June 2023 Newsletter
Welcome to this pre-Barcelona conference edition of the STS Newsletter by PCS, keeping stakeholders up to date about market and regulatory developments in the world of STS.
In this edition, we review the final text of the EU Green Bond Standard Regulation and seek to discern what it means for green securitisation.
We also explore a question that is often asked of PCS: "When does an amendment to an existing transaction that has been notified STS require a new notification to ESMA?".
In our regular features, we share updated data on the STS securitisation market and, in the people section, we present Lauren Shirley, the newest member of the Outreach Team.
And as usual, in “news you may have missed”, short bullet points draw attention to events that may have flown under the radar in the last few months.
As ever, we very much welcome any feedback.
EU Green Bond Standard Regulation.
Where does it leave green securitisation?
The final agreed text of the proposed EU Green Bond Standard Regulation has been published. (You may find it here). What does it hold for securitisation?
The EU GBS
The EU GBS is a proposed green designation for bonds. It is voluntary. The regulation contains no prohibition on marketing as “green” or “sustainable” a bond which does not meet the requirements of the EU GBS and so far, no such prohibition is being proposed. The EU GBS is a designation that can but need not be chosen by an issuer seeking to tap the market for green investments.
Secondly, and differently from the STS standard for example, the use of the EU GBS designation is not limited to EU issuance. UK, US, Australian, Chinese bonds, etc,,, can be marketed in the EU with a EU GBS label.
Skipping over the details – and, as with all things green in the EU, there are many, many details – the essence of the EU GBS is two-fold: first, use of proceeds and secondly, external independent verification.
To meet the EU GBS standard, the proceeds of the bond must be used for green purposes. “Green purposes” are basically defined as those complying with the EU Taxonomy.
Also, to meet the EU GBS standard, the terms under which the proceeds will be used for taxonomy compliant purposes must be the subject of a verification by a new type of regulated verification agent. The EU GBS text contains extensive rules for the regulation of these agents by the European Securities and Markets Authority (ESMA).
What about securitisation?
First, securitisation is not only mentioned in the final text but has fairly extensive and specific rules attached to it. This means that there can be no doubt that a securitisation can be awarded EU GBS designation.
Secondly, the big question regarding securitisations under the EU GBS has been answered definitively. Should an EU green securitisation be a securitisation of green assets or a securitisation whose proceeds go to fund green purposes? PCS has written about this extensively and, for reasons this is not the place to rehearse, emphatically supported the latter approach. We are therefore happy to report that the EU GBS final text now makes it clear that a securitisation will be eligible for EU GBS status based on the use made by the originator of the proceeds generated by the securitisation irrespective of the "greeness" of the assets. This aligns the securitisation rules with those for all other bonds thus maintaining a level playing field.
Thirdly, and somewhat unfortunately, the co-legislators have seen fit to add specific and additional burdens on securitisations seeking to be EU GBS compliant. First, a limited set of financial assets connected to fossil fuels cannot be securitised under the EU GBS banner. (The list is in article 13(c)). Secondly, notwithstanding that the “greenness” of a securitisation is based on the use of its proceeds, the co-legislators have mandated additional disclosure as to the sustainability of the securitised assets, to the extent that the originator has this information.
PCS is opposed in principle to such additional rules falling solely on securitisations as, in our opinion, they unfairly tilt the playing field. In practice though, we suspect that they will not be a material impediment to the growth of an EU GBS securitisation market since (a) there are very few, in any, securitisations of fossil fuel receivables and (b) disclosure is only required in cases where the originator actually has the information.
In a provision that is bound to disappoint some market participants though, synthetic securitisations are explicitly prohibited from achieving the EU GBS designation.
So what next?
Now that the text has been agreed by the Parliament and Council, it will proceed to a vote. Although nothing is impossible, it is exceedingly unlikely that this will not pass on the text that has been published. This should occur sometime in the next few weeks. So, the EU GBS will come into force, in all likelihood, around mid-2023. But it will not be applicable, and so EU GBS bonds could not be issued, until 12 months later – by mid-2024.
However, we note that EU GBS bonds cannot be issued unless they are verified by an ESMA authorised verification agent. But the text provides ESMA with 24 months to come up with drafts of key provisions without which it is not possible to authorise green verification agents. Providing an additional 3 months from ESMA’s presentation of these drafts to the draft becoming a level 2 law, then time for aspiring verification agents to digest the requirements and apply – at the very least, another 3 months – and we could easily not see a fully authorised verification agent for 30 months. The rules do allow aspiring verification agents to operate without ESMA authorisation for 18 months from the EU GBS regulation becoming applicable (ie 12 months after coming into force). But they must do this on a "best efforts" basis of complying with the law. Whether they are volunteers for this somewhat nebulous obligation and liability remains unanswered.
So, unless ESMA accelerates their drafting, we could possibly wait until early-to-mid 2026 for the first EU GBS.
Finally, some question marks hang over the whole endeavour: meeting the EU GBS standard is onerous. It requires amongst other things, wading through the complexities of the taxonomy, getting a verification, reporting via mandatory templates and becoming liable to sanctions. But it is currently a voluntary standard. Will issuers seek it or will they market green bonds on other standards already accepted by investors? Will investors insist on this standard and the EU taxonomy, or elect to craft their own? Will there be volunteers to become verification agents?
This, in turn, leads one to ask how long the EU institutions will leave the EU GBS as a truly voluntary standard?
For securitisation (excepting synthetics), although the EU GBS final text is not perfect, it is as good as could be hoped for. It provides a broadly level playing field that should allow securitisations to find their place in the ecology of EU GBS issuance and fully play their role in financing the transition of the European economy to a sustainable structure.
For green issuance though, there is very little visibility both as to timing and the shape of the EU GBS path forward.
Our market data is now interactive. You can select any of the 8 tabs (STS Type, asset class, .... ) and you can enable or disable any of the time series. Hoover the mouse over any of the number to get more info.
- 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.
News you may have missed
GlobalCapital Lifetime Achievement Award
PCS was honoured when Ian Bell, who has headed the institution since its inception in 2012, was given a Lifetime Achievement Award at the GlobalCapital Securitization 2023 Awards on May 4th.
EBA Consultation on synthetics
The EBA launched a consultation on its proposed guidelines for synthetic STS issuance. This is a very detailed set of guidelines and we strongly encourage those with an interest in synthetics (STS or otherwise) to read the paper and respond by the deadline of July 7th. If your interest is only in true sale, a quick perusal may not go amiss, since the EBA are taking the opportunity to add to and modify some of this existing true sale guidelines. PCS is drafting its response as we write and will always welcome the views of market participants so do not hesitate to contact us to discuss.
PCS Symposia Series 2
After the success of its first symposia series – over 1,100 attendees in 12 cities – PCS has begun its second of what we intend to be an annual set of events, with its very well received Warsaw Symposium on 20th May. For the full list of upcoming events, click here.
Australian Securitisation Forum
Our friends from the Australian Securitisation Forum will visit London on June 12th (on their way to Barcelona) and will be hosting a presentation. If you have an interest in Australian securitisation or are just curious, sign up here.
Draft RTS on sustainability disclosures
the Joint-Committee of the ESA's published the final draft of the RTS on sustainable disclosure (here). This draft, extremely likely to become law, sets out the mandatory format of the optional sustainability disclosures to be made by originators of STS securitisations.
PCS is proud to have reached our 400th STS verification. We want to thank all the originators and arrangers who have mandated us since we started in 2019, all the investors whose trust underpins all we do and all the lawyers with whom we have engaged, sparred, and argued but always with the shared goal of “getting it right”. Thank you!
PCS is a compact organisation with a total staff of 15.
In each newsletter we will introduce one of them so that people get to know us. This time, meet Lauren Shirley, Events Manager and newest member of the Outreach Team.
Lauren is an accomplished marketing professional specialising in corporate conferences and networking events. She joined PCS in January of 2023 in order to manage our European Symposia series. Within 9 business days of her start date, Lauren already had 2 of our symposia under her belt. She now has 8 and is in the depths of organising a further 12 events for our newly launched series 2.
Before falling into the world of corporate events in 2020, Lauren was a seasoned Jewel House and White Tower warden at the Tower of London, her duties ranged from security and operations, to tours and private events.
Lauren is a keen host who enjoys spending time with family and friends over a glass of wine. She is keeping her event management skills honed outside of working hours as a blushing bride to be, planning her upcoming 2024 spring wedding.
For any questions or comments on this STS Newsletter you can contact the PCS staff.
|Ian Bell||CEO||[email protected]|
|Mark Lewis||Head of the Analytical Team||[email protected]|
|Martina Spaeth||Member of the Analytical Team||[email protected]|
|Rob Leach||Member of the Analytical Team||[email protected]|
|Fazel Ahmed||Member of the Analytical Team||[email protected]|
|Daniele Vella||Member of the Analytical Team||[email protected]|
|Rob Koning||Member of the Outreach Team||[email protected]|
|Harry Noutsos||Member of the Outreach Team||[email protected]|
|Ashley Hofmann||Member of the Outreach Team||[email protected]|
|Lauren Shirley||Events Manager||[email protected]|