CLO value emerges ahead of likely autumn surge
With the summer holiday season fast approaching, now feels like a good moment to pause and take stock of developments in the European ABS market year-to-date.
Thus far 2025 has been a notably active and constructive year for structured credit investors, with primary activity across asset classes outpacing expectations and spreads generally tightening. Despite a more subdued week just passed, market dynamics suggest this could be a temporary lull ahead of another strong issuance window post-summer.
Year-to-date, the European ABS market has grown by nearly €40bn, bringing total outstanding volumes to €575bn – a post-global financial crisis record. New issuance now stands at €86bn, just ahead of where we were by this point in 2024. The breakdown is healthy and diversified, with €33bn in CLOs, €25bn in auto and consumer ABS, and €22bn in RMBS of which €17bn has come from the UK. This broad participation reflects both solid investor appetite and improving funding conditions for issuers. One notable development is that more banks and building societies are increasingly using ABS and RMBS as a core funding tool post-quantitative easing as well as for balance sheet optimisation purposes through the SRT market.
Last week’s primary calendar was relatively quiet, but far from uneventful. The standout transaction was BNP Paribas’ €1.2bn NORIA 2025-1, a French consumer loan deal that was very well subscribed, pricing inside guidance across the capital stack. The AAA notes came at Euribor+56bp, while the A and BBB tranches were priced at +115bp and +140bp, respectively, having been tightened substantially from initial guidance. The B notes cleared at just +338bp, highlighting how far the market has rallied since late 2023, though in our view this exceptionally strong level isn’t reflective of where other deals could get done. Still, NORIA offers a clear datapoint confirming the broader trend of spread compression, especially for shorter duration, high quality ABS.
By contrast, the European CLO market has remained more active, with four new transactions pricing last week alongside several refinancings of legacy deals. While overall supply has been strong, some investor indigestion has led to modest spread widening across the stack. AAA CLOs are now clearing at +130-135bp, which is interesting when viewed against the rest of the ABS universe: these senior tranches now offer only a few basis points less than BBB-rated consumer ABS, for what we consider materially better credit profiles and structural protection. For investors comfortable with the longer expected maturities and modestly higher beta, this represents a compelling entry point in our view. Further down the stack, BBB and BB CLO spreads have also widened slightly, to around +325bp and +580bp respectively. We have also seen so-called CLO resets (the full refinancing of older CLOs) being priced at slightly wider levels, though this partly reflects the generally lower quality of their collateral pools. These levels could offer attractive carry for investors willing to take on more risk, though we would emphasise the need for manager selectivity, particularly in a market where loan dispersion remains high.
Looking forward, we do expect activity to slow in the coming weeks as desks wind down for the summer. But we’re equally confident that primary supply will return with force post-summer, as banks, CLO managers, and alternative lenders look to capitalise on favourable ABS market conditions and lock in term funding before year-end.
CLOs in particular are likely to remain at the forefront of that activity, supported by strong loan supply (mostly through refinancings rather than M&A supply), CLO refinancings and relative value in the capital stack. As we noted in the whitepaper we published last week (An introduction to global CLOs), we see CLOs as consistently offering one of the most attractive risk-return profiles in global fixed income. This is partly down to the fact that CLOs historically tend to offer material excess spread compared to similarly rated alternatives, or, as in the NORIA example above, similar spreads to lower rated alternatives.
In a world where risk assets have recovered strongly from the turmoil of Q2, sending spreads across credit back towards historical tights, AAA CLOs increasingly stand out to us as a rare blend of defensive credit, solid spread, and structural clarity in an environment that still rewards quality and patience.
