Mario Draghi's Year of ABS Buying Leaves Investors Underwhelmedby
Purchases trail other assets as investors seek more clarity
Issuance cools even as Draghi supports ABS to boost lending
A year of asset-backed securities purchases by the European Central Bank has left investors underwhelmed and confused.
The central bank’s ABS buying has been dwarfed by other stimulus efforts, and a shortage of detail about what bonds have been bought and why has led to complaints about transparency. The purchases have also failed to prevent a slowdown in ABS issuance, even as ECB President Mario Draghi voices support for securitization as a way of boosting lending.
“The announcement that the ECB intended to buy ABS had more of a positive impact on the market than the purchases themselves,” said Mehdi Kashani, head of European asset-backed securities and structured credit trading at Royal Bank of Canada in London. “A lack of clarity on the ECB’s intentions for the ABS market, the mechanics by which it purchases the bonds and the prices it pays has left the market confused.”
The central bank has only bought 14.8 billion euros ($16 billion) of asset-backed notes since the first purchase on Nov. 21, 2014, making it the smallest part of the 568 billion euros spent under an asset-buying program so far. By contrast, covered-bond purchases total 134.1 billion euros. The slow progress is because most ABS buying has been outsourced and it can take more than a week for a deal to be approved.
An ECB spokeswoman declined to comment on the ABS program, and instead pointed to a speech by Draghi on Friday. The central bank president said that since the asset-purchase programs started, access to finance has become one of the least important concerns among the smaller and medium-sized enterprises it surveys.
The ECB’s decision to buy ABS has divided the market between notes that are eligible and ineligible for the purchase program, said Alexander Batchvarov, head of international structured finance research at Bank of America Corp. in London. Investors could manage this split better if they knew whether a new ABS would be classed as eligible before issuance, he said.
“The ECB created a natural cliff in the market,” he said. “That’s inevitable, but how it is done is important -- the ECB could have been more transparent about the eligibility criteria.”
The central bank plans to continue buying ABS through September as part of quantitative easing. It started buying debt from governments and agencies under the asset-buying program in March, and Draghi has said the ECB will consider further easing at a meeting next month.
To improve the ABS program, the ECB could consult more with dealers and provide greater detail on the mechanics, said RBC’s Kashani. It could also buy lower-ranking, or mezzanine, bonds to lower the cost of securitizations, as well as helping improve regulation, he said.
Tougher rules have contributed to ABS issuance cooling to 75.6 billion euros so far this year from 77.3 billion euros a year earlier, based on JPMorgan Chase & Co. data. They have also limited the amount of money that investors have diverted to ABS from covered bonds and government debt, even amid negative yields, Batchvarov said.
Regulators clamped down on ABS following the 2008 financial crisis, which was widely blamed on securitized products. Requirements for products that meet certain standards are now set to be lightened in order to help spur issuance and encourage bank lending. Draghi has aided this regulatory reversal by championing and buying ABS.
“The most important achievement of the ECB’s program has been to remove the stigma that was previously attached to ABS,” said Patrick Janssen, an ABS money manager at Prudential Plc’s M&G unit, which oversees 247.5 billion pounds ($380 billion). “However, until securitizations have lower capital charges for banks and insurers it doesn’t matter if the ECB buys 5 billion or 50 billion, the market will not be revived.”