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• The numbers show that this first half of the year has been good for true sale securitisations with 45 issues.  Last year saw the final count come in at 100, but one should bear in mind that European securitisations are usually backloaded with more than 60% of the transactions coming in the second half.
• Of course, pessimists would point out that last year also started very well for true sale securitisations (ending the full year at 100) before very choppy spread movements and rate concerns dramatically turned the spigot down in the second half with originators postponing or cancelling deals.  Optimists, for their part, will point out that the strong decline of true sale issuance in 2H2022 was the product of unpredictable macro-events which have no reason to repeat in 2023.
• Placed issuance in true sale securitisation last year ended at around €88 bn.  This year, on current trends, we expect around €120bn of placed true sale, assuming no unexpected events.  We leave it to your general life outlook as to whether you expect the unexpected…
• The driver of the growth in STS true sale issuance is the delayed adaptation of larger banks to the ending of central bank QE.   As free central bank money had to be returned, banks returned to more traditional forms of funding.  Although covered bonds remained the favoured funding channel, large and strategic banks decided not to have all their eggs in the same covered basket and revived securitisation programs that had been placed in suspended animation.  This was very noticeable in the UK and with RMBS.  This explains the larger share of UK deals in the STS mix. Originally, this development had been anticipated for 2022 but… unexpected events. We expect this continued return of UK banks to the STS true sale market to continue in the second half.
• Will EU banks also revive their true sale programs?  Our educated guess is that they will but later.  Let us not forget that the ECB’s free TLTRO cash fell to be repaid later than the BoE’s. So we are anticipating more EU deals in the second half of the year, maybe the first half of next.
• The other notable fact emerging from the data is the low number of synthetic STS transactions.  So far, we have only seen 10 notifications to ESMA, compared to 41 for the full 2022.  STS synthetics do tend to be issued more in the second half and so the imbalance is not as meaningful than the bare numbers suggest.  Also, 10 is statistically a low number so limited statistical conclusions can be drawn from it. But still, one would have expected more.  Because synthetic transactions are private, it is difficult to quantify how much of the decline is a decline in overall synthetic securitisations and how much a shift in the balance between STS and non-STS.
• However, conversations around the market draw attention to the fact that insurance companies have been very active in writing credit protection in the form of insurance policies rather than guarantees or swaps.  But insurance companies writing insurance contracts are not in the habit of cash collateralising their obligations – ask next time you renew your house contents insurance.  Unfortunately, for reasons that have never been in our view adequately explained, STS requires cash collateral.  So, these insurance synthetics chose not to go the STS route.  This would appear to be another unintended consequence of an STS synthetic regime that was trying to do too many things with the same rule set.

Remember, as always, that PCS’ data is by deal rather than, as many research houses do, by volume.  This is not that this is a better way of presenting the data but it is a different way of presenting the data which, hopefully, reveals additional information.

When is new "new" and when is it just the same old stuff?

One question PCS has been asked not unfrequently concerns amendments to transactions that have already been notified STS. Does a new STS notification and verification need to be done following the amendment? Can PCS confirm the changes will not have a negative impact on the existing STS notification or will the now amended securitisation have to be notified (and verified) anew?

There is no simple answer to or test for this problem. There is, however, an approach which should yield the answer or, at the very least, get you much closer to one.

To get some warnings out of the way first, we would stress that this issue is one of legal interpretation and PCS is not a law firm. Therefore, nothing here is legal advice and a chat with your lawyers is highly recommended should you face this question.

That said, this is a question we have encountered a number of times and about which we have had many chats with lawyers. The starting point is the Securitisation Regulation. More specifically, article 18 which reads:

“Originators, sponsors and SSPEs may use the designation ‘STS’ …for their securitisation, only where: (a) the securitisation meets all the requirements of [STS] and ESMA has been notified…; and (b) the securitisation is included in the [ESMA] list.”

So, what is “the securitisation” that needs to be notified and included in the list? Turning to the definition in article 2 yields little of use: “‘securitisation’ means a transaction or scheme, whereby…” tranched investors take asset risk.

In our view, the simple question that must be answered (albeit one that rarely yields a simple answer) is: "following the amendments to the proposed transaction, do we have a new transaction or scheme or merely an amended existing “securitisation”?”

If one has a “new transaction or scheme”, it seems uncontroversial that this new securitisation will need to be notified as a such.

Although less immediately obvious, the wording of the Securitisation Regulation and the intent of the co-legislators does not suggest that any amendment to a transaction, however trivial, should result in a new notification. (Please note that we are making no comment here on the obligations to file amendments to the original ESMA notification if an amendment invalidates an entry in the original notification – that is a different issue).

Once that conclusion is reached though, the Securitisation Regulation ceases to provide any useful pointers as to when amendments are such as to create a “new securitisation”. For this, one must therefore turn to the laws that governs securities generally; specifically, the laws of the jurisdiction governing the securities issued under the securitisation or, in the case of a synthetic securitisation, the contract that creates the credit protection.

The question that must be answered becomes: “Under the laws governing securities in my jurisdiction, are the proposed amendments to the existing securities of such a nature as to terminate those existing securities and create a new set of securities?” For synthetics or loans (such as warehouses), replace the word "securities" by "contract" or "financing".

Sometimes one is fortunate and local law will have fairly clear rules as to the types of amendments that are deemed to create new securities.

Often though, there is little by way of explicit rules. Then one must start to look at other ancillary aspects of the laws of obligations. For example, if one had securities secured over assets by way of charge and such charge needed to be registered, would amendments like the ones proposed be such as to require such a charge to be re-registered? Under insolvency law, if there are – as they almost always are – periods prior to insolvency during which certain transactions can be set aside (“hardening periods”), would the amendments be such as to trigger a re-set of the clock on those periods? If the issuance of certain types of securities in your jurisdiction has tax consequences, would those consequences be triggered by entering into this type of amendments? Are there other aspects of the local law of securities or contracts that help determine when issuance of new securities or the conclusion of a new contract has taken place?

There is no one-size fits all answer, but lawyers should be able to determine whether “new securities” or a "new contracts" emerge from the proposed amendments. And, in this context, “new securities” or "new contracts" means a “new securitisation”, and a new notification.

(For the avoidance of doubt, we are not writing here of new issuance out of an unamended scheme that contemplated from the beginning the issue of additional securities. You clearly do not have a “new securitisation” whenever you roll over ABCP, for example).

Hopefully, even if no simple and straightforward answer can be provided, this article has helped clarify the approach to this problem.

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Contact information

For any questions or comments on this STS Newsletter you can contact the PCS staff.