Significant risk transfer issuance in the first quarter of 2025 reached US$4.67bn in total tranche notional terms which is nearly double the total tranche notional for Q1 2024 and last year proved to be a record one. The first quarter is typically more dormant relative to the rest of the year, but as the SRT market kept growing over the years, first quarters became busier with every single record year. More saliently, Q1 2025 is proving to be a definitive quarter, marking the end of a long period of spread tightening.
According to RTRA data, SRT issuance in Q1 2025 reached US$4.67bn in total tranche notional terms which is nearly double the total tranche notional for Q1 2024 and last year proved to be a record one. Q1 2024 issuance totalled US$2.63bn with annual 2024 issuance reaching a record near US$14bn (see: SRTs soar – 28/01/2025 | RTRA Intelligence Ltd).
As always, Corporate loans and European jurisdictions continue to dominate deal flow.
Figure one-Q1 2025 SRT asset classes by tranche notional
Source: RTRA SRT database
However, new asset classes such as credit lines to business development companies have made their mark for the first time as well as a surprisingly strong presence for leasing assets. The former comes from one trade from SMBC that consisted of a 0%-12.5% CDS structure that referenced a US$3bn portfolio (see: SMBC BDC revolver SRT | RTRA Intelligence Ltd).
Figure two-Q1 2025 SRT asset classes by jurisdiction
Source: RTRA SRT database
The first quarter of this year features a number of innovations. US Bank for example executed a novel SRT where a thick tranche was sliced into smaller tickets that were in turn rated. This was highly unusual for a US corporate portfolio (see: Breaking new ground – 06/03/2025 | RTRA Intelligence Ltd).
Nevertheless, the pertinent and most salient theme remained the continuing spread tightening which eventually came to an end following a nearly two year period (see: Pipeline alert-29/4/2025 – 29/04/2025 | RTRA Intelligence Ltd).
Terry Lanson, Managing Director at Seer Capital notes: ‘’the Federal Reserve’s FAQ clarifying the treatment of SRT deals issued by US banks brought a lot of attention from investors and allocators, who anticipated rapid growth in US issuance. US growth has lagged most people’s expectations, however the additional capital has been largely absorbed by increased European issuance.”
He continues: ‘Most European originators have evolved towards placing deals with a select group of investors who they view as partners. This provides originators with certainty of execution and price tension-which is important for regulators- and optimal allocation of resources for all parties, since originators don’t want to waste time answering questions from investors who are not serious or familiar with the space. Moreover, experienced investors are assured of meaningful allocations after completing their analytical work.”
The SRT market is typically less sensitive to macroeconomic volatility than other markets. From a technical perspective, most SRT investors have locked up capital and a buy and hold approach and from a fundamental perspective, SRT transactions typically reference core lending products originated by banks to longstanding clients. The latter significantly outperform other credit products, especially in challenging economic conditions.
The long period of spread compression meant that investors had to consider mechanisms to enhance returns such as structured repacks, especially in light of more scrutiny over repo financing, although it’s important to note that there’s no evidence of widespread use of repo (see: Leverage eyed – 15/04/2025 | RTRA Intelligence Ltd)
Robert Bradbury, head of structured credit execution at Alvarez and Marsal explains: ‘’pricing generally continued to tighten into Q1 2025 so investors continued the trend of looking into structured repacks, which was underway even prior to the more recent regulatory scrutiny on repo.’’
Structured repacks can take two forms. First, there’s collateralized insurer protection where insurers guarantee an SPV so it can cover losses when they occur and where funding comes from third parties.
The second option is when investors who don’t want repo leverage form partnerships with insurers or pension funds who provide captive re-tranching of risk, typically mezzanine risk.
Another option that was looked at was interest rate swaps (see: Swaps eyed – 23/04/2025 | RTRA Intelligence Ltd). Specifically, utilizing interest rate swaps involves swapping the base rate such as SOFR with the forward curve but with the spread remaining where it is. It’s an approach that can work for yield as opposed to spread focused investors and the rationale is that it can allow a buyer to ‘’lock in’’ more optimal pricing.
However, the swap option doesn’t appear to be a viable option for most investors given the cost and the fact that it would require taking a macro rather than a credit view, since you have to make assumptions about the future trajectory of interest rates.
The Trump administration’s trade war eventually proved to be the catalyst that would turn the tide on pricing. (see: Tariff wars – 09/04/2025 | RTRA Intelligence Ltd). The crisis led to a return of secondary activity following a five year slump from the onset of the coronavirus crisis, although differences over pricing meant virtually no trading.
Nevertheless, the buy side began to get a feel for where spreads might go with the initial consensus among investors pointing to a 150bps-200bps range before settling nearly a month later to a lower one of 50bps-100bps, as real time bidding informed a new set of expectations.
However, the consensus might shift yet further since uncertainty still prevails. The Trump administration has paused the trade war for a 90 day period but time will tell whether this truce ends up being an indefinite or temporary on
