Eagle Point Credit Management discusses current trends

‘To proceed with caution’ is the underlying message echoed by market participants as global uncertainty continues to cloud the outlook for trade, and capital regulation remains a topic under scrutiny. 

The SRT market, which experienced another record year last with total issuance reaching US$29bn, may face some headwinds in the near term. Issuance from banks has been strong, unsurprisingly mostly driven by European banks. "However, we haven’t seen much from US banks, which isn’t surprising – given that the regulators have signalled a potential relaxation of capital rules," says Karan Chabba, head of RCR/Specialty Finance at Eagle Point Credit Management (Eagle Point).  

While it is true that US authorities are pointing toward a relaxation of capital requirements for banks, this shift may still fall short of giving the SRT market its long-awaited boost in the region.  

Beyond regulations, practical considerations also currently shape the banks' approach to this market. “Most major US banks have already tested their ability to execute with at least one deal, so there’s little need for them to pursue multiple transactions at this stage. As a result, there’s no rush from the big US banks, though we may see some activity from smaller lenders – similar to last year’s auto loan securitisations”, Chabba explains. 

Not everything is bleak in the market, though – and EU banks are stepping up to carry the load. Market experts suggest the region will remain active across jurisdictions, even if European regulations on bank capital requirements undergo upcoming adjustments. “They (European banks) have been using this strategy for several years now, and even if there’s a slight relaxation in capital rules for them - which is possible – we believe they’ll continue to use this route to optimise their balance sheets”, Chabba continues.  

Building on the ever-expanding SRT space in Europe, Chabba confirms that Eagle Point continues to engage with major European Banks, describing the space as “pretty attractive – both for the diversity and quality of collateral in these transactions, and for the risk-return profile we can achieve.” 

With over US$12bn in assets under management, Eagle Point leverages its broad expertise to navigate this space. Chabba points to Eagle Point’s ability to bid across different classes as a clear and differentiating strength. He says: “We can analyse granular pools, such as consumer loans, and even work with disclosed pools across diverse asset classes because we have the internal expertise to handle both”. 

Expanding on the underlying asset classes currently being offered in the market, Chabba points out that not much has changed in the past few years. The market is still mostly dominated by large corporate transactions, a few granular SME deals, on-and-off consumer as well as auto transactions. In parallel, esoteric asset classes continue to be a go-to for banks seeking to obtain capital relief and optimise their balance sheets – including sublines, which Eagle Point has previously worked on, along with corporate finance transactions.  

Despite the inherent challenges of the fundraising environment, Chabba noted that interest from LPs remains palpable. The continued engagement suggests there is still momentum in the space, though many are waiting to see where it ultimately leads.  

“The SRT space is subject to how the economy shapes up going forward. There is significant uncertainty around the potential path of the economy due to the unclear direction of global trade relationships, so how this resolves in the next few months will be important to watch. We haven’t yet seen any material impact in the hard economic data on global output, but it’s possible the numbers could weaken.”

He concludes: "We are therefore monitoring the situation carefully and approaching credit cautiously.”

Dina Zelaya