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Brexit not a prelude to British recession

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According to S&P Global Ratings, the British economy will continue to grow, even after Brexit. For this reason, the European securitisation market is expected to come out unscathed, bond analysts of the credit rating agency predict.

The fact that the United Kingdom is leaving the European Union creates uncertainty for investors in Asset-Backed Securities (ABS). It also gives rise to new regulations. Meanwhile, securitisations from non-banks and new sectors, such as marketplace lending, are advancing. We discuss this with Andrew South, Managing Director, Global Fixed Income Research at S&P, and Cian Chandler, Head of EMEA Structured Finance at the rating agency.

What are the consequences of the Brexit?

South: ‘Our economists have looked at the effects of the Brexit on the British economy. In the baseline scenario, they do not predict dramatic developments. Although the economic growth will slow down, it will not lead to a recession. The probability of a crisis in the housing market is low as well. British housing prices are rising 0.5% this year and will rise a further 1.5% next year. In view of the historical correlation between British housing prices and British RMBS ratings, the credit risk will not substantially deteriorate. Lower ratings of British banks or other counterparties have a direct effect on the ratings of British securitisations. For the time being, however, we do not foresee a great impact.’

Non-banks are entering the securitisation market. Will this trend continue?

South: ‘This shift in the market has been taking place for about seven years already. In 2011, 80% of the securitisation volumes came from of banks, now almost 80% belongs to non-banks. Among other things, this is caused by the fact that the banks’ old mortgage portfolios from the time before the credit crisis have been transferred to new owners, including non-banks. They subsequently issued securitisations. This trend will understandably end. On the other hand, we expect non-banks to remain active. For example, one interesting new development is that asset managers conclude an agreement with a mortgage lender to take over parts of the portfolio of underlying mortgages. The asset manager then sells a part of the risk through a securitisation. Asset managers previously invested directly in senior RMBS issued by a bank.’

Chandler: ‘Something else that contributes to this market shift is the fact that banks have access to cheap money from the central banks, so that there is no need for them to issue securitisations as a source of financing. This credit lines from the central banks are slowly coming to an end, as a result of which banks may be returning to the securitisation market in the coming years.’

Marketplace lending platforms are on the rise. Is this a temporary phenomenon?

Chandler: ‘In my opinion, they remain niche parties for the most part. They only look at those parts of the market where they see opportunities. Incidentally, in most cases the platforms are financed by the banks themselves. Consequently, they are not a threat to the banks. Platforms are useful for normalising the prices of the underlying loans, but they will be playing a big role in the market.’

Will the STS framework facilitate further growth on the European ABS market?

South: “The completion of the framework for STS securitisations puts an end to the uncertainty surrounding the regulations in the European ABS market. That is undoubtedly positive. But the new regulations are unlikely to stimulate to market in and of themselves. The framework primarily combines and organises existing regulations for different types of investors. The capital that banks must hold for securitisations is generally equal or even slightly higher than before. Therefore, there is no strong reduction of capital, but the outcome could also have been worse. Although an agreement has been reached at a political level, the technical details have yet to be finalised. Once everything is completely clear, the market can start looking toward the future again.’

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