INTRODUCTION Contributed by: Tamara Box and Sarah Caldwell, Reed Smith
dling pandemic-era savings, has strained house - hold budgets, particularly among low-income borrowers. Consequently, investors have exhib - ited increased caution toward lower-rated con - sumer ABS products, gravitating instead toward business-oriented ABS with stronger balance sheet fundamentals. As for UK business, securitised debt instruments have faced higher refinancing costs, with aver - age rates on senior debt increasing from 4.5% to 7.0% over the past two years. These elevated rates have put pressure on cash flow, impact - ing the credit quality of securitised products backed by commercial assets. With corporate delinquencies expected to rise, particularly in sectors sensitive to labour cost increases and energy price volatility, UK issuers are increas - ingly turning to long-term fixed-rate products to mitigate refinancing risks. The European commercial mortgage-backed securities (CMBS) market has also shown signs of distress, notably within the office space seg - ment, where changing work patterns have led to rising vacancy rates and falling rent growth. Although the CMBS issuance volume rebounded in Q3 2024, delinquency rates are anticipated to rise from 4.8% to higher single digits as loans mature, potentially impacting investor sentiment in 2025. However, niche sectors like single-fam - ily rentals remain attractive, as high mortgage rates make renting a more affordable option for many households. Australia’s securitisation market has benefited from relatively low delinquency rates, supported by low unemployment and a tight rental market. Prime RMBS issuance saw an uptick of approxi - mately 50% in Q3 2024, underlining the stabil - ity of the Australian housing sector amid global economic uncertainty. However, Australian issu -
ers remain vigilant about inflation’s impact on household spending and market participants are watching carefully for any signs of consumer credit deterioration. Regulatory Developments The securitisation regulatory landscape in 2024 has seen substantial changes across the US, the UK and the EU, with common themes focused on enhancing transparency, ESG integration and managing capital requirements. These regulato - ry updates are shaping the securitisation market by influencing investor confidence, guiding issu - ance strategies and addressing cross-jurisdic - tional challenges. Enhanced transparency and disclosure requirements In November 2024, both the UK Financial Con - duct Authority (FCA) and the EU implemented new transparency rules aimed at increasing disclosure obligations for securitisation issuers. These requirements mandate detailed pre-trans - action and post-issuance reporting, particularly for ESG-labelled products. The EU’s renewed focus on ESG securitisation is part of its Capital Markets Union (CMU) initiative, which seeks to attract green investment to fuel Europe’s green and digital transition. Risk retention and ESG integration The upcoming Basel III standards, effective January 2025, introduce temporary adjustments that reduce capital requirements on ESG-linked securitisation assets, which will allow banks to allocate more capital to sustainable projects without compromising on regulatory thresholds. However, securitisation issuance in green and ESG-focused products remains modest, reflect - ing the nascent stage of these asset classes and investor caution regarding standardisation gaps across jurisdictions.
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