Before getting into the second edition of Excess Spread, thanks to everyone who jumped right in and signed up for this newsletter - honestly, it's great to feel this level of support from the market, and hopefully I can continue to inform, or at least amuse.

There’s so much happening in structured finance markets that I’m not even going to try to cover everything in this week’s piece.

This week I didn’t have time get into the first Paratus deal under Apollo ownership, BNP Paribas Asset Management buying Dynamic Credit, Brookfield’s Atom CMBS (and the rise and rise of Standard Chartered), let alone catching up on Shawbrook’s innovative RMBS scoring the UK’s first Simple Transparent and Standardised label on a buy-to-let book.

But it’s great to see the securitisation market humming along, and I’ll do my best to catch up!

Assured’s ambitions

Last week I flagged up the reemergence of the monolines (*one monoline) in structured credit (*two CLOs), pointing out that Assured Guaranty had written its first wrappers for European CLO notes, following several years doing similar trades in the US middle market.

The point of the deals is indeed regulatory benefit — particularly under Solvency II. Assured’s wrap on Blackstone Credit’s Tymon Park CLO, covering triple-A, double-A and single-A risk, was for the benefit of an insurance company, which was able to cut down the punitive costs of holding securitisation outside the “Simple Transparent and Standardised” framework thanks to the guarantee.

It is basically absurd that a double-A institution wrapping a triple-A bond would dramatically improve regulatory treatment, but that’s the world we now live in. If Assured’s involvement brings in more triple-A anchor interest, that will benefit the whole market — though once the bonds hit a certain level, they won’t throw off enough spread to pay for the guarantee, so if these wraps become more common, that could set a floor level for CLO seniors.

But it could also exacerbate the existing liquidity problems in the market. Senior CLO paper has long been less liquid than mezz, and if it’s held by an investor which has sourced a separate, bilateral guarantee on the tranche, the chances of trading the position actively are slim to none. Assured does offer a tradeable guarantee structure in which the wrap moves with the bond, but this could narrow the investor audience for the bond in question.

The firm also has an open door for other securitised product opportunities — CMBS also falls outside the STS framework, and could potentially be yieldy enough to support a wrap, though many insurers active in CRE markets would likely prefer to buy a whole loan instead.

CLOs from Aldi

I did some in-house training on CLOs last week, and got a very good question from one of our team here, shortly after outlining the typical fee structure on a European CLO and talking through the worries about portfolio overlap in the more limited universe of European leveraged finance.

It’s no great secret that the same few big capital structures will be found in size in almost every European CLO — per Fitch, 89% of its rated deals have Altice France in, for example.

Anyway, the question was: “Why not do the same thing much cheaper by just hugging the index?”.

Could one envision a CLO that was just, say, the Credit Suisse Western European Leveraged Loan Index, levered maybe a little less than a regular actively managed one, with a fee structure with just a smallish senior fee, no subordinated fee, no incentive fee for outperforming the equity IRR target. Equity would get something kind of similar to a CLO, but without the fee drag, and could maybe even preserve the valuable call option on credit spreads represented by a CLO refi.

If the current CLO market is offering a Whole Foods service level, or Waitrose at least, isn’t there room for an Aldi and Lidl option?

I can think of a bunch of reasons why this product might not exist…

1. too much institutional commitment to existing high-fee CLO market
2. nobody would want to put in equity to a passive vehicle like that
3. if you were going to do something passive, CLO is the wrong technology, get an ETF
4. CLOs aren’t nearly as similar as they might appear beyond the top obligors

However...

1. seems plausible but not the whole truth
2. seems unlikely, surely someone wants levered beta on leveraged loans
3. Potentially, but retail aren’t supposed to be involved in European leveraged loans
4. Almost certainly (look at the vastly different equity returns!) but that doesn’t actually preclude a budget version from existing

Anyway, if I’ve missed something screamingly obvious, or even subtle and hidden, let me know. If you’re currently structuring one of these, let me know too!

Back to reality, and BWICs

Back in the actually existing CLO market, rather than the imaginary one, Capital Four and Cairn Capital are marketing deals, potentially testing the recent 100bp threshold senior level, while the recent repricing of several tranches in HPS Investment Partners’ Aqueduct European CLO 2019-4 certainly appears to point the way tighter, with a 91bp print on the seniors.

The deal is no pure post-Covid portfolio, with a couple of names in there, such as Hurtigruten and Parques Reunidos, that have been through the wringer in the last year. But the shorter life should be sufficient to account for the tighter pricing vs new issue.

It was also followed into market by BlueBay Asset Management, printing seniors at 102bp again, while Blackstone Credit is also in market at a similar level. In other primary, HPS is resetting its Aqueduct European CLO 2020-5 this week, likely to remain a common trend as managers clear up capital structures smacked by Covid and revamp deals to more conventional tenors — though most market participants expect the flow of 2018 and 2019 resets and refis to dwindle if spreads stay close to current levels.

Certainly the brief sense that the loan market was showing some juice seems to have ended. Roompot’s original 450bp margin looked generous, as we discussed last week, but buysiders expect this to be quickly eroded via margin ratchets of both traditional and ESG varieties.

Events have rather overtaken that assessment, with successive rounds of price talk tightening to 425bp and then 400bp, with OID tighter as well from 99.5 to 99.75 at the final level. Investors 9fin spoke to were hopeful the deal would come with revised docs, cutting down on the number of margin ratchets. Some changes to asset security have already gone through, according to a market source.

Other trades from the likes of UK insurance broker Howden (offering 325bp on a pretty levered single-B flat name, albeit with a decent OID) signal that CLO managers can’t expect much help from the primary market in buying assets to match their wider post-summer spreads.

In-flows to both high yield and leveraged loan asset classes are expected to broadly match the chunky M&A loan supply scheduled for the weeks ahead, meaning technicals may not be as favourable as some were hoping.

We understand there was a decent sized European loan BWIC — around €140m — out on Wednesday, with Refresco, Ceva Sante Animale, Memora, Sebia and Upfield among the larger positions. It’s likely to be a lightening up exercise ahead of the expected autumn supply wave — surely nobody is being forced to liquidate in a frothy market like this.

Auto enthusiasm

European auto ABS has had a storming start, with Santander STS Consumer Spain Auto 2021-1, and AutoFlorence 2, full stack auto loan deals for Santander Spain and BNP Paribas’s Italian arm respectively, “absolutely flying out the door”, according to one suitably impressed banker off the deals.

Class ‘C’ bonds in the BNPP deal were more than 10x done at one point, and even the much larger class ‘A’ was 3x covered, exuberance relatively unusual to see in ABS-land. Santander was 6x and 6.8x done on classes ‘B’ and ‘C’, and screamingly tight on the AA-rated senior tranche at 25bp over Euribor.

The deals probably benefited from positive supply technicals, with limited mezz on offer in euros, captive auto issuers rare and too tight, and investors keep to put cash to work after the summer break.

But these deals certainly help pave the way for other consumer ABS deals — BNPP has rapidly followed up with Fortuna Consumer Loan ABS 2021, a German unsecured consumer loan dealfrom fintech auxmoney, a long time BNPP client. The French bank advised on Centerbridge’s purchase of the lender in 2020, while Boudewijn Dierick, an MD in ABS and covered bond structuring and origination at BNPP, jumped client-side to run capital markets for them.

The next trade, though, will likely see Citi in charge, as it signed a funding line for auxmoney earlier this year, working with Chenavari Investment Management in the equity.

The Love That Dare Not Speak Its Name

I refer, of course, to Pimco’s love for UK mortgage portfolios, an apparently bottomless enthusiasm. If there’s a big portfolio of performing UK mortgages up for sale, there’s a good chance Pimco will be the best bid. It’s larger than most of the “challenger” banks looking to disrupt the High Street, and orders of magnitude bigger than most fintech lenders.

But it’s extremely secretive about its involvement. Training my former colleague Tom in the arts of securitisation, I remember once exclaiming “look, it’s obviously a Pimco deal, look at it”. He proceeded to look at it, and observed, quite reasonably, that there was absolutely no mention of Pimco anywhere in the offering circular, ratings reports, or deal announcement.

So it is with Cheshire 2021-1, a UK non-conforming RMBS announced fully pre-placed by Citi last Thursday. The deal refinances Dukinfeld II, itself a legacy asset deal for CarVal, backed by mortgages originated by a series of pre-08 namesl.

But other than its essential Pimco-ness, not a mention is to be found of the investor actually putting up the cash — though Citi, as risk retention bank, is splattered all over the deal terms.

If one were sufficiently motivated (here is a little tradecraft), one could track the name of the seller SPV, observe that it was renamed from Jupiter Seller Ltd, and that this was also the name of the SPV Pimco used to buy its portion of UK Asset Resolution’s Project Jupiter.

One could also observe that, hidden among the 6000 or so line items of Pimco’s Income Fund holdings, were residual notes in Dukinfeld II, giving it the call and refinancing rights for the portfolio. But you’d have to be really geeking out to bother with all that.

Pimco’s strategy for UK performing portfolio has historically been to buy whole loan books, but structure them into fully preplaced RMBS deals on more-or-less market terms — allowing it to convert a highly illiquid position in a whole loan portfolio into an ostensibly liquid book of RMBS bonds. It’s questionable whether many third parties would want to buy junior paper in a deal entirely controlled by Pimco, but it is at least theoretically possible, and it helps funnel the wall of money in the giant bond fund into UK mortgage risk.

In Irish mortgage deals, such as last year’s Fingal Securities, or the PTSB Glenbeigh portfolio (the latest deal from which has just been announced) it appears to prefer selling on the senior tranche, which pays a pretty derisory spread given that Euribor remains deeply negative, while holding onto the rest of the capital structure.

Does it matter that Pimco keeps schtum about its activities? Not really, other than being gently annoying to journalists.

Everyone in the market can smell a Pimco trade a mile off. But it might help keep the fund’s hands looking clean — many of the UK performing mortgage loans in legacy portfolios are borrowers which consider themselves “mortgage prisoners”, trapped on expensive reversion rates and unable to refi and take advantage of current low interest rates.

They’re quite reasonably angry about being stuck in this position, their treatment is an increasingly live political issue in the UK, and there’s little upside to getting the blame for their predicament.

Pining for the fjords

In risk transfer, Norway is the big news. Possibly. I don’t think anyone’s expecting it to be the largest jurisdiction for synthetic securitisations, given the small size of the banking market. But the country has now incorporated EU securitisation rules into law, potentially opening the door for banks to do deals, and further filling out an increasingly international market.

That doesn’t mean it will be easy — banks will still need to convince the Norwegian supervisor, and will potentially face issues including portfolio size and concentration.

Some of Norway’s largest banks, such as Nordea, are headquartered and regulated elsewhere, and may prefer to hedge any Norwegian corporate exposure through multi-jurisdictional risk transfer deals across their whole books. Pure play Norwegian corporate lending also has a heavy skew to oil and gas and related businesses, potentially making for a less balanced portfolio with a few ESG issues in, for investors that care.

Sadly this week I can’t think of a reason to include any more selfies, so you’ll have to go back to edition #1 for such things. Thanks for reading though!

Feedback still much appreciated though, contact team@9fin.com