Global ABS day 2 recap: euro data centre ABS path cloudy, SRT liquidity tweak

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Discussions focused on European securitisation continued to display fresh momentum on Day 2, but speakers agreed the market still labours under complexity and uneven regulation. Panels ranged from regulatory ambitions with respect to competitiveness and savings and investment union to granular debates on collateralised loan obligation (CLO) arbitrage, digital infrastructure, and nonbank specialty finance. Investor tone was notably upbeat: flows have recovered from the US administration’s post‑April tariff dip, while AAA demand remains deep, although warnings on documentation “slippage” and mezzanine squeeze cropped up repeatedly.

Europe’s ability to compete globally hinges on transparency and regulatory proportionality, panellists said. Synthetic risk transfer (SRT) was hailed as a rare market victory, broadening issuance and attracted new investors.

Regulators are signalling movement. The European Securities and Markets Authority (ESMA) maintains investor protection at the centre of its agenda, while a liquidity coverage ratio (LCR) tweak is expected “imminently”. Speakers welcomed simplification rather than wholesale rollback, arguing that lighter, clearer rule sets would trim costs without diluting safeguards.

A top‑down rethink is needed if securitisation is to unlock the EUR35 trillion of assets sitting on European bank balance sheets. The European Investment Fund (EIF)’s whole structure guarantees and “use‑of‑proceeds” green deals are positive developments to support the growth of the market, but uneven cross‑border treatment still fragments liquidity.

Opinions diverged on Brussels’ latest reform blueprint. One speaker judged it a missed opportunity; another countered that any acknowledgement of past “over‑conservatism” is progress. All agreed that easier passporting of private deals would accelerate growth—and that securitisation’s risk tranching remains uniquely suited to attracting a breadth of investors, which will be key to closing Europe’s funding gap.

Flows have definitively increased versus 2023 as investors chase floating rate exposure—spreads that widened in the spring have already retraced. Panellists cautioned that structures are becoming more complex while some documentation is weaker. That said, macro tailwinds—steady employment and softer rates—justify cautious optimism.

Insurance allocations could climb if Solvency II capital charges ease, but panellists were split on whether reporting relief will spur new buying. Commercial credit, especially small and medium-sized enterprise (SME) CLOs, remains the hot spot for downside risk. Case in point: insolvencies in Germany are ticking up even as default forecasts stay below long‑run averages.

Managers estimate 80 % of the loan universe is healthy, with downgrades idiosyncratic rather than systemic. Still, primary issuance stalled after April. Mezzanine spreads tightened, while AAA demand—fuelled by Japanese and European accounts—remained fierce, crushing day‑one arbitrage.

Regulatory tweaks loom large. A cut in due diligence data fields may reduce transparency, while capital requirement debates could rewrite risk retention economics. CLO equity investors from the US are already rotating into Europe, with a small shift seen as providing a large swell for the European CLO market.

AAA spreads widened early in the year, presenting value for 2025, but investors expect tightening from here as volatility subsides. Investment-grade mezzanine tranches are now viewed as the “sweet spot”, winning half the audience vote, with triple‑As close behind.

Documentation is becoming more manager‑friendly—interim payment dates, looser coverage tests—and investors vowed to push back. Greater pricing tiering by manager quality is coming: Europe still shows only a 10-basis point (bp) to 15-bp dispersion at AAA versus deeper US differentials. Middle market CLOs offer structural perks but suffer from illiquidity and scant secondary data.

Post‑crisis regulation pushed long‑dated, niche lending towards nonbanks. These firms now finance everything from rooftop solar to distillery barrels, structuring bespoke securitisations compared to banks.

But funding hurdles persist with Solvency II, for example, dampening insurance appetite in Europe, and private credit investors shying away from refinancing risk. Panellists, however, still predict steady growth along with merger and acquisition‑driven consolidation among smaller originators.

Data centre capacity is set to double in Europe to 10GW within a decade, mirroring explosive US growth. The securitisation route, however, is still being hashed out, with only two deals having closed so far that have landed in ABS format.

Structurers highlighted lease assignability, OpCo/PropCo splits, and power usage efficiency as swing factors. US investors, meanwhile, provide expertise but there are concerns over currency risk.

Sentiment is broadly positive. Spreads have returned to levels seen before April’s US tariff announcement, even as tariff risks linger. Primary markets are functioning, although many deals are on hold as the markets await clarity on geopolitics and rates.

A sector by sector look shows that UK residential mortgage-backed securities (RMBS) lags, while CLO issuance targets large growth. Auto ABS shows only marginal slippage and buy‑to‑let spreads are at record tights. Over the next six to 18 months, panellists foresee stabilising government yields and selective opportunities—tempered by the usual trio of geopolitics, policy risk, and sovereign debt.

Europe’s EUR460 billion direct lending universe is increasingly tapping securitisation through private credit CLOs. While they mirror broadly syndicated loan (BSL) structures, private credit deals package less liquid, directly originated loans, requiring loan‑by‑loan credit opinions, quarterly reporting, and heavier underwriting. The analytical lift is steeper, but the tranching logic and investor protections will be familiar to seasoned CLO buyers. KBRA rated the recent transaction, Ares European Direct Lending CLO-1.

Managers’ in‑house origination platforms underpin deal pipelines, and early transactions featured 90‑day ramp-up covenants to ensure portfolio buildout. Portfolios are less granular but skew towards B‑rated assets and fewer CCCs; diversification and correlation tests still echo BSL norms. Next up is the potential for multi‑currency formats, which will demand economical hedging solutions, especially for smaller sponsors.

Regional headwinds linger. Smaller ticket sizes and competitive private bank funding mean Europe’s economics can look tight versus the US, yet investor comfort is rising. Most see recoveries and risk‑adjusted returns on par with BSL CLOs, and a pickup in issuance is forecast for year‑end as cost curves flatten and regulatory familiarity grows, cementing private credit CLOs’ role in funding Europe’s burgeoning private debt market.

UK equity release mortgages have expanded rapidly from a low base, propelled by larger average loan sizes, an aging population, and limited pension savings. One panellist highlighted insurers’ enthusiasm for securitising seasoned back‑books after earlier deals—featuring voluntary prepay and call options—were well received by investors.

Rising rates have choked new originations, so supply has shrunk while demand persists, widening spreads and reshaping risk appetite. Regulated issuers must apply prudent home price assumptions and honour negative equity guarantees; higher loan-to-value (LTV) loans now require capital willing to shoulder more tail risk. The investor pool is widening beyond Solvency II‑bound insurers, with US buyers increasingly active.

Sizing these structures revolves around uncertain cash flow timing driven by mortality, morbidity, and prepayment behaviour—all sensitive to borrower age, LTV, and rate paths. Additional wrinkles—dilapidation, inheritance delays, and matching‑adjustment treatment—introduce further complexity. Innovation is skewing towards risk‑sharing and forward‑flow agreements, and activity is picking up in the Netherlands and Germany as equity release becomes an essential retirement‑funding tool across Europe.

Speed and certainty of execution dominated the issuers’ wish list. Panellists stressed the value of robust, programmatic funding platforms that keep asset pools clearly separated—letting investors cherry-pick exposure—and front-load due diligence so closing becomes a formality. Maintaining an active “regulars” book is critical: frequent meetings and pipeline visibility help buyers pre-underwrite deals.

Efficiency tactics ranged from retained note “stock-and-drop” strategies and streamlined execution for RMBS, to MTN-style programmes that allow frequent issuers to tap investor demand. Higher-risk loans that do not fit securitisation boxes are increasingly moved via forward-flow agreements, and private credit channels offer greater structural flexibility.

Basel 3.1 has so far caused only marginal spread compression and little disruption, but structures will adapt—investors prize predictability, and clogged pipelines remain a frustration. Public markets still carry higher execution costs, nudging issuers towards private alternatives.