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European Structured Finance and Covered Bonds Outlook 2023

Looking ahead to 2023, the euro area and the UK economies face the risk of imminent recession, mainly because of the real income hit from surging energy bills. Still, the severity of the recession is unknown. A healthy labour market and strong consumer market can dampen the effect of a recession, but how these forces interplay could affect the performance of businesses, individuals, and ultimately European securitisation markets.

Key highlights include:
(1) Weakening credit performance across the board but more pronounced in certain sectors:
-- Slowing economic growth in 2023 and the end of a long low-interest rate period.
-- Especially in sectors characterised by floating-rate debt, refinancing exposure, and/or exposure to more vulnerable borrowers.

(2) No significant credit impact on ratings, given that the looming recession is expected to be mild:
-- Deeper recession—especially one brought on by more geopolitical shocks, a revival of the Coronavirus Disease (COVID-19) pandemic, or a sharp decline in asset values—might, however, have a greater effect on ratings.

(3) Environmental, social, and governance (ESG)'s continues to gain in traction:
-- Given other more pressing concerns, such as inflation and rising rates, ESG is not a top priority, but continues to gain significance.

(4) Securitisation issuance expected to keep moving at a slow and steady pace:
-- For 2023, we forecast total issuance of EUR 185.0 billion to EUR 195.0 billion, with distributed issuance of EUR 85.0 billion to EUR 95.0 billion compared with EUR 81.2 billion in investor-placed issuance in 2022.
-- The bounceback in distributed European securitisation issuance will occur once there is more certainty about the peak of the central bank tightening cycle from Q2 onwards.