Inflation has been at the forefront of discussion amongst capital market participants, as it plays an important role in how the markets will develop in the year ahead. Depending on how various elements unfold, the implications for the European securitization market may be significant. From collateral performance to central bank actions, the market will be impacted by inflationary forces in the new year. Further, the discovery of a new and potentially more virulent COVID-19 variant is a reminder that the pandemic is far from over. The withdrawal of government support measures presents a challenge to the performance of securitization markets in Europe. As growth and economic activity return, the removal of pandemic support from governments and central banks risks impacting some creditors.
The roll-off of government pandemic support is likely to have a negative impact on collateral performance. Higher stressed borrowers, such as non-conforming and reperforming loan portfolios, are likely to experience the most impact.
An increased risk of persistent inflationary pressures could lead to rising interest rates and central bank actions that could ultimately impact borrowers and the market by increasing both the cost of living and cost of borrowing.
A positive environment for securitization issuance may develop as floating rate and collateralized transactions are likely to appeal to investors in a rising rate environment. Total issuance is expected to decline to €197 billion ($222.6 billion), but higher investor distributed issuance could represent €115 billion ($129.94 billion) of total issuance. Maturity of European securitization regulations and the removal of central bank intervention is likely to support the return of prime issuers to the securitization market over the medium to long term.
Ongoing development in environment, social and governance (ESG)-related securitization issuance is expected to continue in 2022. The market will likely pursue a “use of proceeds” style issuance to a greater extent, while collateral, metrics and definitions progress.
Despite the challenges to European securitization during the pandemic, ratings stability has been high, excluding the troubled aircraft ABS market. Excluding downgrades in aircraft ABS, upgrades exceeded downgrades across ABS, RMBS, CMBS and structured credit over the past two years, with a rating stability ratio of 98%.
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