European Structured Finance Outlook H2 2020: Weathering The Storm - July 28, 2020 - S&P Global
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European Structured Finance Outlook Andrew South
Casper Andersen
H2 2020: Weathering The Storm Alastair Bigley
Sandeep Chana
Antonio Farina
Mathias Herzog
July 28, 2020
Volker Laeger
Key Takeaways
Issuance: European securitization issuance now looks set to end the
year substantially lower than in 2019, at about €60 billion-€70 billion,
while benchmark covered bond volumes also look set to decline.
Central banks: Across Europe, central bank responses to the public
health emergency have included renewed large-scale provision of
cheap term funding for credit institutions, which is likely to stifle
bank-originated structured finance supply.
Macro: With social distancing likely to constrain economic activity for
several more months, we expect both the U.K. and Eurozone
economies to contract by about 8% this year, before rebounding in
2021.
Credit performance: Given the macro backdrop, fundamentals will
continue to be under pressure across structured finance sectors.
However, structural protections mean most asset classes appear
robust, and we have only taken negative rating actions on 4% of our
outstanding ratings.COVID-19 Has Triggered Disruption For Structured
Finance Issuance And Credit Performance
– While the disease has abated in Europe for now, day-to-day activity remains far from pre-crisis norms.
– Financial market volatility, a sharp recession, and robust monetary and fiscal policy responses have
disrupted structured finance issuance and performance.
Daily COVID-19 Deaths, 7-Day Avg. (000s) Traffic Congestion Vs. 2019 Level, 7-Day Avg. (%)
Milan Paris Frankfurt
Europe U.S. Rest of Americas Rest of world
London Barcelona
6 20
5 0
4 (20)
3 (40)
2 (60)
1 (80)
0
(100)
1 Mar
19 Jul
21 Jun
15 Mar
29 Mar
5 Jul
12 Apr
26 Apr
10 May
24 May
7 Jun
Apr 15
Apr 22
Apr 29
May 13
May 20
May 27
Jun 10
Jun 17
Jun 24
Jul 1
Jul 8
Apr 1
Apr 8
May 6
Jun 3
Mar 11
Mar 18
Mar 25
Jul 15
Jul 22
Source: European Centre for Disease Prevention and Control. Source: TomTom, S&P Global Ratings.
3Issuance Prospects Diminish
Volumes Have Stalled Significantly Across Sectors
– Year-to-date investor-placed European securitization and benchmark covered bond volumes are both
down by more than 30%, at around decade lows. Securitizations are mostly being pre-placed for now.
– Full-year figures could now be €60 billion-€70 billion and €90 billion-€100 billion for the two sectors
respectively.
Securitization Issuance (Bil. €) Benchmark Covered Bond Issuance (Bil. €)
Year to date* Rest of year Year to date* Rest of year
120 250
100
200
80
150
60
100
40
50
20
0 0
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
* Year-to-date figures as of July 20 each year. European investor-placed issuance only. Securitization issuance includes structured credit, e.g., leveraged loan CLOs,
but excludes CLO refis and resets. Source: S&P Global Ratings.
5Securitization Issuance Is Increasingly Diverse
– While securitization volumes have declined, the share of issuance from niche subsectors has risen.
– Recent examples include transactions backed by Spanish trade receivables and Dutch auto leases.
Issuance Increase/(Decrease), 2019-2020 (%) Breakdown Of 2020 YTD Issuance By Sector
Other RMBS
Dutch RMBS
CMBS Other ABS CLO
German ABS
CMBS
CLO
U.K. RMBS Dutch
RMBS
U.K. ABS
U.K. ABS
Other RMBS
Other ABS German ABS U.K. RMBS
(60) (50) (40) (30) (20) (10) 0 10
Based on year to date volumes as of July 20 each year. Investor-placed issuance only. Excludes CLO refis and resets. Source: S&P Global Ratings.
6Growth In Banks' Loan Books Supports Issuance,
Although Lending Standards Have Tightened
– Credit conditions have tightened, but only moderately, given governments’ support for households.
– Conditions should gradually improve again, in line with the economic recovery, and we expect
monetary policy to remain extremely loose across Europe for several years.
Growth In Lending To Households, Eurozone (%) Lending Standards, Loans For House Purchase (%)
10 40
8 30
6 20
4 10
2 0
0 (10)
(2) (20)
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Net proportion of respondents tightening standards minus those easing.
Year-over-year change in balance of lending. Source: European Central Bank. Source: Bank Lending Survey, European Central Bank.
7New Official Sector Funding Provision Will Stifle
Bank-Originated Structured Finance Supply
Bank Of England Scheme Net Drawdowns/(Redemptions) (Bil. £)
TFS Estimated TFS maturities TFSME – The approaching maturity of
40 some originators' borrowings
from official sector funding
30 schemes had promised to spur
growth in bank-originated
20
structured finance in the U.K.
10 – However, the Bank of England's
subsequent response to the
0 COVID-19 emergency has
included renewed provision of
(10) cheap term funding for credit
institutions, which is likely to
(20)
stifle bank-originated
securitization supply again.
(30)
– Since its launch in March, the
Q4 2016
Q1 2017
Q2 2017
Q3 2017
Q4 2017
Q1 2018
Q2 2018
Q3 2018
Q4 2018
Q1 2019
Q2 2019
Q3 2019
Q4 2019
Q1 2020
Q3 2020
Q4 2020
Q1 2021
Q2 2021
Q3 2021
Q4 2021
Q1 2022
Q2 2020*
new TFSME has provided nearly
£20 billion in funding.
TFS(ME)--Term Funding Scheme (with additional incentives for small- and mid-sized enterprises). * Approximate, based on data for period between March 31 and July
15, 2020. Source: Bank of England, S&P Global Ratings calculations.
8Securitization Issuance Set To Remain Dominated
By Non-Banks Or Motives Other Than Funding
– Bank-originated issuance is less than €10 billion so far in 2020, and only a quarter of the total.
– Originators are increasingly selling the full capital structure of ABS and RMBS transactions for wider
balance sheet management objectives, rather than just to raise funding.
Securitization Issuance, By Originator Type ABS And RMBS Mix, By Count Of Tranche Rating
Bank CLO Other non-bank AAA AA A BBB BB B CCC and below
100% 100%
80% 80%
60% 60%
40% 40%
20% 20%
0% 0%
2012
2013
2014
2015
2016
2017
2018
2019
2020
2012
2013
2014
2015
2016
2017
2018
2019
2020
2020 year-to-date figures as of July 20. European, investor-placed issuance 2020 year-to-date figures as of July 20. European, investor-placed issuance
only. Excludes CLO refis and resets. Source: S&P Global Ratings. only. Source: S&P Global Ratings.
9Pockets Of Weakness In Credit Performance
Expect A Significant Economic Rebound In 2021
– In our view, economies will experience a bumpy transition to a post-COVID-19 "new normal", which will
only take shape once a vaccine or effective treatment is widely available, likely not until H2 2021.
– The U.K. and Eurozone economies could contract by about 8% this year, before rebounding next year.
Eurozone Unemployment Rate (%) S&P Global Ratings’ GDP Growth Forecasts (%)
Historical Forecast 2018 2019 2020F 2021F
8
14
6
12
4
10 2
8 0
(2)
6
(4)
4
(6)
2
(8)
0 (10)
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Germany France Italy Spain Eurozone U.K.
F--Forecast. Source: Eurostat, S&P Global Ratings.
11Most Securitization Subsectors Have Seen Very
Few Negative Rating Actions
Distribution Of Ratings And Recent Actions, By Count
Recent negative action CCC/CC B BB BBB A AA AAA – Overall, we have lowered or
100% placed on CreditWatch negative
RMBS Structured Credit ABS
only 4% of our ratings on
European securitizations since
75% the beginning of March.
– The most affected asset classes
have direct exposures to sectors
50% suffering most disruption from
lockdown policies, including
corporate securitizations backed
25% by leisure businesses and hotel-
backed CMBS.
– By contrast, for transactions
0% backed by lending to consumers,
CLO
Other SC
conforming
Other RMBS
Prime
Repack
Auto
Other ABS
BTL
Corp. Sec.
CMBS
policy action has helped avoid
Non-
much deterioration in credit
performance.
BTL--Buy-to-let. SC--Structured credit. Based on cumulative actions since March 1, 2020, as of July 16, 2020. Includes actions not related to COVID-19. Excludes
confidential ratings and covered bonds. Source: S&P Global Ratings.
12ABS And RMBS Borrowers Have Taken Payment
Holidays; Liquidity Facilities Will Cover Shortfalls
– Take up of payment holidays has varied significantly between countries and lenders, due to different
eligibility criteria and application processes, but is now likely close to its peak.
– Even if receipts drop substantially, most transactions can cover several periods of bond payments.
Take Up Of Payment Holidays In European RMBS Median Number Of Coupon Payments Covered*
U.K. nonconforming Spanish RMBS
U.K. BTL Dutch RMBS
U.K. prime U.K. nonconforming RMBS
Portuguese RMBS
Portugal
U.K. prime RMBS
Italy
Irish RMBS
Ireland
Auto ABS
Spain
U.K. BTL RMBS
France Equipment ABS
Netherlands Consumer ABS
0% 5% 10% 15% 20% 25% 30% 35% 0 20 40 60 80
BTL--Buy-to-let. Responses may be based on assets backing transactions not * Assuming interest collections fall by 50%. BTL--Buy-to-let. Source: S&P
rated by S&P Global Ratings. Source: RMBS servicers, S&P Global Ratings. Global Ratings.
13ABS And RMBS Transaction Reports Have So Far
Only Shown A Modest Rise In Short-Term Arrears
– Anecdotal evidence from some U.K. originators—where 25%-30% of borrowers initially took a
payment holiday—suggests that 70%-80% of these borrowers are now back to paying monthly
instalments.
Average RMBS 30-60 Day Arrears (%) Average Change In RMBS 30-60 Day Arrears (Bps)
Italy
U.K. buy-to-let
U.K. nonconforming
Spain
Netherlands
U.K. prime
Other
(20) 0 20 40 60 80 100 120
Right-hand chart shows change from Q4 2019 to Q2 2020. Bps--Basis points. Based on sample of transactions for which both Q4 2019 and Q2 2020 data is available.
Source: S&P Global Ratings.
14CLO Portfolio Credit Quality Has Deteriorated
Since March, But Is Now Stabilizing
– Active management of the underlying loan portfolios has helped mitigate the decline in credit quality.
– That said, trading out of distressed collateral has led to some erosion of par in CLO transactions.
European CLO Exposure To ‘CCC’ Category European CLO Exposure To Corporate Obligors On
Corporate Obligors (%) CreditWatch Negative (%)
16 14
14 12
12
10
10
8
8
6
6
4
4
2 2
0 0
Apr 16
Apr 23
Apr 30
May 14
May 21
May 28
Apr 16
Apr 23
Apr 30
May 14
May 21
May 28
Jun 11
Jun 18
Jun 25
Jun 11
Jun 18
Jun 25
Jul 2
Jul 9
Jul 2
Jul 9
Apr 2
Apr 9
May 7
Apr 2
Apr 9
May 7
Jun 4
Jun 4
Mar 19
Mar 26
Jul 16
Mar 19
Mar 26
Jul 16
Solid line is the median, with each band representing a decile, from 10th to 90th percentiles. Estimates based on portfolios from latest available trustee reports, with
ratings updated. Source: S&P Global Ratings.
15Analysis Suggests That Investment-Grade CLO
Ratings Are Resilient Outside Severe Scenarios
Hypothetical Effect Of Downturn Scenarios On CLO Tranche Ratings
For more details, see “Scenario Analysis: How Credit Distress Due To COVID-19 Could Affect European CLO Ratings,” published April 2, 2020. Source: S&P Global
Ratings.
16Most Covered Bond Ratings Are Resilient To Issuer
And Sovereign Downgrades
– About 80% of our covered bond program ratings would be unaffected by a two-notch downgrade of the
issuer or a one-notch downgrade of the sovereign.
Proportion Of Program Ratings Unaffected By
Average Notches Of Uplift, Q2 2020
Combinations Of ICR And Sovereign Downgrade
4 Notches uplift Unused notches uplift
Austria
3 64% 49% 47% 31%
Belgium
ICR downgrade (notches)
Germany
2 80% 62% 57% 37% Denmark
Spain
Finland
1 92% 72% 66% 41% France
Ireland
Italy
0 78% 71% 47%
Netherlands
Norway
-1 Sweden
-1 0 1 2 3 4 U.K.
Sovereign downgrade (notches)
0 2 4 6 8 10
As of July 23, 2020. ICR—Issuer credit rating. Our rating methodology determines how many notches above the ICR a covered bond program may be rated. Some of this
uplift may be “unused” if the program rating is ‘AAA’ or capped by other analytical considerations, reducing the program rating’s sensitivity to any subsequent lowering
of the ICR. Source: S&P Global Ratings.
17Analytical Contacts
Andrew South Antonio Farina
Head of Structured Finance
Senior Director, Covered Bonds
Research – EMEA
+34-91-788-7226
+44-20-7176-3712
antonio.farina@spglobal.com
andrew.south@spglobal.com
Alastair Bigley Mathias Herzog
Senior Director, RMBS Director, CMBS
+44-20-7176-3245 +49-69-3399-9112
alastair.bigley@spglobal.com mathias.herzog@spglobal.com
Sandeep Chana Volker Läger
Director, CLO Senior Director, ABS
+44-20-7176-3923 +49-69-3399-9302
sandeep.chana@spglobal.com volker.laeger@spglobal.com
Casper Andersen
Senior Director, Covered Bonds
+49-69-3399-9208
casper.andersen@spglobal.com
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