European Structured Finance and Covered Bond Survey Results

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J U N E 2 0 1 6

European Structured

Finance and CoveredBond Survey Results

C O M M E N T A R Y


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Structured Finance: Covered Bonds 15 June 2016

European Structured Finance and Covered Bond Survey Results DBRS.COM 2

Contact Information

Gordon Kerr

Senior Vice President

Global Structured Finance

+44 20 7855 6667

[email protected]

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All DBRS ratings and research are availablein hard-copy format and electronically onBloomberg and at DBRS.com, our leaddelivery tool for organized, web-based,up-to-the-minute information. We remaincommitted to continuously refining ourexpertise in the analysis of credit quality andare dedicated to maintaining objective andcredible opinions within the global financialmarketplace.

Table of Contents

European Structured Finance and Covered Bond Survey Results 3

Divergent Issuance Picture 3

Securitisation 3

Covered Bonds 4

Issuers prefer covered bonds to securitisation; bankers the opposite 5

Regulation the Main Impediment as Market Looks Forward 6

New Investors to the Rescue? 6

U.K. and Alternative Asset Classes Expected to Come to Fore 8

Brexit Unlikely, but Spreads Will Widen if it Happens 9

Appendix A: Survey Participant Breakdown 10


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European Structured Finance and Covered Bond Survey Results

DBRS has completed the first annual survey of market participants in European structured finance and covered bond markets.The results of the 2016 survey show both some positive and some concerning information as well as some generally interestinginsights. It should be noted that surveys by their nature are not a representation of definitive answers to the questions posed,

but they do offer insight in aggregate into the attitude and perceptions of the market. Most importantly, they give those of usinvolved in research plenty of opportunity to create a lot of pretty graphs. Get ready for loads of pie charts!

In summary: 79% of Portfolio Managers intend to increase their securitisation investment:

64% by a little

14% by a lot

43% of Portfolio Managers cite lack of supply as a reason why they are restricted from purchasing more.

Despite this, expectations are for a muted level of securitisation issuance and a strong level of covered bond issuance supportedby a busy European Central Bank (ECB). On average:

Securitisation participants expect EUR 75 billion in distributed issuance and EUR 195 billion of issuance in total.

Covered bond participants expect EUR 205 billion in benchmark issuance and the ECB to own approximately 35% ofeligible covered bond issuance.

Divergent Issuance Picture

Securitisation

Starting with the important part of the market in the current environment: issuance. Survey participants were asked about theirview on expectations for issuance in 2016, both distributed issuance and total issuance. In terms of distributed issuance, themajority of survey participants predict a range below EUR 80 billion. In total, 69% predict less than EUR 80 billion, and 84%believe that issuance will be less than EUR 100 billion. Calculating an average of the scores, expectations are for EUR 75 billion

in 2016 (Figure 1).

Total issuance for the market shows a similarly muted picture for expected issuance in 2016, with 63% expecting less than EUR200 billion in total issuance and 79% predicting less than EUR 225 billion. Taking an average of the voting, issuance expectationsare for EUR 195 billion in 2016 (Figure 2). Both of these are below DBRSs original expectations and the forecast made at the endof the year (approximately EUR 85 billion and EUR 230 billion, respectively).

Figure 1: Expectations for Distributed European Securitisation

Issuance in 2016

Figure 2: Expectations for Total European Securitisation

Issuance in 2016

Less than 50-60 bil lion 60-70 bil lion

70-80 billion 80-90 billion


110-120 billion Over 120 billion

Less than 150 bil lion 150-175 bi ll ion



275-300 billion Over 300 billion


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Covered Bonds

For covered bonds, there is a much more varied picture of views on expectations for issuance in 2016. The bulk of respondentschose either between EUR 125 billion and 150 billion and EUR 150 billion and 175 billion (16% and 18%, respectively); conversely,13% chose over EUR 300 billion (Figure 3). While some of these respondents might have been jealous securitisation market

participants, it is more likely that some are extremely bullish on the prospects for covered bond purchases by the ECB throughits ongoing purchase programme.

Figure 3: Responses to the question:What are your expectations for TOTAL benchmark Europeancovered bond issuance in 2016?

100-125 billion

125-150 billion

150-175 billion

175-200 billion

200-225 billion

225-250 billion

250-275 billion

275-300 billion

Over 300 billion

Bullish expectations for ECB purchases and hence covered bond issuance are backed up by responses to the question: What areyour expectations for ECB holdings of eligible covered bond issuance in 2016 through its purchase programmes?The vast majorityof responses (78%) were for between 25% to 55% of outstanding covered bonds. The highest proportion (35%) expect the ECB tohold 25% to 35%. The next highest segment with 24% are a little more bullish (or bearish, depending on whether you are an issueror investor) and expect the ECB to hold roughly half of the outstanding eligible covered bonds, or between 45% to 55% (Figure 4).

Figure 4: Responses to the question:What are your expectations for ECB holdings of eligible covered

bond issuance in 2016 through its purchase programmes?

Less than 25% of outstanding

25-35%

35-45%

45-55%

55%+

European covered bond investors currently face a difficult environment with the ECBs purchasing the majority of issuance andspreads extremely tight. The question is, what is most important to promote growth in the covered bond market? The majorityfeel that maintenance of regulatory support (38%), stopping ECB purchases (29%) and the introduction of new collateral (18%)are the most important things to do to support the covered bond market (Figure 5).

Suggestions under the category of Other included a combination of the main themes above with some subtle difference, furthersupporting these factors. The introduction of a 29th regime was interestingly well supported by 6%, mainly by peripheral marketparticipants. This is in line with DBRS comments that a 29th Regime would be beneficial to some smaller peripheral marketparticipants.1The introduction of European secured notes and a return of public sector covered bonds were less supported, but thisis most likely due to the overwhelming need to support the existing market as a first priority.

1. See DBRS Commentary 29th Regime should Support Smaller and Weaker Issuers but is not a Panacea, 22 February 2016.


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Figure 5: Responses to the question:What would you prioritise as the most important thing to

change in order to support the covered bond market?

Stop ECB purchases

Maintain regulatory support

Introduction of new collateral

Introduction of 29th Regime

Introduction of ESNs

Return of public sector Covered Bonds

Other (please specify)

Issuers prefer covered bonds to securitisation; bankers the opposite

Given a choice of funding, the majority of issuers and bankers prefer to make use of covered bonds and securitisation over the useof unsecured funding and the direct sale of loan portfolios. Retail deposits are preferred by a number of issuers over securitisation,but bankers prefer to make use of capital market instruments, ranking securitisation as their number one choice (Figure 6).

Figure 6: Responses to the question: Given choice of funding, which is preferred to use to fund collateral?

0

1

2

3

4

5

6

RetailDeposits

Unsecured Whole Loan

Sales

Covered

Bonds

Securitisation

Rank

Issuer Banker

Covered Bonds (CONTINUED)


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Regulation the Main Impediment as Market Looks Forward

It is little surprise that regulations are considered the largest impediment to the development of the securitisation market.Survey results further emphasize this, with All Regulations receiving the highest number of votes and the highest averagepriority rank. Of the regulations that are most important to change in order to support the growth of the market, Solvency IIand Liquidity Coverage Ratio (LCR) are considered high priority items to adjust. Next is Simple, Transparent and Standardized(STS), which received more votes than LCR but was not given as high a rank in priority (Figure 7).

Interestingly, after the main regulations in focus, participants prioritised ECB actions via Repo, ABSPP (asset-backed securitiespurchase program), or quantitative easing, and the need to adjust the activities of the ECB. In fact, if these three were summedtogether, it would be considered the highest priority above All Regulations.

Figure 7: Responses to the question: What would you prioritise as the most important things to change to support the growth of the securitisation market?

AllRegulations

SolvencyII

LCR

STS

ECBRepo

ECBABSPP

ECBQE

NSFR

MiFiDII

AIFMD

Nothing

NumberofVotes

Rank Number of Responses (Right)

When analysed in greater focus, there are some interesting differences, depending upon ones market perspective. Separatingsurvey participants into issuers (including arrangers and bankers) and investors (including researchers and traders), STS isviewed as the most important, ranking top by investors and second by issuers. Interestingly, issuers ranked ECB Repo as mostimportant to change, while investors did not. This confirms a long held view by DBRS (see DBRS report: Did FLS Kill theRMBS Star2) that repo operations by central banks are constricting the supply of transactions. DBRS notes that there has beenan increase in U.K. securitisation transactions in 2016 as the Bank of Englands repo operations diminish. Solvency II and LCRboth rank highly for investors and issuers, while MiFiD II (Markets in Financial Instruments Directive) and AIFMD (AlternativeInvestment Fund Managers Directive) rank lowly (Figure 8).

Figure 8: Responses to the question: What would you prioritise as the most important things to change to support the growth of the securitisation market?

0

2

4

6

8

10

12

All

Solvenc

yII

LCR

S

TS

ECBRepo

ECBABS

PP

ECBQE

NS

FR

MiFiDII

AIFMD

Noth

ing

Issuers Investors

2. Did FLS Kill the RMBS Star?, 9 June 2014, Gordon Kerr et al.


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New Investors to the Rescue?

Despite the overhang of regulatory issues and central bank intervention, concerns within the securitisation market lie with adiminishing number of investors and their ability to purchase transactions. However, according to the survey, not all is lost.Investors were asked what their investment intentions were in the next 12 months. The vast majority indicated that they would

be increasing their investment in the sector (75%), with 13% intending a large increase in investment, and 63% an increase ofa little. However, not all plan to increase their investment in securitisations (though if one were not intending to remain in themarket, they would be unlikely to complete the survey), with 6% intending to decrease their investment a lot, and 19% indicatedno intention to change (Figure 9).

Figure 9: Responses to the question:

What are your securitisation investment intentions in the next12 months?

Increase a lot

Increase a little

Decrease a little

Decrease a lot

No change

Market participants are also bullish for the prospect of new investors in the market. When asked whether there would be more orfewer investors in the market in the next 12 months, 33% said there would be more investors in the market. The majority said therewould be no change (45%), but there were 13% who said there would be fewer, and 8% said there would be a lot fewer (Figure 10).

Further to this, when asked what barriers exist for securitisation investors that restrict them from investing, the majority cited a

Lack of Supply top and Regulation second. This is particularly concerning as the market struggles to gain momentum despiteinvestor interest in the sector.


Where do you see the number of SF Investors going inthe next 12 months?

A Lot More

More

The Same

Fewer

A Lot Fewer


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U.K. and Alternative Asset Classes Expected to Come to Fore

As outlined above, investors plan to expand their investment into the sector (or so we hope), but where do people expect issuance tocome from in the next 12 months? The majority think that RMBS and Autos will be major areas of expansion, which is not particularlysurprising. However, Alternative ABS and small and medium-sized enterprise (SME) collateralised loan obligations CLOs are

expected to be large issuance sectors in the next 12 months, particularly from Italy, where Italian non-performing loan (NPL)transactions are being considered. In RMBS, the U.K., Netherlands and Italy are expected to be areas of future issuance (Figure 11).


Where do you expect to see an increase in issuance in the next 12 months?

0

20

40

60

80

100

120

140

160

Autos

All Europe

Italy

Eastern Europe

Europe ex UK

Germany

None

UK

France

Other

Netherlands

Ireland

Spain

Portugal

RMBS CMBS CommercialABS

ConsumerABS

SME CLOs Loan CLOs Alternative ABS(P2P, NPL, etc.)

Other

Looking into expectations in greater detail, Italian NPLs and U.K. RMBS are expected to be the main sectors for increased issuance,

followed by European Alternatives, such as NPLs or marketplace lending. This will be followed by high expectations for an increasein issuance across Europe for Autos, CLOs (both SMEs and Leveraged Loans) and RMBS. Further behind this are the traditionalmainstays of securitisation: Dutch RMBS and German Autos. Interestingly, CMBS does not register in the top 10 (Figure 12).

Figure 12: Top 20 sectors for the question:

Where do you expect to see an increase in issuance in the next

12 months?

Italy - Alternative ABS (P2P, NPL, etc.)

UK - RMBS

All Europe - Alternative ABS (P2P, NPL, etc.)

All Europe - Autos

All Europe - Loan CLOsAll Europe - SME CLOs

All Europe - RMBS

Netherlands - RMBS

Germany - Autos

Italy - RMBS

All Europe - Consumer ABS

Spain - RMBS

UK - Alternative ABS (P2P, NPL, etc.)

UK - Consumer ABS

UK - Autos

All Europe - CMBSItaly - SME CLOs

All Europe - Commercial ABS

Germany - CMBS

Spain - SME CLOs


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Brexit Unlikely, but Spreads Will Widen if it Happens

The hottest topic within the U.K. and much of Europe is the referendum being held by the U.K. on whether or not its citizenswould like to exit from the European Union. According to securitisation and covered bond market participants, the U.K. willvote to remain within the European Union by a large majority of 66% (Figure 13). However, it should be noted the majority of

respondents are not from the U.K.


Do you expect the citizens of the U.K. to vote for or againstan exit from the European Union?

Against For Unsure Don't Care

However, should the citizens of the U.K. opt to exit the European Union, the impact on the market is expected to be a wideningof spreads (65%). The next most popular choice was for no real impact on the market (18%), followed by a total market disaster(11%). Very few participants thought that it would be a positive result should the U.K. choose to exit the European Union, evenfrom a personal perspective.


If they vote for an exit from the European Union, what do you expectthe impact will be for the securitisation & covered bond markets?

Negative - Total Market Disaster

Negative - I will need to find a new job

Negative - Spreads Widen

Neutral

Positive - More UK Issuance

Positive - I always wanted to live in Frankfurt

Positive - Good Riddance


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Appendix A: Survey Participant Breakdown

The survey was open to market participants, and a total of 165 responded (166 if you include Donald Duck), with the majorityfocused on the securitisation market.

Securitisations Covered Bonds

Both (Securitisations & Covered Bonds)

For those that also participate in other markets, financial institutions is the most common for market participants to also beinvolved in.

Sovereigns Corporates

Financial Institutions None - That is all I focus on

Other (please specify)

The majority of survey participants come from a bank, with investment funds, lawyers and other the next most common participation.

Finance Company Trustee Servicer

Bank Other (please specify) Law Firm

Corporation Investment Fund Insurance Company

Hedge Fund CLO Manager Pension Fund


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The majority of participants are either Pan-European or Global in their focus of business. Many have only a domestic focus,which tends to be in either Southern or Western Europe.

Global Pan-Europe Domestic Only

Western Europe Southern Europe Northern Europe

Eastern Europe North America Emerging Markets

Appendix A: Survey Participant Breakdown (CONTINUED)


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European Structured Finance and Covered Bond Survey Results

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