Market Wrap

Excess Spread - Slow start in CLOs, next step for Rizwan, closing on covereds

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

CLOs begin, slowly

When does the equity sell-off really start to smack credit, and….is it now? 

It’s not a full blown crisis in European bondland but it’s certainly not the risk-on buy-anything backdrop that January usually brings, and which seemed to be the tone last week. It’s not that deals can’t get done, but if you don’t have to jam something through the market on a down day, why would you? 

This bump in the road might be more severe than December’s omicron worry  — it can’t just be written off as thin December liquidity and closed books for the year. One might expect that worries about rate rises wouldn’t hurt a floating rate market too much, but for asset managers looking at relative value across fixed income, any softness in corporates can provide a reason to buy less in ABS and CLOs.

It’d certainly be a shame if the market properly pukes before a single new issue CLO has priced in 2022, but it’s been touch-and-go at points. Several new issues are close to the line, and probably butting heads over final pricing, while premarketing of other issues has been extensive.

Deals we understand are out there include issues for Carlyle and BlackRockOnex Credit PartnersGuggenheim Partners and Neuberger Berman, but it’s safe to assume all the managers who issue 3+ deals per year, and smaller managers that weren’t active in H2 2021, will be monitoring conditions if not active selling — and we expect the first new issue deals to be firmed up at the back end of this week or early next. 

Even if execution is taking a while, senior levels look promising, with some deals likely to land at 92 bps, a tighter level than most of H2 last year, and potentially enough to encourage some follow-on reset supply once the market wobble is over.

But still, three full weeks in and we’ve only had resets and refis at the time of writing.

Some of these have been surprisingly old deals  — Carlyle opened proceedings for the year by resetting CGMSE 2015-2, while Barings reset Barings 2015-1 last week, at a somewhat wider spread.

Much of last year’s reset flow was 2020 and 2019 deals, with a smattering of 2017s too — 2015 vintages are a definite rarity.

Deutsche’s research team noted relatively weaker levels for Barings, saying that it was “wide across the stack”, suggesting this was “this was more of a reflection of manager performance and the underlying collateral” (what CLO pricing isn’t?). The double-B seemed most out of line to us, but a deal of this vintage can get pretty credit specific

There were some pretty ropey assets in the original portfolio — a decent clip of perennial restructurers Naviera Armas and Hilding AndersAlstom Auxilia, the remnants of the Galapagos restructuring, plus a triple whammy of stressed travel in the shape of B&B HotelsHotelbeds, and A&O Hostels and Hosting. It’s also true that Barings has a pretty high triple-C percentage across its eight active European deals — median of 9% by Fitch’s estimate. 

But equally, you don’t get to six years of investing in leveraged credit without a few scars. The Carlyle 2015 reset had fewer still-struggling situations, but €3m of PlusServer, trading around 40, is a pretty big dog, and the vehicle remains the proud owner of New Look, Hema, and Technicolor shares from restructurings past.

It might be that at a certain point, the proportion of restructuring candidates in a pool makes a reset the most sensible way forward — we haven’t seen the docs on these, but Moody’s informs us the Barings changes “included the ability to hold workout obligations/loss mitigation obligations” along with some tweaks to concentration limits and an update to the new standard Moody’s matrix. The agency also notes a punchy effective date provision, giving full par value to defaulted obligations for the purposes of determining that the CLO can become effective.

The Barings deal did bring an infusion of new assets into the structure as well, though — arranger BNP Paribas had a sidecar vehicle ramping up another €100m, bringing the portfolio back up to a €400m target par. With the deal already in amortisation, it can only be reset on a payment date, explaining the rush to get this through the market early on in the year.

While market conditions might be slowing down the pace, big picture, CLO management looks attractive — and it’s still attracting new platforms. We’ve talked about whether there’s room for more US managers to start European shops (yes, absolutely, why would you not?) and a bit about consolidation already.

But we didn’t think CQS would be in a big hurry to dust off its shelf. It’s only got a single deal active, Grosvenor Square 2015-1, and even that’s out of reinvestment period and has an average portfolio price in the 97s.

We were, however, wrong. Bloomberg’s got hold of a CQS investor letter saying that it’s investigating doing an ESG CLO in Europe, possibly (though the article is unclear), an Article-8 aligned issue, which is pretty much the new state-of-the-art for ethical CLO construction.

It’s not clear how far the plans are advanced, but it’s nice to see new names emerge again as active issuers. Investors, though, will be wanting firm evidence that the platform won’t be mothballed again the next time around the block.

We’ve been watching WhiteStar Asset Management’s progress with interest, as one of the biggest US CLO platforms to look at starting a European shop. In contrast to other US entrants, it was willing to buy, and even buy in size if necessary, rather than hire a key individual and build out around them.

It settled on MacKay Shields’ European platform last year, after a long search — a two-deal shop that it could infuse with the oxygen of new hiring mandates and new capital. Now, we understand, it has a warehouse open for its third deal (the first under the Trinitas brand), and is about to open a warehouse for the fourth.

The team, led by Conor Power and Brian McNamara, is also on the hiring trail, working on recruiting another two analysts to join the three already in place — WhiteStar prides itself on giving each analyst a limited pool of names to cover, allowing deep knowledge of the underlying credits.

WhiteStar’s intention, we understand, is to make sure there’s a homogenous credit culture between Dallas and Dublin, which isn’t easy — several transatlantic managers end up with quite different reputations in the US and EU markets (Sound Point has been mentioned by several investors).

In secondary, there’s been a fair bit of CLO equity hitting BWICs over the past week or so, with sub notes in deals from Ares, PGIM, Blackstone Credit,and Man GLG trading, while clips of Sculptor and CVC equity missed their levels. No full tranches were on offer, but some of the positions were sizeable enough to matter and elevate the sales beyond a pricing exercise — perhaps some profit-taking as the 2022 machine fires up and managers seek equity for new issues.

£3m and counting

Another day, another Rizwan Hussain court case, as the flurry of legal activity approaches a crescendo. Sadly my dalliance with Covid prevented me heading down to the Rolls Building last week to see the action, but the judgement suggests neither Rizwan nor any of his associates were present, so it would have just been me, the Sanne Group team (directors of the Business Mortgage Finance vehicles), their legal representatives at Simmons & Simmons (some of which Rizwan has filed claims against in person), and more solicitors from CMS Cameron McKenna watching the action. 

Various judges have raised questions about the extent to which the various named Rizwan collaborators actually exist — a separate hearing on Tuesday, concerning the Hurricane Energy attack, determined that the next part of the case should happen in person, in part to settle questions of identity (witnesses would need to show up with their passports).

This was opposed by Rizwan, who didn't show up but filed a statement saying setting a date will be tricky as he is “attending an international roadshow in Asia”. He is, however, scheduled to be at the Royal Courts of Justice next week (see below), so unclear how that roadshow is going to go.

Here’s my running tally of names, associates, and possible aliases — Rizwan Hussain, Godfrey Hicks, Peter Morrow, Annabel Watson, Amanda Watson, Alfred Olutayo Oyekoya, Jai Singh, Elizabeth Kirby, Mohammed Osman, Rajnish Kalia, Gary Fung, Jason Fung, Stuart Sherwood, Glen Watford, Usman Ahmad, Artemakis Artemiou. I’m pretty sure at least five of them exist to some extent; the others are harder to pin down, with letterbox addresses (occasionally in the Marshall Islands) and a very spotty record of actually showing up in court for the many suits and countersuits generated by Rizwan’s attacks.

The latest Sanne judgement underlined the cost of all this — £3m and counting to the BMF vehicles. Honestly that seems low to me; the judge said there had been 26 separate proceedings concerning the BMF attack alone. But it shows the seriousness of the situation, besides being a grave distraction from the day job for all concerned. The question we raised a couple of weeks back - who pays for “Rizwan risk” going forwards? - is a real one.

The “Rizwan side” filed claims for £377.25m, £47.51m and £149.25m in the BMF case, all of which were struck out. There was an application for the judge in question, Mr Justice Miles, to recuse himself, which he didn’t, and he granted pretty much every request from the Sanne side - read the full version.

Yours truly got a small shout out, with the judge noting that the situation had been the subject of “specialist media reporting”. Indeed it has.

The next step is the big one, which could see Rizwan go back to prison, and it is lined up for next week, beginning February 2. At issue is the question of whether Rizwan broke an existing court injunction against interference with the BMF vehicles, and the case may help cut through the knot of special purpose entities and purported directors and determine who is behind it all.

We can’t write much about it ahead of time, but will be watching with considerable interest….

Ripon is off

Blame the Omicron coursing through my veins but I suggested last week that smaller issuers were well-advised to get out ahead of the Ripon refi, which will see £6bn or so of UK buy-to-let mortgages financed in securitisation.

This was pure nonsense — Pimco already owns the call rights to the portfolios, part of its increasingly extensive collection of former UK Asset Resolution mortgages, and will likely be tucking away the capital structure rather than troubling the market by selling bonds. 

Barclays or Citi tend to be Pimco's risk retention banks of choice, and sure enough, this week brought a 15G filing indicating Barclays would be in the driving seat, joined by Goldman Sachs, the original bank on the deal when Blackstone bought the portfolio back in 2017.

Harben, the smaller slice of the old Bradford & Bingley book, which was owned by M&G, is still likely to come to market, but we’d expect some pre-placement or anchor orders in place in the senior to firm up the exit, with more public placement through the mezz.

It’s probably time for a bit of a mea culpa on broader market conditions too — I probably wasn’t the only one to survey the splendid oversubscriptions on the smorgasbord of deals last week and conclude that we were in pretty good shape.

But, markets eh. After a miserable Monday in equities, big selloffs in tech and crypto, and distinct softness in higher beta credit, ABS was bound to be hit eventually. It usually takes a day or two, but it’s never going to resist completely, especially with a tough-talking Fed meeting on Wednesday.

So it is with Finance Ireland’s second deal in two weeks, the small balance CMBS Pembroke Property Finance 2. A book update late on Wednesday had the class As 1.6x done, the class B 1x done, the class C and D listed as “call desk”, and the E and F 1.5x done wider than IPTs.

A second update on Thursday dug up more demand, but gave some ground on price — the class C and D spreads were set at 285 bps and 350 bps, from IPTs of mid 200s and 300 area respectively.

Senior, though, held in, at 145-150 bps from mid 100s IPTs, and class B came at 200 bps from 200 area IPTs. Those levels point to a deal that’s definitely getting done, but the buoyant conditions last week seem to be long gone.

Closer to covereds

Nationwide’s Silverstone master trust is named after a racetrack, but I tend to think of it more like a big Bentley, all quiet wood panelling, gently purring engine and soft suspension. It’s generally reckoned the best of the UK master trusts, which means pricing sets the floor for the sterling RMBS market.

If that’s right, then last week’s 2022-1 print is good news. At 29 bps over Sonia, it’s the tightest sterling RMBS print post-financial crisis (there was a Holmes deal at 28 bps, but pegged to Libor, so the benchmark basis etc etc). Coming this week it might have had a tougher time (the sterling A2 is a couple of bps back of reoffer) but….it didn’t.

That level is pleasingly close to covered bonds, which is what really matters for bank supply in the securitisation market — a £500m covered bond from Yorkshire Building Society printed at 27 bps, in the same five year tenor, on January 11. Even adding a handful of basis points for the Nationwide-YBS spread it suggests the RMBS premium is shrinking, and RMBS *should* benefit from lower collateral consumption, matched funding and so forth.

Silverstone also signals that smart treasury teams aren’t all about screwing the last basis point out of investors — the dollar tranche was clearly a more expensive route to market than sterling, once swapped back, and hence Nationwide stuck to $250m (and international accounts tried to pile in), but the handful of basis points given up on the swap buys continued access to the deep onshore dollar market for when it’s needed.

It wasn’t just any dollar tranche, of course — it uses the SOFR benchmark, still in its very early days as a dollar FRN standard, with some investors accelerating their systems shifts specifically so they could play this deal. 

NewDay has long added dollar SOFR tranches to its credit card ABS deals, but these have attracted relatively narrow interest, while much of the mainstream prime US consumer ABS market is fixed rate, leading to a limited set of comps for the dollars, but the 7x subscription level sends a signal to other prime issuers looking at crossing the pond once markets settle down.

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