Market Wrap

Excess Spread - On the move, €150bn solar, Deco debacle

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

Good behaviour

Just before we all flew out to Barcelona, the folks at Deutsche Bank research put out a nice piece looking at call schedules and incentives for UK RMBS — handy for the visually-minded or Bloomberg-deprived among us. Give them a shout if you want to take a look

The biggie is Hawksmoor, the old GE Money non-conforming book sold to Blackstone, TPG and CarVal, and named for either the architect or the steakhouse. It traded since then to Davidson Kempner, which sponsored the 2019 refi, Hawksmoor Mortgage Funding 2019-1, which itself is up for call in August.

The senior step-up margin is 158 bps, which might just about be beatable at the moment, if an anchor can be found for an absolute ton of bonds — there’s £1.26bn of class ‘A’ outstanding at the moment, and presumably any refi would also relever the deal….so we might be talking north of £1.5bn of class ‘A’. The mezz step-ups, capped at 100 bps, are all wildly, laughably out of the money….a class ‘G’ note, rated Ca/BBB-, at 450 bps?

But we can report that DK is at least trying — an SPV called “Stratton Hawksmoor 2022-1” was incorporated at the end of April (DK deals tend to be dubbed “Stratton”). We’d hope this mean a call will be forthcoming, but the market did look considerably more attractive in late April, so a refi was much more economically viable than today…. DK is a regular user of the securitisation market, but it’s not a charity!

The specialist lenders so far seem to be behaving very respectably. Polaris 2019-1 was called into Polaris 2022-2, with Pepper gritting teeth and printing where the market demands. Foundation Home Loans called Twin Bridges 2019-1 and 2017-1, and has a vehicle filed for Twin Bridges 2022-2 dated late May — so a term deal might be forthcoming.

We’ve also got calls looming for London Wall 2017-1 (in August), and two Kensington deals, Gemgarto 2018-1 and Finsbury Square 2019-2, in September. While we were nerding out on Companies House, we spotted KMC Russell Square, a newish Kensington warehouse vehicle which appears to be financed by Bank of America — what we’ve not yet figured out is whether that’s a regular piece of Kensington financing to keep origination ticking along, or a facility for holding assets prior to launch/honouring existing deal calls.

There’s been a Finsbury Square 2022-1 SPV incorporated since December last year, but Kensington sponsors a variety of other London square-themed vehicles — Trafalgar, Berkley, Grosvenor, Sloane, Hoxton, Hannover — for its various financing needs.

LBOs are back

…so the CLOs should follow? Thursday saw the first launch of a properly decent cross-border LBO package since Refresco at the beginning of May, the acquisition loans for 888 Holdings’ purchase of William Hill’s international operations. The public euro offering is in FRN and fixed bond format, plus a $500m loan for a total of £1.017bn-equivalent to be distributed.

After the deals drought we’ve seen it seems churlish to question this, but in happier times that would be seem a bit small for a three-format issue. Banks have stepped up to take down a large portion of the original financing, with a £401m term loan A and £358m delayed-draw included— leaving less for the CLO market.

But still, it’s a real LBO, and a first step in unblocking the large underwritten backlog.

CLOs and leveraged loans are always a symbiotic relationship, and they’ve been symbiotically stuck for the last couple of months as risk markets have widened. Almost any financing agreed last year is now a long way underwater for a term takeout, whether that’s an LBO loan or a CLO warehouse, and banks, sponsors, CLO equity and managers have all been wondering how to get things moving with the minimum pain possible.

Print a CLO when there’s no loan supply, and you’re dependent on illiquid and volatile secondary markets (best to get a trading desk lined up to help, as in Carlyle’s print and sprint). Push out an LBO loan when the CLO bid is thin and it’s going to struggle.

It’s been a delicate dance, as the particular nuances of each market — level of triple A demand in CLOs, private credit money in LBOs — have affected execution strategy. CLO managers have been pre-sounded a ton of deals, but it’s hard to keep to firm levels when Crossover moves 100 bps in a week, and when CLO liability costs are lurching around too.

We don’t know how quickly the CLO prints will follow this deal, but we hear Investcorp is closing in on another Harvest deal, while various managers with the captive cash have been looking at print and sprint following Carlyle, most notably GSO.

The 888 Holdings bonds follow chemical distributor Manuchar into market, but presumably the banks will want to take less of a bath on execution — Manuchar, a B3-rated chemicals distributor, cleared at 86.

How much pain underwriters can take depends on how well-hedged they are, but the slow decline followed by collapse meant that even in February, interest rate and credit hedges were costly by historical standards, and it will have been tempting to cut corners…

On the move

There’s a few job moves I think are worth talking about, so bear with me….this could take a while.

Breaking pre-conference was BNP Paribas trading head Mehdi Kashani heading to Arini.

Who is Arini, you may well be wondering……well, it’s a new credit long-short fund established by an “Exceptional young French trader”, reportedly named after a particular kind of parrot.

Founder Hamza Lemssouguer was a rockstar HY trader at Credit Suisse, which was originally supposed to back his fund. CS unfortunately had a few issues in 2021, and he struck out on his own. Mehdi will be setting up the CLO platform over there, another potential debutant to add to the long list.

A new CLO platform would normally be led by a veteran leveraged loan hand (Rob Reynolds at Pemberton, Jonathan Bowers at Acer Tree for example), while pre-BNPP, Kashani focused on mortgage/consumer trading. But Arini evidently does things differently, from the 30 year old founder down. Running the BNPP CLO trading operation also must give a particular sensibility around docs, structuring, rates and optionality that goes way beyond the standard corporate credit analysis approach.

We also think Jefferies trading head Craig Tipping’s move to head European structured credit at Alberta Investment Management Corporation (AIMCo) is worth a look. We haven’t been aware of these guys playing in European securitised products to date…that’s not to say they don’t, but he latest annual report, from 2020, doesn’t disclose any strategy dedicated to structured products, with illiquid buckets focused on private equity, real estate, infra, renewables and “strategic opps”, which is pretty tiny.

But it’s got $168bn of assets under management, so…exciting stuff.

Janet Oram’s buildout of the structured finance operation at USS continues apace, with Colin Behar hired a few months back from Prytania, more hiring to come, lots of dry powder, and a readiness to get going (once the entry levels are right). Right on cue, USS has launched its first asset-backed securities mandate, putting up £1bn to deploy in the liquid, ISIN, investment grade end of the product.

Funding Circle’s Sachin Patel, the former Chief Capital Officer at the SME lender, is switching to the buyside, and will be heading up Neuberger Berman’s push into European Specialty Finance, a new strategy for the firm that can invest flexibly across forward flows, venture debt, equity and mezz. NB already operates this strategy in the US, but Patel is running the new European side — watch to see if NB follows Waterfall Asset Management and Magnetar to strike a deal with Funding Circle I guess. Following his departure, Dipesh Mehta and Sam Granger at Funding Circle both get a bump up to be co-heads of global capital markets.

Jeremy Hermant of the British Business Bank (Funding Circle’s biggest partner during the pandemic times) is also on the move, heading back to the private sector as capital markets head at Allica Bank. We don’t know much about Allica Bank (it started SME lending in 2020), but we do know it’s been shipping in some venture funding (as well as its existing investor Warwick Capital Partners), and last year bought a £600m SME book from Allied Irish, which was exiting the UK SME business, so expect big things here.

Somewhat older news, but we’re curious to see what the next phase brings for Deutsche Bank. The Bad Times are in the rear view mirror, and the securitised products business is looking to spread its wings. DB always used to be about doing the weird off-the-run stuff in private, sometimes for syndication, sometimes for hold, often as a principal. Ex-NAB boss Matt Williamson rejoined earlier this year as “European Head of ABS Capital Markets Coverage”, mandated to go after a bit more flow. NAB’s European securitisation business under his watch vaulted up the league tables and did decent bits of financing for the likes of Kensington, and if BNPP can become a massive volume shop (with ex-DB management), why can’t Deutsche do the same now it’s fixed up some of its cost-of-capital issues?

Finally it would be remiss of me not to mention my former colleague Ashley Hofmann, who has just moved over to Prime Collateralised Securities (PCS), a third-party verifier and market advocacy group. She used to sell the Global ABS conference itself at IMN, more recently the GlobalCapital Awards and much else besides, and will undoubtedly be a huge upgrade to the series of outreach events PCS has been running.

Lacking Decorum

Life is too short to follow every banged up pre-08 CMBS limping into the grave, but a fantastic fight is brewing over Deco 11 UK Conduit 3, an old Deutsche-sponsored deal issued in 2006

It’s already in administration, and the assets have been sold, but noteholders are righteously pissed off, and the administrators are suing the special servicer and various other parties in the High Court.

Herbert Smith is representing the Deco vehicle as claimant, and defendants include special servicer Solutus Advisors, Tim Knowles, Claire Sharp (real estate investors, directors of the vehicles which bought the Deco assets) Gareck Wilson, Thomas Hopkinson (of Solutus), plus the various companies used to acquire and manage the properties.

I’ve written about this before at my old shop (for those with a GlobalCapital subscription, ping me if interested) but I’ll try to give the brief rundown.

The deal defaulted in early 2020, and special servicer Solutus (appointed in 2016) sold the properties backing the deal. So far so good, but the buyer was Chapelmount, a company controlled by Lancashire businessman Tim Knowles…..and another Tim Knowles-controlled company, Acepark, also owns Solutus.

So Solutus, responsible for maximising noteholder recoveries, sold the properties to a company owned by the same guy that controls Solutus.

Solutus said in 2021 that the relation was “common knowledge”, and said the sale was at a premium to market value, but noteholder representatives said in an RNS that “there are grounds for believing the [the loans backing the deal] were discharged by transactions involving affiliates of the Special Servicer at a material undervalue”.

It’s complicated by the market backdrop of 2020 — what was the right value for a shopping centre and some office buildings at a time when the pandemic was raging at full pace? Maybe Knowles was the best bid?

There’s also a related fight over the £750k “liquidation fee” for the sale of the assets, which is not supposed to be paid if the servicer sells to an affiliate.

The fight could draw in Cheyne Capital, which has a longstanding relationship with Solutus dating back to 2010. Cheyne was at the heart of several of the most contentious CMBS restructurings in the post-crisis period, and almost always replaced existing servicers with Solutus (set up by ex-DB servicing team) as part of these transactions.

It also appears to have loaned Knowles’ firm money to purchase the properties out of Deco….

Anyway, no court date set that I can see, but should be a spicy one.

Uncle Jamie’s squeeze

We’ve talked about the difficult times for specialist lenders looking to write mortgages at market-implied rates quite a bit lately, but haven’t focused very much on the deposit part of the equation.

That’s for good reasons (this is supposedly a securitisation newsletter) but even deposit-funded institutions don’t have it easy. Fixed rate term deposits have always been a competitive and yield-focused market, but new entrants in the current account space have made things even trickier — notably, ChaseJP Morgan’s UK challenger bank.

Full disclosure, I am a customer, and I like it! I also saw a securitisation banker at one of the UK clearers sporting one of their cards, rather than using a current account from their own institution…

But Chase has been expanding aggressively since launch in September last year — it’s hard to walk around London without seeing the adverts — built on a white-labelled tech solution from “10x Banking”, run by former Barclays boss Anthony Jenkins. It’s offering 1.5% on sight deposits and has some pretty deep pockets.

According to the latest numbers for Chase UK, it’s got a 250% capital ratio, with £2.1bn of common equity tier one. That’s enough to support a pretty major deposit drive.

The report also disclosed that JP has taken all of its CIB and corporate exposure out of that entity, and Chase hasn’t yet started lending, so it’s an unadulterated money pit at this point…but JP Morgan can afford to keep shovelling fivers into the ground for a while yet, and smaller institutions trying their best to borrow low, lend high and stay profitable will struggle to compete with someone determined to buy the market. The squeeze will continue!

€150bn for solar

Solar securitisation was a hot topic under the baking Barcelona sun, despite the continued lack of public deals in Europe. Conference organisers IMN put together a panel named “Let There Be Light”, featuring bankers from Credit SuisseAlantraSociete GeneraleCredit Agricole, and Barclays, and moderated by KBRA’s Killian Walsh. Kroll rates a bunch of the US PACE deals, and wants to get in on the action when the European market emerges.

One panellist, Gordon Beck of Barclays, ran through the most bullish possible case, based on the EU’s plans to roll out solar generation.

The EU is apparently targeting 600GW of solar installation by 2030. If half of that is rooftop (vs power stations), half of that again is residential, and half of that is financed rather than purchased outright (so we’re down to 75GW) at an average cost of €2 per watt (plausible)….that’s €150bn of financing by 2030.

Even if we haircut that figure a fair bit, that’s got to be an interesting opportunity, no?

We’ve touched on some of the issues, but the way to make it work is likely to keep things simple. Solar panels might well include offtake (power purchase) agreements, which give a source of cashflows to service the loan, while some installations can include tax incentives, or separate leases.

But both massively increase the complexity associated with securitising solar loans, not least because of the need for maintenance capex through the life of the asset. By far the simplest way to execute a transaction is to simply extend ordinary loans (for solar panels) to borrowers, and bundle them up just as one would in a normal deal.

That doesn’t make it easy — the ideal structure for a solar loan, given the payback period of the panels, is long term and fixed rate. That’s always awkward to fit into a short-term floating rate ABS, particularly if the loans are not secured, and particularly so in a rising rates environment, but it lowers the burden of legal complexity.

“It’s felt like it’s two years away for at least the last two year,” said Beck on the panel. “There are now private warehouse transactions starting to be executed, with a view to issuers preparing for a public term securitisation takeout. Clearly those come with some structural challenges, the nature of the product being one….We could see something later on this year, if not it will certainly happen next year.”

He continued: “In the US, there were really a handful of very strong US originators who took the market and grabbed it and ran with it in a concentrated way…but the development we’re starting to see in Europe is the emergence of national champions whose sole focus is solar installation and financing. The more we those take market share from commercial banks, which are the obvious alternative, the more likely we are to be able to reach critical mass.”

Elsewhere in EMEA, Credit Agricole and SG did a deal in Cote d’Ivoire, which is somewhat off the beaten track for securitised products markets, but a market where solar isn’t just an environmental/cost nice-to-have, but an essential way of procuring electricity in a country with a less reliable grid.

Penalties kicked?

Solvency II is probably the most painful pieces of financial regulation ever to pass through the corridors of Brussels.

It started in 2001, and took until 2016 to go live (here’s a timeline of the horror).

The difficulty was partly because several financial crises unfolded along the way, and partly because it was clear from pretty early in the process that it wasn’t fit for purpose, but had an unstoppable and awful momentum of its own.

Anyway, the regulation still isn’t settled for good, with European insurance regulator EIOPA consulting on further alterations to the framework, following this up with a webinar session to get feedback on Wednesday. It’s supposed to produce a document for the European Commission recommending changes by September, so time is tight for responses.

The potential changes are in the right direction, if insufficient — EIOPA is looking at more nuanced capital treatment for assets that don’t fit into the STS (simple transparent and standardised) category, and a more nuanced treatment, distinguishing between mezzanine and junior, for STS deals.

EIOPA has noticed that despite all of the well-intentioned rulemaking around securitisation in recent years, EU-regulated insurance investment in securitisation is holding steady at almost nothing. Figures in the consultation paper put securitisation positions at 0.34% of insurance investment, compared with 7% for covered bonds and 38% for corporates.

Where there is investment, it’s mostly in the “non-STS” category — assets such as CLOs which don’t get the “simple transparent and standardised” designation. STS was supposed to be a catalyst for encouraging securitisation investment, and comes with capital charge incentives….but these don’t seem to be getting much traction.

The consultation also comes with lots of pleas for data, and lots of caution about the quality of existing statistics — market participants are invited to help EIOPA out in this respect.

I can’t do better than a description of the regulatory process offered by one reader, reproduced here for your amusement:

“It’s like they’re watching a football match where they can only see the centre circle and consider what happens at either end of the pitch not relevant to them. They can count the goals by the number of kick-offs, so who needs to watch them or know and understand how they were scored?”

It’s highly illustrative (and contributors to the public webinar made these points) that insurers seem massively keen to take securitisation exposures via routes that aren’t hit by Solvency II.

They’re an increasingly important part of the SRT market, offering unfunded tranche guarantees of first loss or mezz. The most active SRT insurers are Bermuda-regulated reinsurers, of which Renaissance Re is the most prominent, but even for a European-regulated firm, taking an exposure as an insurance liability rather than a financial asset gives massively improved capital treatment.

Then we have the insurers actively buying whole loans in preference to RMBS — a particularly prominent trend in the Netherlands, but one could also look to the UK life insurers buying equity release portfolios, or PE-sponsored Bermudan reinsurers gathering whole loans, CLOs and illiquid assets of all kinds. Insurers are also increasingly active in portfolio or single name corporate hedging, with some banks preferring to manage risk through these partnerships rather than CDS or indices.

Insurers are managing to score these goals, dribbling around or lobbing the regulations, and it’s obvious to everyone in the industry that they’re hungry for the kinds of consumer risk, corporate risk, and even tranching that can come out of securitisation — every investment angle other than Solvency II-regulated asset purchases has been thriving.

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