Watching spreads and structures as ABS momentum builds

Last week marked another record-breaking year for the securitisation industry as over 5,500 market participants gathered in Barcelona for the annual Global ABS conference, surpassing last year’s attendance and reflecting the growing momentum across both public asset-backed securities (ABS) and private asset-backed finance (ABF) markets.

The tone was one of positivity on the market’s future, supported by strong technicals, sustained inflows and expanding demand. However, there was also a renewed focus on fundamentals, risk pricing, the evolving regulatory landscape, and of course the uncertainty surrounding global trade and growing geopolitical tensions. Like other markets, European ABS stands to be a beneficiary of investors’ increasing desire for diversification need with reluctance towards US assets likely to persist.

Despite geopolitical uncertainty, ABS spreads have swiftly retraced their post-April 2 widening, reflecting the broader trend across credit and risk assets. Many investors hoping to capitalise on the temporary dislocation following the “liberation day” sell-off found limited supply, underscoring the strength of technical demand. Still, some participants questioned whether current valuations fairly reflect macro uncertainty. The flattening of credit curves, particularly in the mezzanine tranches of ABS, has raised questions about whether lower-rated bonds are adequately pricing in potential future volatility.

A key theme this year was the performance of European consumer loans. Tighter lending criteria from banks has helped to stabilise certain portfolios, while others continue to face pressure from inflation and the cost of living, as well as rising unemployment in Germany, for example. That said, European ABS deals are seeing structural leverage increase gradually over time, something we are cautious about. We continue to monitor asset performance closely and favour true alignment of interest in deals (in other words, hard capital at risk), a reduction of which can become a source of future risk for our portfolios and the market. While we have seen a rising trend in arrears in consumer credit – most notably in non-prime segments – when compared with corporate credit, European ABS structures should remain generally well set up to withstand economic slowdowns. Our focus is on short maturities and strong amortisation profiles, as well as well-established lenders with strong domestic franchises, conservative origination standards and a long track record through the cycle – in other words, keeping it simple.

Primary volumes are surging once again after a brief pause in April, with over €69bn issued year-to-date across European ABS and collateralised loan obligations (CLOs), in line with 2024 pace. We expect the new issue pipeline to remain active into the summer, supported by strong inflows into securitised credit and demand from US investors looking to capitalise on a more stable European macro backdrop. On the CLO side, despite tighter loan spreads and limited primary supply – dominated by refinancings and repricings – we expect new issuance to pick up both in Europe and the US, particularly as 2023-vintage deals become increasingly refinanceable and managers seek to reduce cost of funding. Due to a better economic outlook for Europe, and better relative value, we favour European risk, but we recognise that US CLOs offer liquidity and diversification. 

ABF was a major focus again at this conference, with particular interest in the growing use of Significant Risk Transfer (SRT) by banks. SRT has gained strategic importance for banks, which are increasingly incorporating it into capital planning and risk management frameworks. SRT is now firmly on the radar of private credit investors hungry for yield, looking to access corporate, consumer or more specialised portfolios originated by banks. Our approach in this market is to stay selective and be patient, as we expect a surge of issuance from banks. Growing demand has resulted in significantly tighter spreads, but we also note a broader mix of collateral and more aggressive structures as banks try to optimise their capital positions. Many traditional SRT investors increasingly point to forward flow partnerships and CLO equity markets as alternative opportunities. 

On the regulatory front, there was anticipation around the upcoming European Commission proposals to revive securitisation’s role in financing the real economy and make the market more attractive for issuers and investors. Market participants remain wary that the proposed measures may fall short of expectations. However, the Commission recognises the pivotal role ABS can play in funding the European economy and there is strong engagement from the industry, so we are hopeful reforms could successfully improve access, especially for insurers, and help tighten AAA spreads and improve market liquidity. This would certainly take time but would support growth of the securitisation market over the long term.

While technicals remain strong and spreads have tightened, we are focused on liquidity and high quality pools of assets. We continue to see good relative value in AAAs in both ABS and CLOs, though we are happy to be patient as we expect further volatility.