The future is bright for European ABS

Investors are increasingly looking to diversify their fixed income investments. Whilst many options are available, one of the most compelling is specialty finance. For investors seeking an alternative source of return together with portfolio diversification benefits, this is proving a compelling destination.

Fixed income investors have steadily been exploring alternative allocations within their portfolios. Seeking greater return diversification, areas such as structured credit have come into focus. With a variety of options available, perhaps one of the most compelling are asset backed securities (ABS). This is a component within the structured credit universe which investors are increasingly looking towards but may not fully appreciate the breadth of benefits it can offer. 

Whilst not a new area of credit, ABS may not be as familiar an investment destination as other more traditional fixed income options. It is therefore worthwhile to recap what exactly ABS are and how they are structured.

What are asset-backed securities?

ABS is quite a broad term and covers a diverse spread of assets such as residential mortgages, consumer loans, credit card receivables etc. The value to investors is that ABS facilitates entry to parts of the investment universe that may otherwise be difficult to access. This in itself can provide certain portfolio diversification benefits.

Depending on the assets, the structure of ABS can vary: residential mortgages will typically be packaged up as residential mortgage-backed securities (RMBS), whilst corporate loans will typically be packaged to form a collateralised loan obligations (CLOs).

Once the pool of these assets grows to a certain overall size, typically €300-500 million, they are moved into a bankruptcy remote special purpose vehicle (SPV). This structure is important as it removes the credit linkage to the originating bank. 

Read the full article.