Market Wrap

Excess Spread - Short CLOs, leaning on STS, sniffing around solar

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

Short and sweet

Last week we talked about whether CLOs would go short in response to challenging markets...shortly before Napier Park gave us a helpful print to examine, in the shape of Henley VII, which adopted the Covid-era 1 year non-call / 3 year reinvestment period structure.

Pricing took a further turn for the worse — 105 bps on seniors, compared with 100 bps and 96 bps for CVC and Blackstone the previous week, and 240/3%/315/425/775/1050 down the stack. But there is a war on, and all things considered, the levels aren’t that bad.

As with the CVC and Blackstone deals, Napier Park should be able to pick up cheap assets now it has locked in some term funding, a move particularly helped by the relatively large bond bucket at 15% maximum. Expected bond purchase price is below 95, according to deal docs, which should mean a nice return as these pull to par. In current conditions issuers are unlikely to be rushing to call deals, but there’s a lot of decent paper in the low 90s at the moment with no real Russia or commodities concerns, so it’s probably a good time to be bargain-hunting.

We also note with interest that Standard Chartered is on the deal as a co-manager alongside arranger Jefferies. We’d read that as a sign that the bank has taken down a bunch of paper, probably anchoring the senior tranche — but does it point the way to something more?

StanChart’s entry into RMBS took a similar form, starting with senior tranche investing, and expanding into warehouse financing and fully-fledged JLM and arranger mandates. StanChart already has a CLO trading and distribution business, and clearly has an appetite to invest in its European securitised products would CLO arranging be the next logical step? We asked about this last year and were told no, but new year, new ambitions?

The existing arranging desks out there are probably having a tough time though — after a monster 2021, flat-out on resets, refis and new issue, 2022 is looking far more barren, even if the new issue market continues to hold up. Very few calls are now in the money, knocking out perhaps €40bn of reset/refi supply, and the associated deal fees — Fidelity Grand Harbour 2019-1 was the latest deal to file a notice cancelling a proposed call, though, optimistically, some of the equity is still reviewing options. Arranging desks are going to have a tough time making budget under these conditions.

New products, such as CRE CLOs, might have helped, at least for banks with CRE and structuring skills, but the pipeline that was assembling after the Starz deal in the autumn remains sat on arranger balance sheets, waiting for the right market conditions for an exit.

Nonetheless, it’s a good sign that more managers are sniffing around the market — even if the exit levels are expensive today, the medium term view for European CLOs still seems to be bullish. Pemberton announced earlier this month that it had hired Spire Partners’ Rob Reynolds to lead a new CLO business, while Natixis is set to relaunch its platform, with the transfer of the Ostrum Asset Management loans business into MV Credit, another Natixis subsidiary focused on private credit mezz.

Carlyle also doubled down, announcing last week it had won the race to buy CBAM Partners. It also offers a useful datapoint for the value of a CLO platform — Carlyle bought CBAM’s $15bn AUM for $615m in cash and 4.2m shares (worth around $172m at announcement for a $787m total). If we assume 50 bps running on the $15bn, that’s a healthy double digit multiple, though incentive fees make it more complicated, and CBAM probably owns some of its own equity, making true comparison tricky.

It also, incidentally, makes Carlyle Credit the largest CLO manager in the world, which may be useful for bragging rights if nothing else — it was already firmly in the top bucket and on every investor list going, so it’s unlikely to make much difference to execution strategy.

Limping along

In consumer asset classes, primary is limping along, in STS-eligible format. Citi and Bank of America announced Brignole CQ 2022 on Friday, an Italian consumer ABS backed by salary assignment loans.

It’s a well-known shelf, sponsored by Creditis, a Chenavari-backed lender, and the execution approach is cautious, with the €133m senior note preplaced and the rest of the capital stack to be distributed in the privacy implied by “call desk”. Given that the senior can be helped along by ECB buying, it’s perhaps surprising that this tranche was locked up ahead of time, but in troubled markets it might be wise to keep potential anchors onside by making sure they get bonds.

UCI’s Prado X RMBS, another well-established issuer, is distributing the senior, as it usually does — these are pure funding trades for a financial institution not a sponsor, so no need to go down the stack.

Expect the ECB to be present in the book, but even here there’s still a strong note of caution with the deal announcement specifying that the “issuer has the flexibility of retaining a portion of the class A notes” — arrangers BNP Paribas and Santander (co-owners of UCI) can size the placed element to demand. Presumably if the deal doesn’t go well, the ECB will end up with the bonds anyway as repo collateral, but it’s pretty clean and pretty standard stuff, and the price talk of high 50s for good euro STS paper is attractive.

Worth a try?

SME securitisation is still struggling to catch a break. Despite its prominence in the regulatory debate, one of Europe’s few SME securitisation issuers is out of the game.

Be-Spoke Capital, whose Alhambra SME 2019-1 had a fairly tortuous multi-year journey to market, is not intending to repeat the painful experience, and is rebranding as a pure asset manager, raising funds from LPs, investing in SMEs, and steering clear of funding through securitised products.

The deal, when it came, was intended to help pave the way for more SME deals — it received public support from the EIB, in the form of a €61m investment in the mezz, which was intended “to support Spanish SMEs and mid-caps with long-term financing opportunities that complement the offer of traditional lenders”.

It hasn’t performed particularly well, which is another argument for not repeating the experience — by the middle of last year, five loans had defaulted since closing, for a cumulative balance of 13%. Another nine borrowers, representing 26% of the remaining balance, were assessed at a CCC-rating level, according to DBRS. A lot of this can plausibly be blamed on Covid, of course. Despite the various state support packages out there, it’s been a rough couple of years for small businesses everywhere.

The securitisation’s structural protections are also working fine — excess spread has been diverted to amortising the class As, and only the class Z notes seem to be suffering — but perhaps that’s another reason Be-Spoke wants to avoid using this kind of funding strategy in future.

We bring it up here because it’s a live example of the difficulties in getting a true SME securitisation market up and running. Banks often prefer to simplify their SME funding activities and seek personal guarantees or hard asset collateral, but true corporate style SME lending is pretty hard to get right.

The EIB group has been active across many channels of SME support as well as the Alhambra deal, doing lots of risk transfer deals, for example, and more recently, supporting the Aquisgran deal, a securitisation of Spanish guaranteed loans, another structure for which it has big plans.

It’s worth noting that another SME rarity, Gedesco Trade Receivables 2020-1, muscled over the line in late February / early March 2020 as the pandemic closed in, performed much better through the pandemic period. By late 2021, it only had 10 bps of the portfolio in the 30-60 past due bucket.

But this too helps illustrates the difficulties of SME securitisation — Gedesco was an unusual mix of receivables-backed lending, promissory notes and corporate direct lending, which may have added up to more effective seniority than the Be-Spoke loans.

It might be more accurate to consider SME securitisation, already a tiny market, as several sub-markets depending on the particular structures of the underlying collateral. You could even consider equipment ABS, another niche asset class usually grouped with auto loans and leases, as another form of SME securitisation.

Sunny side up

Early days yet, but word has reached us that solar securitisation in Europe might be about to stir. It’s a developed market in the US, mostly through the PACE and C-PACE tax lien schemes, which operate on a state-by-state basis through local property taxes. Fortunately, these states including populous and sunny places such as California, easily big enough to sustain an active capital market in its own right.

There’s been a “EuroPACE” project plugging away for the past few years, with various “leader cities” exploring how such a scheme could work, but to our knowledge, origination hasn’t got near the levels needed to contemplate a capital markets exit — though there is EU money behind it, and perhaps solar ABS simply isn’t necessary when there’s abundant state-backed capital.

But state supported or not, it seems like rooftop solar should be able to fit into a securitisation framework — a large upfront expenditure followed by savings, year after year, which can be diverted to pay down the loans. The exact mechanisms might be complex, with homeowners perhaps reluctant to take on obligations which could make it harder to move house, but it must be doable.

We’re yet to hear any firm intel on the possible structures for Europe — we’re more at the “funds sniffing around” stage — but we think it’s a market with huge potential. Investing in solar is crucial for the energy transition, and all the more important with fossil energy costs spiking, so joining the dots to the capital markets would make a real and important difference to the world.

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