[June 07, 2018]

Global ABS Conference Recap - Day 3

The conference appeared slightly less crowded on the third and final day the Global ABS (News - Alert) Conference, as some ABS pros caught early flights home or were still recovering from the lively Barcelona night life. Many of today's panels were focused on some of the more esoteric corners of the market. There were a number of panels devoted to periphery and emerging market topics such as Asian ABS investment opportunities and the Russian securitisation market (see Figure 1). Today's line up also featured a number of panels on renewable energy financing and the CLO market, which we summarize below (see Day 1 and Day 2 recaps for further reading on this year's conference).

CLO Manager's Roundtable

The moderator began the panel by introducing three themes: the evolving regulatory landscape in the U.S. and Europe, CLO 2.0 structures, and recent changes in the CLO manager landscape. The panelists first discussed regulatory divergence between the U.S. and Europe, echoing a sentiment expressed at several other panels. As of April, risk retention rules no longer apply to U.S. open market CLOs, while European CLOs will be subject to risk retention and increased disclosure requirements beginning January 2019. The panelists proceeded to discuss CLO 2.0 structures, remarking that the current structures reflect the collective experience of the market from the Financial Crisis and that CLOs have been a resilient product. There was a broad agreement that the 2.0 structures have become more homogenous, manager-to-manager, with investors now placing more weight on credit selection and trading ability. The panel concluded with a discussion of new managers in the CLO landscape and what challenges there may be on the horizon. The panelists identified a virtuous cycle of new CLO mangers adding diversity to the market, thereby expanding the investor pool, deepening liquidity, and ultimately, broadening the market. However, while global CLO markets have been converging, CLO managers will need to achieve consistent performance and match investor expecations in an environment of regulatory divergence between the U.S. and Europe.

Will Green Bonds Ever Be More Than a Niche?

The panel began by putting the green bond market in context: the first issuance was in 2007 by the World Bank and the European Investment Bank. By year-end 2013, global issuance was approximately $11 billion and by year-end 2017 reached $155 billion. However, despite impressive growth, this figure represented only 1-2% of global fixed-income investments. The panelists discussed a basic question: what is a green bond? An important distinction was made between green assets, such as solar and wind, and a commitment by an originator to use securitisation proceeds for green purposes, whether or not the underlying assets are green. Both of the preceding examples are considered green bonds, and the European Commission has over the past year worked on green bond taxonomy, with the aim of providing clarity and transparency to investors. The panelists also discussed regulatory treatment of green bonds and noted that regulators face two choices if the aim is to incentivise the market: either give green bonds preferential capital treatment or exempt green bonds from certain regulatory elements. The panelists agreed that preferred capital treatment was the ideal course of action, noting that regulatory exemptions could result in less robust structures. The panel concluded that green bonds are already more than a niche market, given that the auto industry and others that produce the underlying assets for many ABS deals are turning green.

U.S. Versus European CLO Markets: A Fork in the Road

The panel kicked off with a question to the audience: how will the sale of U.S. risk retention bonds by some managers affect U.S. CLO spreads? The vast majority of the audience thought it would cause moderate spread widening over the near/medium terms. The panel then briefly discussed the recent U.S. Court of Appeals decision exempting U.S. open market CLOs from the risk retention requirements under Dodd-Frank. As a result of the court's ruling, there has been robust supply in Q2, as managers decided to reset and sell off their equity pieces, placing upward pressure on spreads across the capital stack. A sell-side research analyst on the panel provided more background, noting that the U.S. CLO market saw $118 billion of new supply and $65 billion of resets in 2017. There has been substantial year-over-year growth in 2018, with around $55 billion of new issue supply and $53 billion of resets priced through the first five months of the year. The research analyst projects around $140 billion of new supply and $120 billion of resets for full year 2018, which could cause further widening if the increase in supply isn't met with new pockets of demand. Finally, the panel addressed how a number of CLO managers have been issuing duel U.S./EU compliant CLOs. Managers who are active in both the U.S. and European markets is expected to grow, since it allows them to maintain a global investor base, diversify holdings, and exploit pricing inefficiencies between the two markets.

Renewable Energy ABS: Can the Success of Solar Backed ABS and PACE be Repeated in Europe?

The panel kicked off with an overview of PACE and solar financing in the U.S., with KBRA's Tony Nocera describing how PACE programs allow property owners to finance renewable energy projects through a special tax assessment on their property tax bill. PACE assessments are secured by a lien on property and typically have the same priority as real estate taxes, making them senior to any non-tax liens, including claims of the mortgage holder. Meanwhile, solar loans and leases are typically a personal obligation of the borrower/lessee and are secured by just the equipment be financed. The discussion then turned to how there have been a few regional and national renewable energy financing schemes in Europe, but none have reached the scale of the solar loan/lease and PACE financing markets in the U.S. However, last fall the European Commission awarded a €2.4 million grant to Global New Energy Finance and seven partner organizations to develop the EuroPACE program, inspired by the U.S. PACE financing model. Overall consensus was that this program could successfully grow the availability of affordable renewable energy financing in Europe, but given the diverse property tax systems between countries, it may take some time to meaningfully scale up.

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