Global structured finance to reach $1.4 trillion in 2021

Global structured finance new issuance volume increased 60 per cent to approximately $685 billion in the first half of 2021 and could rise to $1.4 trillion by the end of 2021.

In its half-year outlook, S & P Global Ratings raised its 2021 forecast for global structured finance issuance by about 15 per cent to slightly over $1.4 trillion, following a more active than expected first half.

The report stated that conditions would remain favourable for structured finance issuance this year as credit outlooks remain largely stable, though there are still some pockets of distress in certain sectors and regions due to the pandemic.

The report noted that new issuance volume increased by 30 per cent in the first half of 2021 compared with the same period in 2019, robust growth that reflects ongoing recovery from the COVID-19 pandemic and higher-than-expected economic growth, as well as low available yields and low benchmark rates driving demand for structured finance products.

“We believe conditions remain favourable for structured finance issuance through year-end as the recovery from the pandemic progresses. The negative effects of the pandemic appear to be subsiding in most structured finance markets, but new variants and infection waves pose credit and issuance risks. Structured finance ratings have held up relatively well overall, even though the aggregate rating migration turned negative” the report stated.

It added that the European investor-placed new issue securitisations could end the year close to €100 billion after bouncing back from the market disruption caused by the COVID-19 pandemic. Volumes increased more than 60 per cent year over year to €52 billion in the first half of 2021. Although 2020 may be a flattering basis for comparison, issuance through June 2021 was also almost on a par with the post-financial crisis record set in 2018.

The report pointed out that central banks’ ongoing large-scale provision of cheap term funding for credit institutions in response to the COVID-19 pandemic continues to stifle bank-originated structured finance supply. However, non-bank issuance more than doubled year over year in the largest European subsector, and the leveraged loan CLO market has also seen solid growth.

S & P Global Ratings outlined that most ratings have been resilient to the effects of the pandemic such that in the 12 months ended June 2021, the global rating agency only lowered about 3 per cent of its ratings on European securitisations.

However, the report expected that credit performance could remain under pressure through the end of the year. For sectors backed by lending to consumers, the underlying borrowers have benefited from both income support and debt payment deferral schemes. As these support measures come to an end, collateral performance could begin to deteriorate in line with rising unemployment.

For corporate-backed transactions, rising credit distress among underlying borrowers could pose some credit risk. For example, we expect the annualised default rate for European speculative-grade corporates to remain elevated at over five per cent through March 2022, and this prolonged period of higher defaults could have a knock-on effect for European CLOs.