Europe's Prestige Brand Builds Market Cred

It’s been exactly one year since ‘Prime Collateralised Securities,’ (PCS) the prestige label for European deals that meet certain criteria, was announced at IMN’s Global ABS Conference in Brussels in 2012. 

The label was designed to be a simple way of communicating and identifying securitizations that meet predefined best practice standards with regard to quality, transparency and standardization.  Its sponsors hoped that promoting these standards would make this asset class more appealing to a broader base of investors, and that this, in turn, would boost issuance and improve liquidity in the secondary market.
So far, the initiative’s success has been limited.

PCS can boast that, since it was introduced, roughly 70% of all investor-placed issuance that has come out of Europe has opted to obtain the label. But this high rate of adoption is less impressive than it might seem, because that 70% amounts to only 12 deals as of April 2013. 

In an interview with ASR, Ian Bell, head of the PCS Secretariat, said that the fact that only 12 deals have been issued with the new PCS label is not a “reflection on the label,” but rather a consequence of efforts by both the European Central Bank’s (ECB) and the Bank of England to inject liquidity into their respective banking systems.

“It is very difficult to convince a treasurer to do a structured finance deal which will, all in all, come back at over 100 basis points, when they can turn around and get free funding from the central bank”  by using a securitization as collateral in a sale and repurchase (repo) agreement, said Bell.

The impact that this has had on the securitization market is unfortunate, but unavoidable. “The central bank liquidity program is about preserving the banking system in Europe and it has done a great job in this respect, but how to extricate ourselves from this position is a really continent-wide deep conundrum,” he said.

Now that Europe’s banking system is on life support, the central bank faces the challenge of weaning banks from its liquidity support program, without killing them. Bell says that, especially for peripheral countries in the European Union, such as Spain, Portugal and Greece, there is no easy solution. 

A ‘Credible, Independent Voice’ in Policy Debates

At the onset, part of the impetus for PCS was a desire to impact the development of European regulation affecting securitization.  On that level, Bell said, PCS has had a great start. “We have in a very short amount of time been able to establish PCS as a credible, independent voice in the policy debates,” he said.

Bell, the former head of European securitization at Standard & Poor’s, spoke to ASR from Brussels. He said that PCS has been able to quickly establish its credibility with regulators. He attributes this success in part to the independent status of the PCS initiative.

The group has a two-tier structure: the PCS Association, which is comprised of a group of independent directors from outside the securitization industry; and the PCS Secretariat, led by Bell, which is responsible for the day-to-day administration and management. The PCS Secretariat grants the PCS label to securities and monitors the transactions for compliance after they are issued.

“It is clear that we are less shy about saying that things went wrong and this approach has been refreshing for policymakers,” Bell said.

However, PCS must first establish a track record before regulators are able to formally endorse the label in regulation – it has to be seen as a success in the market and it must show that it has credibility with investors.  Bell pointed out that, although the PCS initiative was announced in June 2012, the first issue to carry the label, Bilkreditt 3, a Norwegian auto deal issued by Santander Consumer Bank, was only completed in November of last year. 

“Regulators are always going to be the last movers and [are] never going to be the first movers – they haven’t closed the door on using labels like PCS in regulations but they need to ensure that the PCS is successful and credible  [before endorsing it], and that could take another year or more,” he said.

Bell is encouraged by the good reception the label has received so far. The latest endorsement comes by way of Benoît Coeuré, a member of the executive board of the ECB.