M&G pitches European credit to Koreans
M&G Investments argues European structured credit, particularly consumer-backed assets, offers Korean investors higher returns and defensive qualities.
M&G Investments is urging Korean institutional investors to consider European structured credit for higher returns and defensive characteristics. James King, head of Structured Finance Portfolio Management at M&G, made the case in a recent interview, highlighting the market's recovery and growth potential since the 2008 financial crisis.
King said the appeal lies in exposure to consumer credit, such as mortgages and auto loans, rather than corporate risk. He argued the European consumer has proven resilient across multiple recessions. The market is also expanding as European banks increasingly use securitization for funding and capital relief.
Shaking off the 2008 stigma
Structured finance still carries the baggage of the 2008 crisis, associated with complexity and systemic risk. King contends this legacy obscures a key fact: the worst damage was concentrated in US subprime markets. The European experience was materially different.
He attributed Europe's relative resilience to structural factors. Securitization there was primarily a funding tool, with banks retaining some risk, incentivizing careful underwriting. Europe also had more creditor-friendly legal frameworks and stronger social safety nets, helping households service debt during downturns.
Underwriting standards have improved since then, King said. Loan-to-value ratios are generally lower, and borrower documentation is stronger. "I firmly believe the collateral that has been originated today in Europe is a lot better than the collateral that was originated in the run-up to the financial crisis," he stated.
Regulatory changes and market growth
Post-crisis regulations, described by King as "much harsher," also strengthened the market. Risk-retention requirements ensure originators keep "skin in the game." The launch of the European DataWarehouse, a centralized data repository, has standardized reporting and improved transparency for investors.
King said it is important to distinguish between Europe's public and private structured finance markets, both of which are growing. He estimated annual growth at around 10% to 20%.
| Market Segment | Estimated Size | Notes |
|---|---|---|
| Public Market | ~650 billion euros | Down from ~2 trillion euros at its pre-crisis peak. |
| Private Market | ~200 billion euros | M&G's estimate. |
Morgan Stanley has forecast the public European structured finance market could reach 1 trillion euros by 2030. King called that forecast achievable.
Defensive returns and specific opportunities
For investors, King positioned European consumer asset-backed securities as a defensive part of the credit market that still pays a premium due to perceived complexity. "Defaults as the percentage of the entire universe, I think, peaked at around 2% per annum in Europe," he said, contrasting it with a US peak "nearer 12% per annum."
He highlighted several growing segments. Significant Risk Transfer (SRT), used by banks to manage capital on corporate exposures, has become more standardized. Around 50 banks have now issued SRT.
M&G also sees opportunity in specialty finance, where banks move long-dated consumer assets off their balance sheets. King noted the European consumer finance market totals around 11 trillion euros, yet only a small fraction is financed through ABS. "It's huge. It's got huge growth potential," he said.
On yields, King said M&G's most popular pension fund strategy on the investment-grade side is roughly double-A rated and yields around SOFR plus 190 basis points. On the non-investment-grade side, he said specialty finance can offer low- to mid-teens internal rates of return.
The firm's ability to capture these opportunities rests on a platform of about 50 structured finance professionals. King described a fundamentally driven investment process where every asset pool is analyzed on a line-by-line basis.
