Morningstar DBRS' Takeaways From Global ABS 2025: European Capital Markets Constructive Despite Volatility

As part of its takeaway series, Morningstar DBRS is publishing several write-ups about pertinent topics discussed at Global ABS, one of the largest annual structured finance events, hosted in Barcelona. On Tuesday 10 June, Christian Aufsatz, Managing Director of European Structured Finance and Covered Bond Ratings at Morningstar DBRS, moderated a panel of four industry experts assessing what the rest of the year looks like for capital markets and their place in an increasingly volatile world.

Aufsatz kicked off the panel by polling the audience on whether their outlook for the European securitisation market had improved, deteriorated, or stayed the same since the beginning of the year. Just 13% thought the market had improved while 47% thought it had deteriorated and 40% thought it had remained the same. The panel were slightly more optimistic, with one member highlighting that issuance volumes were still on track to reach early-year forecasts, although the composition is different than expected. There has been a large issuance spike in broadly syndicated loan collateralised loan obligations (BSL CLOs) and a significant increase in commercial mortgage-backed securities (CMBS) but a lag in residential mortgage-backed securities (RMBS). In its "European Structured Finance and Covered Bonds Outlook 2025: Will the Recovery Continue?" commentary, Morningstar DBRS expected stable placed European securitisation issuance, with slowing in RMBS and CMBS.

The main talking point so far this year has been the market volatility caused by the announcement of U.S. tariffs as reflected in Aufsatz's second poll to the audience, which identified the U.S. President Donald Trump, tariffs, trade uncertainty, and geopolitics as the biggest risks facing the European securitisation market for the remainder of the year. One panellist pointed out, however, that the European securitisation market has performed exceptionally well amid the current uncertainty compared with government debt and corporate credit, while another cited the positive impact on European defence stocks. Another made the analogy that a degree of stress is required to grow muscle, and hopefully this period of stress will ultimately strengthen the European capital markets.

The panel also discussed the trending topic of private credit versus public securitisation, and views were generally positive about private credit. When Aufsatz asked whether private credit markets were as volatile as public markets in the immediate aftermath of the initial U.S. tariff announcement, one panellist asserted that markets were closer to business as usual in April, partly because of the degree of competition in private credit as investors seek the best deals. Indeed, in the week following "Liberation Day" (2 April 2025), significant risk transfer (SRT) issuers were continuing with transactions at competitive levels. The same panellist emphasised the belief, however, that Europe needs a wider public securitisation market to remain competitive.

Aufsatz then noted that, in Europe and partly because of regulation, a lot of debt that could have fed securitisations has gone into debt funds, which then started to use leverage themselves. One panellist noted that, before 2008, the European securitisation market was mostly composed of RMBS transactions and these loans shifted into covered bonds, not necessarily debt funds. The real "privatisation" of the European securitisation market occurred in the SRT space, which has grown significantly and has scarce available data even related to its size.

Another panellist said that there was certainly a place for both bank funding and credit funds, especially as they start to work together more. As banks can originate loans then pass along some of the risk, they can remain relevant and continue to service their key clients while private credit companies benefit considering their vast cash that they can then put to work. The panel also pointed out that investors in private credit and SRT have the benefit of a lot of information and agreed that such information is asymmetrically distributed, however. The panel concluded that private credit is not a competitor but a complement to the public market, and that a larger public securitisation market would benefit European capital markets and ultimately the real economy.

One aspect on which the panel were somewhat divided was the recently leaked draft proposal to change securitisation and related regulation in the European Union. Regulation and regulatory uncertainty was another risk factor in the second audience poll, and Aufsatz asked if the proposal would result in more issuance volumes and help to close Europe's securitisation gap with the U.S. While the details are not yet clear, one panellist said that the direction was positive, but highlighted the risk of even more complexity with yet another resilience "label" and questioned whether the anticipated reduction in capital charges for securitisations will be sufficient. Another panellist claimed that the potential reforms might be great for the funding of the real economy and would lead to more transparency in the markets while another did not see the need for further regulation, claiming that simplicity is necessary for growth in the European securitisation market. All agreed that, in Europe, any regulatory changes will take considerable time to implement.

Aufsatz's final question to the audience was about European securitisation spreads for the rest of the year. Nearly all audience members predicted a degree of volatility, but 38% thought that spreads would remain unchanged and 33% thought they would tighten after the volatility. The panellists unanimously agreed that spreads will be volatile for the rest of the year but will likely not end the year wider than they are now. Some voiced concerns for 2026, however, in terms of the macro outlook, spreads, and volatility.

Written by Ella Rigby

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