Monkey business

There’s an ugly fight kicking off over Silverback Finance, a chunky credit-linked CMBS issued back in 2015, and backed mostly by Santander’s portfolio of retail bank branches, which has already resulted in both parties heading to court.

The deal was originally a sale-and-leaseback with Uro Property, a Spanish real estate company, funded by €1.34bn in class A1 and A2 CMBS notes. As with the UK supermarket sale-and-leasebacks, the credit quality of the notes was heavily dependent on sole tenant Santander, rather than structural credit enhancement.

But Santander seems to have been working on unwinding the arrangement — the bank bought Uro Properties in 2020, triggering a loss of the crucial “SOCIMI” designation for Uro, an arrangement similar to REIT status with tax advantages.

This in turn triggers a “SOCIMI Status Loss Event” under deal docs, which means mandatory prepayment of the loan and early redemption of the bonds. So far so good….this is Santander we’re talking about, it definitely has the money to cover the €1.053bn remaining under the loan.

The problem is…..does this mandatory prepayment come at the make-whole price or not? 

Santander / Uro thinks not — it has offered to pay all principal and accrued interest, but not the make-whole, which also includes NPVing all interest that would have been paid, out to the original maturity of the loan.

The trustee in the deal, BNP Paribas, says that this make-whole is due, “pursuant to instructions of some of the bondholders who subscribed to bonds that were issued to fund the Loan”. It says that it will not release the security on the loan until this is paid — hence the trip to court.

The face-off has also triggered a Loan Event of Default, since the trustee won’t allow repayment until the make-whole payment is included.

BNP Paribas Trust Corporation, repped by Baker & McKenzie, has filed its claim in the UK commercial court, with Uro Property Holdings SOCIMI as the defendant, represented by Humphries Kerstetter.

We aren’t lawyers or judges or anything of the kind, but, looking at the docs, it kinda looks like bondholders have a point — here’s the relevant section.

We suspect the case will turn on whether Uro lost its SOCIMI status “by act or omission of the Borrower” — if it wasn’t by “act or omission”, no make-whole is due. Arguably it wasn’t an act of the borrower, Uro, which triggered the prepayment, but an act of Santander (in buying Uro). No doubt some very clever folk are polishing these arguments as we speak.

We’re talking about a fair wedge though — the Loan Maturity Date is February 2037 and May 2039 for the A1 and A2 loans, which are paying 3.1261% and 3.7529% respectively. This will be discounted at Bunds+38 bps and B+ 41 bps.

At this point my maths gives out — to make matters extra-complicated, these are amortising notes — but it’s definitely well into nine figures, a number well worth fighting over. A quick scout around suggests that various BNYM-linked fund managers are in the deal, Newton, Insight and BNY Mellon itself, plus State Street and DWS. Drop me a line if you’re a bondholder and want to outline Santander’s perfidy in more depth.

Big picture, Santander probably regrets ever signing the deal in the first place. Sale-and-leasebacks can be a handy way of raising funding against assets, but if there’s one thing banks haven’t lacked in the past seven years, it’s funding. TLTRO II and III came in 2016 and 2019, flooding all of Europe’s banks with liquidity far cheaper than this deal could provide. If Santander has to pay a chunky make-whole too, that adds insult to the initial injury.

Film buffs

Last week’s Schur Flexibles debacle is, objectively, a storm in a teacup — there’s only €192.5m of notional exposure across the whole European CLO market, according to Deutsche Bank, and the whole facility for the Austrian plastic packaging maker is €475m.

But it’s still a reminder that sometimes leveraged credit markets can totally blindside even the most sophisticated participants. It’s all very well building a nice credit model, but when a loan plummets more than 30 points on allegations of accounting irregularities, there’s not much that could have been done.

Among the unfortunate holders, according to 9fin’s data, were Axa Investment Managers, with five of its Adagio CLOs buying in, Investcorp, Tikehau, Anchorage Capital, Carlyle, BlueBay…etc etc. A pretty healthy spread of managers are exposed to it, despite the small size. 

Apollo, reported to be leading the lenders’ committee, is also a big holder — and also bought the semi-private financing which funded the company under previous sponsor Lindsay Goldberg — just another illustration that knowing the company well doesn’t seem to have helped avert disaster.

Schur, however, might be an interesting test for the new workout powers built into CLOs since 2020. The move from par loan to restructuring was so rapid that the traditional remedy of selling up when the trouble starts wasn’t available, so CLO managers, like it or not, are going to have to hang in there for the restructuring, unless they want to crystallise a big loss now.

The company was running a call with lenders on Thursday to go through the options — 9fin’s Chris Haffenden has covered the situation here — though as we understand it, the point of the call was more to outline what’s really happened to the company and give lenders enough information to make a decision. 

The point of the workout powers is really to allow CLOs to put in new money more easily, but that’s not much a remedy for accounting problems — it’s more about getting a fundamentally good company back on its feet again. 

In Schur, sponsors have put in a shareholder loan and agreed to backstop a new working capital facility, covering liquidity for now, but it’s possible lenders will be asked for new money or writedowns down the road.

Far more important than Schur’s idiosyncratic situation is the sell-off in much larger capital structures, such as Upfield (Flora Foods), where prices have been drifting wider for a month or more. 

This has been further compounded by the sharp risk-off mood on Thursday following the Russian invasion of Ukraine — chemicals names have been hammered as gas and oil prices surged, Crossover has blown out, and an array of levered names with specific Russian angles have traded down sharply. We took a look at some of the most exposed in more depth here (9fin subscribers only).

For CLOs, the question of timing is crucial — a deal coming to market off a fully ramped warehouse in the last couple of weeks would already be looking at market value losses, especially if it was heavy on the bond side of things. Tests for the CLO going “effective” have been slackening in recent months, but it still means an uphill struggle for the deal in the early part of its life.

Less ramped portfolios, however, will have been able to bargain-hunt after pricing, paving the way for a strong performance out of the gate. CLO pricing has been drifting wider, judging by the primary prints this week, but the arbitrage still works at these levels.

The reset of ICG’s St Paul’s IX is the weakest primary print this week — in line with the broader trend of divergence in refi and new issue levels — with classes C-F at 300 / 400 / 775 /1075 bps, compared to 240 / 350 / 680 / 975 in KKR’s new Avoca XXVI deal.

The portfolio features a few hairy names — Novafives, now trading in the low 80s, equity from the Technicolor and Dummen Orange restructurings, and the aforementioned Flora Foods — justifying the weaker print down the stack.

At the senior level, it was actually a basis point tighter than Spire’s new issue Aurium IX, at 94 bps vs 95 bps — and that’s the crucial point for CLO supply going forwards. Despite the market turmoil, senior spreads have held up well, and levels are still inside those of H2 2021, meaning that overall CLO cost of debt isn’t blowing out too much.

But CLO issuance down the road is pegged to loan supply — managers will try to get their open warehouses out, but if there's a prolonged pause in leveraged loan primary, new CLO formation will inevitably stall as well

Cereal offender

The problem with writing up deals on a Thursday is that it’s easy to call it wrong — as I did with Barley Hill No. 2, which I’d assumed was seeing a slightly sluggish execution thanks to the rough market backdrop, with only 1.4x senior coverage at the first update.

But later in the day, after I’d gone to press, the book smartened up considerably, with coverage of 2.2x, 2.8x, 3.2x and 1x down the stack, and prices firming up nicely from IPTs. Given the literally stormy backdrop, syndication was always going to be a more delicate affair — worth starting with a little juice left in the price and building a nice book before pushing tighter.

So I'm owning up to a bad call — well done to TwentyFour and JLMs HSBC and Bank of America for getting this through handily in troubled times.

As the times seem to be getting more troubled before they get better, ABS is probably a decent place to be — better than banks, better than HY credit, better than some IG, and a hell of a lot better than EM. Levels might slip wider, deal execution might be more challenging, but delinked consumer credit in western Europe has to be one of the safer asset classes to hide in.

One issuer that’s in the market whatever the weather is VW Financial Services, which printed its German lease deal VCL 35 on Wednesday via UniCredit, BNP Paribas, and DZ Bank. 

Driver, its loan shelf, and VCL for leases pretty much set the floor for European ABS spreads, at least in their German incarnation, and from that, we can conclude that imminent war on the European continent added 5 bps to senior spreads (compared to VCL 34 in October 2021).

It looked like a smooth syndication too, with a size increase from €750m to €1bn, and tightening pricing from mid-high teens to 15bp on the senior, and 90 bps area to 85 bps on the class B. This might have gone less smoothly if syndication had dragged on a day longer, but looks pretty textbook.

Like Finland’s Tommi, though, the ECB helped out a lot — 39% of the deal was allocated to the central banks and official institutions. Tapering the purchase programmes later in the year means less support for clean ABS at these levels, but perhaps not much less…the ABSPP has always struggled to maintain itself, since euro-denominated eligible supply has been thin on the ground, and so much of its holdings consists of rapidly amortising auto ABS notes from the likes of VW.

In other words, it has to buy aggressively in the few eligible deals just to avoid going backwards.