ABSXCHANGE EMEA COMMERCIAL MANAGER
STANDARD & POOR’S VALUATION & RISK STRATEGIES
IN the past decade, the European structured finance market has undergone radical change. The global economic downturn was the most severe stress test for securitisations in decades. Indeed, the fallout from the collapse of US residential mortgage backed securities (RMBS) and collateralised debt obligations (CDOs) resonates on trading floors to this day. However, while the performance of the US structured finance market has not recovered to pre-crisis levels, global trends suggest that increasing transparency among market actors is leading a positive wave of change.
In 2010, Europe's economic recovery contributed to improved aggregate credit performance among structured finance transactions. Last year was the first year since the economic downturn in which structured finance transactions exhibited more upgrades and fewer downgrades from the major ratings agencies. Indeed, market sentiment appears to be changing as more and more transactions are being issued publicly in response to renewed demand. Even in a highly challenging credit environment, the European structured finance sector has proven resilient.
But what has led to the improvement in market confidence? Principally, it has been an evolution in the approach that all levels of market participants – investors, regulators and banks – take towards underlying data.
Investors are requesting loan-level data to better understand the risks inherent in ABS instruments on offer and hence make better investment decisions. While a lot of investors might be reticent to invest in certain markets, the ability to look deeper into deals on a loan-level basis has seen investors return to the structured finance market with more confidence.
Regulators are moving in a similar direction. The European Central Bank and the Bank of England have both indicated they are going to compel originators to make loan level data widely available. Regulatory standardisation in the markets is certainly something that can help increase the comfort levels of market participants. Furthermore, improving loan-level transparency puts investors on an even footing with issuers, enabling them to ramp up their analytics capabilities to examine transactions with equal precision.
Part of the reason why the crisis hit structured finance so hard was that, prior to the economic downturn, structured finance transactions were often heavily oversubscribed. Compared to supply, demand for structured finance bonds was so high that not enough effort was spent on risk analysis. Yet this represents a great opportunity for investors to utilise loan-level data in their analysis of underlying risks – such as loss severity, default rates and recovery lag – which are increasingly relevant in the current economic environment. Going forward, the ability to forecast cash-flows more confidently will be critical.
As a further aid to investors, risk analytics providers are increasingly able to offer cash-flow models for transactions which have yet to be issued. Indeed, Standard & Poor’s ABSXchange continues to seek new ways of improving cash-flow analysis of structured assets, as new data sets become available and in response to the changing needs of investors. In this way, ABSXchange develops products and services that provide true added value to the investment and portfolio monitoring process.
While some uncertainty regarding future regulatory development may suppress market confidence, the nuts and bolts of the financial services industry in the future will hinge on clarity and transparency of information for all parties. Certainly, information transparency in the structured finance market is no longer simply a desirable objective. It is a reality. What’s more, it is a reality where, as economic actors adjust to a new environment with greater emphasis on risk analysis, all parties stand to benefit.