CACEIS NEWS 39 EN

No. 39 - September 2014 - caceis news 5

A resurgence in the securitisation market

Interview with Jean-Marc Léger, CEO EuroTitrisation On 27 March, the European Commission recommended reviv- ing securitisation to make it easier for small and medium-sized enter- prises to access the capital markets. Is securitisation about to make a comeback? In a depressed economic environ- ment, the European Commission has effectively proposed reviving securitisation as part of its action plan dated 27 March to ensure the long-term financing of the economy. The European Central Bank (ECB) and the Bank of England (BoE) have also called for greater use of secu- ritisation again in Europe. In terms of outstanding, European securitisa- tion peaked at €2.2 trillion euros in 2009 before falling back to the 2007 level of about €1.5 trillion euros at year-end 2013. The “toxic” label that was often attributed to securiti- sation during the financial crisis was due more to the way this refinancing technique was used rather than to the technique itself. The opacity and complexity of American resecuritisation techniques through 2008 – which were charac- terised by high risks in an unregulated framework – cannot be compared to European practices, which concen- trate on quality underlying assets managed by management companies in compliance with the Alternative Investment Fund Managers (AIFM) directive. Securitisation transforms assets (cor- porate, consumer, mortgage and in- frastructure loans) into liquidity or collateral that banks can use for re- financing with the ECB. Moreover, banks associated with the automobile and retailing industries do not have deposits and use securitisation for refinancing. Companies can also re-

sort to securitisation to mobilise trade receivables. Lastly infrastructure pro- jects are increasingly financed via special purpose vehicles (SPVs). TheAssociation for FinancialMarkets in Europe defines securitisation as an “operation that pools together secu- rities which are then dividend into tranches according to the level of risk”. Securitisation is re-emerging with the new Basel III capital adequa- cy requirements for European banks, although the securitisation of an asset portfolio does not reduce any pruden- tial capital requirements unless there is a significant transfer of credit risk

for underwriting investors. They act as reinsurers or guarantors for a pool of debt. The potential of securitisation in various sectors of the real economy can be illustrated via a few examples of FCTs managed by Eurotitrisation originated by: Renault Credit Investissement (Auto Loans and leases, Dealer Floor plan), Credit Agricole Consumer Finance (con- sumer loans), Carrefour Banque (credit cards), Credit Foncier (resi- dential loans), Rexel or Eiffage (trade receivables) or the conduit Magenta sponsored by Natixis. The development of securitisation in France relies essentially on the FCT, which replaces FCC since the AIFM directive took effect. Will this new legislation have any im- pact on your strategy? Eurotitrisation, a pioneer in securiti- sation and the leading FCT manage- ment company in France since it was created in 1988, is contributing to the revival of securitisation, encouraged notably by the 2 nd  August reform of the insurance code. It enables insti- tutional investors to place up to 5% of their investments in securitisation vehicles. Moreover, French banks created a marketplace company, Euro Secured Notes Issuer (ESNI), which issued €2.65 billion in guar- anteed debt instruments last April, backed by bank loans to companies (SME and midmarket companies). These standardised, liquid securities will be eligible as collateral within the Eurosystem once approved by the ECB, which is expected shortly. Eurotitrisation was selected via a re- quest for proposal to be the manage- ment company for this new vehicle. We could duplicate our role in the ESNI model with other European banks. This fits within our partnership strategy with European originators. The AIFM directive, which took effect on 22 July, strengthens the security of all fund management firms by organising the universe of Alternative Investment Funds (AIF) at the European level. With nearly €1.5 trillion in managed assets, secu- ritisation is an important part of this category. The AIFM directive has Business School, Jean-Marc Léger held various senior positions in banking, particularly at Paribas and CDC. Since June 2001, Jean-Marc Leger is EuroTitrisation's CEO. He acquired a wide experience in FCC setting-up processes covering all types of securitisation. A graduate from ESSEC Jean-Marc Léger

special clauses for securitisation that take into account its specificities. The transposition of the directive into French law presents both an opportu- nity and a challenge for the incum- bent securitisation management com- panies like ours, which manages 180 billion euros of the 220 billion euros in securitised operations outstanding. We see this as an opportunity be- cause through the status of a portfo- lio management company (PMC), we have acquired the same monitor- ing and compliance tools as all fund management companies working for third parties. Granted, we already had strict procedures as part of our opera- tions designed by investment banks and insurance companies, which are rated by several rating agencies and created jointly with depositaries like CACEIS, which monitor us closely. TheAIFM framework officialises this risk monitoring, which we described in detail in our accreditation package which the AMF renewed on 22 July. This new status opens new areas of intervention for managing European securitisation vehicles under French law. We anticipated this develop- ment as of 2008, and we are going to amplify our missions as operat- ing agent of vehicles under foreign law (Luxembourg, Ireland), for which we have an initial experi- ence, and for other jurisdictions in the European Union. We can also become managers of other vehicles

without demanding new accredita- tion but by simply extending our programme of activities. The AIFM directive also represents a challenge because it strengths European competition between management companies. There is no question but that we have the techni- cal strengths to face up to competi- tion. This is why our European de- velopment strategy is highly focused on partnerships where we stand to gain from technical and commercial complementarity. The creation of FCT with CACEIS as depositary has long served to build our reputation. We are ready to share and maximise our com- plementary nature on the European markets by associating our shared drive to provide investors with transparent information on the quality of underlying assets within a secure framework in compliance with regulations be the management company for Euro Secured Notes Issuer (ESNI). Eurotitrisation was selected via a request for proposal to

to a third party. Universal banks are thus able to switch from an “originate to hold” strategy (generate loans that will be held on the balance sheet until maturity) to “originate to distribute” (loans become an immediate source of liquidity for the originating bank). The European authorities are taking measures to ensure that securitisa- tion stimulates the supply of credit for the real economy while reducing the systemic risk presented by banks when financing the economy on their own. This activity has strong growth potential. In this buoyant environment for securitisation, which debt in- struments and categories of un- derlying assets are managed by Eurotitrisation? Eurotitrisation handles all forms of classic and synthetic securitisation instruments. It has 25-years of experi- ence with these products; teams spe- cialising in the statistical analysis and monitoring of debt and related risks, accounting, and cash operations as- sociated with these operations; and powerful computer facilities. With €74 billion broken down into 120 operations, we have 44% of French market share. Assets can be divided into four major underlying catego- ries: corporate loans (CLO-CDO), mortgage-backed securities (RMBS- CMBS), consumer loans (ABS) and infrastructure projects.

European ABS issuance (€bn) 2006 to 2013

2010

2050

Retained ABS

Non retained ABS

800 700 600 500 400 300 200 100 0 900

500 600 700 800 900 400 200 100 300

0

2006

2007

2008

2009

2010

2011

2012

2013

2006 2007 2008 2009 2010 2011 2012 2013

Sources European Central bank

*Population aged 65 and older to population aged 15 to 64

€74bn

with

European Securitisation Outstanding (€tr) Q2 2008 to Q2 2013

broken down into 120 operations, EuroTitrisation has 44% French market share

Retained

Placed

2,5

2,0

1,5

1,0

0,5

0

2008 Q2

2008 Q4

2009 Q2

2009 Q4

2010 Q2

2010 Q4

2011 Q2

2011 Q4

2012 Q2

2012 Q4

2013 Q2

Synthetic securitisation corresponds to risk transfer operations reserved

Sources: AFME/SIFMA Members, AFME, Bloomberg, Dealogic, Thomson Reuters, SIFMA