Slide 1: US & European Credit and Structured Finance Landscape

Speaker Notes: Today we’ll examine the credit and structured finance landscape across the
US and Europe. We’ll start with a high-level market overview – looking at macro drivers like
interest rates and investor demand, as well as regulatory and funding conditions. Then we’ll
dive into three major structured finance sectors – Covered Bonds, Residential Mortgage-
Backed Securities (RMBS), and Collateralized Loan Obligations (CLOs) – reviewing their
recent performance and future outlook. For RMBS and CLOs, we’ll compare the risk/return
profiles of the highest-rated (AAA) tranches versus the equity (first-loss) tranches in each
deal. We’ll also discuss developments in sustainable structured finance – including ESG-
linked issuance, the EU’s STS securitisation framework, and regulatory changes (like EU
Taxonomy alignment, Solvency II and liquidity rules). Finally, we’ll highlight current relative
value opportunities across these asset classes and give a forward-looking assessment of
structured finance’s role in global capital markets.

Slide 2: Market Overview – Macro Drivers & Funding

Speaker Notes: Broad macroeconomic conditions set the backdrop for credit markets.
Interest rates have likely peaked – both the U.S. Federal Reserve and the European Central
Bank took policy rates to restrictive highs (Fed ~5.25%, ECB deposit ~4%). Now, with
inflation easing back toward 2% (as the chart shows for the US and Eurozone), the
expectation is that monetary policy will become less restrictive going into 2025. In fact, S&P
forecasts Eurozone inflation ~2.1% and an ECB rate cut to ~2.5% by mid-2025 . Market
pricing (via overnight index swaps/futures) also implies the Fed could cut roughly 75bps by
late 2025 and perhaps ~300bps by mid-2026, reflecting a anticipated pivot once price
stability is assured.

On the economic outlook, growth is slowing but not collapsing – a “soft landing” scenario is
hoped for. For example, Eurozone GDP is projected around +1.2% in 2025 , with some
divergence across countries. Risks like renewed U.S.–China trade frictions or geopolitical
shocks are causing volatility in markets. In a recent poll of securitisation market participants,
only 13% felt conditions had improved since the start of the year, while ~47% saw
deterioration – highlighting cautious sentiment amid volatility.

Funding conditions tightened noticeably in 2022–2023 as rates rose. However, financial

system liquidity is still adequate and banks remain well-capitalized. In Europe, the wind-
down of ECB lending facilities (like TLTRO) means banks have had to replace that funding
by issuing debt in capital markets. This contributed to a surge in bond issuance (especially
covered bonds, which we’ll discuss) in 2023. Credit spreads spiked during the 2022 inflation
shock and other stress events (e.g. the chart indicates the 2025 “tariff turmoil” blip), but in
general have stabilized or tightened somewhat as inflation came under control. Overall, the
macro backdrop – high but peaking rates, lower inflation, and a mixed growth outlook – is
cautiously constructive for credit, setting the stage for our structured finance markets review

Slide 3: Market Overview – Investor Demand & Regulation

Speaker Notes: Let’s talk about investor demand and the regulatory environment. After a
long low-rate era, investors are now finding significant yield pickup in structured finance
products. As interest rates rose, spreads on assets like RMBS and CLOs also widened,
making securitized assets relatively more attractive. We’ve seen a clear resurgence in
placed (i.e. publicly sold) deals. In Europe, about €94.7 billion of securitizations were placed
with investors in 2023, up from ~€79bn in 2022 . That trend intensified in 2024, with placed
volume ~€146bn – about 58% of total issuance , which is remarkable considering after 2008
much issuance was retained by banks. Big institutional investors – including global asset
managers, insurance companies, pension funds, and now even dedicated CLO ETFs – are
allocating more to these higher-yielding, asset-backed sectors. The hunt for yield and
portfolio diversification is boosting appetite for structured credit.

On the issuance side, the European securitisation market has been in recovery mode. Total
issuance went from about €202.8bn in 2022 to €213.3bn in 2023 , and further to roughly
€250+ billion in 2024 . These are the strongest volumes since the financial crisis. Moreover,
a larger share is being sold to investors rather than kept on bank balance sheets – 2023 was
notable as the first year since 2008 that investor-placed issuance overtook retained deals .
We also saw new types of collateral being securitized (for example, pools of residential solar
loans, middle-market corporate loans, etc.), reflecting innovation in the market . In early
2025, issuance overall is tracking forecasts, but its mix is different: panelists at June’s Global
ABS conference noted a surge in broadly-syndicated CLO issuance and a jump in CMBS,
whereas RMBS volumes have lagged expectations so far . So, investors are embracing
certain asset classes more than others at the moment.

Turning to regulation, it’s a pivotal factor in structured finance. Policymakers post-2008

imposed stricter rules (like risk retention of 5%, higher capital requirements, and
transparency standards) to ensure securitisation is safer and simpler. Europe introduced the
STS designation – basically a quality label for securitisations that meet high standards of
simplicity, transparency, and standardisation. STS deals get regulatory benefits: banks get
lower risk-weighted asset charges and they’re more acceptable as collateral or for liquidity
buffers. As of Q4 2023, roughly 43% of new European securitisation volume was STS-
compliant , which indicates many issuers follow this best practice route. Even so, insurers
and banks often still find the capital charges on even AAA securitisations to be high relative
to similarly rated covered bonds or corporates. There’s ongoing debate (and actions) to
recalibrate these rules. In fact, European authorities are reviewing the securitisation
framework right now – a draft proposal suggests slightly reducing capital charges on senior
tranches and potentially introducing a new “high quality” label, aiming to narrow the
“securitisation gap” between Europe and the much larger US market . The concern in
Europe is that overly harsh treatment pushed a lot of lending into other channels (like
covered bonds or private credit funds) . Any changes will be slow, but directionally the hope
is to make securitisations more attractive to investors by aligning capital treatment with
actual risk. Meanwhile, covered bonds remain a regulatory favorite – they are exempt from
bail-in, get low risk weights (often 10% for AAA covered bonds under CRR), and qualify as
high-quality liquid assets (HQLA) for bank liquidity ratios. This advantageous treatment is
part of why European banks have historically issued covered bonds heavily for funding.
Overall, regulation is evolving to balance safety with market development, and this will
influence how robust the investor demand becomes.
Slide 5: RMBS

Speaker Notes: Let’s now focus on the RMBS market – one of the core sectors in structured
finance – and walk through the key dynamics driving issuance, pricing, and risk today.

First, look at the chart on the slide. It shows that U.S. mortgage rate spreads over Treasuries
are at their highest levels in nearly a decade. This reflects both a risk premium and reduced
investor demand relative to prior years, especially for lower tranches. But this also means
yields are more attractive, particularly for credit-savvy investors.

Despite this, issuance has been resilient, especially for senior tranches. In 2024, total U.S.
mortgage-backed issuance reached about $1.6 trillion, largely agency-driven, but we also
saw $22–133 billion in non-agency RMBS depending on scope. Within that, AAA-rated
tranches remain in demand, offering stable cashflows and strong credit protection – which is
shown in the tranche table on the slide.

In Europe, RMBS volumes also rebounded – notably, the UK saw about €33.8 billion in
investor-placed RMBS in 2024. Still, spreads on EU RMBS remain wider than equivalent
U.S. tranches, creating a relative value opportunity – particularly in the mezzanine space,
where yields may be compensating more than fairly for the credit risk.

Turning to the market drivers, the key forces to watch are mortgage rates, house price
trends, and default expectations. If U.S. recession risks rise, we could see more stress in the
equity tranches, where loss absorption begins. That’s something to monitor closely – while
credit fundamentals are still sound today, risk builds over the medium term.

So in summary:

 Current spreads create yield opportunities.

 Senior RMBS remains a solid risk-adjusted core asset.

 Mezzanine tranches in Europe look especially attractive for selective credit investors.

 And equity tranche exposure should be taken cautiously, particularly with the macro-
outlook uncertain.

Together, this sector offers tiered risk-return choices – and for the right investors, a useful
way to gain exposure to the housing and consumer credit cycle.

Slide 4: European Covered Bonds – Performance & Outlook

Speaker Notes: Now let’s turn to European Covered Bonds, often considered the safest
segment of structured finance (although technically they’re secured bank debt, not
securitisations). These bonds have a long history – over two centuries without a single
default on record . That safety comes from their structure: investors have dual recourse,
meaning if the bank issuer fails, bondholders can still rely on the dedicated cover pool of
high-quality assets (like prime mortgages or public-sector loans) to get repaid. The cover
pools are usually overcollateralized (more assets than needed for the bonds), providing a
hefty cushion. For example, covered bond programs typically maintain 20%+ excess
collateral above the bond amount, and issuers must keep the pool’s credit quality high
(replacing any non-performing loans). This is why even severe scenarios (house price drops,
etc.) haven’t resulted in losses to covered bond holders historically. Rating agencies note
that even though risks like commercial real estate or sovereign exposures exist in some
cover pools, the excess credit enhancement and legal frameworks mean the bonds can
weather a lot of stress without downgrades .

2023 was a blockbuster year for covered bond issuance. European banks issued on the
order of €140–150 billion in benchmark covered bonds , which is near record territory. The
reason is straightforward: banks needed to refinance loans they had taken from central
banks (TLTROs) and also fund new lending, and covered bonds are a cost-effective way to
raise large amounts. Investor demand was very strong, given the high credit quality and
improved yields. By 2024, issuance cooled a bit – partly because a lot of refinancing was
front-loaded in 2023, and partly as mortgage lending slowed amid higher interest rates (less
new collateral to fund) . Still, we expect healthy issuance around €140bn in 2025 as per
S&P’s outlook , not far off recent highs. Essentially, covered bonds remain a staple funding
tool for European banks.

On the performance side, rising interest rates did increase funding costs for issuers and
initially widened covered bond spreads in 2022. But as markets settled, spreads tightened
significantly through 2023 into early 2024. In fact, by mid-2024, the extra yield on covered
bonds over government bonds had shrunk to roughly 0.4% (40 bps) , which is quite narrow.
Historically, investors demanded closer to 1% more than govvies for corporates, so covered
bonds at +40 bps indicate they were almost as soughtafter as sovereigns. This narrow
spread – or even “negative greenium” in some cases – suggests investors are willing to pay
up for safety. For investors, covered bonds offered a chance to get a yield slightly above
treasuries or Bunds but with nearly sovereign-level security (remember that track record of
no defaults). The Nordea insight piece even highlighted that covereds were poised to
outperform corporates in a volatile 2024, given their defensive nature . And when spreads
briefly widened due to an event (like a political surprise in France mid-2024 ), many saw it as
a buying opportunity since fundamentals hadn’t changed.

From a regulatory perspective, covered bonds enjoy special treatment: they’re carved out of
bail-in (so investors won’t be “bailed-in” in a bank resolution scenario) , and regulators allow
banks and insurers to hold lots of them cheaply capital-wise. Under European banking rules
(CRR), qualifying covered bonds can carry extremely low risk weights (as low as 10% for
AAA-rated issues). Plus, in liquidity regulations (LCR), top-quality covered bonds count as
Level 1 HQLA up to certain limits – essentially on par with government bonds in liquidity
buffers. These advantages partly explain why European banks might choose to issue a
covered bond rather than an RMBS (securitisation) – it’s simpler and the investor base
(including the ECB in the past through CB purchase programs) is very receptive. The
Covered Bond Directive implemented in 2022 has further harmonised standards across
Europe, which helps cross-border investors trust that a Spanish cédula or a German
Pfandbrief or a French Obligation Foncière all meet robust criteria.

In summary, Covered Bonds are performing strongly as an asset class: extremely low credit
risk, modest but reliable returns. They are a cornerstone for conservative investors and will
remain so. Going forward, we foresee issuance normalizing slightly lower than 2023’s peak,
but still substantial. If anything, if banks see deposit growth bounce back or lending stay
tepid, they might need a bit less new funding, thus the expected modest dip in supply . But
demand should handily absorb what comes, given how well these bonds balance yield and
safety. For global investors, covered bonds offer a quasisovereign alternative that can add
yield without materially increasing portfolio risk.

Slide 7: Sustainable Structured Finance – ESG and STS Developments

Speaker Notes: Let’s discuss sustainable structured finance, encompassing ESG-themed

products and the intersection of securitisation with sustainability goals. First, where are we
seeing ESG issuance? The covered bond market has been a frontrunner. By 2024, roughly
5–8% of annual covered bond issuance was green or social . Big issuers in Germany,
Nordics, France have all done green covered bonds where the cover pool is made of
mortgages on energy-efficient buildings or loans financing renewable projects. Nordea’s
report highlighted that covered bonds, with €3tn outstanding, have begun to embrace ESG
labeling strongly . In securitisations (ABS/MBS), the uptake is slower. There have been a
few Green RMBS in the Netherlands (where the pool’s homes have high energy ratings) and
some auto ABS deals where only electric vehicle loans are included, for example. Also,
some sponsors have issued sustainability-linked notes where the coupon step-ups if ESG
targets aren’t met (this is more common in corporate bonds but could appear in structured
deals). Overall, though, ESG securitisation volume is small – Scope Ratings notes that even
though ESG is “standard” to consider now, labeled issuance was only ~€18bn in 2024 for
covered bonds (and a few €bn for ABS), so a niche . The good news: it didn’t decline as a
share of the market from 2023, meaning it’s holding ground or growing slowly .

Why not faster growth? Challenges are significant. For one, to call a securitisation “green,”
you need data on the underlying assets’ environmental characteristics. For thousands of
loans in an RMBS, that means you need energy performance data for each property – a big
task especially if loans come from years ago when no one collected that. The EU Taxonomy
for sustainable activities has strict technical criteria; aligning a pool of assets with those
criteria can be tough. Issuers also face “ESG fatigue” – as noted in Scope’s outlook, covered
bond issuers feel “between a rock and a hard place,” flooded by new ESG regulations and
reporting asks . The cost/benefit is unclear: the so-called “greenium” (yield advantage for
green bonds) is tiny in this sector – Scope found on average just ~1 bp tighter for green
covered bonds . So there’s not a strong pricing incentive yet; issuers do it to diversify
investor base or for corporate responsibility reasons.

Regulators are pushing transparency: In 2022, the European Banking Authority released a
report on sustainable securitisation and basically said let’s not create a new label yet, but
improve disclosure. The EBA and ESMA drafted detailed sustainability disclosure standards
for STS securitisations – meaning that if you do an STS deal, you’ll likely have to report on
environmental performance of assets, alignment with taxonomy, etc. This is still being
finalized, but it’s the direction of travel. Over time, we might see a formal “Green STS” or
similar, but regulators are cautious – they don’t want greenwashing or overly complex
frameworks when STS itself is still bedding in.
On the STS framework: I mentioned it earlier, but it’s worth noting its success. A large
proportion of European deals, especially RMBS, consumer ABS, etc., are STS nowadays.
For instance, pretty much every prime RMBS out of the Netherlands or Italy now is STS.
This has given comfort to investors that these deals meet high standards in structure
simplicity and transparency. STS has also slightly reduced capital charges: under CRR, the
senior STS tranche risk weight might be e.g. 10% instead of 15% (for banks using
standardised approach) – not huge, but helpful. Also, STS securitisations have lower floor
risk weights and better treatment in Solvency II after 2018 revisions (insurers get a bit of
relief for STS vs non-STS). However, the industry feels it’s not enough – Insurance Europe
and others argue that even with STS, the capital charges are disproportionate to the actual
risk (e.g. senior STS tranche of high quality might carry more capital than an AA-rated
corporate bond). There’s indeed a review on this: the EU is reviewing Solvency II and CRR
for securitisation. One idea floated is to cut securitisation capital charges by maybe an
additional 5-10% for seniors to see if insurers will invest more . But it remains to be seen if
they’ll implement that; some regulators worry about going too far.

Another regulatory aspect: Liquidity (LCR) treatment. Currently, only very high-quality
securitisations (senior positions of STS deals with certain ratings and currencies) can be
counted and only as Level 2B assets with a haircut in banks’ liquidity buffers. That’s a
restrictive treatment compared to covered bonds (Level 1/2A) or corporates (Level 2A if
high-rated). The industry would love to see senior STS get Level 2A or even 1 status
eventually, to make banks more comfortable holding them. The European Commission is
examining these as part of the Capital Markets Union action plan.

So essentially, STS has improved the baseline – deals are more standardized now, and that
helps on the ESG front too, since you can build ESG reporting on a common base. But more
regulatory tweaks are anticipated to further boost the market’s attractiveness.

Finally, let’s consider the role of structured finance in sustainable finance. As Europe and the
world aim to finance the transition to a low-carbon economy, enormous investment in things
like green real estate, electric cars, renewable energy, etc., is required. Banks and lenders
will originate a lot of green loans – but they have balance sheet constraints. Securitisation
can be a powerful tool to recycle capital: for example, once a bank has made a bunch of
green home improvement loans, it could pool and securitize them, freeing up capacity to
lend more. The European Investment Bank (EIB) and other public entities are already
endorsing this idea by participating in some green securitisations (like a Spanish green
housing retrofit ABS in 2023 ). This involvement can credit-enhance deals or just provide
investor confidence. Over time, if we get a clearer regulatory framework and perhaps some
incentives, we might see a strong green securitisation market develop – channeling
institutional ESG investment into granular assets via ABS.

For now though, the ESG segment is small. Many investors do ask about ESG features even
for regular CLOs or RMBS (for instance, whether the manager considers ESG in collateral
selection), but it’s not usually a make-or-break. However, given Europe’s policy goals (like
reducing emissions 55% by 2030), it’s “unstoppable” that more emphasis will fall on all
financing instruments, including structured finance, to contribute . So we expect a continued
gradual integration of ESG – more green deals, more reporting of carbon footprints of
collateral, possibly even performance triggers linked to ESG outcomes. And perhaps
eventually, regulators may grant preferential treatment (lower capital or otherwise) for
securitisations that demonstrably help meet sustainability objectives – though they have
been patient on that front so far (Scope notes those calling for preferential treatment for
green covereds just have to wait).

In summary, sustainable structured finance is in the early stages. The groundwork is being
laid via disclosure requirements. The STS framework ensures deals are transparent and
could be a vehicle for adding ESG info. We are likely to see incremental growth in green
RMBS/ABS and covered bonds. For investors with ESG mandates, these provide a way to
invest in green assets with diversification. And big picture, as green lending grows,
securitisation will be vital to funnel capital from global markets to those end borrowers –
making the structured finance market an important conduit in achieving climate finance
goals.

Slide 8: Relative Value & Investment Opportunities

Speaker Notes: Let’s bring it together by looking at relative value across these instruments
and where a global investor might find the best opportunities today. The chart on this slide
illustrates one striking example: the orange line is the spread of European AAA CLOs, and
the black line is the spread of the Euro Investment Grade Corporate Index (both over similar
benchmark). As you see, in early 2025, AAA CLO spreads were around 130–140 bps,
whereas IG corporates were around 80–90 bps . So, an AAA CLO was paying roughly 0.5%
more than the average BBB/low-A corporate – despite being a higher credit quality and
having shorter duration (floating rate). This highlights a clear relative value play: high-grade
structured credit offers significantly higher yields than equivalently rated vanilla bonds.

Why does this opportunity exist? Mainly due to market technicals and liquidity.
Securitisations are more complex and less liquid, so they trade at a spread premium. Also,
not all investors (especially in Europe) participate in structured credit due to past stigma or
regulatory constraints – so those who can invest are paid a bit of a scarcity premium. For
example, European insurance companies historically bought few securitisations due to
Solvency II charges; if that changes even slightly, spreads could compress.

Now, in practical terms: If we are constructing a portfolio, we might consider overweighting

certain structured asset classes:

● AAA CLO tranches: These are arguably one of the best risk/reward deals out there
for highgrade fixed income. You get a top-rated instrument with essentially zero
historical default risk and floating rate interest. Today that might yield around 6%
(SOFR + ~1.4%). Compare that to, say, a 5-year US Treasury at ~3.7% or an AAA
covered bond at maybe 4%. You’re getting a nice pickup. Additionally, AAA CLOs
have shown they hold value in turmoil – minimal drawdowns relative to other assets .
So, for a defensive allocation, AAA CLOs make a lot of sense. One caveat: you have
to do your homework on manager and structure nuances, but at AAA level,
differences are minor. In a world of volatile rates, having a floating-rate asset reduces
your interest rate risk – so if rates go up, you earn more.
● Covered Bonds: While their spreads are tight, they still yield a bit more than
government bonds (e.g. a German 5y covered might yield 3.2% vs Bund at 2.7%,
etc.). Given that covered bonds are extremely safe and liquid (some issues are ECB
eligible and trade in size), they’re a great core holding for safety. For an institutional
investor who might otherwise park money in govies, allocating to covered bonds can
add incremental return without sacrificing much liquidity or quality. Especially after
the spread widening episodes (like mid-2024 in France), one could step into covered
bonds at attractive levels – Nordea noted that when covered spreads briefly widened,
it was a compelling entry point . As issuance is set to moderate, technicals may
support covered bond prices.

● Senior tranches of RMBS/ABS: These can offer a sweet spot – more yield than
covered bonds but similarly strong credit. For instance, a AAA UK RMBS might give
SONIA + 80–100 bps. That’s more than a same-tenor covered bond maybe at +20
bps, in exchange for a bit less liquidity and a slightly different risk profile. If one is
comfortable analyzing the collateral and trusts the STS framework, these senior
tranches can be very money-good and diversify exposure (they are tied to consumer
risk/housing which might behave differently than corporate bonds in a downturn).

● Mezzanine tranches: For those willing to take more credit risk, moving down to
mezzanine (say BBB-rated tranches) can boost yields substantially. A BBB CLO
tranche might yield ~6-7% above base, and a BBB RMBS tranche similarly can be in
mid to high single-digit yields. These are interesting for credit investors who can
analyze the tail risk – because while rated investment grade, they can take losses if
things go really poorly. But if one is selective (e.g., maybe prefer mezz tranches of
prime auto loan securitisations, which historically have low volatility, or mezz
tranches of CLOs managed by top-tier managers with diversified collateral), the
spread might overcompensate for the actual risk. We often see specialist structured
credit funds focusing on these mezz pieces for alpha.

● Equity tranches: Now, these are not for the faint of heart or for a quick trade. But if
you are an investor who can hold illiquid positions and stomach variability, CLO
equity for instance is an asset that can produce 15%+ returns over time. Right now,
conditions for new CLO equity are interesting: loan spreads are relatively high and
loan prices a bit below par, so new CLOs are getting assets at discounts and issuing
liabilities at wider spreads (which the equity has to pay). The net arbitrage is okay but
not as fat as, say, in 2016. However, if you pick a CLO manager known for good
trading and credit work, the equity could outperform expectations especially if credit
markets rally (loans bought cheap go up in value, and the deal can refinance at
tighter spreads later – equity benefits greatly in that scenario ). It’s worth noting many
CLO equities are priced around or below par in secondary now, implying double-digit
yields to maturity if things go normally. That said, if a recession hits and loan defaults
surge, equity distributions could dry up.

● Cross-currency opportunities: US vs Europe – US structured credit (like US CLOs,

US CMBS, etc.) often yields more due to a larger, more competitive market. A global
investor might hedge USD CLO tranches back to EUR and pick up extra basis. Also
within Europe, sometimes sterlingdenominated tranches yield more than euro
 tranches of same deals (if fewer natural GBP buyers), so there can be relative value
by currency.

Now, think of capital efficiency: If I’m a European insurer, holding a AAA CLO might soon
become a bit easier on capital if reforms pass. Getting in before that happens could yield a
nice spread compression gain (the logic being, once more insurers are allowed/comfortable
to buy, demand goes up and spreads tighten). Similarly, banks have been hesitant on some
securitisations due to liquidity rules, but if LCR is adjusted to allow more, banks might
allocate more to, say, AAA RMBS for their liquidity books, driving spreads in.

Market conditions are always evolving, but as of mid-2025, structured credit spreads are
generally wider than pre-pandemic norms, in part reflecting lingering risk aversion and QT
(central banks stepping away). However, the general expectation is we won’t see spreads
blow out barring a severe recession. In a poll, most market participants expected structured
spreads to stay the same or tighten in the coming months . Some caution beyond 2025 if
macro deteriorates was noted, but for now, carry trade is king. That means an investor can
collect these high coupons, and if spreads tighten a bit, that’s bonus return.

To summarize the recommendations: - Keep quality in the portfolio via AAA CLOs and
covered bonds – earn high quality carry. - Augment returns with select ABS/RMBS mezz or
CLO mezz if you have credit expertise – these can significantly boost portfolio yield and are
often overlooked by generalists. - For those with high risk tolerance, allocate a small slice to
equity tranches of CLOs or other securitisations – it’s akin to an alternative investment that,
while risky, can pay off handsomely especially if the economic scenario is mild (so far, post-
Covid, that’s been the case with default rates low). - Diversify across managers and asset
types (e.g., don’t put all mezz in one sector like all consumer ABS; mix some CLO, some
consumer, etc.) to mitigate idiosyncratic risk.

Everything should be sized according to one’s risk budget. But overall, given where
valuations stand today, structured finance offers some of the best relative value in credit
markets, especially on a risk-adjusted basis for higher-rated tranches. As the market
continues to recover and gain broader acceptance (with help from regulatory tweaks), we
expect these spreads to eventually compress toward more “fair” levels – so investors who
enter now can enjoy the income and potential price upside as that happens.

Slide 9: Outlook & Conclusions – The Evolving Role of Structured Finance

Speaker Notes: To conclude, let’s reflect on the bigger picture and what’s ahead for the
structured finance landscape:

The role of structured finance in the capital markets ecosystem is poised to grow. We have a
banking sector under pressure to optimize balance sheets – higher capital requirements (like
Basel III final reforms) and leverage constraints mean banks can’t hold as many loans per
unit of capital as before. Securitisation is a tool to alleviate that: by packaging and selling
loans, banks transfer risk to capital markets and free up capacity to lend more. In the US,
this is long established (think of the huge agency MBS market, CLOs for leveraged loans,
etc.). Europe, however, has lagged – what’s often called the “securitisation gap.” European
securitisation issuance is a fraction of US levels when you exclude the government-backed
agency MBS. There’s recognition at policy levels that to finance growth and innovation (and
now, the green transition), Europe must unlock more capital via markets – and a “wider
public securitisation market” is needed . That’s why initiatives like STS, and potential tweaks
like European Secured Notes (which would be a covered bond-like framework for SME and
infrastructure loans) are underway . If successful, we might see entirely new asset classes
securitized (e.g., loans for energy-efficient retrofits, digital infrastructure, etc.), broadening
the market.

The industry outlook for the next couple of years is generally stable to positive. We’ve
emphasized that underlying asset performance (mortgages, consumer loans, corporates) is
currently solid. Households still have strong balance sheets in aggregate, home prices have
softened in some regions but not crashed (and in many places, housing affordability is
improving again as incomes rise and prices dip slightly ). Corporate earnings have held up,
and while higher interest costs will strain weaker companies (particularly highly leveraged
ones – the typical CLO obligor), default rates are expected to rise only gradually. For
instance, you might see US leveraged loan defaults go from <1% to maybe 3% or so in 2024
– not great, but not calamity (in 2009 it was ~10% for context). With structured deals
structured to withstand multiples of those default rates at senior levels, we’re not expecting
senior tranche impairments. Upgrades outpaced downgrades in structured finance in 2023 ,
showing transactions deleveraging and performing better than initial stress assumptions.

We do remain cautious about macro risks: If inflation resurges or geopolitical events shock
the system, we could get renewed volatility. Or, if central banks overshoot tightening and
economies enter a deep recession, then consumer and corporate defaults could spike
beyond expectations. In such tail scenarios, mezzanine tranches could face losses and even
some AAAs (in extreme cases like severe property crashes) could be tested – though given
the buffers, it would take a truly extreme event for a AAAs to lose principal. More likely, pain
would be felt by equity and lower mezz holders (via loss of income or write-downs) while
seniors still ultimately get paid, albeit maybe later or with rating volatility.

From a regulatory perspective, there are a few near-term developments: - The EU’s
consultation on securitisation could yield adjustments by late 2025 or 2026 that make the
market more attractive (e.g., simplified disclosure, slightly lower capital for certain tranches,
or an official framework for things like synthetic on-balance sheet securitisations which are
widely used by banks for risk transfer). - The idea of European Secured Notes (ESNs) for
SME loans has been on the table (as Scope mentioned, an initiative delayed to 2025 ). If
implemented, that could open a whole new segment – essentially mini covered bonds for
SME financing. It underscores that innovation is ongoing; even blockchain is being
experimented with for covered bonds as an infrastructure tech, though that’s more
operational than product-based . So we expect some innovation but mostly incremental
improvements.

Monetary policy will have a big influence: If indeed the Fed and ECB start cutting rates in
2025, that can reduce funding pressure on consumers and companies – indirectly benefitting
asset performance (e.g. mortgages become more affordable to refinance if rates drop,
helping RMBS). Lower rates could also spark more borrowing (which then can feed new
securitisations). For structured product investors, a falling rate environment might decrease
coupon income on floating tranches but typically increases the market value of fixed-rate
tranches. Many securitisation tranches are floating, so their prices are more tied to spreads
than rates. We might see spread tightening if rate cuts improve sentiment and if no major
credit issues emerge. That means there’s potential upside in current investments (price
appreciation on top of carry).

Another dynamic: we have a refinancing wave coming in structured finance. Lots of 2018–
2019 vintage deals had 5-year call options or end of reinvestment periods around 2023–
2024. In CLOs, for example, a huge chunk of deals will need to be refinanced or reset to
extend them. 2024 was already a record year partly because managers re-issued (reset)
older CLOs into new ones at current market terms . This activity gives investors chances to
invest in new tranches and for equity holders to possibly extend and improve financing. It’s
generally a positive sign of a functioning market when refis are happening. Similarly, many
European RMBS have optional redemption dates; if spreads tighten enough, issuers might
call and re-issue at lower cost. For investors, you have to watch call risk (your high-yielding
bond might get taken out early at par if it’s economically favorable to the issuer), but then
you can reinvest in new deals.

We also touched on private credit vs public securitisation – interestingly, a lot of loans that
could be securitised are ending up in private credit funds now. The consensus is that both
will coexist and even complement each other . Banks originate, maybe offload some via
securitisation or via whole loan sales to debt funds, etc. What’s important is that structured
finance provides transparency and standardisation that private deals often don’t have – and
in times of stress, that can attract investors back to public markets. So if volatility hits, we
might ironically see even more securitisation as a way to redistribute risk broadly (rather than
bilaterally).

Bottom line: We recommend that investors stay diversified and engaged with this market.
The structured finance industry has come a long way since 2008 – it’s more regulated, deals
are simpler, and investor information is better. The asset class offers compelling value and
will be crucial in funding economic activity (including the green transition as noted). We
expect it to keep expanding responsibly, and global institutional investors who skillfully
allocate to structured finance will benefit from enhanced yields, strong credit performance,
and portfolio diversification. It truly can be a win-win: investors get better returns, and the
real economy gets credit flowing from those investments.

In conclusion, as we navigate the current environment of higher yields and evolving

regulations, structured finance is reasserting itself as a core component of capital markets.
By carefully selecting opportunities across covered bonds, RMBS, CLOs (and beyond, into
other ABS sectors), investors can capture attractive risk-adjusted returns. And by staying
attuned to regulatory shifts and market trends, they can position portfolios to take advantage
of the positive trajectory in this space. The combination of macro tailwinds (like eventually
easier monetary policy) and micro improvements (like STS and better data) should support
the structured finance market’s growth and solid performance in the coming years. Thank
you.