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JUNE

2016

C O M M E N TA RY

European Structured
Finance and Covered
Bond Survey Results

European Structured Finance and Covered Bond Survey Results

DBRS.COM

Contact Information

Table of Contents

Gordon Kerr
Senior Vice President
Global Structured Finance
+44 20 7855 6667
GKerr@dbrs.com

European Structured Finance and Covered Bond Survey Results

Divergent Issuance Picture

Securitisation 3
Covered Bonds

Issuers prefer covered bonds to securitisation; bankers the opposite

Regulation the Main Impediment as Market Looks Forward

New Investors to the Rescue?

U.K. and Alternative Asset Classes Expected to Come to Fore

Brexit Unlikely, but Spreads Will Widen if it Happens

Appendix A: Survey Participant Breakdown

10

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Structured Finance: Covered Bonds

15 June 2016

European Structured Finance and Covered Bond Survey Results

DBRS.COM

European Structured Finance and Covered Bond Survey Results


DBRS has completed the first annual survey of market participants in European structured finance and covered bond markets.
The results of the 2016 survey show both some positive and some concerning information as well as some generally interesting
insights. It should be noted that surveys by their nature are not a representation of definitive answers to the questions posed,
but they do offer insight in aggregate into the attitude and perceptions of the market. Most importantly, they give those of us
involved in research plenty of opportunity to create a lot of pretty graphs. Get ready for loads of pie charts!
In summary:
79% of Portfolio Managers intend to increase their securitisation investment:
64% by a little
14% by a lot
43% of Portfolio Managers cite lack of supply as a reason why they are restricted from purchasing more.
Despite this, expectations are for a muted level of securitisation issuance and a strong level of covered bond issuance supported
by a busy European Central Bank (ECB). On average:
Securitisation participants expect EUR 75 billion in distributed issuance and EUR 195 billion of issuance in total.
Covered bond participants expect EUR 205 billion in benchmark issuance and the ECB to own approximately 35% of
eligible covered bond issuance.

Divergent Issuance Picture


Securitisation
Starting with the important part of the market in the current environment: issuance. Survey participants were asked about their
view on expectations for issuance in 2016, both distributed issuance and total issuance. In terms of distributed issuance, the
majority of survey participants predict a range below EUR 80 billion. In total, 69% predict less than EUR 80 billion, and 84%
believe that issuance will be less than EUR 100 billion. Calculating an average of the scores, expectations are for EUR 75 billion
in 2016 (Figure 1).
Total issuance for the market shows a similarly muted picture for expected issuance in 2016, with 63% expecting less than EUR
200 billion in total issuance and 79% predicting less than EUR 225 billion. Taking an average of the voting, issuance expectations
are for EUR 195 billion in 2016 (Figure 2). Both of these are below DBRSs original expectations and the forecast made at the end
of the year (approximately EUR 85 billion and EUR 230 billion, respectively).
Figure 1: Expectations for Distributed European Securitisation
Issuance in 2016

Figure 2: Expectations for Total European Securitisation


Issuance in 2016

Less than 50-60 billion

60-70 billion

Less than 150 billion

150-175 billion

70-80 billion

80-90 billion

175-200 billion

200-225 billion

90-100 billion

100-110 billion

225-250 billion

250-275 billion

110-120 billion

Over 120 billion

275-300 billion

Over 300 billion

Structured Finance: Covered Bonds

15 June 2016

European Structured Finance and Covered Bond Survey Results

DBRS.COM

Covered Bonds
For covered bonds, there is a much more varied picture of views on expectations for issuance in 2016. The bulk of respondents
chose either between EUR 125 billion and 150 billion and EUR 150 billion and 175 billion (16% and 18%, respectively); conversely,
13% chose over EUR 300 billion (Figure 3). While some of these respondents might have been jealous securitisation market
participants, it is more likely that some are extremely bullish on the prospects for covered bond purchases by the ECB through
its ongoing purchase programme.

Figure 3: Responses to the question:

What are your expectations for TOTAL benchmark European


covered bond issuance in 2016?
100-125 billion

225-250 billion

125-150 billion

250-275 billion

150-175 billion

275-300 billion

175-200 billion

Over 300 billion

200-225 billion

Bullish expectations for ECB purchases and hence covered bond issuance are backed up by responses to the question: What are
your expectations for ECB holdings of eligible covered bond issuance in 2016 through its purchase programmes? The vast majority
of responses (78%) were for between 25% to 55% of outstanding covered bonds. The highest proportion (35%) expect the ECB to
hold 25% to 35%. The next highest segment with 24% are a little more bullish (or bearish, depending on whether you are an issuer
or investor) and expect the ECB to hold roughly half of the outstanding eligible covered bonds, or between 45% to 55% (Figure 4).

Figure 4: Responses to the question:

What are your expectations for ECB holdings of eligible covered


bond issuance in 2016 through its purchase programmes?

Less than 25% of outstanding


25-35%
35-45%
45-55%
55%+

European covered bond investors currently face a difficult environment with the ECBs purchasing the majority of issuance and
spreads extremely tight. The question is, what is most important to promote growth in the covered bond market? The majority
feel that maintenance of regulatory support (38%), stopping ECB purchases (29%) and the introduction of new collateral (18%)
are the most important things to do to support the covered bond market (Figure 5).
Suggestions under the category of Other included a combination of the main themes above with some subtle difference, further
supporting these factors. The introduction of a 29th regime was interestingly well supported by 6%, mainly by peripheral market
participants. This is in line with DBRS comments that a 29th Regime would be beneficial to some smaller peripheral market
participants.1 The introduction of European secured notes and a return of public sector covered bonds were less supported, but this
is most likely due to the overwhelming need to support the existing market as a first priority.

1. See DBRS Commentary 29th Regime should Support Smaller and Weaker Issuers but is not a Panacea, 22 February 2016.
Structured Finance: Covered Bonds

15 June 2016

European Structured Finance and Covered Bond Survey Results

DBRS.COM

Covered Bonds (CONTINUED)


Figure 5: Responses to the question:

What would you prioritise as the most important thing to


change in order to support the covered bond market?
Stop ECB purchases
Maintain regulatory support
Introduction of new collateral
Introduction of 29th Regime
Introduction of ESNs
Return of public sector Covered Bonds
Other (please specify)

Issuers prefer covered bonds to securitisation; bankers the opposite


Given a choice of funding, the majority of issuers and bankers prefer to make use of covered bonds and securitisation over the use
of unsecured funding and the direct sale of loan portfolios. Retail deposits are preferred by a number of issuers over securitisation,
but bankers prefer to make use of capital market instruments, ranking securitisation as their number one choice (Figure 6).
Figure 6: Responses to the question: Given choice of funding, which is preferred to use to fund collateral?
6
5

Rank

4
3
2
1
0

Retail
Deposits

Unsecured

Whole Loan
Sales
Issuer

Structured Finance: Covered Bonds

Covered
Bonds

Securitisation

Banker

15 June 2016

European Structured Finance and Covered Bond Survey Results

DBRS.COM

Regulation the Main Impediment as Market Looks Forward


It is little surprise that regulations are considered the largest impediment to the development of the securitisation market.
Survey results further emphasize this, with All Regulations receiving the highest number of votes and the highest average
priority rank. Of the regulations that are most important to change in order to support the growth of the market, Solvency II
and Liquidity Coverage Ratio (LCR) are considered high priority items to adjust. Next is Simple, Transparent and Standardized
(STS), which received more votes than LCR but was not given as high a rank in priority (Figure 7).
Interestingly, after the main regulations in focus, participants prioritised ECB actions via Repo, ABSPP (asset-backed securities
purchase program), or quantitative easing, and the need to adjust the activities of the ECB. In fact, if these three were summed
together, it would be considered the highest priority above All Regulations.

Rank

Nothing

AIFMD

MiFiD II

NSFR

ECB QE

ECB ABSPP

ECB Repo

STS

LCR

Solvency II

All Regulations

Number of Votes

Figure 7: Responses to the question: What would you prioritise as the most important things to change to support the growth of the securitisation market?

Number of Responses (Right)

When analysed in greater focus, there are some interesting differences, depending upon ones market perspective. Separating
survey participants into issuers (including arrangers and bankers) and investors (including researchers and traders), STS is
viewed as the most important, ranking top by investors and second by issuers. Interestingly, issuers ranked ECB Repo as most
important to change, while investors did not. This confirms a long held view by DBRS (see DBRS report: Did FLS Kill the
RMBS Star2) that repo operations by central banks are constricting the supply of transactions. DBRS notes that there has been
an increase in U.K. securitisation transactions in 2016 as the Bank of Englands repo operations diminish. Solvency II and LCR
both rank highly for investors and issuers, while MiFiD II (Markets in Financial Instruments Directive) and AIFMD (Alternative
Investment Fund Managers Directive) rank lowly (Figure 8).
Figure 8: Responses to the question: What would you prioritise as the most important things to change to support the growth of the securitisation market?
12
10
8
6
4

Issuers

Nothing

AIFMD

MiFiD II

NSFR

ECB QE

ECB ABSPP

ECB Repo

STS

LCR

Solvency II

All

Investors

2. Did FLS Kill the RMBS Star?, 9 June 2014, Gordon Kerr et al.
Structured Finance: Covered Bonds

15 June 2016

European Structured Finance and Covered Bond Survey Results

DBRS.COM

New Investors to the Rescue?


Despite the overhang of regulatory issues and central bank intervention, concerns within the securitisation market lie with a
diminishing number of investors and their ability to purchase transactions. However, according to the survey, not all is lost.
Investors were asked what their investment intentions were in the next 12 months. The vast majority indicated that they would
be increasing their investment in the sector (75%), with 13% intending a large increase in investment, and 63% an increase of
a little. However, not all plan to increase their investment in securitisations (though if one were not intending to remain in the
market, they would be unlikely to complete the survey), with 6% intending to decrease their investment a lot, and 19% indicated
no intention to change (Figure 9).
Figure 9: Responses to the question:
What are your securitisation investment intentions in the next
12 months?
Increase a lot
Increase a little
Decrease a little
Decrease a lot
No change

Market participants are also bullish for the prospect of new investors in the market. When asked whether there would be more or
fewer investors in the market in the next 12 months, 33% said there would be more investors in the market. The majority said there
would be no change (45%), but there were 13% who said there would be fewer, and 8% said there would be a lot fewer (Figure 10).
Further to this, when asked what barriers exist for securitisation investors that restrict them from investing, the majority cited a
Lack of Supply top and Regulation second. This is particularly concerning as the market struggles to gain momentum despite
investor interest in the sector.

Figure 10: Responses to the question:


Where do you see the number of SF Investors going in
the next 12 months?
A Lot More
More
The Same
Fewer
A Lot Fewer

Structured Finance: Covered Bonds

15 June 2016

European Structured Finance and Covered Bond Survey Results

DBRS.COM

U.K. and Alternative Asset Classes Expected to Come to Fore


As outlined above, investors plan to expand their investment into the sector (or so we hope), but where do people expect issuance to
come from in the next 12 months? The majority think that RMBS and Autos will be major areas of expansion, which is not particularly
surprising. However, Alternative ABS and small and medium-sized enterprise (SME) collateralised loan obligations CLOs are
expected to be large issuance sectors in the next 12 months, particularly from Italy, where Italian non-performing loan (NPL)
transactions are being considered. In RMBS, the U.K., Netherlands and Italy are expected to be areas of future issuance (Figure 11).
Figure 11: Responses to the question:
Where do you expect to see an increase in issuance in the next 12 months?
160
140
120
100
80
60
40
20
0

Autos

RMBS
All Europe
Italy
Eastern Europe

CMBS

Commercial
ABS

Europe ex UK
Germany
None

Consumer
ABS
UK
France
Other

SME CLOs
Netherlands
Ireland

Loan CLOs

Alternative ABS
(P2P, NPL, etc.)

Other

Spain
Portugal

Looking into expectations in greater detail, Italian NPLs and U.K. RMBS are expected to be the main sectors for increased issuance,
followed by European Alternatives, such as NPLs or marketplace lending. This will be followed by high expectations for an increase
in issuance across Europe for Autos, CLOs (both SMEs and Leveraged Loans) and RMBS. Further behind this are the traditional
mainstays of securitisation: Dutch RMBS and German Autos. Interestingly, CMBS does not register in the top 10 (Figure 12).
Figure 12: Top 20 sectors for the question:
Where do you expect to see an increase in issuance in the next
12 months?
Italy - Alternative ABS (P2P, NPL, etc.)
UK - RMBS
All Europe - Alternative ABS (P2P, NPL, etc.)
All Europe - Autos
All Europe - Loan CLOs
All Europe - SME CLOs
All Europe - RMBS
Netherlands - RMBS
Germany - Autos
Italy - RMBS
All Europe - Consumer ABS
Spain - RMBS
UK - Alternative ABS (P2P, NPL, etc.)
UK - Consumer ABS
UK - Autos
All Europe - CMBS
Italy - SME CLOs
All Europe - Commercial ABS
Germany - CMBS
Spain - SME CLOs
Structured Finance: Covered Bonds

15 June 2016

European Structured Finance and Covered Bond Survey Results

DBRS.COM

Brexit Unlikely, but Spreads Will Widen if it Happens


The hottest topic within the U.K. and much of Europe is the referendum being held by the U.K. on whether or not its citizens
would like to exit from the European Union. According to securitisation and covered bond market participants, the U.K. will
vote to remain within the European Union by a large majority of 66% (Figure 13). However, it should be noted the majority of
respondents are not from the U.K.
Figure 13: Responses to the question:
Do you expect the citizens of the U.K. to vote for or against
an exit from the European Union?

Against

For

Unsure

Don't Care

However, should the citizens of the U.K. opt to exit the European Union, the impact on the market is expected to be a widening
of spreads (65%). The next most popular choice was for no real impact on the market (18%), followed by a total market disaster
(11%). Very few participants thought that it would be a positive result should the U.K. choose to exit the European Union, even
from a personal perspective.

Figure 14: Responses to the question:


If they vote for an exit from the European Union, what do you expect
the impact will be for the securitisation & covered bond markets?
Positive - Good Riddance
Positive - I always wanted to live in Frankfurt
Positive - More UK Issuance
Neutral
Negative - Spreads Widen
Negative - I will need to find a new job
Negative - Total Market Disaster

Structured Finance: Covered Bonds

15 June 2016

European Structured Finance and Covered Bond Survey Results

DBRS.COM

10

Appendix A: Survey Participant Breakdown


The survey was open to market participants, and a total of 165 responded (166 if you include Donald Duck), with the majority
focused on the securitisation market.

Securitisations

Covered Bonds

Both (Securitisations & Covered Bonds)

For those that also participate in other markets, financial institutions is the most common for market participants to also be
involved in.

Sovereigns

Corporates

Financial Institutions

None -That is all I focus on

Other (please specify)

The majority of survey participants come from a bank, with investment funds, lawyers and other the next most common participation.

Structured Finance: Covered Bonds

Finance Company

Trustee

Servicer

Bank

Other (please specify)

Law Firm

Corporation

Investment Fund

Insurance Company

Hedge Fund

CLO Manager

Pension Fund

15 June 2016

European Structured Finance and Covered Bond Survey Results

DBRS.COM

11

Appendix A: Survey Participant Breakdown (CONTINUED)


The majority of participants are either Pan-European or Global in their focus of business. Many have only a domestic focus,
which tends to be in either Southern or Western Europe.

Structured Finance: Covered Bonds

Global

Pan-Europe

Domestic Only

Western Europe

Southern Europe

Northern Europe

Eastern Europe

North America

Emerging Markets

15 June 2016

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