Market Wrap

Excess Spread - Not with a bang but a whimper, PE vs venture capital, Call Me Definitely

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

Not with a bang but with a whimper

Up until last Friday, generally benign conditions meant that, despite general exhaustion, the primary pipeline was set to keep pumping out deals until the last possible date. But thanks to Omicron, 2021 looks set to fade away rather than burn out.

If you don’t have to print, and aren’t well advanced in prepping a new issue, it’s probably a month for sitting out of the market and cooling off. Finish your admin, file your expenses, and do your Christmas shopping. 

Primary supply, especially in CLOs, has been pumping out relentlessly all year, taking volumes to record levels, fraying nerves and stretching credit appetite. Even before Friday’s news of Omicron, the bottom of the capital structure was starting to widen, with B- notes in Carlyle 2021-3 last week at 965 bps.

Deals that were in market on Friday sprinted to the finish line, with the aim of getting out and getting priced, even against a difficult backdrop — better that than to have a partly sold deal dribbling out through thin end of year liquidity. As it turns out, this week has remained reasonably well supported, but that was a brave call to make amid Friday’s volatility.

Execution levels weren’t the greatest in the Friday deals — the lower mezz tranches in Barings 2021-3, at 360/700/970, were wide of pre-Omicron Bridgepoint 3, at 340/645/955 — but not disastrous compared to the softer market that was already creeping in during late November. Senior notes in the Henley III reset and Barings 2021-3 came at 97 bps and 96 bps on Friday, basically in line with pre-variant levels, and tighter than a few 100 bps+ prints a couple of weeks back. 

The Henley III reset was mostly subject by Wednesday, but priced late on Friday, with no levels circulated for the single-Bs, suggesting this may not have been placed publicly. 

Napier Park, the manager of the Henley shelf, is a junior CLO tranche investor as well as CLO issuer, so may have preferred holding the exposure itself. Invesco VII via BNP Paribas also priced on Friday, with senior notes at 99 bps but at stronger levels than Henley or Barings in the junior. 

“We saw one or two accounts come in on Friday and cancel any order they had outstanding, pending more information on the variant, but that was marginal,” said a CLO syndicate manager. “But in general books held together pretty well, and deals continued to get done at reasonable levels. There’s been most softness at the bottom of the capital structure but only 1 or 2 bps at the senior, and overall cost of capital is still attractive.”

Much of the remaining visible pipeline has now come to roost, and mostly without too much damage. Fair Oaks IV, priced on Tuesday via Barclays, held together well, with the 97 bps senior and 970 bps single-B levels basically in line with Friday’s deals, while Hayfin VIII, via Goldman Sachs, looks tight to most recent issues, at 96 bps-940 bps for the senior and single-B respectively. One presumes the book was largely built by last week, but investors don’t seem to have held out for their pound of flesh, perhaps appreciating a relatively low levered deal from a manager with a conservative reputation. Blackstone Credit’s Cabinteely Park, priced on Thursday through Credit Suisse, also looks decent, at 97 / 950 bps for the senior and single-B.

While Monday saw market participants in pensive mood, by mid-week bankers were suggesting a window still existed, especially for refis or resets, or deals which had been heavily presold. 

“We wouldn’t advise doing a new deal now without any anchors in place,” said one banker. “But if you have done some premarketing already it’s possible to get something done, and if you’re doing a reset or a refi there’s certainly a window.”

Another securitisation syndicate banker said their firm had a single deal left in the pipeline for 2021, likely to be fully preplaced at announcement. 

With loans from top tier credits also trading off, managers that can lock in liabilities and get their buying boots on should be in a strong position — though there’s plenty of runway left in warehouses too, so we may just see deals announced more fully ramped in 2022.

Levels above 1000 bps tend to make managers think twice about placing single B exposure at all, as this comes too close to the cost of equity to justify issuing an additional credit-enhanced debt tranche. The first few deals after the March 2020 sell-off were often lower levered, with no single-B offered, or in some cases, a delayed-draw single B which could be added later.

Call me definitely

Morgan Stanley placed a refinancing of the Tudor Rose portfolio, a book of buy-to-let mortgages bought from Axis Bank when it shut its UK operations, this week. Morgan Stanley acted as principal on the old deal, priced in June 2020, but quickly found an exit, selling the equity to Ellington Management in September 2020. Ellington’s “Jepson Limited” vehicle is now the risk retention in the new issue.

The Jepson name is allegedly a reference to Carly Rae Jepsen (sic), noted for worldwide smash hit “Call Me Maybe”, among other works. Jepson Limited was also the risk retention for Jepson Residential 2019-1, an Irish reperforming loan securitisation notable in part for its limited defences against extension risk — i.e…..the lack of call incentive….

The weakness in call structure did indeed come to pass earlier this year, as Pimco, which had bought the equity from Ellington, delayed the exercise of the option beyond the First Optional Redemption Date — though, as it turned out, only by a single interest period, before recutting the portfolio into Jamestown Residential 2021-1.

The new deal, though, is a very different animal, with abundant call protection - a 2x step-up on the senior margin, 1.5x down the stack, full turbo after the first call, and a remarketing process for the portfolio a year after first call. 

This is pretty much in line with the original terms on last year’s Tudor Rose deal, and reflects in part the nature of the portfolio — there’s not much interest cover in an reperforming loan deal, so there’s very little wiggle room to put in large post-call step ups without messing up the structure. In this book, though, there’s plenty of spread to play with, with the mortgages paying 3.9% on average.

Not surprisingly, execution was a lot stronger than last year, with a discount margin of 82 bps on the senior compared to 140 bps last year, and class D DM at 225 bps instead of 390 bps. The class E and F notes included in last year’s deal have been dropped entirely, with the far lower coupons allowing for a more efficient structure.

It did, however, have to go through the ugly Omicron market, and ended up at the wide end of price thoughts. IPTs were H70s/LM100s/M100s/H100s, compared to final levels of 82/150/175/225. 

Virus and variants, though, were unlikely to have had as much impact as the already-thinning liquidity this late in the year — it’s unfortunate that the original deal’s “Early Optional Redemption Date” fell in December rather than a more congenial syndication season — but the financing still looks vastly better for Ellington than Tudor Rose 2020-1

PE versus venture capital

Over the last decade or so, private equity and hedge fund money has anchored a lot of European securitisation market activity. That might mean portfolio purchases from the likes of Cerberus, Davidson Kempner and Lone Star, or indirect ownership through portfolio company platforms, such as Blackstone/TPG owning Kensington, Cinven owning NewDay, or Chenavari owning Creditis and BuyWay.

More recently, though, venture capital money has started to stream into the sector, as “fintech” lenders become increasingly important securitisation clients. Some of these firms are already experienced public market securitisation issuers, the likes of a LendInvest or Funding Circle (both of which are already listed), while others are at an earlier stage — Molo or Proportunity, for example.

The interesting question will be whether PE appetite can match VC pricing aspirations. Private equity shops are still keen to gain access to consumer asset portfolios, and often have tons of cash to spend. We’ve already talked here about Apollo’s Athene and Athora-fuelled scramble for assets, demonstrated most publicly with the purchase of Foundation Home Loans. 

Fast growing fintechs represent another source of consumer assets, but the bid-offer between PE valuations based on the asset pool plus origination franchise, and VC aspirations (take on the world, disrupt the incumbents, grow 20x) might make these conversations difficult. PE wants to own platforms to secure a steady stream of assets, but fintech founders won’t like their prices.

That doesn’t mean VC-backed fintechs won’t welcome outside cash from the traditional value-based credit investing world, but it won’t be as owners — Funding Circle and LendInvest both opted to go public rather than sell to sponsors, but firms such as Waterfall Asset Management, Sixth Street, Chenavari, and Magnetar have ended up contributing equity to their origination efforts.

While we’re talking fintech and challengers, we’re very interested in the news that Allica Bank, a UK challenger backed by special sits fund Warwick Capital Partners, has bought a £600m UK SME book from AIB. 

It’s just done a sizeable series B, raising £110m from investors including Atalaya Capital Management, but £600m is still a chunk of change for an institution that had a £160m balance sheet in total at the end of last year — and that means a nice piece of financing business for whoever is backing the purchase, and maybe, a securitisation out the back end.

SPV-spotting, BNPL, small balance CRE

We like to keep an eye on the forward pipeline as best we can over here, and one way to do that is through SPV-spotting. Sometimes the names don’t tell you very much about the deal that’s coming, but sometimes they can be extremely eloquent.

Here’s a couple we spotted that we’re excited about. Dutch Property Finance 2022-CMBS1, an SPV created in October, must mean Dutch specialist lender RNHB, co-owned by CarVal and Arrow Global, is looking to issue a CRE-only pool in the New Year.

It has historically mixed in a fair slug of commercial exposure into its existing DPF deals (25% in the last issue, from September), with the collateral spanning rental properties, small CRE, and mixed use — think flats above shops or small mixed developments — and deals have gone decently. There’s a strong bid for euro deals with a bit of juice left in.

But all else being equal, splitting out the portfolios to have cleaner, single-asset class deals should mean more efficient structures and probably tighter pricing too. We’ve already seen the UK’s Together Money go down this road, carving out a small balance CRE portfolio, and now a first lien-only deal from the mixed deals it started with. Once a specialist lender is originating enough assets to split up portfolios, it always ought to be more efficient to finance them separately

More generally, it’d be nice to see small balance CRE become a more fully established securitisation asset class. We’ve already got Finance Ireland and Together as issuers, and if RNHB is joining too, then “three is a trend”, as the old newsroom aphorism goes.

The second intriguing structure was an SPV named Hokodo Funding, with little other info available. But there’s a decent chance this is a warehouse for Hokodo, a UK-based buy-now-pay-later company that just raised its $12.5m Series A this summer. BNPL is (potentially) the Next Big Thing in consumer credit, and we’ve already talked a little about how it might work in securitisation markets (the US, as usual, is miles ahead). We’ve spotted warehouses for Aussie-based AlphaPay, and for LayBuy, but the market is very much still getting started. 

If Hokodo has only just done a $12.5m Series A, it probably doesn’t have the firepower to provide much warehouse equity itself, so our bet would be that it’s found a partner among the structured credit funds sniffing round the sector. Maybe it’s a 2022 takeout, maybe it’s the year after, but it’s certainly one to watch.

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