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January 31, 2020  

Brexit Opens Door to Pickup in ABS Issuance

With the U.K.’s exit from the European Union set for today, the region’s structured-finance market is coming back to life.

Several deals from U.K. and E.U. issuers hit the market this week, including a £643.5 million ($842 million) mortgage-bond offering from Kensington Mortgage’s Finsbury Square program. And sources described a healthy pipeline of transactions to come, with investors showing strong demand.

Indeed, some recent securitizations have fielded more orders than the underwriters could accommodate. They included Kensington’s transaction, which was upsized from $651 million.

Doubts about how the Brexit process would unfold, and confusion over the ways it might affect trading, had been weighing on market conditions since it was approved in a June 2016 referendum. More recently, a consensus emerged that the impacts would be minimal — with the official separation date as perhaps the last major variable.

Now, with Brexit a reality, uncertainty surrounding the withdrawal has all but vanished.

The prevailing belief among securitization professionals is that the move doesn’t require adjustments to deal structures, thanks in part to measures implemented as part of post-credit-crisis regulatory updates. What’s more, there appears to be little appetite in the U.K. or E.U. to revisit the rulemaking process so soon.

It also helps that the U.K. passed a statute in 2019 that harmonized its securitization rules with E.U. controls. And while underwriters that market and distribute U.K. offerings in the E.U. eventually will need separate regulatory permissions, they won’t become necessary until 2023.

European Parliament ratified the Brexit withdrawal agreement on Jan. 29.

Offerings from U.K. issuers could stand to benefit the most, with sources describing healthy demand from investors in the E.U. and elsewhere. “There will be a pickup in supply,” a London-based asset manager said. “And the lifting of the Brexit cloud should help promote stronger demand for U.K. securitizations.”

London also has been at the center of recent hiring campaigns that law firms, rating agencies and banks have been carrying out in anticipation of Brexit. “There is a massive pool of capability in London,” one banker said. “And it has a global reach. Given many E.U. economies have challenges compared to the U.K., Brexit should make London even stronger.”

That said, the implementation of Brexit promises to remove what may be the last major political and economic roadblock to a thriving securitization industry elsewhere in Europe. Issuance of asset- and mortgage-backed bonds underpinned by European collateral had struggled to maintain traction since 2016, totaling $81.9 billion that year, $73.7 billion in 2017, $88 billion in 2018 and $77.3 billion in 2019, according to Asset-Backed Alert’s ABS Database.

Over that stretch, U.K. deals dropped from more than half of the total to 46% in 2018 and 47% in 2019.