Contents

ABS

Heat pump ABS faces headwinds in Europe

The heat pump ABS market faces scalability hurdles, including policy challenges, data gaps and financing models

The nascent market for heat pump ABS faces significant challenges despite its potential role in Europe’s energy transition. A lack of support from policymakers and a shortage of historic default data are proving to be hurdles for an asset class that has often been tipped to follow solar ABS’s ascent into everyday European securitisation discourse.

Declining heat pump sales across Europe and the UK pose a threat to the scalability of heat pump ABS. Christian Aufsatz, md of European structured finance ratings at Morningstar DBRS, notes that after an initial surge in adoption, markets may have reached a saturation point where further growth requires incentivising hesitant homeowners, given the large upfront investment required.

Financing models also play a pivotal role. “To achieve scalability, debt needs to be an accepted way of financing,” Aufsatz explains, highlighting that many homeowners still rely on equity subsidies, mortgages or out-of-pocket payments rather than loans or leasing.

Mudasar Chaudhry, lead of European structured finance research at Morningstar DBRS, echoes these concerns, pointing out the disparity between current installation rates and governmental targets. “In 2023, only 60,000 heat pumps were installed in the UK, while meeting targets requires tenfold annual growth. Policy pullbacks and fragmented green initiatives further complicate scaling efforts,” he says. Nonetheless, he remains optimistic about long-term prospects, emphasising the importance of heat pumps in achieving net-zero goals.

Nordic countries, leaders in renewable heating, have adopted heat pumps extensively. According to a 2024 report from the European Heat Pump Association, Norway boasts 635 installed heat pumps for every 1,000 households. Finland and Sweden have the second and third highest ratios, with 512 and 438 per 1,000 households respectively. Germany and the UK, in contrast, have just 46.8 and 14.5 heat pumps per 1,000 households respectively.

Yet this comparatively strong Nordic showing has not translated into a securitisation market. Chaudhry explains that financing models in these regions often rely on state-backed incentives or other mechanisms that do not align with traditional ABS structures. “Just because the Nordics lead in adoption doesn’t mean their practices will spill over into securitisation markets elsewhere in Europe,” he says.

Heat pump data gaps and other hurdles
Comparing heat pump ABS to residential solar ABS reveals unique challenges. Aufsatz emphasises the lack of historical performance data for both, which complicates risk assessment. “Unlike consumer loans, heat pump financing spans 25 years, positioning it closer to mortgages. However, as unsecured debt, it lacks property security,” he explains. Borrower behaviour is another factor, as homeowners – typically inclined toward energy efficiency – may face challenges related to maintenance contracts and equipment quality.

Rising inflation and energy costs add another layer of uncertainty. While heat pumps can insulate homeowners from fluctuating energy prices, insufficient data prevents accurate predictions of default rates.

New financing models like heat-as-a-service contracts introduce complexities for ABS. Aufsatz notes that such models are harder to analyse due to their reliance on service providers’ performance. Chaudhry adds that prepayment risks, cash flow structures and asset ownership models, common challenges in securitisation, become even more pronounced in these arrangements.

Investor interest in heat pump ABS remains speculative due to the absence of dedicated issuances. Chaudhry observes that asset classes like RMBS with ESG components generally attract strong demand, as they align with sustainability goals. “Investors value transactions tied to environmental initiatives, though the specific appetite for heat pump ABS remains untested,” he says.

Bundled green tech ABS ahead
Bundling heat pump ABS with other green technologies, such as solar panels or EV charging stations, could enhance scalability. “Such integration makes sense as providers increasingly offer comprehensive energy solutions,” Aufsatz notes. For all of these, challenges include determining recovery expectations. Loan sizes related to heat pump installations are usually larger and would need to be seen in the total portfolio context.

Regulatory developments could shape the market indirectly. While no specific measures target heat pump ABS, the broader Capital Markets Union initiative and REpowerEU mandates aim to promote securitisation as a funding mechanism for renewable transitions.

Chaudhry underscores the importance of strategic partnerships between manufacturers, energy providers and financial institutions. “The heat pump market’s infancy necessitates collaboration to expand borrower bases and financing options,” he says, emphasising the sector’s reliance on cohesive efforts.

Selvaggia Cataldi

CLO Managers

Balancing CLO demand with challenges

Canyon Partners forecasts another strong year for CLOs fueled by robust investor demand and tightening spreads

Following last year’s record end for CLO issuance in both the US and Europe, expectations for issuance in 2025 are similarly elevated, if not in excess of 2024, according to Canyon Partners.

Speaking to SCI, Erik Miller, partner and co-head of the CLO business at Canyon Partners, highlights that this record was driven in part by pent-up demand for issuance that was delayed during 2022 and 2023. Even so, the statistics are still considerably higher than what the market had envisioned for the three-year period starting in early 2022, which is constructive for the CLO market.

“As we look ahead, broker dealers’ expectations are for issuance that is near to what we saw in 2024, driven by two main factors," he says. "One of them is rates and an expectation that the front end of the curve will continue to tighten along with lessening inflation. The second portion is spreads, and we're now seeing spreads in both the asset and liability markets converging to levels that are closer to historical tights, rather than wides. Coupled with pent-up private equity capital, this suggests there should be a significant amount of activity in the loan market, which should drive CLO issuance as well.”

A potential foil to that narrative could come in the form of more stubborn inflation and policy activity, particularly in the US. This is likely to drive robust economic activity that may fan the flames of inflation in the US more so than it would have under a different administration, according to Miller.  

“We recently saw the US Fed talk about slowing down its rate-cutting cycle, and the market react to that, which might mean that rates stay high, cash flow stays skinny, and issuance is more difficult to get done, both on the loan and the CLO side,” he says.

Looking at defaults in the leveraged loan market, Miller notes some bifurcation.

“The triple-C loan market now accounts for more than 10% of the total market, marking an increase from previous levels, and within that cohort of loans, a number of them trade at or below 90 cents at deeply discounted levels," he says. "Many of those issuers are suffering from unsustainable capital structures.”

Higher-rate environment sees issuers adapt
On the other side, there are a number of issuers adjusting the cost of their capital structures to address or accommodate a higher rate environment and starting to show more cash flow break even and profitability, Miller notes.

He adds: “So the forecast for defaults has gotten as high as 4% and companies have proven to be a little bit more dynamic than that forecast, but a protracted elevated default cycle is still a risk for the CLO market.”

The biggest component of the structural side of the CLO equation is the spread side, and liability spreads are now at a level where reset activity is possible again. This means resets and refinancings will start to crowd new issue CLOs and constrain issuance capacity, Miller believes.

“As it relates to the flexibility of terms within a CLO structure, the biggest innovation that we've seen in the last several years has been the more widespread adoption of bond baskets, both on the secured and unsecured side. In a volatile rate environment, bonds can be a useful tool for CLO managers to build par generative trading gains or play defence with lower dollar exposures on the loan side.”

When it comes to investor sentiment Miller says he is seeing almost unanimous additional demand from all historical participants in the CLO triple-A market.

He says: “US and European banks, US and European insurance companies and Japanese banks are all showing more interest in the CLO triple-A category than we've seen for the last 24 months. This should portend well for spreads and supply, but it also can create a technical overhang of surplus supply, which can crowd out the market.”

Appetite grows for CLO triple-As
However, according to Miller, nearly all parties have replenished their budgets with earnings from the last year and are showing increased appetite for CLO triple-As versus what has been seen in the last two years.

“CLO triple-A investors are still attracted by the relative spread that CLO triple-As offer, which is greater than other investment grade products, and encouraged by the historical performance of CLO triple-A, both in terms of liquidity and in terms of credit quality. These two pieces of the CLO triple-A stack should support a very resilient bid for CLO triple-As and support demand this year,” Miller continues.

Overall, Miller believes the US market looks slightly safer than the European market. “The incoming administration's protective domestic policy should benefit US-based issuers and US-based companies,” he says.

Ramla Soni

CMBS

Cautious optimism for European CMBS

European CMBS market will navigate cautious optimism in 2025, with logistics dominating and offices evolving

As 2025 begins to unfold, the European CMBS market is evolving against a backdrop of cautious optimism, sectoral shifts and changing economic conditions. The coming months promise to be pivotal for market participants as they navigate the space.

“Existing deals have so far performed quite well,” says Brian Snow, vice president and senior credit officer at Moody’s Ratings, emphasising that the structures of CMBS have facilitated orderly transitions even during market turbulence.

“Most of the loans have either paid off or extended, sometimes with the servicers’ approval for extending beyond their original final maturity dates,” he explains. “Servicers have shown flexibility, avoiding fire sales and instead working with cooperative borrowers who have maintained equity.” This dynamic stands in stark contrast to the global financial crisis.

“Borrowers entering this cycle had moderate LTV ratios around 60% to 65%,” says Snow. “Even with property prices dropping by over 20% in some cases, borrowers have managed to maintain debt service by purchasing in-the-money interest rate caps and staying current on loans.”

An exception to this overall resilience was the River Green default, an idiosyncratic case tied to a single tenant’s financial distress. “This isn’t representative of the broader market,” Snow clarifies.

Logistics dominates CMBS as offices adapt
Looking ahead, the logistics sector is expected to dominate CMBS issuance. “Last year, logistics led the market and this trend should continue in 2025,” Snow notes. “CMBS has proven to be an effective product for logistics, attracting both borrowers and investors. Additionally, we may see opportunistic transactions, such as another data centre deal or refinancings of serviced office portfolios.”

While office spaces have been less favourable, Snow points out that strong sponsors with high-yielding portfolios can still draw investor interest. Retail, particularly non-discretionary retail, has also shown surprising resilience.

Snow highlights the positive impact of rate cuts by the ECB and the Bank of England. “In Europe, floating rates like LIBOR and Sonia play a critical role,” he says. “Lower rates make property acquisitions and refinancings more economical. But confidence, reflected in bond spreads, is equally important. Spreads have tightened, signalling increased investor confidence and liquidity in the market.”

This renewed confidence is bolstered by stabilising – and a slight rise in – real estate prices, alongside improving transaction volumes in key markets such as the UK. Snow expects continental Europe to follow suit in 2025.

Despite high office vacancy rates, Snow observes a gradual return to the office and evolving market dynamics. “High-quality spaces in prime locations, especially those with strong ESG credentials, are in demand,” he explains. Vacancy rates remain high in older, less desirable buildings, particularly in submarkets like London’s Docklands and Paris’s La Défense. However, central markets like London’s West End and Paris’s Centre West exhibit resilience, with single-digit vacancy rates.

To address refinancing challenges, Snow points to servicers granting extensions and focusing on high-quality, well-located properties. “Bifurcation is evident; it’s not one office market but many distinct submarkets,” he says.

Europe and US diverge on delinquency risks
On delinquency risks, Snow notes a significant divergence between Europe and the US. “In Europe, office delinquencies are not granular enough to draw broad conclusions,” he explains. “While some large office loans have failed to repay on time, they’ve typically been granted one-year extensions.”

Secondary and emerging markets present limited opportunities for CMBS, except in logistics. Snow highlights that logistics’ unique requirements, such as strategic locations near major transport nodes, make secondary markets viable.

“This year could mark a strong vintage for CMBS,” Snow states. “With interest rates and property yields near long-term averages, originations will benefit from more conservative underwriting.”

Selvaggia Cataldi

Capital Relief Trades

New entrants

SRT market update

Prospective issuers are reportedly expected to issue increasingly more programmatically, as ‘one and done’ inquiries to SRT practitioners are petering out from smaller banks in Europe.

“They’re plotting what their SRT programme is going to be, not just if they’re going to do an SRT,” commented one investor. Of course, issuance from smaller banks will always be more sporadic given their limited pool size. Issuing an SRT on a standalone basis has never been attractive to “serious people” according to another investor. “It’s too expensive not to think about programmatic issuance first,” they added.

However, for first time issuers, the time frame is more relaxed. In the case of the UK’s challenger banks who were reportedly eyeing up 2025 for entry will delay until 2026. Challenger banks are reportedly delaying entry as a result of the new p-factor and on the basis on them not being so capital needy, 2026 is said to mark a more likely target for their first SRT issuance than 2025.  Another investor pegged the likely delay to SRT market entry onto difficulties in communicating with the PRA.

On this specific topic and segment, Jeremy Hermant, senior advisor at Alantra, adds some additional clarity. He says: “Given the PRA focus on operations and governance, challenger banks are focusing on readiness which can take months of preparation to be ready for January 2026. On the other hand, CP13/24 has made clear that unfunded SRT are now allowed since October 2024, widening the investor pool thus decreasing the cost of SRT for UK banks that would choose this alley.”

With multiple sources in agreement with the new projected timeline of challengers entering the market in 2026, one did note that two challenger banks remain more advanced in their SRT conversations and more likely to issue in H1 2026 – including Shawbrook.

Claudia Lewis

ABS

Gathering Momentus

New York dealer brings new platform to impact lenders

Momentus Securities, a New York-based boutique broker-dealer, will bring its first securitization of unguaranteed Small Business Administration (SBA) 7a loans in Q1 through a new platform designed to give small lenders access to securitization, says president Jaime Aldama.

The offering will be in the order of US$20m, will carry a 10-year maturity and, it is hoped, an investment grade rating with the help of credit enhancement. Aldama believes the floating rate note will price in the region of the mid-300bps over SOFR.

But this deal will be the first of many, now the platform has been put in place, and subsequent examples should be closer to US$100m in size. Momentus will leverage its investor contacts to seek buyers, and it thinks that private credit funds and established asset managers will participate.

While smaller community lenders have been able to securitize the guaranteed portions of 7a loans, thus freeing up the balance sheet for more lending, they have struggled to sell the unguaranteed portions due to difficulties of scale and expense. The single lender securitization process has generally only been available to lenders who have significant pools of 7a loans. Recent deals have averaged US$100m, says Momentus.

The new platform streamlines and standardizes the whole process using a Master Trust structure that issues specific Series A trusts for each lender. Each offering is completed faster and more cheaply than would have been the case in the past,  bringing smaller and less experienced lenders to the table.

“The idea was to bring some of the structuring tools, whether it’s simple securitization trades or CRT trades, that are available for the large Wall Street banks to a universe of lenders that don’t have access either because it’s too expensive, or too complex or because they don’t have the banking coverage,” Aldama told SCI.

The SBA 7a loan programme provides loan guarantees to lenders that allow them to provide financial help for small businesses with special requirements. The maximum loan possible under the scheme is US$5m.

Borrowers must show they are unable to secure credit from the non-government avenues. The primary objective of many 7a lenders is to provide capital to underserved borrowers and Momentus is keen to support these goals. “We’re a socially driven investment bank, meaning we put purpose over profit. Obviously, we have to keep the lights on, but it’s more about servicing community-centred lenders,” says Aldama.

It has been working closely with the SBA in the development of the platform, and Katie Frost, associate administrator of the SBA’s office of capital access hailed its efforts, saying “We are committed to ensuring that these community-focused lenders have the liquidity to provide loans. Helping them access the necessary capital to serve their communities is a top priority for us.”

Simon Boughey

Capital Relief Trades

CRT to the rescue?

New research suggests regional exposure needs help

On paper, US regional bank current loan exposure looks robust, but peering behind the curtain things don’t look quite so rosy, according to new research from Heliostat Capital, a New York-based specialist structured finance advisor.

The research examines the 2Q 2024 SEC filings from 79 regional banks with net assets of between US$10bn and $100bn and determined that the greater than 95% “pass” rating of the aggregate US$1.6trn commercial loan exposure “may be optimistic.”

If so, then greater use of CRT by these banks in 2025 and beyond might be on the cards.

“Say you’ve got a performing, high LTV loan that attracts more capital and hurts return on capital.  Or a portfolio.  A mezz CRT works well to reduce LTV and reg cap,” Charles Callahan, who heads Heliostat, told SCI.

A credit is rated as “pass” by the Office of the Comptroller of the Currency (OCC), the principal commercial bank regulator, as one which is not loss, substandard, doubtful or a special mention (page 15 of the Comptroller’s Handbook).

Special mention assets, according to the OCC, “have potential weaknesses that may, if not checked or corrected, weaken the asset or inadequately protect the institution’s position at some future date.”

Of the overall exposure, US$1.2trn is made up by commercial and industrial and (C&I) and commercial real estate (CRE) mortgages, all of which is rated at or above 95% pass level.

However, loans in this category are facing headwinds. Firstly, most of them were contracted when rates were much lower than they are now. Treasury yields have pushed higher in recent months, particularly since these filings were made at the end of Q2 2024. Inflation has not gone away and the Fed seems unlikely to cut rates as enthusiastically as was once hoped.

The ten-year note is currently around 4.64% - off recent highs but 100bp wider than in mid-September. Tariffs – if enforced – will be inflationary as well. Given these pressure, borrowers will have more difficulty refinancing debts.

Lockdown affected CRE significantly and the corporate world now seems unwilling to return to full-time office work, though this week’s executive order by President Trump curtailing working from home for federal workers may ameliorate the trend. This sector contains well-known credit problems and defaults in the sub-investment grade loan market recently attained highs not seen since the pandemic.

Heliostat points out that the total commercial loan exposure of US$1.2trn represents more than four times the book equity of those 79 banks and a 5% error in credit quality assessment could diminish book equity by 20% or more.

This US$1.2trn is constituted by US$578.6bn of CRE loans, US$568.5bn of C&I loans and $US$60.8bn in multi-family loans. The remainder of the US$1.6trn is made up of residential mortgages (US$311bn) and consumer loans ($74.3bn). The lowest pass mark achieved for these loans in 95.2% (CRE) while the resi mortgages have a pass mark more than 99%.

“Will the next few years be a golden age of continued economic expansion?  We hope so, but there is uncertainty.  Given the inflationary nature of the policies in play – tariffs, tax cuts, deportations – it is hard to see how elevated Treasury rates do not continue.  High rates will put pressure on the performance and refinancing of stressed assets” says Callahan.

“Savvy players – the large banks – use structuring tools to take risk off the table and improve efficiency, to increase return on capital.  Smaller institutions can too.  The tools we use – CRT, SRT, securitization – are proven to be effective while often allowing the bank to retain control,” he concludes.

Simon Boughey

Structured Finance

Job swaps weekly: Investcorp names successors to Ghose and Shandell

People moves and key promotions in securitisation

This week’s roundup of securitisation job swaps sees Investcorp promoting two team members to lead its liquid credit investment strategies as part of a succession plan. Elsewhere, ARC Analytics has appointed a new ceo for its data business, while Ninety One has hired an RBC BlueBay Asset Management veteran as portfolio manager on its developed market specialist credit team.

Investcorp has named the next generation of leadership to drive its liquid credit investment strategies, which are focused on the broadly syndicated loan (BSL) markets. 

Neil Rickard, md and head of credit research in Europe, will become co-head and head of ICM Europe, alongside Corey Geis, currently md and head of trading and capital markets in the US, who will become co-head and head of ICM Europe. Their new positions become effective from 1 April 2025.

Both Jeremy Ghose, managing partner and ceo of ICM, and Tom Shandell, head of US CLOs and broadly syndicated loans, are retiring from their current executive roles as global head credit management and head of liquid credit investments in the US respectively. 

From 1 April, Ghose will step down to become non-executive chairman of the business and continue to participate in various investment committees until his retirement on 31 July 2025. Shandell will continue to participate on the US credit investment committee until his retirement on 30 June 2025, thereby offering strategic guidance and ensuring a smooth transition to Rickard and Geis as they step into their enhanced roles.

Rickard has been part of the credit management team in Europe since 2011. Prior to this, he worked at Mizuho Corporate Bank from 2005.

Geis has been part of the credit management team in the US since 2017 and has almost three decades’ experience in credit, including at GoldenTree Asset Management and TD Securities.

Meanwhile, ARC Analytics has named Vivek-Anand Dattani as ceo of its data business, focused on building new data-driven solutions to help clients manage risks. Based in London, he will report to ARC Analytics’ ceo Ro’i Ehrlich.

Dattani was previously svp, global head of structured sales and strategic alliances at Trepp, which he joined in May 2017. Before that, he was a global account specialist at Moody’s Analytics.

Ninety One has hired Justin Jewell from RBC BlueBay Asset Management as portfolio manager on its developed market (DM) specialist credit team. Based in London, he will work alongside Darpan Harar as co-portfolio manager on multi asset credit and global total return credit strategies, as well as focusing on the expansion of the DM specialist credit platform. 

Jewell leaves his role as partner, senior portfolio manager and co-head of global leveraged finance at BlueBay after 16 years with the firm. During his time with the firm he worked across the high yield, leveraged loan, CLO and multi asset credit products.

Steve Baxter has joined SS&C Technologies as a senior director leading business development for private debt, syndicated loans and CLO services in the EMEA region. He joins from Alter Domus, where he led sales and commercial relationships since November 2023 across the Solvas suite of middle office software, specialised in loan administration, data extraction and CLO compliance. 

Prior to Alter Domus, he spent a year as executive director and head of loans, CLO and private debt solution sales for EMEA at S&P Global. Baxter also spent seven years at IHS Markit in various senior sales roles.

New York law firm Otterbourg has included two structured finance specialists among six attorneys being appointed as equity members. Michael Regina and Michael Rich have both been promoted and become shareholders at the firm. 

Regina joined the firm in June 2022 as an associate, following two years at the Associated Construction Contractors of New Jersey. He focuses on loan transactions, including asset-based loans, term loans and other structured finance transactions, as well as portfolio acquisitions and dispositions.

Rich has been with Otterbourg for eight years, having joined directly after graduating from St John's University School of Law. He focuses on lease and loan transactions, including asset-based, cash flow and structured finance transactions, and portfolio acquisitions and dispositions. 

And finally, Dave Lancaster has joined Cushman & Wakefield as executive md in its equity, debt and structured finance (EDSF) platform, based in the firm’s Chicago office. He will lead the EDSF team's services aimed at production home builders across the US market, with a particular focus on the single-family residential debt market. Lancaster leaves his role as founding principal at Tile Capital after four years with the business, where he focused on family office commercial real estate capital advisory.

Corinne Smith, Ramla Soni, Kenny Wastell