23. Nov 2016 Scope research – Cross-sector
Structured Finance Outlook 2017: Moving forward in the credit cycle
Scope’s European structured finance outlook for 2017 is stable. Modest economic growth and abundant liquidity will support the credit performance of European securitisations and covered bonds.
Scope expects that the aggregate issuance volume for European structured finance transactions will not exceed EUR 200bn in 2017, which is due to different and opposing trends. The rising appeal of structured finance transactions for investors looking for positive yields could be constrained by political risks and strict regulatory framework. The seasonality of structured finance and covered bond issuance in 2017 will be affected by the political agenda of major European countries, with an important upcoming referendum in Italy and elections in Germany, France and the Netherlands.
However, Scope's outlook on the credit performance of most asset classes in 2017 is stable to positive. All European asset classes will benefit from the persisting low interest environment in Europe and sound credit origination by banks. This is despite the risk of increased protectionism and populist policies worldwide, which could disrupt the weak economic recovery.
Sectors related to mortgage, SME and consumer-finance will continue to exhibit low delinquencies despite political uncertainties which pose downside risk to European GDP growth. The opposing forces of credit expansion pushed by the central banks and regulatory capital controls imposed on European banks has a positive effect on the credit quality of newly-originated SME, auto, consumer and residential mortgage loans. Scope expects that banks will continue to originate sound credit, just as they have been doing since the last financial crisis.
The substantial liquidity available in the market will support the refinancing conditions for secured loans underlying CMBS and CLO transactions, in a way that Scope considers healthy and still far from the pre-crisis most-aggressive underwriting.
Scope thinks rising public debt and record-level low-yields in Europe are dark clouds on the horizon. Those pose serious long-term risks, but are unlikely to break into a storm in 2017.
The increasing proportion of fixed-income instruments entering negative yield territory will encourage new global investors to enter the European ABS or the European CLO space given the stable credit outlook for Europe. This should help to close the gap between the perception of risk that originators have and that of investors.
Higher retention requirements may slow down the public issuance of transactions in favour of private structures such as regulatory capital securitisations, and Scope expects a growing number of bespoke private transactions, such as synthetic securitisations or Solvency II-oriented debt-fund securitisations exposed to alternative assets, continuing the trend already observed in 2016.
Download the full report: 'Structured Finance Outlook 2017: Moving Forward in the Credit Cycle'.
Analyst Conference Call
Scope Ratings discusses its European Structured Finance outlook for 2017 in a telephone and web conference call on Wednesday, 30 November 2016, 4:00 pm CET. Following a brief presentation, Scope analysts will be available to take questions.
When: Wednesday, 30 November 2016 at 4:00 pm CET
How: Conference call and web presentation
Analyst: Guillaume Jolivet, Karlo Fuchs
Please register here.
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