Solvency II is turning out to be bad news for structured credit. The high level of capital that insurers, and now probably pension funds too, will have to hold against AAA bonds will cause an exodus of investors from these assets. That was the feeling this month at the year’s biggest securitisation conference.
One delegate at the event – which still attracts 3,000 people involved in CMBS as well as RMBS and other asset-backed capital markets – said it is clear that CMBS rides at least in part on the back of infrastructure serving other ABS classes. So if Solvency II knocks back all the structured credit markets, and its infrastructure – sales, trading, research – starts to erode significantly, it makes the hurdle CMBS must overcome for a revival even higher.
In contrast, Solvency II treats whole loans – unsecuritised commercial mortgages – more favourably. Although they deny that it is regulation driving them, insurance companies and pension funds are increasingly attracted to mortgage lending.
There is no way insurance companies and pension funds will take the place of banks as primary sources of debt capital, but one-by-one, ‘real money’ investors with supplementary offers of funding have started moving in.
Banks and building societies provided 90% of European debt finance in recent years; but that figure has started to drop and last year insurers provided 15%. The newcomers say this is due to the opportunity in the market now, with real estate a vast area of credit, the banks in retreat and strong returns available.
It is not clear whether this was a cunning plan all along on the part of regulators. At the securitisation conference, Mark Nichol, a CMBS researcher at Bank of America Merrill Lynch, had an interesting take on the subject; having recently attended a property industry meeting with the Bank of England, his impression was that regulators would like to see real estate taken away from banks, which they think would reduce volatility. Let’s hope the new market entrants don’t make the same mistakes.
For borrowers who have seen former banking partners fall away in the past two years, it is a confusing time. They will have to work out the differing objectives of this mix of lenders – and quite a few would-be lenders have yet to figure that out too. Lenders seeking to partner with other lenders must do the same.
In this month’s Viewpoint, our commentators say the structure and terms of debt capital also need to change to encourage this new generation of lenders. So, there need to be more long-dated and fixed-rate loans with fees for early repayment. In return, lenders must make concessions for borrowers seeking flexibility to manage assets and sell properties.
Hopefully the wheels will also be oiled by people who already understand borrowers’ needs and how banks work: ex-bankers quitting capital-starved banks to follow the money at the new-generation lenders a trend that is also already under way.