Keynote: Convergence between ABF and Private Credit

The opening keynote set the tone for the conference by framing the current environment as a continuation of a structural regime shift that began in 2021–2022. This shift is defined by persistently higher interest rates, elevated volatility, more frequent exogenous shocks and sustained inflationary pressure. While credit fundamentals remain broadly stable, macroeconomic factors are now the dominant driver of outcomes. Against this backdrop, asset-backed finance (ABF) was identified as relatively well positioned due to its shorter duration, real asset backing and faster amortisation, although it remains exposed to rate volatility. The discussion also highlighted the growing importance of private credit and the potential for liquidity-driven contagion between private and public markets.

Key insights

• The current macro regime shift is structural and expected to persist.
• ABF benefits from structural features suited to an inflationary environment.
• Macro shocks, rather than credit deterioration, are the primary risk.
• Private credit introduces liquidity-related contagion risks.
• Opportunities are concentrated in infrastructure, supply chains and emerging markets.

Global ABS market – State of play

This session examined how asset-backed securities (ABS) markets are responding to a volatile geopolitical and macroeconomic backdrop. Despite recent uncertainty, primary markets remain open, although issuance has become more intermittent and requires greater flexibility in execution. Spread widening has been concentrated in mezzanine tranches, while senior tranches continue to benefit from relatively strong demand. The discussion also highlighted increased scrutiny of governance and lending practices, alongside the potential for regulatory reform in the UK and EU to stimulate renewed investor participation. At the same time, new asset classes are expanding the securitisation universe, albeit with structuring and data challenges.

Key insights

• ABS markets remain functional but more episodic and execution-sensitive.
• Spread widening is concentrated in mezzanine tranches, with senior spreads remaining relatively tight.
• Governance and structural scrutiny have increased across transactions.
• Regulatory reforms may support increased investor demand, particularly from insurers.
• New asset classes present opportunities but also data and transparency challenges.

Evolution of the SRT market

Panellists explored the development of the significant risk transfer (SRT) market, which has evolved from a niche product into a core capital management tool for banks. Growth has been supported by increased standardisation and regulatory clarity, particularly in Europe, while the US market offers significant expansion potential. The discussion emphasised the structural differences between SRTs and collateralised loan obligations (CLOs), including their private nature, lack of ratings and more direct exposure to losses. While investor participation is increasing, the market remains relatively concentrated, and risks include both asset performance and shifts in investor appetite.

Key insights

• SRTs are now an established and scalable capital management tool for banks.
• Structural differences from CLOs include private execution and higher loss exposure.
• Standardisation and regulation have driven growth, particularly in Europe.
• The US market presents significant growth potential.
• A concentrated investor base and asset performance remain key risks.

Data centre financing – Driving convergence

This panel discussed the rapid expansion of data centre financing and its role in broader asset class convergence. Growth in the sector is being driven by increasing demand for digital infrastructure, particularly in relation to AI, with Europe expected to see significant development despite currently lagging the US. The discussion highlighted how data centres sit at the intersection of infrastructure, real estate and private credit, with financing structures evolving accordingly. However, the sector faces a number of structural challenges in Europe, including planning constraints, energy limitations, and environmental, social, and governance (ESG) considerations.

Key insights

• Data centre financing is a high-growth area, particularly in Europe.
• The sector reflects convergence across infrastructure, real estate and private
  credit.
• Structuring varies depending on development stage and asset type.
• Key constraints include planning, energy supply and construction costs.
• ESG and energy efficiency considerations are central to future development.

Keynote: Macroeconomic impact on CLO markets

This session focused on the interaction between macroeconomic conditions and CLO markets, with particular emphasis on geopolitical risk, inflation, and technological disruption. The discussion highlighted the persistence of energy price volatility and its inflationary effects, alongside the risk that markets are underestimating the likelihood of further rate tightening. AI was identified as a major disruptive force, particularly for sub-investment-grade sectors, while private credit risks were viewed as real but not currently systemic. The potential transmission of stress between private and syndicated markets remains an important area of focus.

Key insights

• Geopolitical volatility and energy shocks are reinforcing inflationary pressures.
• Markets may be underpricing the risk of further rate increases.
• AI is likely to drive significant sector-level disruption.
• Private credit risks are present but not currently systemic.
• Transmission risks between private and public markets remain a concern.

CLO outlook 2026: Navigating tight markets

This panel considered the drivers of persistently tight CLO spreads and how managers are positioning portfolios in response to evolving risks. Strong demand from a broad and diversified global investor base continues to support spreads, particularly for senior tranches, while the floating-rate nature of CLOs remains attractive in a volatile rate environment. However, panellists identified a number of risks, including geopolitical uncertainty, AI-driven disruption and the upcoming maturity wall. The discussion also emphasised the growing importance of manager differentiation and structural innovation.

Key insights

• Tight spreads are supported by strong and diversified investor demand.
• Floating-rate structures enhance CLO attractiveness in volatile rate environments.
• Key risks include geopolitical shocks, AI disruption and the maturity wall.
• Manager differentiation and credit selection are increasingly important.
• Structural innovation and evolving issuance strategies are expected to continue.

LMEs and credit market implications

This session examined the increasing use of liability management exercises (LMEs)and their implications for credit markets. LMEs are now a routine feature of the leveraged loan market, used proactively to address liquidity constraints rather than as a last-resort restructuring tool. The discussion emphasised that LMEs redistribute value rather than resolve underlying credit issues, creating more complex and path-dependent outcomes for investors. As a result, credit analysis is becoming more challenging and requires a more active and engaged approach from managers.

Key insights

• LMEs are now a standard and proactive feature of the leveraged loan market.
• They redistribute value rather than deleverage balance sheets.
• Credit analysis is becoming more complex and less reliant on traditional metrics.
• Active participation in restructurings is increasingly important.
• Manager capability and structural flexibility are key differentiators.

AI in credit markets

This panel explored the role of AI in credit markets, focusing on its impact on risk assessment and portfolio management. AI is increasingly being used as a tool to identify risks earlier, rather than to replace underwriting decisions. The discussion highlighted the structural and ongoing nature of AI-driven disruption, with particular implications for business model durability and sector-level risk. Early signs of stress are expected to emerge through margin pressure rather than defaults, shifting the focus towards valuation risk and more proactive portfolio management.

Key insights

• AI is being integrated into credit analysis as a risk identification tool.
• Disruption is structural, ongoing and difficult to predict.
• Stress is likely to appear first through margin pressure rather than defaults.
• The focus is shifting from default risk to valuation risk.
• Managing sector exposure, particularly in software, remains challenging.

Client Alert 2026-097