2019 has been an unpredictable, but relatively buoyant, year so far. As at the end of August, new issuance stood at €20.15 billion to nudge ahead of the 2018 year-to-date total, with July being a record new issuance month in the 2.0 era with a total of €5.42 billion from 13 deals (the previous monthly record was November 2017, with €4.74 billion issued from 11 deals).
This was despite a slower than usual start to the year, caused by a variety of factors including a frontloading of warehouse openings at the end of 2018 in advance of the EU's Securitisation Regulation coming into force on 1 January, the market's assimilation of that regulation (see below) and market conditions in quarter one, including the then-latest 31 March Brexit deadline date.
In total (as of August), 38 managers have issued 48 new deals with 2019 also being notable for the number of new entrants (including in Q2 alone Fair Oaks, MeDirect, Napier Park and Sound Point). However, refinancing and reset activity has remained subdued, with the equity perhaps less incentivised to incur the costs of these transactions given the record 2.0 low AAA bids on 2017-vintage deals.
Securitisation Regulation – Agreeing a Market Approach
The first quarter of the year saw the European market work out the detail of complying with the transparency and reporting obligations contained in the Securitisation Regulation, applicable to both warehouse and CLO phases alike.
The Regulation requires, among other things, the originator, sponsor and SSPE (i.e. the SPV issuer of the securities) of a securitisation to make available certain information to investors in the securitisation, regulators (known as competent authorities) and, upon request, potential investors. These disclosure requirements include an obligation to make quarterly reports in respect of underlying exposures, as well as provide quarterly investor reports. There is also significant event-based ongoing reporting, such as when a material breach of the transaction documents occurs.
Finally, certain information is required to be made available pre-pricing, including advanced drafts of the transaction documents. For warehouses, this has not made much difference given everything occurs on warehouse signing, but for the CLO phase this has resulted in a front-loading of the document negotiation prior to pricing - compared to previous practice where the transaction documents were drafted only after the pricing red was agreed.
In terms of making the required information available, nearly all deals have chosen to list on the Global Exchange Market, rather than producing a prospectus and listing on the Main Securities Market, so that the CLO is a private transaction for the purposes of the Regulation. This means the relevant information does not have to be reported to a securitisation repository (a new creature of the Regulation, which hosts and makes available reportable information in a central and public format). Instead, all reporting is made available via a secure-access website which is typically hosted by the collateral administrator and can be accessed by relevant reporting recipients once information is duly certified in accordance with agreed procedures.
The form of ongoing reporting templates has not been finalised as yet, so an interim reporting regime under a European regulation known as CRA3 applies for the time being. Meanwhile, an industry working group has been analysing the more detailed data fields in the draft Regulation templates to agree consistent market approaches to reporting for the CLO sector, particularly given the templates were built more for primary-originated ABS, taking into account the fact that a CLO manager may have difficulty sourcing certain data for required fields in that context.
In terms of the documentary position, the SSPE has generally accepted legal responsibility to act as the designated reporting entity (as permitted by the Regulation), but it then delegates actual reporting to the collateral administrator, on the basis of an assistance obligation from the collateral manager. It should of course be noted that the sponsor or originator retention holder retains regulatory liability for designated breaches of the Regulation, alongside the SSPE, subject to any contractual allocation of this risk in the deal documents. Much of Q1 was spent agreeing that framework between the SSPE, collateral manager and relevant agents, with market positions on both the operational burden and legal liability now largely agreed. While the collateral administrators have retained a discretion not to perform ongoing reporting upon finalisation of the reporting templates, given the progress made by the market so far on the detail in such reporting, it is not anticipated this risk will materialise in practice.
Outlook for the Remainder of 2019
As the pipeline of open warehouses remains strong, including with new entrant and returning UK, EU and US managers yet to price their first deals, and given the Securitisation Regulation has largely been digested by the market, the outlook for the remainder of the year looks largely to be dependent on economic and market conditions, as well as political events. Of course, a "no-deal" Brexit looms large in the rear-view mirror again and it has been interesting to see some account bank activity migrate to Ireland already in anticipation of this well publicised divorce. After a lull in activity in early August, as we go to press in early September, activity has picked up strongly again, including with respect to refinancing and resets, so it would appear the traditionally hectic run into year end should materialise, capping off another busy year!
3. Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12th December 2017 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation, and amending Directives 2009/65/EC, 2009/138/EC and 2011/61/EU and Regulations (EC) No 1060/2009 and (EU) No 648/2012.
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