In July, I was invited to write an article for Finance Dublin Yearbook 2021 in relation to securitisations using Irish SPVs. In my article, I provided some market observations in respect of the period from March 2020 to July 2021 and also discussed some new and developing trends. The text of my article is included below:

Despite the unprecedented challenges posed by the COVID-19 pandemic in the last fifteen months, securitisation structures have generally weathered the storm well and have demonstrated a capacity to withstand the associated market volatility.

As vaccination programmes gain momentum across Europe and the threat of the virus recedes, the outlook is positive for securitisation transactions using Irish SPVs in the coming 12 months.

CLO Transactions

After a positive start, pricing of new issuance CLOs in the European CLO market came to an abrupt pause at the end of the first quarter of 2020 amid concerns around the impact of the pandemic on CLO portfolios.

Following a brief hiatus, pricing of new issuances did restart during the second quarter of 2020, albeit at a slower pace and with some new features. New issuances around that time tended to be smaller in size with shorter non-call periods and / or reinvestment periods. New "loss mitigation" and "workout" features designed to give collateral managers greater flexibility to hold and participate in restructurings of CLO assets also appeared in CLO transaction documents.

The second half of 2020 saw the CLO recovery gather momentum. We also experienced intense activity in the fourth quarter of 2020 associated with the migration of the majority of existing CLO transactions structured using Dutch B.V.s to Ireland in response to changes to the Dutch VAT regime. Approximately eighty Dutch CLO transactions migrated from the Netherlands to Ireland in the final quarter of 2020.

Increased confidence around the roll-out of COVID-19 vaccination programmes and pent-up investor demand resulted in attractive pricing in the first half of 2021, prompting a large volume of new Euro CLO issuances. Attractive pricing at this time also prompted a wave of reset / refinancing transactions as collateral managers sought to reduce the cost of capital on their existing CLO transactions.  Data from Fitch Ratings confirms that some 38 new Euro CLO transactions priced in the first half of 2021. There have been over 100 reset / refinancing transactions during this period.

It seems likely that 2021 will be a bumper year for CLOs and possibly a record breaker. Assuming that European economies continue to recover from the COVID-19 pandemic and vaccination programmes continue to succeed, it is likely that pricing will remain attractive on CLO transactions resulting in further new issuances, resets and refinancings for the remainder of this year.

CMBS Transactions

The European CMBS market had one of its best half-year performances in recent memory in 2021.

According to market reports, new European CMBS issuances for the first quarter of 2021 hit EUR 2.1 Billion. Demand for the CMBS product remains high, but it has been interesting to see some new deals being backed by a slightly different class of commercial property that may have fared better during the COVID-19 pandemic (e.g. logistics assets). It has also been interesting to see the trend towards ESG investing continue to gather momentum and we were pleased to advise on the first ever green European CMBS issuance complying with the ICMA Green Bond Principles last year.

The full impact of COVID-19 on the demand for and price of office buildings and retail space remains unknown and it will be interesting to see what impact this will have on the type of underlying assets that back CMBS transactions going forward. The impact on legacy CMBS transactions also remains to be seen.

The outlook for the CMBS market for the remainder of 2021 remains positive and we anticipate continued activity in this area.

Non-Performing Loan (NPL) Transactions

Shortly after the onset of the pandemic, we saw increased interest in the establishment of Irish section 110 structures designed to capitalise on prevailing market dislocation. Market participants at that time predicted a wave of defaults in the retail, aviation and hospitality sectors. However, due to the various measures implemented across Europe designed to support and protect businesses, the wave of COVID-19 related non-performing loans predicted in 2020 did not materialise. Consequently this market has not been as active as originally anticipated.

It remains to be seen how businesses (particularly in the retail, hospitality and aviation sectors) will perform once government COVID-19 supports are tapered off but it seems inevitable that there will be an uptick in NPL activity in the coming months. Recent amendments to the European Securitisation Regulation which were designed to facilitate NPL securitisations and help Banks cleanse their balance sheets indicate that regulators too anticipate an increase in NPL activity across Europe in the short to medium term.

Other ABS Transactions

As the post-COVID-19 economic recovery takes hold across Europe, we anticipate increased issuances across many other categories of structured products including RMBS, Auto Receivables and Credit Card Receivables.

Non-Correlated Products

Non-correlated products such as catastrophe bonds continue to perform well and were relatively unscathed by the COVID-19 pandemic although they were not totally immune to shifts in market sentiment.

We were pleased to advise on the first multi-arrangement catastrophe bond programme approved by the Central Bank of Ireland in 2020 – we now expect this to be the preferred approach for ILS sponsors over stand-alone structures, especially for repeat issuers.

We remain optimistic about the securitisation market for the remainder of 2021 and predict continued high levels of activity across the majority of products for the remainder of the year. Ireland will continue to be the European jurisdiction of choice for the establishment of issuers of securitisation transactions. We also expect the trend towards ESG compliant securitisations to continue.