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Another Barcelona conference done, with just a few changes to time-honoured tradition. Under the new ownership of FT Live, the folks stuck behind the booths were blessed with natural light, carpets and an altogether more pleasant environment. Less happily, some mixed messages from the Hotel Arts banished the drinks dos for Bank of America and Goldman Sachs down the coast to the new SLS Hotel, an admittedly beautiful building (as long as you look out to sea and not towards the garbage incinerator).

Before we dive into some of the conference takeaways, thanks are in order. First of all to conference organisers Afme and FT Live, and then to the many fine institutions that hosted us over the week.

These were Clifford Chance, Santander, Alantra, Bank of America, BNP Paribas, Lloyds, Slaughter & May, JP Morgan, NatWest, Jefferies, Deutsche Bank, Citi, and AO Shearman, whose financing and/or legal services we recommend unreservedly!

Overall conference judgment quickly deteriorates into cliché. Was this year optimistic, cautiously optimistic, or constructive? It certainly wasn’t bad, anyway. Inside the cosy Global ABS bubble there seemed to be a real determination to ignore Donald Trump, the anti-ICE protests, the deployment of troops on the streets of Los Angeles, the shredding of the constitution and the general US political madness.

There are some good reasons to ignore it. Securitisation is a fairly high carry product, kicking off cash all the time (and receiving principal payments too). It’s a run-fast-to-stay-still kind of thing, with markets buoyed on the constant need for reinvestment.

The biggest challenge facing firms is how to deploy cash. Senior doesn’t make much of a return for real money, public market mezz is in acutely short supply (everyone’s trying to buy good bonds at healthy spreads!), private market mezz is also highly competitive. It’s an issuer-friendly market out there, especially in the juicier parts of the capital structure, but funding teams are still running full days of investor speed-dating, just to be sure.

There’s a fair bit of portfolio sale activity (including one awkward seller asking for final bids during the conference) but there’s never quite enough for the amount of money chasing asset-based finance.

Some firms try to ease the competitive pressure by sourcing under-the-radar assets, some firms try to ease it by only bidding mega-deals, but there’s a very wide band in the middle that will be intensely competitive. Scale has to be truly stupendous to get bidders to fall away; fundamentally it doesn’t take that much longer, in terms of person-time-input, to bid on a €1bn book than a €100m book, so it’s a much better return on person if you win it, and the equity cheque even on a billion isn’t huge (if it’s mortgages).

The banks are also amping up their activity in this market. Deutsche Bank hasn’t exactly been out of the principal finance business, but it’s certainly had periods where appetite waxed and waned, and it hasn’t been shipping much risk out in securitised format.

But as a signal of intent, it just hired Cenan Djenan out of Citi’s principal finance operation, charmingly known as the 100% financing team. Yes, they just do debt financing, but with 100% advance rate, clear?

Different banks take different approaches to distributing principal finance risk. Demonstrating balance sheet velocity and a path to an exit are generically good investment banking things to do, but does that mean flip it and ship it, and crystallise the economics ASAP? Sell or finance part of it at some point in the next couple of years? Partnering up with a fund can also provide validation and tick the market price box (and cut the competition through a joint bid).

Principal finance clearly generates the best return on securitisation-banker-hours, so we’d expect more institutions to join the party; any bank where the binding constraint is availability of manpower, not money, will be pushed in this direction. We're not sure the competition is going to ease any time soon.

Ease off the hype

Vibes were also good in the SRT market, with competition still intense, but signs the hype cycle has eased off. The overarching sentiment surrounding SRT is in line with our past months of reporting: pricing is tight, but maybe the worst is over.

“October last year was the worst,” said Matthew Moniot, co-head of credit risk sharing at Man Group, speaking on an SRT investor panel. “Certainly, by December we could see evidence of signs that all was not perfect in the little SRT kingdom.”

Many investors agreed Liberation Day might have been the push required to rebalance the market a bit.

“It feels like we have gone from about four times oversubscribed to maybe less than two. These are signs that we have come out of the worst,” said Moniot. “I think Liberation Day was helpful in reminding people that risk has not been banished.”

Multi-strategy and relative value investors are throwing less money at SRT than they were two years ago, with caveats that they’ll still enthusiastically do the right deal with the right assets and so on. Nobody would want to admit they were out, for fear they wouldn’t be shown deals.

What is the minimum return that justifies the hassle of an SRT investment? A resounding “it’s complicated”. There is more to SRT than the ticket price, as discussed by 9fin.

Portfolio managers with funds dedicated to SRT are anxiously waiting for the pendulum to swing back. All eyes are on the second half of the year to see how things will play out.

“Liberation Day accelerated some of that pipeline,” said James Parsons, partner at PAG. “If you were going to do an SRT transaction this year, and had it lined up, you better do it now.”

Issuers have come to find a reliable base of investors, even in uncertain times.

One issuer, Zak Chaudhary, director at Deutsche Bank, said most transactions now come with early certainty of execution and structure.

“What is happening is a natural result of how the asset class has performed over the years,” he said, speaking at an issuer panel.

Deustche takes a wide variety of distribution approaches, from widely syndicated to bilateral.

“A lot of the sophisticated investors are now moving off the beaten SRTs path,” said Chaudhary. The expertise of longtime solutions-driven SRT investors is useful for delving into more complex asset classes and structures.

US regional banks, which some had touted as a possible source of synthetic SRT supply over the past couple of years, have focused on doing deconsolidation deals, a combination of true sale of assets and financing provided by the bank. Here’s a couple of examples, as discussed by 9fin.

The primary driver for these transactions has been concentration relief for US banks. They are broadly subject to a 300% supervisory limit on CRE loans and 100% supervisory limit on acquisition and development loans.

Smaller UK banks have also tended to do cash de-recognition deals for capital relief, requiring an audit and accounting opinion rather than regulatory sign-off, as for a synthetic SRT.

Some banks see synthetic SRT as part of a broader continuum of partnership arrangements, including joint ventures and forward flows. They have been discussing solutions to release part of regulatory capital as assets are being originated, rather than identifying pre-existing loan portfolios on balance sheet.

Folks at the conference also discussed more expansion of SRT into project finance, consumer assets and even splicing assets that would have traditionally gone into corporate deals like corporate protection guarantees.

Other SRT themes include the ever-present discussion on repo-based leverage, with market participants exhibiting different levels of concern over the PRA’s dear CFO letter on capitalisation of repo financing to SRTs. Replies to the regulator should be coming in at any moment.

Potential routes to managing regulatory risk include shortening the repo roll period, or even adding a reg cap call to the contract — allowing the financing bank to either amend pricing or terminate the contract.

A final area of examination was around bank risk controls for SRTs, especially for newer issuers but not exclusively.

This ties into the some of the operational risks involved with SRT, as discussed by 9fin. An SRT needs to be followed throughout its lifecycle, making sure the portfolio data, replenishments and credit event declarations run in a timely manner.

Having a single person coordinate all the banks’ functions can help avoid situations where, for example, loans are inadvertently sold before they can enter a workout and benefit from credit protection. This could amount to implicit support (since it is minimising investor losses), a practice banned by regulators.

One step forward

With the European Commission drafts circulating, there was plenty of regulatory discussion, if you had the stomach for it.

The proposals (which we talked over last week and covered in more depth here and here) seem to be divisive; the capital reduction parts are very useful, and could materially improve synthetic and cash SRT supply, but the disclosure regime is less popular, particularly the potential penalties for investors that do not (or cannot) fill in the right forms.

The SRT market, always very regulation-sensitive, likes a lot of what it sees.

There’s lots of excitement over what the new risk weight floor changes could bring in terms of making deals in low risk-density asset classes, like mortgages or low risk corporate loans, more viable, and there’s high potential in the insurance changes too.

These aim to expand the presence of insurance further via unfunded STS and Solvency II changes to securitisation capital charges. There has been a push to expand unfunded insurance participation into SRT, as discussed by 9fin.

Insurance capital ought to be a good fit for transactions featuring longer tenors or lumpier portfolios, like mortgages and project finance. Insurers are also looking to expand their presence with multilateral development banks and emerging economies.

Unfunded participants protected €3bn of SRT tranches in 2024, according to a recent IACPM survey. That is compared to total protected tranches of around €26bn to €28bn that year, according to industry estimates.

The average attachment point for insurers has progressively come down from 4.5% to 2.8% according to insurance panellists.

“We price to risk, not to yield,” said Victor Ong, deputy chief executive of Axis Capital.

Still, the mechanism by which the capital reduction comes through is a little annoying. There’s some understandable scepticism about whether adding another designation (resilient) on top of the existing Simple Transparent and Standardised (STS) is really what the market needs. We already have a way of identifying the good bonds; they are the ones with the triple-A ratings.

The rich irony in the whole business is that the sub-market, which is actually simple, transparent and standardised, in any ordinary way of using the words, is leveraged loan CLOs. There’s far less variation in CLO docs and structures than in say, RMBS or consumer ABS. Disclosure doesn’t really get more transparent than monthly reports on which 100 or so large cap companies have their loan exposures in the vehicle (and which were bought and sold and why).

Some of the concerns about the Commission package are basically concerns about whether this is the end. Some of it (particularly the capital part) is a move in the right direction, but does it move far enough, and what triggers the next move?

Will the European policymakers feel that securitisation is fixed and done once this package is in place, and will the industry have to mobilise a fulsome lobbying effort four or five years down the line to fix the fixes? The regulatory backdrop has been in flux ever since the financial crisis, and some stability would be good. Regulation should be like plumbing; if you have to think too hard about this, it’s probably going wrong.

The cross-border elements are also complex. There’s a clear EU bias in the drafts; lighter less punishing investor due diligence requirements for EU-only transactions; only EU-supervised insurers doing unfunded SRT protections. Deals sold into the EU need to match EU disclosure standards, so investments by credit institutions outside the EU can’t get maximally beneficial regulatory treatment.

It’s understandable large economic blocs are less bothered about smoothly integrating their markets into a single global whole. Look at the US, which loves extraterritorial regulation more than it loves motherhood and apple pie.

But it’s still unhelpful in the actual world we live in, where the largest securitisation market in the EMEA geography is the UK (a third country), and the largest securitisation market by far is the US. Securitisation investors are always going to want the flexibility to go where the deals are, and the drafts appear to be a step in the wrong direction here.

Still, maybe the regs are working, for a certain value of working. If there is exuberant behaviour, it’s primarily in the spots not touched by the Securitisation Regulation. Aggressive high advance-rate asset-based lending to cash-burning startups can easily cause accidents (as we saw with Grover), while NAV lending is the other area where it sounds like froth is building.

The trad pitch for NAV lines is something like “don’t worry advance rates are very low, the portfolio is diversified, and it’s primarily to manage capital return/fund lifecycle”. Traditional private equity investments are really not very levered by securitisation standards; new LBOs are generally done with equity cheques of 40-60% these days, so a 20% LTV NAV line against a portfolio of this stuff shouldn’t be too sketchy

But you can do a NAV line against a portfolio of pretty much anything, and as more firms enter the market, advance rates are rising, and the NAV product is morphing more into a structural leverage tool rather than a facility to smooth out capital return.

Some of these deals are awkwardly jammed into the securitisation framework, some of them are pure loans (financed out of securitisation team balance sheets), but it’s still a sector to watch… if only it were transparent enough to do so.

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