The State of Securitisation

The U.S. securitised products sector is undergoing transformation, blurring the lines between traditional banking and structured finance. As financial institutions increasingly integrate public and private credit, the sector is also expanding beyond domestic U.S. borders, with a notable rise in cross-border transactions. At the same time, more immediate concerns such as valuations, consumer health, AI-related investments, and tariffs are shaping market participants’ discussions across the sector's various asset classes. Explore these dynamics and what they mean for the future of securitisation.

Key Takeaways

• Valuations were a key theme, with general agreement among participants that spreads are tight across the entire sector.
   
• A strong desire to source opportunities, particularly in private, asset-based finance (ABF) style of transactions remains.
   
• Issuance is also expected to continue at a strong pace across all sectors (Figure 1).
   
• In addition to supply and ABF opportunities, some significant credit trends were also discussed as consumer credit performance remains challenged in ABS, while CLO managers described navigating tariffs and other government policy initiatives.

CLOs: Selectivity Is Key With Historic Issuance

The CLO market is contending with historic levels of issuance, and the industry is focused on operational challenges at this level of issuance.

Managers remain focused on asset sourcing, which has proved challenging. Until M&A and LBO activity picks up, leveraged loan supply is expected to come from dividend recapitalizations and refinancings of private credit deals.

With economic policy uncertainty ratcheting higher (Fig 2), managers are scrutinising portfolios to identify and reduce exposure to issuers exposed to tariff and government efficiency risks. Industries most exposed to tariffs are not typically large allocations in CLOs.

Bank card yields remain relatively high and challengers are looking to chip away at the profitable $1 trillion market. Even a small pullback from banks would create a sizeable opportunity. However, the buy now, pay later (BNPL) lenders will challenge banks for the same customer's business.

Banks are increasingly competing with investors for lending opportunities (e.g., fleet, whole business securitisation, equipment, aircraft), and this could compress spreads and limit available supply.

The commercial/corporate sector is not experiencing any specific weakness by industry type and lenders are avoiding the lowest-quality credits within industries.

Commercial/corporate origination volumes by issuers have generally seen steady growth and performance has not deteriorated except for select captive finance equipment issuers with farm economy exposure.

RMBS: Mortgages Hold Up

Insurance companies’ interest in mortgage credit is especially evident in residential mortgage whole loans.

Mortgage credit investors are monitoring the rise in non-qualified mortgage (QM) delinquencies, which are mostly stemming from the lower FICO and cash-out refi cohorts. However, these are not resulting in material losses due to low loan-to-value ratios and a strong housing market.