2019 has been an interesting year in the capital markets and securitisation arena. The coming into effect of the EU’s new Securitisation Regulation and the (full) implementation of the new Prospectus Regulation were big events.
Both regulations contain an element of consolidation and updating as well as some entirely new elements. This generated a flow of queries and questions which kept legal advisors thinking and adapting to the new detail.
These regulations form part of the overall development of the EU’s Capital Markets Union (CMU). The objectives of CMU includes deeper integration of capital markets across the EU, reduced fragmentation, diversified financing sources and strengthened cross border capital flows.
Legislative innovation often produces uncertainty as new and untested rules come into force and get implemented into products and processes. On the securitisation side, in particular, this seems to have impacted overall deal flow. We highlight this with some figures below.
It is also the case that the slow progress of the EU in finalising the second level implementation measures required to flesh out the Securitisation Regulation has heightened uncertainty.
Then there is the constant Brexit shaped ‘elephant in the room’. What to do … deal or not? This seismic political phenomenon has driven business and regulatory enquiries all year relating to the impact on passporting rights for prospectuses.
The Securitisation Regulation (Regulation (EU) 2017/2402) is an integral part of the EU’s objective to implement a high-quality and stable securitisation market in the EU. This and Ireland’s ‘European Union (General Framework for Securitisation and Specific Framework for Simple, Transparent and Standardised Securitisation) Regulations 2018 (S.I. No. 656 of 2018)’, apply from 1 January 2019.
The EU considers securitisation to be an important element of properly functioning financial markets. This is because it facilitates the diversification of funding sources and the allocation of risk across the EU’s financial system. But, ten years since the “Great Recession”, the securitisation market in the EU is still a shadow of its former self. The EU’s 2019 issuance (year to date) of EUR 133 billion is a far cry from its peak of EUR 818 billion in 2008.
The regulation lays down a general framework for regulating in-scope securitisation activity and sets out certain requirements that apply to securitisation activity in the EU i.e. risk-retention and due diligence rules, requirements in relation to investor transparency, a ban on re-securitisation and criteria for credit granting. It also creates a specific framework for simple, transparent and standardised (‘STS’) securitisation.
As firms confront the new regulatory demands, the volume of European securitisations has plummeted. In the first quarter of 2019, firms issued only EUR 32 billion of securitised products – a decrease of 63% from the fourth quarter of 2018, according to data from the Association for Financial Markets in Europe.
Read more about this here
The purpose of the Prospectus Regulation (Regulation (EU) 2017/1129) is to harmonise requirements for the drawing up, approval and distribution of the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market. The objective of the regulation is to ensure investor protection and market efficiency, in accordance with high regulatory standards.
The regulation applies to persons:
- seeking admission of securities to trading on an EEA regulated market, including the Irish Stock Exchange plc, trading as Euronext Dublin, or
- making an offer of securities to the public within the EEA, albeit not seeking admission to trading on an EEA regulated market
It really remains to be seen whether the new provisions will strike an appropriate balance between making access to capital markets more cost-effective for issuers, while providing adequate disclosure to investors. Particularly given the constraints placed on risk factors and the new requirements for prospectus summaries.
Read more about this here
We discussed what would happen if the UK had left the EU on 31 October 2019 - with or with-out a deal - and the implications for the passporting of prospectuses for debt securities. The update is that the UK is still in the EU and there is still no agreed deal.
The loss of passporting rights in a no-deal Brexit has the potential to be disruptive. In the short term, EU issuers operating in the UK can draw some comfort from the ‘onshoring’ of EU prospectus rules and transitional provisions in the UK.
But issuers operating out of the UK into the EU will likely need to identify a new home Member State as there are no comparable transitional provisions in the EU’s legislation. The longer term effects of Brexit are unknown, but firms may be able to mitigate potential problems with proper contingency planning.
Looking forward to 2020, we see positive opportunities and development – especially in Ireland.
Based on the data coming through from the Central Bank of Ireland, it appears that Ireland is maintaining its position as a leading jurisdiction in which to establish SPVs for the purpose of issuing debt securities. This is the case for standard corporate debt issuances and securitisation transactions. To illustrate this, Ireland has the highest number of securitisation assets in the euro area. Ireland’s share of euro area assets is 23.6%. This is €42 billion more than second-place Italy.
The EU has given securitisation its seal of approval as a method of financing. Ireland is a leading jurisdiction through which to transact. We expect this to lead to a further increase in securitisation activity in Ireland during 2020. This should manifest itself in relation to the refinancing of loan portfolios which have been acquired over the last few years and on international deals which are structured through Ireland.
Whatever the outcome, our Debt Capital Markets team will remain at the forefront of transactional and technical development.
The content of this article is provided for information purposes only and does not constitute legal or other advice.
 See for instance, The Central Bank of Ireland’s Research Techical Paper entitled ‘International Debt and Special Purpose Entities: Evidence from Ireland’, Vahagn Galstyan, Eduardo Maqui & Peter McQuade, Vol. 2019, No. 13 - https://www.centralbank.ie/docs/default-source/publications/research-technical-papers/13rt19-international-debt-and-special-purpose-entities-evidence-from-ireland-(galstyan-maqui-and-mcquade).pdf?sfvrsn=4