For years, the term titling has been inevitably associated with the financial crisis of 2008. However, the European market has little to do with the American model that caused the collapse of the subprime mortgages. Today, European degrees, since the RMBS (Residential Mortgage-Backed Securities) hasta los CLOs (Collateralized Loan Obligations), are consolidated as a solid, regulated asset with a growing role within fixed income strategies.
More mature and regulated market
The volume of European securitizations currently exceeds 560,000 million euroswith a diversified structure: about half corresponds to CLOs, around 26-27% to RMBS and the rest to other modalities.
Jorge DiazSales Director Eurizon explains that European regulation has been key to reinforce the security and transparency of the market. «Europe never had the low-quality mortgage CDOs that collapsed in the US. In 2008, European RMBS were solid assets, barely registered defaults, the default rate was less than 1%, and they quickly recovered in price. With current regulation, the market is even more resilient».
Greater profitability with controlled risk and resilience
In a credit environment with compressed spreads, the most attractive opportunities are today concentrated in the CLOshigh yield corporate loan securitizations. From Eurizon, Jorge Díaz points out that “an RMBS offers between 60 and 80 basis points of spread, while an AAA-rated CLO is around 140. That is why we see the most value currently”.
These instruments offer interesting returns with hardly any duration, which makes them a flexible alternative to capture yield without significantly increasing rate risk.
Furthermore, he points out that both CLOs and RMBS are closely linked to the economic cycle, but have overcollateralization which give them a strong absorption capacity in the face of adverse scenarios. «Securitized assets include reserves to cover possible defaults. This overcollateralization is what makes the market so resilient». And in the case of CLOs, remember that No default has been recorded since its creation about 15 years ago.
Vision of the selectors: trust, regulation and communication
Javier BlascoManager and Senior Analyst of Open Architecture at CaixaBank AM, recognizes that one of the biggest challenges is transfer confidence to the end customer. «As selectors, we invest through funds from third-party managers, and the rating reference is essential. The European market is mostly AAA, which provides peace of mind and makes it easier to explain that these are high-quality issues».
Furthermore, he adds that regulation also acts as a element of credibility: «Each improvement in regulations, just as happened with banking, strengthens the perception of security. Today the structures are more robust and transparent».
But still, he admits that the memory of 2008 pesa. “The subprime crisis was a global media shock and it is difficult to change that perception, even if the European context was totally different”.
For its part, Javier Gayol, Head of Institucional Solutions at Santander AM, highlights that European securitizations compete in the same space as investment grade corporate credit, high yield or subordinated bank debt. And explains that “offer a pick up of additional profitability on investment grade and sovereign debt, with very contained credit risk. The key is not to confuse liquidity risk with solvency risk and to adequately diversify the underlying assets”. Therefore, this decorrelation with other fixed income instruments makes them a valuable complement within institutional portfolios.
Despite their advantages, liquidity remains a challenge for funds with daily valuations. From Caixabank they point out that “When you manage long-only portfolios with daily liquidity, it is difficult to work with instruments whose NAV is updated weekly or biweekly”. “Not only for operations, but also for internal assessment”. Therefore, the asset fits better in strategies of alternative or longer horizon investment.
And the entities agree that securitizations are no longer a mere opportunistic bet. “In our case, they represent around 5% of fixed income portfolioswith a conservative approach and focused on senior and liquid tranches”they explain from Santander AM. “In a still positive cycleCLOs provide additional profitability and diversification. For this reason, we consider that they should form a structural part of the portfolios”.
What route remains for its real adoption?
For this market to gain visibility and penetration in retail or semi-professional portfolios, experts agree on three priorities: training, transparency and standardization.
From Santander AM, Javier Gayol highlights that «It is essential to explain what is behind each asset, the collateral, the underwriting rules or the stress scenarios. The more homogeneous and comparable the information is, the more trust it will generate».
While from CaixaBank, Javier Blasco adds that the financial education will be decisive: «In Spain remains a little-known asset. It must be explained with examples and placed in the current context, not in 2007. Furthermore, its inclusion in recognized benchmarks would help legitimize the asset among institutional and retail investors.”.
In the end, European securitizations are experiencing a silent rebirth: more regulated, more transparent and with a solid history of solvency. CLOs and RMBS have gone from being viewed with suspicion to being considered an efficient tool to diversify portfolios and improve profitability. The stigma of the past still needs to be overcome, but the consensus between managers and selectors is clear: The new generation of European securitizations is here to stay.
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