Kroll Bond Rating Agency UK Limited (KBRA) released its 2022 Outlook for European structured finance, exploring key trends facing the market in the year ahead.

Inflation has been at the forefront of discussion amongst capital market participants as it plays an important role in how the markets will develop in the year ahead. Depending on how various elements unfold, the implications for the European securitisation market may be significant. From collateral performance to central bank actions, the market will be impacted by inflationary forces in the new year. Further, the discovery of a new and potentially more virulent COVID variant is a reminder that the pandemic is far from over. The withdrawal of government support measures presents a challenge to performance of securitisation markets in Europe. As growth and economic activity return, the removal of pandemic support from governments and central banks risks impacting some creditors.

Key Takeaways

• The roll-off of government pandemic support is likely to have a negative impact on collateral performance. Higher stressed borrowers such as non-conforming and reperforming loan portfolios are likely to see the most impact.

• An increased risk of persistent inflationary pressures could lead to rising interest rates and central bank actions that could ultimately impact borrowers and the market by increasing both the cost of living and cost of borrowing.

• A positive environment for securitisation issuance as floating rate and collateralised transactions are likely to appeal to investors in a rising rate environment. Total issuance is expected to decline to EUR197 billion, but higher investor distributed issuance could represent EUR115 billion of total issuance. Maturity of European securitisation regulations, and the removal of central bank intervention, is likely to support the return of prime issuers to the securitisation market over the medium to long term.

• Ongoing development in environment, social, and governance (ESG)-related securitisation issuance is expected to continue in 2022. The market will likely pursue a “use of proceeds” style issuance to a greater extent, while collateral, metrics, and definitions progress.

• Despite the challenges to European securitisation during the pandemic, ratings stability has been high, excluding the troubled aircraft ABS market. Excluding downgrades in aircraft ABS, upgrades exceeded downgrades across ABS, RMBS, CMBS, and structured credit over the past two years, with a rating stability ratio of 98%.