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CLOs

Strong demand for EU CLO triple-Bs despite differing post-RP dynamics

Poh-Heng Tan from CLO Research highlights seasoned EU CLO triple-B tranches trading above par despite varied reinvestment profiles

This week saw a list of seasoned EU CLO triple-B bonds, all of which received covers well above par, with discount margins in a narrow range of 302–311 bps. This is despite their varying reinvestment end dates. Two bonds have passed their reinvestment period (RP) by over two years, one has just concluded its RP, and two have RPs ending in 2026.

Source: SCI

Both BCCE 2018-2X D and EGLXY 2013-3X DRRR received very similar covers and DMs despite their markedly different post-RP annualised prepayment rates. EGLXY 2013-3X has close to 0% post-RP annualised prepayment rates, whereas BCCE 2018-2X has much higher post-RP annualised prepayment rates, which is also reflected in its lower triple-A factor in the table below.

One might assume that BCCE 2018-2X D would carry higher call risk, given its recent low equity distribution and positive equity NAV. By contrast, EGLXY 2013-3X’s triple-A tranche, with a very low spread of 62 bps and its post-RP prepayment track record, is likely to remain outstanding for much longer, justifying the above-par pricing for the triple-B tranche.

Investors are naturally more cautious about paying up for bonds with higher call risk. AVOCA 13X has just concluded its RP, and the manager has traditionally paid down more quickly than peers, with more deals fully liquidating in the second year of the post-reinvestment period. If historical trends are a reliable guide, this bond would likely yield less than 280 DM if fully redeemed in April 2027.

CLOs

EU tightens CLO originator standards

The EU's clarified originator definition upends established use of conditional sales agreements to satisfy CLO risk retention rules

CLO risk retention for manager-originators has become more complicated after the European Commission recently clarified its definition of an originator, with a popular method of achieving compliance now ruled unsatisfactory by European lawmakers.

The decision was announced via a response to a Q&A lodged in 2021 regarding the widespread use of conditional sales agreements by manager-originators to ‘season’ assets and remain compliant with risk retention regulations.

The European Banking Authority’s (EBA) response states that doing so would no longer satisfy risk retention requirements.

More specifically it posed whether an entity that manages and establishes a CLO, or any securitisation for that matter, can be classified as an originator under the EU Securitisation Regulation (EUSR) 2017/2402.

The EBA states: “If an entity has not purchased the assets but has entered into a conditional sale agreement with the securitisation special purpose entity (SSPE) whereby the entity is obliged to acquire relevant assets from the SSPE, such entity does not qualify as an originator and therefore cannot fulfill the risk retention requirement on this basis.”

This decision could have significant implications for CLO retention holders in the EU to qualify as an eligible retainer under EUSR, forcing manager-originators to use alternative methods of ensuring they remain compliant, such as forward purchase agreements.

Market reactions and alternative compliance structures

In a recent blog covering the EBA’s response to the Q&A, Sushila Nayak and her fellow partners at Dechert explain the mechanics behind a forward purchase agreement and how they comply with the new interpretation of the EUSR.

A forward purchase arrangement allows for the sale of assets from the originator to the issuer on a forward-looking basis, provided there have been no defaults during the seasoning period, whereby the originator retains any interest paid during the period prior to the sale to the issuer and is exposed to the default and credit risk during this time.

“By utilising netting arrangements or other tri-party structures, the originated assets can be settled directly with the CLO issuer once the forward sale has occurred. As this construct involves the actual purchase and sale of assets (as opposed to a contingent arrangement under a conditional sale agreement), a forward purchase arrangement is consistent with the Commission’s interpretation of the originator definition under the EUSR.”

Dechert however notes, the response does not state whether the new interpretation will apply to new CLOs or existing deals as well.

Chris McGarry, partner at Mayer Brown, tells SCI he expects the former, although we may see some changes for the purposes of selling CLOs on the secondary.

“The Q&A is prospective and intended to guide retainers on future transactions though we may see some refreshed origination for secondary market purposes.”

In response to whether this move marks a broader regulatory shift towards stricter ‘skin in the game’ regulations in the EU, Sarah Milam, partner at Akin, tells SCI she feels it is more aimed at redistributing risk among market participants in the CLO lifecycle.

“This is a further step towards stricter rules. The EU seems to be concerned about shifting risk between various parties, perhaps even more than the idea that the securitising party retains “skin in the game.”

Milam adds she does not believe this update particularly “ensures better alignment of interest or clearer and more direct exposure for managers, but perhaps reduces the market’s divergence in this area.”

This interpretation will affect other asset classes, Milam notes, stating ABS market participants will also need to take heed of the updated definition and its implications.

“This will spill over to other asset classes. This model is more common in CLOs than it is in other asset classes; however, it is used. As interest in asset backed finance (ABF) and cross-asset class, multi-originator, joint ventures and other non-traditional securitisations has increased, there are ABS transactions which will need to consider this interpretation as well.”

McGarry argues the response is not as significant as some market commentators are making out, pointing to a report from the Financial Stability Board published in January on the impact of risk retention rules on the CLO market.

“It is accepted (e.g. in the FSB report earlier this year) that applying risk retention to CLOs is fitting a square peg into a round hole which is why the risk retention does not apply under the US rules.”

The purpose of the risk retention rules as conceived by the G20 was to stop the originate to distribute business model which does not exist in the CLO market, McGarry notes.

“Under the EU rules, hardly any managers since Brexit qualify as ‘sponsors’ (one type of eligible retainer) and the only other type of entity eligible to be a retainer is an ‘originator’,” he explains. “Limb ‘b’ of the originator definition was deliberately drafted by the Commission so as not to specify a minimum seasoning period or anything beyond the retainer taking credit risk in the originated assets; none of that is changing.”

McGarry also points out that the updated originator definition is not as significant as the EU’s Solvency II proposals where new capital rules for insurance companies are expected to encourage insurance companies to increase their allocations to CLO tranches, particularly those lower down the capital structure.

“Of course, retainers like the assets so much that post-securitisation they are taking long-only levered exposure to the assets and signing a contract which says they are the last investor out of the deal. This shouldn’t be making summer headlines; the Solvency II proposals are the game-changer and in a significantly supportive way for the market.”

Solomon Klappholz

CLOs

Middle market CLOs gain momentum as private credit surpasses $40bn

Growth in PC/MM CLO issuance and tighter structures fuel optimism despite origination challenges

Private credit and middle market CLOs (PC/MM CLOs) are beginning to gain traction in Europe after continued momentum in the US. According to data from SCI’s European and US CLO Deal Tracker, the total value of the PC/MM CLO market in 2025 has already surpassed US$40bn, putting it on track to exceed 2024’s yearly total of US$65bn.

There have been 78 PC/MM transactions as of 13 August, composed of 39 new issues worth US$20bn, as well as 73 reset/refi deals worth US$22bn.

Research from Bank of America (BofA) notes the PC/MM CLO market hit US$20bn in new issuance in July and is on track to meet its projection of US$50bn by year-end.

Looking at the underlying collateral, BofA reports that direct lending in the US reached US$1tn by July, with private credit CLOs making up roughly 18% of deployed direct lending capital and another US$300bn of dry powder remaining.

The report adds that private credit CLO triple-A spreads, which were tracking at 155 bps at the time of publishing, are still among the widest fixed income products, making them an attractive structured credit asset class.

With spreads tightening across the board, private credit CLOs could pose an attractive alternative to their broadly syndicated loan (BSL) counterparts. As the BofA report concludes: “If you liked a certain loan in BSL, you should love it in private credit with tighter docs, stronger terms, higher spread.”

Speaking to SCI, Chris Enas, md and deputy CLO portfolio manager at Monroe Capital, suggests continued optimism around the US’s burgeoning middle market could spell further growth for PC/MM CLOs, although some challenges remain.

“We’re talking about Middle America where most of the growth is expected to come from to some extent,” he says. “There’s a lot of operating businesses in the middle market. But what’s unique about operating in the middle market is I would say it’s a little more difficult to penetrate and originate deal flow in that space.”

Nonetheless, Enas underscores that middle market CLOs offer managers and investors significant benefits compared to their broadly syndicated alternatives.

“In the BSL world you’re dealing with very large borrowers and very syndicated lending groups. Most of the time you’re dealing with documentation within your credit agreement that, when compared to the middle market, tends to be looser,” he explains.

“We feel like in the middle market there are a lot of structural protections that can be negotiated into your transactions that also may provide you as a manager a little more comfort around the downside.”

Building on this point, Dan Zwirn, CEO and CIO at Arena Investors, tells SCI that although PC/MM CLOs have traditionally seen less interest compared to BSL paper due to the smaller size of borrowers, the very features Enas describes - tighter documentation, stronger protections, and closer alignment of interests - mean middle market CLOs are typically structured in a more conservative way while still maintaining attractive yields.

“Theoretically over time people were less inclined towards [middle market CLOs] because the theory was that these were smaller companies and thus intrinsically more risky,” he says. “But at the same time the leverage on the loans in the middle market CLOs was lower and the leverage in the structure tends to be more conservative because the GP and its investors typically have more skin in the game than in BSLs.”

Zwirn points out that a BSL tends to be ten times levered and the equity is frequently not held or only in small part held by the manager.

“In MML the leverage tends to be more like 2:1 and the equity tends to be held by the manager and his core investors, not just placed with CLO equity buyers, so there’s much greater alignment of interest.”

Solomon Klappholz

Asset-Backed Finance

Harley-Davidson transforms finance arm with KKR, PIMCO deal

Motorcycle maker turns HDFS into capital-light unit in private credit milestone

Harley-Davidson has recently inked a US$1.25bn deal with KKR and PIMCO  to transform its lending arm, Harley-Davidson Financial Services (HDFS), into a capital-light unit that could set a precedent for how industrial companies monetise captive finance businesses amid the rise of private credit.

The deal’s three-part structure, including a back book sale, equity sale, and a five-year forward flow agreement, marks one of the most complex and unique ABF transactions ever executed. 

“Had it been just asset and equity sales, a single buyer might have sufficed,” a source familiar with the matter tells SCI. “But the forward flow piece meant diversity of funding was critical, hence the two-partner approach.”

The deal, announced on July 30, monetises more than US$5bn of HDFS’ retail loan receivables and includes the sale of minority equity stakes in HDFS - valuing the unit at about 1.75 times post-transaction book value - and a five-year forward flow agreement under which KKR and PIMCO will purchase about two-thirds of new loan originations. 

Under the deal, Harley retains control of HDFS, which will continue to originate and service both new and existing loans.

The partnership aims to monetise HDFS at a high valuation, recycle proceeds into the core industrial business trading at a lower multiple, and lift overall shareholder value. “This is value-accretive if you believe in the industrial business’ future,” notes SCI’s source.

Shares in Harley-Davidson are up more than 15% over the past month, and been on an upward trajectory since the announcement, a move SCI sources attribute more to short-term sentiment than a structural rerating.

“The reality is the market still doesn’t fully understand HDFS,” adds the source. “This deal crystallises value, but its complexity means investors will need time to digest how the capital-light model impacts future earnings.”

KKR and PIMCO stood out among the competitive bidders, with price playing a role but the prospect of a long-term partnership seen as equally important. The forward flow is expected to represent about US$2bn annually over five years, making trusted partners essential for Harley’s strategy.

The deal also reflects a broader trend in private credit: as alternative managers increasingly seek long-duration assets, ABF deals appear particularly attractive.

“Private credit firms are aggressively pursuing these opportunities,” SCI’s source says. “They can fund portfolios efficiently, and the blended cost of capital is increasingly competitive with traditional financing channels.”

While the transaction could serve as a blueprint for peers, SCI sources note it ranks among the most intricate ABF deals ever seen. Harley’s case was highly specific, given the outsized role of HDFS in the company’s overall valuation.

As private credit’s role in consumer finance accelerates, the Harley transaction is already being seen as a landmark. “It broke new ground,” the source says. “You’ll likely see more deals like this – but rarely at this scale or complexity.”

Marta Canini

Capital Relief Trades

BBB agrees to a new ENABLE Guarantee transaction

SRT market update

The state-owned British Business Bank (BBB) has finalised a credit risk transfer with merchant banking group, Close Brothers. The transaction, carried out under the BBB’s ENABLE Guarantee programme, will provide up to £300m of support for hire purchase, sale and hire purchase, and leasing facilities within Close Brothers’ asset finance portfolio.  

Structurally, the bilateral transaction follows the BBB’s classic risk transfer modus operandi: Close Brothers retains 25% of the portfolio’s risk — including the first loss tranche — while the remaining 75% is guaranteed by the BBB.  

On the guaranteed tranche, Close Brothers holds little to no RWAs, while the retained first loss tranche is either deducted from capital or risk weighted at 1250%. Reportedly, this is Close Brothers’ inaugural capital relief transaction. 

Commenting on this partnership, Michael Strevens, md, structured financial institution solutions at the BBB, notes: “Close Brothers is a trusted and long-standing finance provider to thousands of UK smaller businesses. This transaction reflects both institutions’ commitment to ensuring small businesses continue to access the finance they need — especially in tougher times.”

By helping SMEs finance business critical, capital assets, and enabling business to grow, the BBB stresses the importance role asset finance plays within the UK’s smaller business landscape, where the market reached a record of £23.5bn in 2024. 

Dina Zelaya

Capital Relief Trades

Swedish consumer SRT finalised

SRT market update

Avida Finans has executed a synthetic securitisation referencing a SEK2.8bn portfolio of consumer loans. 

Settlement and closing of the transaction are estimated on 11 September 2025. Additionally, the transaction is structured as meeting the STS criteria.

Avida Finans, headquartered in Sweden, specialises in consumer and SME financing across the Nordics. The firm has also acquired the credit card operations in Sweden and Norway from Santander Consumer Bank, earlier this year.  

 "We view this transaction as a move in the right direction to reinforce our position for the future. By reducing our capital requirements while keeping our focus on our customer base, we are building a solid platform being able to support our customers going forward," comments Lennart Erlandson, cfo at Avida Finans.

The deal, advised by Revel Partners and White & Case, will deliver substantial capital relief, and strengthen the Avida Finans' balance sheet. 

Nadezhda Bratanova

Capital Relief Trades

FCA consultation to create tailwind for SRT issuance?

SRT market update

On 1 August 2025, the UK Supreme Court overturned a landmark ruling on car finance commissions, stating that car dealers who sold vehicles and arranged the finance did not have a fiduciary duty to their customers. While the Supreme Court's decision inevitably reduces the expected financial impact on lenders, it also affirmed that unfairness could still be present in specific cases. Following the ruling, however, the Financial Conduct Authority (FCA) announced a consultation for a new redress scheme to address cases deemed unfair. The FCA is aiming to publish the consultation by early October, with total costs of the redress expected to be between £9bn and £18bn.

Within this context, it begs the question of whether for banks specifically affected by the motor finance scandal, SRTs can offer a direct solution. While still speculative for now, the potential CET1 impact on banks could fundamentally boost SRT issuance (in their typical role to optimise balance sheets and improve CET1 ratios).

For example, Close Brothers' H1 2025 results show that the group took a £165m provision in relation to motor finance commissions, a key driver for the H1 2025 operating loss before tax of £103m. The provision reduced the CET1 capital ratio by approximately 150 bps, from 13.7% to 12.2% as of 31 January 2025. Furthermore, car finance loans account for around 20% of Close Brothers’ entire loan book. Coincidently or not, Close Brothers’ recently completed a bilateral SRT with the British Business Bank (albeit linked to its asset finance portfolio).

Similarly, Lloyds (Black Horse) has the highest potential number of claimants (1.5–3.5m) and the largest estimated redress cost (£2.5–3.9bn). They have already provisioned £1.2bn and still face a significant potential CET1 hit of 0.61 percentage points.

Regarding the larger banks (Lloyds, Santander and Barclays), one SRT investor believes that any redress scheme that does result from the Supreme Court’s decision will be quite absorbable for the largest banks because of their significant profitability and capital buffers. Yet, they believe the PRA's new and alternative stance on Challenger Banks as the main factor for future SRT issuance. They say:

“I would expect (the FCA’s redress scheme) to have minor influence on SRT issuance. But I don't think it will create capital problems for any of the major banks, but rather push some of the smaller banks to consider things. And we hear that the PRA is becoming more open to Challenger Bank's involvement in the (SRT) market. And I think that's where the CET1 impact will perhaps be harder to address if they don't do anything. I think the bigger banks can absorb it through earnings. They have the capital cushions and the income-generating capabilities.”

For many observers and market participants, the Supreme Court ruling and the FCA's subsequent announcement of a redress scheme reduces the expected overall economic impact for the auto lenders involved, and more specifically on UK banks. Although widely seen - for now - as a decisive legal victory for major city banks, the ultimate impact remains uncertain and will depend on the final details of the FCA's redress scheme.

Vincent Nadeau

Structured Finance

Job swaps weekly: Fifth Third expands ABF group

People moves and key promotions in securitisation

This week’s roundup of securitisation job swaps sees Fifth Third expand its asset-backed finance group. Elsewhere, Niam Credit has appointed a new cio in Stockholm, while BAWAG Group has hired a former Alantra executive as European head of partnerships. 

Fifth Third has expanded its asset-backed finance group within the commercial bank, adding new capabilities to underwrite and distribute ABS across transportation, consumer entertainment and equipment finance. 

Leading the team as md of ABF is Rebecca Moss, who joined the bank in 2022 following senior roles at Credit Suisse and Deutsche Bank. Supporting her are several experienced ABF bankers, including Steven Ellis, md, ABF-Consumer; Hector Campos, md, transportation and large-ticket equipment; and Joel Ashman and Kristan Gochee, both serving as md for the syndicate function. On the sales side, recent additions include Chris Connors, md of ABS sales, who joined Fifth Third in July after a career in structured product sales and trading at DLJ, Bear Stearns, Bank of America and Credit Suisse, among others. 

Fifth Third has served as bookrunner on eight ABS deals so far this year, totalling US$3.4bn, with more than US$4bn in capital commitments to clients. The build-out reflects the bank’s strategy to reinforce its role as a key provider of asset-backed finance solutions.

Meanwhile, Niam Credit has appointed Emma Jack as its new cio in Stockholm. Jack brings almost 20 years of experience in the private markets to the firm, specialising in real estate, renewable energy infrastructure, speciality finance and structured finance. She joins from PGIM Private Alternatives, where she most recently served as a portfolio manager for its global private debt strategies team in London.

Nick Colman has joined BAWAG Group as European head of partnerships, working across a number of the firm’s inorganic growth strategies, including platform financings and forward flows, and portfolio acquisitions/loan-on-loan financing. Based in London, he was previously co-ceo of Alantra’s financial institutions group, having joined the firm in July 2018 from KPMG’s global portfolio solutions group.

Aon has appointed David Kinzel as USA practice leader for structured credit and political risk, based in Denver. Kinzel leaves Marsh McLennan after a combined 16 years with the firm, most recently as senior vp - structured credit and political risk growth leader. He previously left Marsh McLennan in 2016 to take up a role as vp - global solutions at Alliant Insurance Services, before rejoining the buisness in 2021.

Eagle Point Credit Management has recruited former Morgan Stanley Investment Management executive director Ken Yamashita as md and head of client and partner solutions for Japan. In his new role, Yamashita will oversee existing investor relationships and institutional business development in Japan, and will report to senior principal and head of client and partner solutions Kyle McGrady. Based in Tokyo, Yamashita leaves his role at Morgan Stanley after a year and a half with the business, having previously spent six years as BlackRock's head of alternative sales for Japan and 10 years as a director at Strategic Value Partners.

Cadwalader has further strengthened its securitisation and real estate capabilities, with the hiring of Louis Vitale and Michael Fabrizio as counsel and associate respectively in its New York office. Vitale focuses on CLOs of corporate, private credit and commercial real estate debt. He was previously of counsel at Clifford Chance and counsel at Sidley Austin before that.

Fabrizio also focuses on CLO transactions, including corporate CLOs, CRE CLOs and infrastructure CLOs. He was previously managing associate attorney at Sidley Austin, which he joined in February 2020.

And finally, Massachusetts-based Needham Bank has promoted James Daley, who established the bank's structured finance team, to executive vice president and director of commercial and industrial banking. Daley joined Needham in 2020 as senior vp, before being promoted to director of structured finance in 2021. He previously spent seven years at Customers Bank, in addition to having spells at Flagstar Bank and Banco Santander.

Corinne Smith, Marta Canini, Claudia Lewis, Kenny Wastell