KBRA: inflation could have “significant” consequences for the European structured finance sector
Inflation has been at the forefront of discussions among financial market participants, as it plays an important role in market developments over the coming year. Depending on how the various elements unfold, the implications for the European securitization market can be significant. From collateral performance to central bank actions, the market will be impacted by inflationary forces in the new year. Moreover, the discovery of a new, potentially more virulent COVID-19 variant is a reminder that the pandemic is far from over. The withdrawal of government support measures represents a challenge for the performance of securitization markets in Europe. With growth and economic activity returning, the removal of pandemic support from governments and central banks is likely to impact some creditors.
- The removal of government support in the event of a pandemic will likely have a negative impact on the performance of guarantees. The most stressed borrowers, such as non-conforming and reproducible loan portfolios, are likely to be the most affected.
- An increased risk of lingering inflationary pressures could lead to higher interest rates and central bank actions which could ultimately impact borrowers and the market by increasing both the cost of living and the cost of loan.
- A favorable environment for securitization issuance could develop insofar as variable rate and guaranteed transactions are likely to attract investors in a rising rate environment. Total issuance is expected to fall to 197 billion euros ($222.6 billion), but an increase in issuance distributed by investors could account for 115 billion euros ($129.94 billion) of total issuance. The maturity of European securitization regulations and the removal of central bank intervention should encourage the return of prime issuers to the securitization market in the medium and long term.
- The ongoing development of environmental, social and governance (ESG) securitization issuance is expected to continue in 2022. The market is likely to pursue “use of proceeds” type issuance to a greater extent, while safeguards, measurements and definitions are progressing.
- Despite the challenges of European securitization during the pandemic, rating stability was high, excluding the struggling aircraft ABS market. Excluding aircraft ABS downgrades, upgrades have exceeded ABS, RMBS, CMBS and structured credit downgrades in the past two years, with a rating stability ratio of 98 %.