DBRS on European ABS
Quarterly European Securitisation Issuance Report Q2 2022
The European securitisation markets started strong in 2022, with the strongest first quarter after the global financial crisis for issuance. However, the issuance momentum was short lived because of Russia's invasion of Ukraine, alongside ongoing concerns around rising inflation and tightening monetary policies. The total market securitisation issuance amount was EUR 37.4 billion in Q2 2022, around 44% lower than Q1 2022 this year and 1.9% lower than Q2 2021. Similar to trends observed in Q1 2022, issuance was skewed toward retained transactions, which totalled EUR 19.2 billion or 51% in the second quarter. The slight overweight of retained securitisation issuance could be attributed to dampened investor appetite in light of the aforementioned factors.
The European distributed issuance in Q2 2022 was relatively weak at EUR 18.2 billion (including CLOs), representing a 40% drop versus EUR 30.2 billion in Q1 2022. However, the distributed volume in Q2 2022 was still 70% higher than EUR 10.7 billion in Q2 2020, which can be attributed to the Coronavirus Disease (COVID-19) pandemic.
In Q2 2022, the cumulative monthly numbers from April to June surpassed levels the same periods in 2020 and 2021. The 2022 level was well ahead of 2020 and 2021 levels in April, but only slightly ahead of 2020 and 2021 levels in June.
A breakdown of total issuance in Q2 2022 by sector reveals a different picture than in Q2 2021, mainly because of the following changes:
Collateralised loan obligations (CLOs) made up 22% of deal volume in Q2 2022, which increased by 2% compared with Q2 2021, despite recent market volatility.
Overall asset-backed securities (ABS) volumes declined. Auto ABS as a percentage of issuance decreased to 17% in Q2 2022 from 21% in Q2 2021 and consumer ABS fell to 10% in Q2 2022 from 27% in Q2 2021.
There was a 20% increase in residential mortgage-backed security (RMBS) contribution, climbing to 46% in Q2 2022 compared with 26% in Q2 2021.
Commercial mortgage-backed securities (CMBS) decreased in contribution to 2% in Q2 2022 versus 3% in Q2 2021. There were two CMBS transactions that totalled EUR 661 billion in Q2 2022 while there were three CMBS transactions in Q1 2022 that totalled EUR 789 billion.
Q2 2022 had a more concentrated distribution across sectors compared with Q2 2021, which saw relatively broad distribution. Prime RMBS and CLOs together constituted half of the issuance volumes, a higher percentage than in Q2 2021. Consumer loans represented 25.3% in Q2 2021 and declined to 7.4% in Q2 2022. Auto ABS and buy-to-let (BTL) RMBS remained at around the same level in Q2 2022 as in Q2 2021.
The UK remained a dominant region for European securitisation issuance with annualised Q2 2022 numbers making up a considerable portion of issuance. Due to large retained transactions from France in Q1 2022, the annualised projected figures for France seem high and we expect volumes to remain mostly in line with their historic average this year. Crossborder transactions also composed a substantial portion of transactions. Spain's return to the market continued in Q2 2022, representing a growing proportion of transactions while Italy, Ireland, and the Netherlands lagged behind. The annualised numbers will normalise with more transactions, so we expect the numbers to change in the future.
The introduction of simple, transparent, and standardised (STS) securitisations in 2019 has been a key regulation to support securitisation issuance in Europe. STS transactions made up 25.3% of transactions year to date (YTD) in 2022 versus over 40% in the full-year 2021. This can be attributed to the decline in prime RMBS transactions issued with STS verification YTD.
In Q2 2022, prime RMBS issuance reduced while nonconforming and BTL RMBS increased compared with Q2 2021. Consumer ABS demonstrated steady but decreased issuance compared with Q2 2021, but was still higher than in Q2 2020. CMBS contributed less to the issuance volume in Q2 2022 than Q2 2021, but still exhibited a better performance than in Q2 2020, during which there were no CMBS issuances. Credit card loans constituted four times more issuance volumes than in previous second quarters. In general, the distribution of collateral types in Q2 2022 remained mostly the same as in Q2 2021. Although the issuance volumes dropped compared with Q2 2021, they were still stronger than in Q2 2020 but remained lower than in Q1 2022.
All in all, although issuance momentum was robust in the beginning of the year following the strong issuance momentum from the slowdown of the coronavirus pandemic, the current securitisation market has been affected by geopolitical uncertainty associated with Russia's invasion of Ukraine, tightening monetary policy, and the inflationary environment. In the near term, rising inflation and rising interest rate continue to be a challenge for consumers and corporates, which is also reflected in the Q2 issuance volumes as investors await a better window of opportunity in the markets.
In light of tightening monetary policies, cost-of-living crises, inflationary pressures, and a general slowdown in issuance volumes in the European securitisation market, we have now revised our end-of-year issuance forecast downward. We expect issuance to be EUR 180 billion to EUR 190 billion in 2022, 45% to 50% of which will be distributed issuance.
Link to full report
https://www.dbrsmorningstar.com/research/399839