Uncertainty over new EU rules could slow investor-placed securitization issuance in Europe after five years of steady growth, according to S&P Global Ratings.

New securitization issues jumped 30% year over year to more than €105 billion in 2018, driven by volume growth across asset classes. Collateralized loan obligations provided the biggest boost by far with issue volumes surging 40% last year, the agency said Jan.14.

Postcrisis high

Although far from precrisis levels, 2018 securitization issuance volumes were the highest recorded since 2008, Andrew South, managing director of global fixed-income research at Ratings, said in a webcast discussion on the report Jan. 15. Volumes have hovered between €60 billion and €80 billion since 2010, and broke the €100 billion mark for the first time in 2018, he said.

Nevertheless, some of the momentum may be lost in 2019 with volumes sliding below the prior-year level, which may have been inflated due to front-loaded issuance before the new EU securitizations regime took effect, South said.

The new framework, effective Jan. 1, replaces all existing legislation governing securitizations in the EU and redefines some requirements under which institutional investors can participate in securitization transactions.

For example, investors must carry out due diligence to assess potential risks before they join a securitization, set up internal processes to monitor performance throughout the lifetime of the transaction, and provide the regulator with evidence that they understand the risks involved in their securitization holdings.

Unclear rules

However there is uncertainty around definitions in the new framework, including around determining what constitutes securitization. Many transactions that have been labeled as securitizations or asset-backed securities, by virtue of their structure, may no longer be considered as such under the new EU securitization regulation, U.S. law firm Paul and Hastings LLP said in an analysis of the framework.

There is also no definition of what constitutes "exposure" to a securitization under the new rules, the company said.

This uncertainty, coupled with the threat of significant sanctions for noncompliance, may subdue new issuance in 2019, as originators wait for more clarity on the new rules, Ratings said in its Jan. 14 report. Firms would also need to adjust their business processes and reporting systems to ensure full compliance with the new regulations, and that may also delay some new issues, the agency said.

Although the securitization regulation is already in force, a number of auxiliary processes linked to it are yet to be completed, Ratings said. Most of the technical standards aimed at providing additional clarity on the new rules have not been approved and the market infrastructure envisaged in the regulations is not yet complete, it said.

Banks return

Another factor that may have put pressure on originators to issue before the new year starts was the gradual tapering of net assets purchases by the European Central Bank throughout 2018. As this triggered a widening of structured finance spreads, some issuers may have raised volumes while market conditions were still favorable, Ratings said.

Nevertheless, the phasing out of the ECB asset purchase programs will have a positive effect on securitization issuance volumes in the future. Given that they are relatively cheaper and less risky than other types of structured debt, covered bonds, in particular, are likely to benefit from the change in monetary policy, Ratings said.

The return of banks to the structured finance market was already observed in 2018 and accounted for part of the issuance surge over the year, South said during the discussion Jan. 15.

On most measures, Ratings expects aggregate European structured finance credit performance to be positive in 2019. "For most asset classes, the 12-month trailing average change in credit quality has been positive for at least two years, indicating aggregate upward ratings movements," it said.

Descriptions in this article were not prepared by S&P Global Ratings. To read the full S&P Global Ratings report, please click here.