At Dechert, approximately 70% of the rated note transactions we see are targeted at US investors. A key reason for this is that US rated feeder structures can look like securitisations from a European perspective, particularly if the underlying fund is a credit fund. This is because these transactions feature multiple tranches of notes and tightly controlled cash flows derived from underlying credit. European and UK insurers using the standard approach to risk capital have high charges for investing in securitisations and tend to want issuances with different characteristics.

So there has been lots of interest in a recent European proposal to reduce the risk weights for insurers investing in securitisation, which must be implemented into EU Member State law by January 29, 2027. The optimists say that the change will finally permit US structures to be offered into Europe.

The change will reduce the stress factor applied to securitisations. For a ten-year single-A tranche it will drop from 100% to 44%. But single-A-rated corporate debt of the same duration will still have a much lower stress factor of 10.5%. So there will still be incentives to invest in transactions that are not securitisations, particularly where the debt has a long tenor.

The international insurance regulatory organisation (IAIS) also supports more proportionate treatment of securitisations. The IAIS Insurance Capital Standard, published in December 2024, applies significantly lower risk charges to investment-grade securitisation exposures than either the current UK/EU framework or the EU's forthcoming 2027 recalibration. This suggests an international consensus is moving towards lower risk capital requirements for senior investment-grade securitisations.

If EU interest in securitised issuances does pick up, there will need to be some structuring add-ons that are not present in all US rated note transactions:

  1. The originator (which might be the master fund or its manager) will need to retain a 5% interest either in the form of instruments issued by the rated note feeder or by retaining exposure to the loans and other instruments owned by the master fund (the “Loan Portfolio”). While the latter approach is the most efficient, it has sometimes been questioned where funds are acting as originator.
  2. The originator will need to comply with the substance and credit-granting requirements in the European securitisation regulation. These will likely be satisfied where a fund originates the Loan Portfolio but can require some diligence, for example, where the Loan Portfolio is purchased.
  3. There will need to be EU securitisation-style transparency reporting on the Loan Portfolio. These rules are also likely to be relaxed but the implementation timetable will lag behind the changes to insurance capital treatment. Funds and managers who are familiar with European collateralised loan obligations (CLOs) will be used to the cost and administrative burden of this reporting.
  4. The EU ban on resecuritisation will mean either that there should be no securitisations in the Loan Portfolio or that all of the parties are comfortable that the transaction does not involve resecuritisation.

In addition to these requirements, other drivers may lead EU and UK investors in rated notes to continue to look for notes with different profiles to standard US issuances. For example, an insurer looking for matching-adjustment treatment on its investment is likely to want call protection, limited or no deferral on senior interest and an amortisation profile that differs from the typical two- to three-year run-off period.

So while it is possible to set up a single issuance that will satisfy US, EU and UK investors, there are likely to be an unusually large number of constraints on the terms. If issuance costs can be kept low, it may be easier to have separate products for different regions. These regional differences and similar differences that we have observed in Asia and Australia make it ever more relevant to look at establishing platforms that allow for efficient programmatic issuance of notes with different characteristics. This could either be through a master-trust-style approach or a permanent finance company.