Economic research securitisation 2010

In partnership with: IFSL RESEARCH APRIL 2010 SECURITISATION 2010 OVERVIEW Activity in global securitisation markets in 2009 was dominated for the second successive year by repurchase operations of central banks These issues, designed to boost credit and liquidity, kept gross securitisation issuance at high level of $2,860bn, up from $2,764bn in 2008 Excluding these funding operations, net issuance* sold into the market and purchased by end-investors, was much lower although it recovered slightly to $548bn in 2009 from $439bn the previous year (Chart 1) The value of annual net issuance therefore remains a fraction of that before 2008 The global market for securitisation has slumped since the autumn of 2007 due to turbulence in credit markets, a lack of liquidity and a reduction in investors’ tolerance of risk The background to the crisis is summarised on page WWW.IFSL.ORG.UK Chart Global net securitisation issuance* $bn, annual net issuance $bn, quarterly net issuance 600 2250 Asia Europe US 2000 1750 500 400 1500 1250 300 1000 200 750 US 500 100 Europe 250 Asia Recent quarterly data shows a modest recovery of net issuance in the US *Excluding securitisation issues retained by the issuing banks during 2009 with totals well in excess of $100bn in the final three quarters Source: Dealogic of 2009, having risen from a low of $13bn in Q4 2008 The annual US total of $463bn contrasts with more depressed markets elsewhere, particularly Europe where net issuance dropped to $27bn in 2009 from $67bn in 2008 and $455bn in 2007 Leading industry groups in the securitisation industry have been working together to develop market-led solutions to restore investor confidence in securitisation Specific initiatives in Europe have included support for standardising securitisation products and improving issuer disclosure and investors' due diligence practices The US market for mortgage finance has been supported by the federal housing agencies and also the $200bn Term Asset-Backed Securities Loan Facility (TALF) designed to facilitate buying of asset-backed securities This may have contributed to the partial recovery in US net issuance that is not evident elsewhere Country breakdown for gross issuance shows that US remained the leading issuer in 2009 at $2,113bn, over 90% of which was based on MBS (Chart 2) Issues in Europe totalling $577bn were only just over a half of the previous year but remain inflated by the repurchase schemes operated by the central banks The UK was again the largest European issuer in 2009 but funding of banks’ was much reduced and the UK’s share of the European market therefore dropped to 21% from 38% Continuing stimulus to liquidity contributed to gross securitisation in Canada of $57bn Issuance in Australia at $21bn was slightly higher than 2008 but much lower than previous years 2007 2008 2009 2007 2008 2009 Chart Gross securitisation issuance Assets securitised, $bn 4000 3000 US 2000 1000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Assets securitised, $bn 1100 Europe 1000 900 800 700 600 500 400 300 200 100 Australia Japan 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Sources: Securities Industry and Financial Markets Association, European Securitisation Forum, Reserve Bank of Australia,Fitch Ratings *Dealogic data on net issuance and AFME/ESF data on gross issuance are compiled on a different basis so are not directly comparable IFSL SECURITISATION IN THE US Since the securitisation crisis broke in the autumn of 2007 federal supported mortgage backed issuance has dominated activity in the US market with other issuance also dependent to some extent on federal support Mortgage-backed securities (MBS) Since the Federal Housing Finance Agency placed the two larger agencies, Fannie Mae and Freddie Mac, into conservatorship (the US equivalent of nationalisation) in 2008 the US government has ensured an ongoing supply of affordable mortgage finance while taking responsibility for the two agencies’ liabilities in excess of $5,000bn It has stabilised the agencies and reduced the growing systemic risks to the mortgage finance system By early 2010 the Fed had purchased $1.25 trillion of agency MBS in a purchase program intended to supply low cost finance for the housing market This program came to an end in March 2010 Other forms of support to the housing market such as home buyers’ tax credits have also been important in sustaining demand for mortgage finance Statistics compiled by the Securities Industry and Financial Markets Association (SIFMA), indicate that MBS rose nearly a half to $1,957bn in 2009, from $1,344bn in 2008, bringing MBS much closer to the value of issuance in the two previous years (Chart 3) Agency MBC reached $642bn in Q2 but fell away in the second half dropping to $395bn in Q4 (Chart 4) Ginnie Mae, which has always had a government guarantee, has with federal assistance taken a much larger share accounting for nearly a quarter of the agency market in 2008 and 2009, up from around 9% in the three previous years (Chart 5) The delinquency rate for Ginnie Mae, at 9.1% at end-2009 for mortgages over 90 days in arrears, was much higher than Fannie Mae 5.3% and Freddie Mac 3.9% Collateralised mortgage obligations (CMOs), also based on agency issuance, increased from $129bn to $228bn in 2009 Private label or non-agency MBS has sunk to a low ebb with issuance down to $45bn in 2008 and $32bn in 2009, from $774bn in 2007 Some issues in the past two years have required support from TALF, a $200bn lending programme created by the Federal Background to the crisis in global securitisation markets The global market for securitisation slumped in the autumn of 2007 due to turbulence in credit markets, a lack of liquidity and a reduction in investors’ tolerance of risk These difficulties were triggered by the sub-prime crisis and compounded by the downfall of Lehman Brothers, as well as the nationalisation of the US federal agencies - Fannie Mae and Freddie Mac The problem in the sub-prime market originated from the package and sale of many sub-prime mortgage loans to investors through mortgage-backed securities (MBS) Many securities defaulted had been given an overly high credit rating by the rating agencies Contagion was spread further because MBS were sold on to investors, through collateralised debt obligations and structured investment vehicles Some investors, particularly a number of banks, acquired a vast quantity of these assets, which became toxic Many investors exited the market contributing to limited issuance in the US and European securitisation market beyond issues made by the federal agencies The weakening of banks’ balance sheets caused by holdings of large tranches of MBS and ABS has resulted in substantial recapitalisation of all banks, not just those directly affected by investment in toxic assets Securitisation 2010 Table Securitisation issuance based on originating country or region Annual value of gross issuance, $bn 2005 2006 2007 3175 3298 US 3000 76 Australia 91 67 81 Japan 83 76 25 Canada 29 45 2008 1508 18 58 77 2009 2113 21 50 57 157 41 50 49 19 9 63 407 242 38 55 36 47 13 10 143 10 604 237 36 84 56 26 14 15 132 12 622 400 121 119 107 51 74 60 22 21 41 32 1047 123 95 87 61 38 37 19 18 10 58 31 577 28 South Korea Other Asia 14 Latin America Emerg mkts total 46 24 20 50 21 20 43 19 19 18 55 28 10 14 52 3818 4155 3854 2764 2870 UK Italy Spain Netherlands Belgium Germany Ireland Portugal France Pan-Europe Other Europe Europe total World total Sources as listed in subsequent charts and tables relating to countries and regions Chart Issuance of mortgage-backed securities in the US US MBS annual gross issuance, $bn 3200 Private label CMO 2800 Agency backed 2400 2000 1600 1200 800 400 1997 1999 2001 2003 2005 2007 Source: Securities Industry and Financial Markets Association 2009 IFSL Reserve to provide financing for US entities that purchase newly issued securitisations, including credit cards, auto loans and commercial mortgages Asset-backed securities in the US (ABS) ABS issuance, in common with private label MBS, has fallen substantially since mid-2007 having previously risen steadily since 1990 Annual ABS issuance has fallen from a peak of $1,166bn in 2006 to $164bn in 2008 and to $155bn in 2009 (Chart 6) Issuance fell from $615bn in the first half of 2007, to a low of $31bn in the second half of 2008 (Chart 4) Since then there has been a modest recovery with issuance totally $72bn and $84bn in the two halves of 2009 TALF has supported some ABS during 2009, but TALF for consumer ABS came to an end in March 2010 Sectors to have experienced a particularly sharp fall are home equity and CDOs each have fallen from over $200m in 2007 to $6m and $2m respectively in 2009 (Table 2) The market in both these sectors was closed in the second half of the year with no issues at all A moderate volume of activity in credit cards, auto and student loans continues Restoring investor confidence in securitisation markets Global initiative The Securities Industry and Financial Markets Association (SIFMA), the American Securitization Forum (ASF) and the European Securitisation Forum of the Association for Financial Markets in Europe (AFME/ESF) have formed a global, joint working group that will create and publish recommendations designed to help revitalize the securitization and structured credit markets, and bolster investor and broader public confidence in those markets The goals of this initiative include improving the operation and function of these markets in ways that enhance market discipline and transparency, while preserving the essential role that securitisation plays in funding consumer and business credit needs European initiative In Europe the securitisation industry has been focusing during the market turmoil on developing market-led solutions to restore investor confidence in securitisation Initiatives led by the AFME/ESF have focused on developing market-led solutions to restore investor confidence in securitisation These initiatives seek to enhance transparency by improving access to and quality of data, and to develop market practices for better market infrastructure to ensure a more sustainable and robust European securitisation market in the future Specific initiatives include: - Support for standardisation of securitisation products; - Improving issuer disclosure and investors' due diligence practices; and - Reducing information asymmetries and improving alignment of incentives between originators, investors, and other market participants These initiatives are seeking to address the factors that contributed to the crisis These factors included deterioration in loan underwriting standards, Table ABS sectors in the US overreliance on credit ratings, growth of complex highly Annual issues, $bn 2005 2006 2007 2008 2009 leveraged positions, misjudg484 460 217 Home equity ment of liquidity risk, lack of a CDOs 412 25 199 344 sense of shared responsibility Auto 82 36 85 62 74 67 59 68 46 100 and rising losses in the US sub- Credit cards 67 28 63 22 61 prime markets which triggered Student loans 54 12 77 17 58 Other the global crisis in confidence 164 156 952 1166 854 Total ABS Source: Securities Industry and Financial Markets Association Securitisation 2010 Chart US issuance of MBS & ABS Quarterly issuance of US MBS & ABS, $bn 700 Agency MBS 600 500 400 300 200 100 ABS Non-agency MBS 2007 2008 2009 Source: Securities Industry and Financial Markets Association Chart US issuance of agency-backed MBS Agency-backed MBS issued in the US each year, $bn 2100 FHLMC FNMA 1800 GNMA 1500 1200 900 600 300 1997 1999 2001 2003 2005 2007 2009 Source: FHLMC (Freddie Mac), FNMA (Fannie Mae), GNMA (Ginnie Mae) Chart US issuance of asset-backed securities $bn, annual issuance of ABS 1200 1000 800 600 400 200 1997 1999 2001 2003 2005 2007 Source: Securities Industry and Financial Markets Association 2009 IFSL SECURITISATION IN EUROPE Securitisation issuance in Europe in 2008 and 2009 has been heavily influenced by the repurchase schemes operated by the Bank of England and the European Central Bank These repurchases have begun to be wound down during 2009 as AFME/ESF data shows that gross securitisation in European countries fell from $1,047bn in 2008 to $577bn in 2009 (Chart 6) Much of this drop is due to scaling down of funding operations by the Bank of England as UK issuance dropped from $400bn to $123bn Over 90% of deals in 2009 were retained by originators and sellers of debt and not sold on to investors This is demonstrated by Dealogic figures which indicate that net issuance in the European primary market more than halved to $27bn in 2009 from $67bn in : and were 94% down on $455bn in 2007 (Chart 7) AFME/ESF reports that fundamental issues are still preventing a recovery of the securitisation market including a reduced investor base; availability of more competitive sources of funding; and an overhang of retained issuance After the UK, the next largest issuers in Europe in 2009 were Italy, Spain and the Netherlands (Table 1) The proportion of pan-European issues that cannot be attributed to individual countries was 10% in 2009 The banks’ funding requirements have meant that securitisations were more heavily skewed to RMBS in 2008 and 2009 than was previously the case when the primary market was functioning normally (Table 3) There was a pick up in CDOs in 2009 Spreads and ratings A lack of liquidity, increased credit risk and limited demand from investors contributed to a sharp jump in spreads from the third quarter of 2007 Spreads continued to rise through 2008 and the first half of 2009 but began to ease in the second half of that year For example, spreads for AAA-rated European ABS auto loans, previously at around 10 basis points (bp) between 2004 and mid-2007, rose steeply to reach over 400bp during the second quarter of 2009 (Chart 8) However, spreads subsequently halved to around 200bp in November and December Spreads for AAA-rated credit cards peaked even higher at 700bp in Q2 2009 but were down to less than 300bp by end-2009 The number of downgrades to European securitisation issues doubled to 2,216 in 2009 from 1,174 in 2008 Upgraded issues halved from 184 to 86 between 2008 and 2009 The downturn in the securitisation market is demonstrated in the contrast with 2007 when 481 upgrades were more than double the 214 downgrades (Chart 9) The Q4 2009 total of 677 downgrades was slightly down on the 728 in Q4 2008 Securitisation 2010 Chart Securitisation issuance in Europe Annual issuance, $bn - bars: gross MBS & ABS issuance - line: net issuance for 2007-2009 1100 1000 900 Mortgage-backed securitisation Asset-backed securitisation 800 700 600 500 400 300 200 100 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: European Securitisation Forum, Dealogic Table European securitisation by type of collateral Issuance, $bn RMBS CMBS MBS total CDO Other ABS Europe total 2005 180 61 241 15 151 407 2006 307 75 383 138 83 604 2007 356 65 421 122 79 622 2008 862 869 71 107 1047 2009 333 22 355 149 73 577 % share RMBS CMBS MBS total CDO Other ABS Europe total 44 15 59 37 100 51 12 63 23 14 100 57 10 67 20 13 100 82 83 10 100 58 61 26 13 100 Source: European Securitisation Forum Chart Spreads on AAA-rated European ABS Basis points at mid-year & end-year on 1-4 year auto loans 400 350 300 250 200 150 100 50 2002 2003 2004 2005 2006 2007 2008 2009 Source: Fitch Ratings, European Securitisation Forum IFSL SECURITISATION IN REST OF THE WORLD Australia Issuance of securitised bonds by Australian issuers has been substantially curtailed from mid-2007, although the second half of 2009 provided some evidence of a nascent recovery (Chart 10) Having declined from $68bn in 2007 to $18bn in 2008, issuance picked up slightly to $21bn in 2009 The bulk of the issues in 2008 were purchased by the Australian Office of Financial Management (AOFM) as part of the Australian government’s injection of liquidity into financial markets However, there has been less dependence on AOFM with four out of five RMBS issued in recent months amounting to A$5.3bn not requiring AOFM as a cornerstone investor Less than 10% of issuance required AOFM support, down from 80% in the first half of the year The pick up in investor demand is helped by the relatively high quality of the underlying assets and is reflected in declining spreads There has also been a substantial narrowing of the gap between secondary and primary market spreads, suggesting that the market has worked through much of the overhang of supply created by the liquidation of structured investment vehicles MBS, particularly RMBS, remains the mainstay of the Australian market, accounting for 82% of issuance in 2009 There was no offshore issuance in 2009, which up to 2007 had accounted for around half of issuance Canada Although Canadian banks did not invest significantly in the securitisations which became toxic to the balance sheets of many US and European banks they have faced liquidity constraints in the wholesale funding market The Bank of Canada in 2008 therefore committed to purchasing up to C$75bn of insured mortgage assets through the Canada Mortgage and Housing Corporation These helped underpin term-backed ABS and MBS in 2008 and 2009, which otherwise has been significantly impaired Gross securitisation in Canada in 2008 fell back to $57bn in 2009 from $77bn in 2008, having jumped from $45bn in 2007 (Chart 11) Previously, securitisation in Canada had grown steadily and become increasingly broad-based since its inception in the mid-1980s Japan Securitisation in Japan fell to an estimated $50bn in 2009 from $58bn in 2008, having dropped by a quarter from $76bn in 2007 (Chart 9) In 2008, volume declined significantly across all asset types especially CMBS, where the decline in transactions was caused by a lack of liquidity in the real estate finance market Latin America In Latin America Moodys estimate that issuance fell from $18bn in 2008 to $18bn in 2009 (Chart 13) Activity in Latin America has been less affected by the credit crunch, as the markets have ben less exposed to CDOs and subprime mortgages International issues have fallen away in the past three years from from $4.6bn in 2007 to $0.5bn in 2009, with local issues therefore predominating Brazil was the largest issuer in 2009 with $5.0bn, followed by Mexico $2.8bn and Argentina $2.6bn Asia South Korea remains the biggest issuer in Asia after Japan Issues Securitisation 2010 Chart Ratings changes on European securitisation Number of upgrades & downgrades of European securitisations 750 Downgrades 600 450 300 150 Upgrades 2007 2008 2009 Source: Fitch Ratings, European Securitisation Forum Chart 10 Securitisation issuance in Australia $bn 90 ABS MBS 80 70 60 50 40 30 20 10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: Reserve Bank of Australia Chart 11 Securitisation issuance in Canada $bn 80 70 60 50 40 30 20 10 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: Bank of Canada IFSL recovered to $36bn in 2009 from $21bn in 2008, having previously declined steadily over a number of years from $40bn in 2001 Main types of securitisation to benefit from the growth included MBS, non-performing ABS and corporate ABS Since 2003, other Asian countries have entered the securitisation market facilitated by the introduction of an appropriate legislative framework Issuance in 2009 was estimated at $10bn Securitisation 2010 Chart 12 Securitisation issuance in Japan $bn 90 80 70 60 50 40 30 20 10 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: Fitch Ratings Chart 13 Securitisation in emerging markets Annual value of issuance, $bn 40 35 South Korea 30 25 20 15 Latin America 10 Other Asia 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: Fitch Ratings, Financial Supervisory Service (South Korea) IFSL Securitisation 2010 Securitisation and its main structures Securitisation offers a way for an organisation to convert a future stable cash flow arising from a financial asset, usually some form of loan, into a lump sum cash advance This is achieved by converting the future cash flows into tradable securities which are sold as a means of raising capital Securitisation markets have been in crisis due to a variety of factors Industry proposals to restore viability by attracting a new investor base are set out on page Mortgage-backed securities Agency and private label mortgage backed securities are based on the ‘pass-through’ and have been the most common structure for US securitisation since the market was developed in the 1980s Under a pass-through the MBS issuer acquires mortgages from the original mortgage lenders, which are then examined to ensure they meet credit quality guidelines Loans with similar characteristics with regard to yield and maturity are pooled together and the servicer ‘passes through’ a pro rata share of all interest and principal payments to the investors The actual packaging or ‘pooling’ can be undertaken by the US mortgage federal agencies or by private enterprises Private label MBS are companies other than Fannie Mae, Ginnie Mae and Freddie Mac that create and sell MBS or other bonds Private label MBS has slumped by over 95% since the onset of the financial crisis Residential mortgage-backed securities (RMBS) are debt instruments secured by residential property Commercial mortgage-backed securities (CMBS) are debt instruments secured by commercial property such as offices, shops, factories and warehouses, as well as blocks of flats and hotels They enable banks to pool their commercial property loans and repackage them Collateralised mortgage obligations (CMOs) CMOs were created because pass-through securities don’t always match investor requirements, due to a lack of certainty of cash flow and mismatch of maturities CMOs were first issued in the early 1980s and offered a full spectrum of maturities: banks and thrifts wanted a shorter term instrument while pension funds and insurance companies wanted long term securities Asset-backed securities (ABS) ABS are bonds or notes backed by financial assets that have been issued in the US since 1985 These assets consist of receivables, other than the mortgage loans, that have been securitised ABS therefore span home equity loans, credit card receivables, car finance, collateralised debt obligations (CDOs), student loans, equipment leases and manufactured housing contracts CDOs refer to a debt obligation whose underlining collateral and source of payments consist of existing bank loans and other forms of debt obligations, such as emerging market and high yield debt IFSL OTHER SOURCES OF INFORMATION AFME/ESF Securitisation Data Report (quarterly) www.afme.eu Securitisation 2010 IFSL Research: Report author: Duncan McKenzie Director of Economics, Duncan McKenzie d.mckenzie@ifsl.org.uk +44 (0)20 7213 9124 Bank of Canada Weekly financial statistics Financial System Review, December 2008 www.bankofcanada.ca Senior Economist: Marko Maslakovic m.maslakovic@ifsl.org.uk +44 (0)20 7213 9123 International Financial Services London 29-30 Cornhill, London, EC3V 3NF Financial Supervisory Service (South Korea) Weekly Newsletter www.fss.or.kr Fitch Ratings www.fitchratings.com This report Securitisation 2010 is one of 15 financial sector reports in IFSL’s City Business Series All IFSL’s reports can be downloaded at: www.ifsl.org.uk © Copyright April 2010, IFSL Data files Datafiles in excel format for all charts and tables published in this report can be downloaded from the Reports section of IFSL’s website www.ifsl.org.uk Reserve Bank of Australia Statement on Monetary Policy (quarterly) www.rba.gov.au Sign up for new reports Securities Industry and Financial Markets Association (US) Research Quarterly www.sifma.org If you would like to receive immediate notification by email of new IFSL reports on the day of release please send your email address to download@ifsl.org.uk Thomson Reuters Debt Capital Markets Review (quarterly) www.thomsonreuters.com In partnership with: International Financial Services London (IFSL) is a private sector organisation, with nearly 40 years experience of promoting the UK-based financial services industry throughout the world City of London Corporation administers and promotes the world’s leading international finance and business centre and provides free inward investment services This brief is based upon material in IFSL’s possession or supplied to us, which we believe to be reliable Whilst every effort has been made to ensure its accuracy, we cannot offer any guarantee that factual errors may not have occurred Neither International Financial Services London nor any officer or employee thereof accepts any liability or responsibility for any direct or indirect damage, consequential or other loss suffered by reason of inaccuracy or incorrectness This publication is provided to you for information purposes and is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or as the provision of financial advice Copyright protection exists in this publication and it may not be reproduced or published in another format by any person, for any purpose Please cite source when quoting All rights are reserved  ... SOURCES OF INFORMATION AFME/ESF Securitisation Data Report (quarterly) www.afme.eu Securitisation 2010 IFSL Research: Report author: Duncan McKenzie Director of Economics, Duncan McKenzie d.mckenzie@ifsl.org.uk... biggest issuer in Asia after Japan Issues Securitisation 2010 Chart Ratings changes on European securitisation Number of upgrades & downgrades of European securitisations 750 Downgrades 600 450... $10bn Securitisation 2010 Chart 12 Securitisation issuance in Japan $bn 90 80 70 60 50 40 30 20 10 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: Fitch Ratings Chart 13 Securitisation