Market Wrap

Excess Spread - Buy Now Pay Later, Brexit bonus, specialist lender M&A

Owen Sanderson's avatar
  1. Owen Sanderson
9 min read

It wasn’t a “normal” IMN Global ABS by any means, with attendance way down on Barcelona, its traditional home, some sponsors staying away, and UK participants by far the dominant faction. The view of the majestic Marylebone flyover and easy access to the Westminster Centre for Psychological Health wasn’t quite like the sun sparkling over the Med, but after more than two years since the last Global ABS, it was fantastic to be back.

The market seems healthy - in outlook, credit quality, optimism about the future - as well as in physical good health. Enforced absence from the fluorescent lighting of the trading floor has allowed market participants to shake off their pallid complexions.

This week’s Excess Spread will be a compilation of thoughts, ideas and scribbles from your correspondent’s conference notebook - we’ll be talking CLOs, buy-now-pay-later, buy-to-let RMBS, and still, after 12 years, regulation.

Strength to strength in CLOs

A few stats underline the strength of the European CLO market - the European market is on course for record issuance volumes this year, not just record post-2008, but outright. There are more managers than ever before, a wider universe of leveraged loans to buy, and a huge amount of value left on the table compared to other fixed income products.

One panel’s polling question asked the audience where the best value was to be found in senior securitisation tranches, with five potential categories. A massive 59% voted for leveraged loan CLOs, though the data wasn’t perfect - 6% inexplicably voted for euro auto ABS, where spreads are now scraping single digits over Euribor.

The value of the embedded Euribor floor in CLOs has become less valuable, but it’s still not trivial - the headline spread on new issue CLO seniors remains at 100 bps, or thereabouts (Anchorage Capital Europe 5 came at 102 bps on Tuesday, Carlyle’s 2021-2 deal broke triple digits at 99 bps, and PGIM’s Dryden 89 came at 100 bps).

However, total return is substantially higher. Your correspondent swung by the Prytania Solutions stand to scope out their CLO indices, which were posting a 118 bps margin for senior CLO tranches, taking account of the floor.

The rating relative value vs the underlying instruments is also compelling, a point made by several panellists over the two days of the conference. Single B leveraged loans are pricing between 350 bps and 450 bps (admittedly, most of them B2/B), while CLO single Bs (usually B3/B-) can pay 950 bps. It’s a similar story across the rest of the stack.

Market participants say that the investor base up and down the capital stack has also become deeper and more diverse. While some managers prefer the certainty of anchors at both ends of the capital structure, neither equity nor seniors are beholden to specific accounts, with syndicated deals finding considerable success. More than 10 accounts bought equity in Sound Point V earlier this year, and the summer’s crop of deals featured a mix of preplaced and syndicated senior notes.

Investors that were too cautious to buy the dip last spring have been encouraged by the resilience of the product, and returned to market to look at senior and mezz. Capital for equity may also be easier to access right now, as competing pools of adventurous money, such as distressed and special sits funds, struggle to spend the cash they raised last year.

But strong levels of CLO formation doesn’t necessarily mean all the large cap LBOs lining up will be easy to execute — at least, not without tapping multiple capital pools.

CLOs have to maintain diverse portfolios, and each individual vehicle is unlikely to take down more than €5m of a given loan. So if there are 50ish managers in the European market, each with an open warehouse, plus 50 more deals which have priced but are still ramping….that’s only €500m of potential CLO demand from new vehicles.

The €200bn or so of already outstanding CLOs can offer a lot more potential demand, of course — but have less need to gather assets in a hurry than warehouses or newly priced deals.

For the CLO market, the ideal pattern of supply is a regular flow of medium-sized deals, allowing managers to rapidly ramp granular portfolios, rather than a lumpy pipeline of megadeals — though levfin bankers seem optimistic that all sectors and sizes will be firing through the autumn, so hopefully the current deal vintage will have good access to collateral in primary.

Buy Now Pay Later

Securitisation people can sniff out a juicy sector, and the explosive growth in point of sale, buy now pay later financing has not gone unnoticed (UK volumes tripled last year, according to a regulatory study).

Market leader Klarna’s $46bn valuation, courtesy of its last investment round with SoftBank, signals the excitement around the sector, with Goldman buying GreenSky, PayPal buying Paidy, and Square paying $29bn for Afterpay. Recent FT coverage of Affirm’s financing for Peloton bikes shows the US market is actively securitizing these loans already.

European securitization deals floating around are private (so far), while the lofty equity valuations for the BNPL companies act as a double-edged sword - securitisation is most useful for the capital-constrained, funding-optimising firms, eking out extra leverage and shaving basis points. If SoftBank is firing a stream of Vision Fund money at the sector, why bother with a finely-tuned funding model?

Deals are definitely in the works though. Just to look at UK providers, Australia’s Afterpay has a £125m warehouse line with Citi and a £50m warehouse with NAB, according to its corporate disclosures, while Laybuy has an £80m facility from Victory Park Capital — and surely some of these will hit the term market. Smaller providers seem to be funded through the specialist venture debt market, with full recourse collateral packages, but as they grow will doubtless turn to securitisation.

But the sector is divisive. Businesses can definitely jack up their sales through offering financing at the point of sale, offering instant gratification to eager consumers funnelled through exquisitely targeted ads.

But that may be encouraging overstretched customers to buy items they don’t need and can’t afford, in a format that obscures the spectacular annualised rates charged by some BNPL firms.

At its best, it can offer customers a buffet of credit options available when they need them, disintermediating traditional consumer finance - but at its worst, it’s just another form of lending to customers that can’t afford it, and one which could see a regulatory crackdown down the road. UK authorities said in February that the sector would be brought under Financial Conduct Authority supervision, though it delayed this move earlier this month.

Troubles at guarantor lender Amigo Finance and Provident Financial’s Personal Credit arm could prove prescient. The latter decided to shutter its operations after FCA opposition to its English Scheme to address compensation claims for mis-selling. The former is in talks with the regulator over a second Scheme after the FCA successfully blocked the first.

ESG in the streets, crypto in the sheets

Almost every panel I saw paid lip service to the ESG-sustainable finance revolution sweeping markets, while there were several sessions focused entirely on that area. The same issues came up again and again - difficulties in standardising sustainability, difficulties in figuring out who pays for it, what ESG should cost, the relationship between ESG and credit quality, the role of regulation.

But in private, many people are far more sceptical. They may well believe in rapid action to combat climate change, but see financial ESG instruments as meaningless virtue signalling, which has led to a huge rise in box-ticking bureaucracy.

Separate ESG questionnaires from individual investors are a huge burden for issuers; ESG reporting, now required under the European Union Sustainable Finance Disclosure Regulation, is a huge burden for investors. ESG ratings and information add further data requirements to a market which is already data-heavy. And if issuers expect a “greenium” for labelling their issuance….the buyside has to do all this heavy lifting and accept lower returns as well.

As one hedge fund manager put it...give me everything that’s non-ESG, everything that’s the least ESG possible, that no-one else wants….ship it in. Shortly before checking his decidedly un-ESG crypto portfolio.


One is a fluke, two is coincidence and three is a trend, according to the old journalist’s aphorism. So one can definitely call out a “trend” in appetite for UK buy-to-let lenders, with Apollo buying Foundation Home Loans, Shawbrook buying The Mortgage Lender, and Starling Bank buying Fleet Mortgages. That’s quite apart from JP Morgan’s big bet on UK buy-to-let, with a £725m commitment to buy loans direct from LendInvest, and I’ve probably missed a couple - let me know on

Putting a price on a BTL lender last year would have been almost impossible, with huge pandemic uncertainty, payment holidays, and the lurking threat of unemployment. But as some of these risks have receded, BTL has emerged as a sweet spot where mortgage margins remain elevated but funding spreads are tight.

The big High Street banks are pouring their stranded ring-fenced resources into prime low LTV owner-occupied, leading to record low interest rates for the best borrowers. But rates in lending to underserved segments, including professional landlords, self-employed, adverse credit, complex income and so on remain attractive. On the demand side, the challenger banks like Shawbrook and Starling have cheap capital, but need to show some growth, especially on the asset side - it’s no good having a nice app and gathering deposits without any lending.

For investors wanting a taste of the BTL action, there’s still a question about the right format to access the product — is it best to own a platform, lend to the sector privately, provide warehouse equity, or own securitisation debt?

Either way, a bounce in M&A means more work for securitisation bankers, who have the skills that their FIG M&A colleagues may lack in unpicking the complex nests of securitisations that fund the specialist lenders.

A Brexit dividend?

Most of the securitisation market seemed to be broadly on the side of “Remain” in the Brexit referendum, with a breezy confidence in Global ABS 2016 (held in early June), that the UK would vote to stay in.

But wind forwards five years, and there’s some chance the market could be one of the few UK sectors to benefit, even as the queues at London’s petrol stations lengthen.

The UK government is consulting on changes to the European Securitisation Regulation, which was transposed verbatim into UK law before the UK’s exit from the Union. It might end up sticking close to the EU version, but it’s an opportunity to rethink some of the dumbest parts, or even go back all the way to basics and do it better.

The UK has always been the largest jurisdiction for European securitisation (the CLO market is technically a bunch of Irish SPVs, but physically most of the people are in London, and so are the managers) so even small changes, tweaking the mechanics of risk retention, pruning extraterritorial pieces, or lowering the admin burden could be a big benefit to the market.

Of course, it remains political. EU securitisation regulations are going to stay extraterritorial, and any major loosening of the UK regime will jeopardise mutual recognition between the blocs. Small sterling deals backed by UK assets can get by with onshore demand, but bigger more complex trades or frequent issuers will want to stay compliant with any EU rules.

UK policymakers are also looking actively at other securitisation-related changes, which could improve home ownership, encourage green investment, and perhaps, free the mortgage prisoners. The UK government has offered guarantees to first-time buyers for years, under the “Help to Buy” scheme, but it lacks a broader framework like the Dutch NHG scheme.

Thoughtful structuring of such a body, however, could help make sure that underserved borrowers keep their access to mortgage financing - and therefore allow the mortgage prisoners, stuck on expensive standard variable rate mortgages after the collapse of Northern Rock and other lenders, to refinance out.

Views and feedback much appreciated — get in touch on

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