering widening at the top end and meaningful tightening further down the credit curve.
In fact, the slight surprise is maybe how little senior spread widened considering the much greater supply. But this does make more sense when one takes into account the high volume of refinancings and therefore the more subdued growth in net supply. The tightening further down the capital stack compared to the widening at the top end also illustrates the capacity constraints from senior investors. This was also reflected throughout the year with cover level for senior tranches in primary staying at 1x to 1.2x for most of the year (improving to 1.5x to 1.7x towards the end) compared to 5x to 7x (hitting up to 10x) for the juniors.
Senior investor numbers remain the limiting factor to the growth of the true sale term securitisation market.
Please note that, differently from most year-end commentaries, we have focused on number of deals rather than volume of issuance. The reason for this is not that numbers have a greater explanatory power than volume but rather that they have a different and complementary explanatory power.
Many research firms and other commentators provide the volume numbers, and it seemed of limited value to just do the same. By focusing on numbers, PCS hopes to shed not a better light but a different light on the year.
All numbers are as of 12th December 2023. Comparisons with 2023 are, whenever possible, to the same date ie 12th December 2023 but sometimes, when the data is not available, we have compared to the full year 2023. This is made explicit in the text. The numbers are extracted from ESMA’s and the FCA's STS databases and follow the definitions provided by originators in their STS notifications to ESMA or the FCA.
(Hover over the sections for legends)
Representing 35% of the term market by volume, the STS market in 2024 showed no improvement on its 37% share last year.
In sheer numbers of transactions, 2024 looks like a very good year. The year saw 246 transactions notified as STS compared to 198 in 2023 (full year). This follows the course of the market as a whole (as one would expect from STS maintaining is overall share of the total market.)
In the core market for which STS was originally created – namely the true sale traditional placed securitisations – the growth followed suit and was even a little better than for STS overall. This year 147 term transactions were notified, of which 102 were publicly placed. This compares to 126 by this time last year with 84 public. So, the growth of publicly placed transactions, at just under 25%, more than matched the overall growth in all STS issuances (17%).
Also, for regulators who have expressed the fear that an increasing number of term transactions would become private, the good news is that this is most definitely not the case. Representing 84 out of 126 term STS transactions at this time last year (66%), public deals were 102 out of 147 (70%) in 2024.
Synthetic transactions (listed as on-balance-sheet or OBS deals by ESMA) were flat (25 in 2024 so far vs 26 by this time last year).
The growth in numbers was found in ABCP transactions which went from 24 to 73, reversing a declining trend (52 in 22, 77 in 21). One should, of course, be careful with ABCP numbers since the rules require, in the case of transactions with multiple ABCP conduits participating, that each conduit notify STS separately. These transactions being private, no data is available on individual transactions. So, it becomes impossible to determine how much of any growth is the result of more transactions and how much is the result of an increase in the number of European conduits participating in each transaction.
Geographically, the spread of public STS transactions remains extremely stable with the exception of the relative growth of the UK.
| Jurisdiction | 2024` | 2023 | Difference |
| UK | 26 | 20 | +6 |
| Germany | 20 | 18 | +2 |
| France | 14 | 12 | +2 |
| Netherlands | 12 | 10 | +2 |
| Italy | 10 | 11 | - 1 |
| Spain | 8 | 7 | +1 |
| Ireland | 5 | 6 | -1 |
| Austria | 2 | 0 | +2 |
| Portugal | 2 | 2 | 0 |
| Finland | 2 | 2 | 0 |
(Sharp eyes will have noted that the 2023 sums add up to 88 rather than 82 quoted above. This is because the 2023 numbers in the table are for the full year rather than the 82 which was the number up to the same date as the 2024 numbers).
“Sing, o Goddess, of the anger of Donald, son of Fred/Accursed, which brought countless pains on the sons of Europa”
A Homeric (mis)quote seems apposite for anyone seeking to go into Cassandra’s line of work in these troubled times.
What will 2025 bring to Europe’s securitisation market and particularly its STS segment?
All other things being equal, we anticipate (if that is the right word, although “guess with wild abandon” may be a better term) issuance to be a little up from 2024 at maybe around €150-160bn and STS remaining around 35%-40% of that total. We would see auto’s recovering a little but not much and RMBS increasing a little. We would also expect growth in synthetics transactions as Basel 3 final implementation bites. How much of the synthetic growth will be in STS is difficult to gauge as it is dependent of the behaviour of insurance companies and their pricing of unfunded (and therefore non-STS) transactions.
But – and it is a very substantial “but” – the words “all other things being equal” at the beginning of the preceding paragraph are doing an enormous amount of heavy lifting in that sentence.
Amongst the very long list of “things” that may not be “equal” and impact our predictions here is a small selection:
Markets are always, of course, somewhat unpredictable. But never since the GFC has the spectrum of plausible outcomes ranged so wide even when only considering the "known unknowns". The simple truth is no-one can honestly say they have decent visibility even in the shortest of terms. So, it's time to strap yourself in for the ride as it could be wild.
With the consultation that closed on December 4th, the European Commission began a process which, with some luck, should result in a reform of the existing EU regulatory regime. However, what does that mean in practice? How do such processes unfold? Who gets to decide the final shape and extent of such regulatory reforms and what are the steps that take us from where we are today to a hopefully better calibrated regulatory framework for European securitisation?
To assist, we thought we would present the likely course of the reforms as a play in three acts.
Legislative and regulatory changes in the EU involve the following characters:
The Commission - in its incarnation as DG FISMA, the directorate general in charge of finance. The Commission is the executive arm of the EU. Directorate Generals are its ministries. As such they propose draft legislation to the Council and the Parliament. DG FISMA will be in charge therefore of writing the first draft of any law modifying securitisation's regulatory regime. It has just acquired a new head, the Portuguese Commissioner (think "Minister"), Maria Luis Albuquerque. Former national minister of finance, she is highly qualified to head DG FISMA as she has a strong understanding of financial markets. Bear in mind that, like any other executive branch, the Commission is not a regulatory body but a political institution.
The Parliament - directly elected and, the clue is in the name, Europe's parliament. Parliament is one of the two "co-legislators". Made up of 720 directly elected members, it discusses, amends and ultimately votes on European legislation. In practice, like national parliaments, it acts through committees with special areas of expertise. The committee that will pour over any Commission proposal on securitisation will be the Economic and Monetary Affairs Committee or "ECON" for those in the know. Newly elected in June 2024, this Parliament contains some old war horses familiar with securitisation. But many key MEPs with knowledge of the securitisation file retired this time round and so new faces will need to take over the baton. Parliament, like national legislative houses, is organised in and operates through political parties that enter into alliances.
The Council - is the name given to the member states acting here as "co-legislator". As the name implies, for a text to become European law, it must be approved by both the Parliament and the Council. Effectively, the EU operates as a classic bi-cameral legislation where two houses of equal weight must vote new laws: Council and Parliament. In the case of securitisation legislation, the Council is made up of the 27 ministries of finance of the member states. The Council usually operates through consensus building and ferocious horse-trading.
The Regulators - in our case, the three European Supervisory Authorities (ESAs) which are the EBA for banks, ESMA for securities markets and EIOPA for insurance companies. They do not draft legislative proposals. Together with the ECB, they will be consulted by the Commission on proposals and their views sought on technical matters. But the Commission is not required to follow their lead when drafting even though it pays considerable deference to their technical expertise.
The Stakeholders - a catch all category for all actors with an interest in the subject at hand. In the case of securitisation, it will include all market participants. But stakeholders also include think-tanks, associations of concerned parties including citizens or participants in other markets that may be affected by changes to the securitisation market and various other organisations that feel they have a stake. Their views are sought, for example via consultations and they often express themselves through trade associations representing a section of the market.
The play opens before a backdrop of serious concern bordering on panic. Shadowy shapes prowl the back of the stage emitting threatening sounds. Their names are Trump, Putin, and Xi. The Chorus sings of the declining wealth and power of Europa, falling behind its siblings America and China and of the fights amongst its children that threaten to tear its house apart. All is not well, to say the least.
This act is halfway done. Having heard from wise men and women (Draghi, Letta, Donoghoe, Largarde and others) that Europa needed to revive and grow its securitisation market. The Commission sought the views of the regulators and stakeholders as to what could be done to improve the situation. Having listened, the Commission distilled those views into a series of questions which became the consultation whose deadline was December 4th. Many stakeholders and regulators will have filed responses. (For PCS's see here). DG FISMA will now go through the answers to the 167 questions and work out what they are being told about what is or is not working, what should or should not be changed and, technically, how change can be effected.
Following this work, the Commission will almost certainly then reach out to stakeholders and regulators with further questions. It will also sound out Parliament and the Council to try to divine what is politically feasible. No executive wants to present a legislative proposal which, for political reasons, is dead-on-arrival. The Commission has openly stated that it wishes the first Act to end by August 2025. So expect the first quarter of 2025 to be an intense time of discussion and the second quarter one when proposals are floated discreetly to gauge reactions.
Having quizzed the experts, floated trial balloons, worked out intended and unintended consequences and consulted the entrails to determine the co-legislators' appetite for change, the Commission will then - if the decision is to proceed with some reforms - write a legislative proposal in the form of a draft regulation. As mentioned, the Commission has said it wanted this draft to hit the desks of the co-legislators by the summer of 2025. Whilst very supportive of this ambitious timetable, many experienced theatre-goers in the audience did comment that Act I did seem very short and wonder if its length may not increase on the night.
Once the Parliament and the Council have their draft, they each get to do their thing. ECON, for the Parliament, will appoint a "rapporteur" whose job it will be to shepherd through the law. Each legislative proposal gets its rapporteur. The rapporteur may come from any political family. The parties who do not provide the rapporteur will each provide a "shadow rapporteur". Together the rapporteur and shadow rapporteurs will get together to move the file along. Amendments will be proposed, bits added and other bits taken out. At the end of this process, the Parliament's version of the draft law will emerge.
In the Council, a similar process will take place, save that here the shepherding is done by the member state that hold the six month rotating presidency. The Council will make its amendments, subtractions and additions and produce its version of the draft law. At the start of this year, the presidency will pass to Poland. If the Commission meets its self-imposed deadline of August 2025 to lay down a draft regulation, this would mean that it will be up to Denmark, the next presidency, to do most of the shepherding, passing the torch to Cyprus at the end of 2025.
How long the second act takes is impossible to tell. There is no fixed deadline and each co-legislator does its thing at its own pace. without coordinating with the other. Some plays have been known never to get to the end of Act II, going on interminably until the audience loses the will to live and exits the theatre. When what became the Securitisation Regulation had its second act, the Council took a couple of months to agree its version of the text, the Parliament a couple of years.
In Act III we now have two draft laws representing the views of Parliament and those of the Council. Then begins the mysterious process known as the trilogue. The Commission, ECON and Council gather and seek to reconcile the Parliament's draft text and the Council's. Deals are made and unmade, things are traded, hands are wrung, voices sometimes raised, hair often torn out.
But, if the Gods of Politics are smiling, out of trilogue emerges the compromise text all can agree on. That text is then sent to the full Parliament and Council to be formally voted. (It is constitutionally possible for the full Parliament or Council to vote down the agreed trilogue text but that is very rare indeed and usually indicates something has changed quite dramatically in the political weather).
Like the length of Act II, there is no telling how long the audience will need to stay in its seats for Act III.
The new law is published in the official journal, a new day is born and a new securitisation regime is almost in place. The audience will still have to wait for the date the new regulation comes into force - which could be 12 months or more depending on what the law contains. Also, few laws are created, Athena-like, fully formed and armoured. Before they can become operative, secondary legislation needs to be passed, usually drafted by Regulators but determined by the Commission. And that is a whole other play...
We would like to take this opportunity to thank our readers and other stakeholders for their support throughout 2024, as well as convey our season's greetings and best wishes for the new year.
So, from Amsterdam, London, Paris, Milan, Munich, Poznan and Warsaw the Outreach Team and the Analytical Team from PCS send you this season’s greetings and wish you a happy, prosperous, and healthy 2025.
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