Rizwan’s arrest warrant

The guest of honour failed to show up to Rizwan Hussain’s committal hearing for contempt of court on Wednesday (2 February) this week — FL-2020-00023, Business Mortgage Finance 4 PLC vs Hussain and others, to give it full legal attribution.

This is…unorthodox — the point of a committal hearing is that one can be committed to prison, right there and then, and attendance is very much non-optional.

Rizwan told the court, in a submission sent at 11pm the night before, that he had Covid, providing a “grainy photo of a lateral flow test” in the words of the judge. He also declined to disclose his location, said he was unwilling to submit his passports to the court, and argued that his physical attendance at the hearing was “unnecessary”. 

The day before the hearing also brought a final roll of the dice, with yet another attempt to claim that various Rizwan associates were the directors of the BMF vehicles, and that in this capacity they were withdrawing the committal claim for contempt of court (a tactic which has tried and failed already).

The judge was unconvinced — the claimants (Simmons & Simmons, representatives of the Business Mortgage Finance SPVs and their legitimate directors at Sanne Group), argued that he hadn’t registered the Covid tests with the NHS, hadn’t done a PCR test, and hadn’t done a certified lateral flow, in which a doctor watches you take the test on live video. 

They also pointed out that he’d said he’d be staying in the Radisson Blu in Bloomsbury (not bad digs for someone recently bankrupt, with a stack of unpaid court orders), which had no record of any reservation.

After some back and forth, the judge ordered a “Bench Warrant” — when found, he will be arrested and brought to court to do the hearing in person. Simmons & Simmons had already requested this previously, suspecting a no-show on the day, but this time the judge agreed.

This will bring a certain amount of jubilation across the structured finance world, especially among the sponsors and trustees of various legacy deals, his preferred targets.

Since his release from prison last year, the number of Rizwan attacks has multiplied and diversified. In 2018-2019, he targeted Fairhold, RMAC and Business Mortgage Finance, while last year and so far in 2022 he’s attacked Clavis Securities, Mansard Mortgages, Eurohome, Eurosail, Stratton, Great Hall Mortgages, Hurricane Energy, and Symphony International Holdings, as well as maintaining a flurry of claims and counterclaims in relation to BMF (admittedly, not usually in person when it can be avoided).

It’s striking to me at least how poorly defended the main Rizwan lines of attack have been (and still are!). Standard operating procedure appears to be issuing RNS notices in the names of various vehicles, and amending Companies House records to name him, his SPVs or associates as directors.

In spite of the crucial trust function both of these official datasets serve, there appears to be no obstacle at all to changing these records. The legitimate directors of most of the targets have sought, and usually received court orders telling him to stop, but the long journey of the BMF directors shows how weak these have been in practice and how hard it is, short of a stay at Her Majesty’s pleasure, to stop him continuing to prosecute these attacks.

The regulator also seems to be asleep at the wheel. I know of several persons and institutions which have reported Rizwan’s activities to the FCA — after all, they pretty much all concern false statements about listed securities — and yet not a peep from the market police in more than three years he’s been trying this stuff.

If you just read Excess Spread for the market chat, the above might seem totally incomprehensible — the backstory is long and tortuous and there’s no room for it here. But you can read the first part of the saga at my old shop GlobalCapital. If the committal hearing results in a hiatus on new Rizwan activity, I will have a go at writing part two.

Debut managers, lenders in the driving seat

The first debut CLO manager of 2022 looks likely to be Acer Tree Investment Management, in the market with Logiclane I CLO via Barclays. Though Acer Tree is a new fund, started last year, it is run by some of the biggest names in European CLOs — Jonathan Bowers, who co-founded the massive CVC Credit platform (22 European deals so far), as well as Sasha Vlahcevic, Philip Grose and Askin Aziz, who all worked together in Deutsche’s leveraged finance business during the 1990s, before heading in different buyside directions.

That means selling the deal is unlikely to have been the hardscrabble bid for credibility experienced by some debut managers — even though Acer Tree may not be on all investor lists, there’s lots of track record to point to, and relationships with sponsors and banks are unlikely to present much difficulty given the people involved.

It reminds me a little of the launch of Spire Partners back in 2015 — a new platform, a new name, but a core management team with a strong pedigree from their respective roles at 3i Debt Management. Spire is now on its eighth deal, but still trades partly off the smaller manager strengths of selectiveness, nimbleness and credit picking, limiting the speed with which it prints new Aurium issues.

From the small startup to the global megafund, Bloomberg is reporting that Fortress Investment Management is eyeing up a European CLO - not before time. It’s a big US BSL and middle market manager, so it clearly has the skills, and it's a major player in the European private credit and special sits world….adding some par loan management on top shouldn’t be too tricky. 

It’s sort of worth putting the question the other way around — for managers with credit skills who don’t have a CLO shop yet, why not? 

When we’ve asked the question, it tends to be for administrative, not economic reasons — even credit managers that might find the rules of CLO management restrictive can see the economic logic of locked in term leverage at a reasonable price, and the equity arb remains attractive for managers bringing their own cash. 

But it is a lot more work than a simple fund. More vehicles, more KYC, directors, trustees, lawyers, risk retention, risk retention financing, regulatory reporting and the like — how much larger would the European market be today if this burden was lower?

While some shops are starting CLO businesses, others are for sale — most notably Alcentra and CBAM, two massive CLO shops reportedly on the block at the moment. 

My former colleague Silas wrote a detailed deep dive into goings-on at Alcentra, floating a valuation of around $2bn for the firm, which has around $43bn in AUM. That seems cheap compared to the $4.2bn T Rowe Price paid for Oak Hill, with around $50bn. Meanwhile, CBAM, more of a pure-play CLO operation, is reportedly looking for between $500m-$1bn for its $15bn in AUM.

The pricing comps aren’t necessarily that meaningful — there’s a big difference in risk, earnings volatility, and market exposure between institutions which are primarily clipping fees for managing other people’s money, and institutions with a lot of their own capital invested in their funds, and we haven’t seen any of these sale details.

But it does make you wonder whether the ultimate owners of CBAM and Alcentra are hoping to top tick the market this year — exit while the CLO market is still good, rather than hang about to find out what happens in 2023.

More than a month into 2022, and we now have the first true new issues in European CLOs, Guggenheim Partners’ Bilbao IV via Jefferies, and Onex 2022-1 via Bank of America. 92 bps is the number for the senior tranche on both, confirming the recent reset prints and underlining that we’re tighter from the back end of last year, volatility notwithstanding.

That might mean we’re entering a rather pleasing period for CLO management generally — cracks have started appearing in parts of the European loan market, with Keter postponed, Covis Pharma reworked into a loan and partly hung, and Morrisons subordinated exposures sold partly to credit funds ahead of the launch of general syndication. Each of these situations is pretty idiosyncratic — price was the problem for Keter, credit issues for Covis, and size/time of underwriting might have driven the Morrisons choice.

The big cross-border issues look to be going better — sector leaders like Scientific Games Lottery and McAfee — so it’s by no means a market shutdown. 

But it’s certainly no picnic getting a leveraged financing with some hair away at the moment, which should put lenders in the driving seat on docs, terms and price once again, and given credit pickers more opportunity to differentiate themselves — happy hunting for managers who’ve got warehouses to fill and new deals to ramp.

Kensington carve-up 

Sky’s scoops machine Mark Kleinman has dropped some more details on the Morgan Stanley-led sale process for Kensington, the UK’s most frequent RMBS issuer and mainstay of the market. We thought a few months back that the process didn’t bode well for RMBS supply, with most of the big buyers for UK performing mortgages likely to lean less on securitisation than the Kensington of old.

That sad prognosis looks to be confirmed, with a potential split looming for Kensington between the origination business and the back book, and M&G and Pimco said to be in pole position for the mortgage assets. We thought Apollo (via insurance arms Athene or Athora) would potentially have a seat at the top, given its deep pockets and apparent appetite for whole loan books, but never bet against Pimco’s hunger for UK mortgage assets. M&G is a harder institution to parse, as it depends on whether the “M&G” in Sky’s story is the sponsor-style specialty finance division, a committed and regular sponsor of European securitisations (most recently in Finance Ireland RMBS 4), or M&G the bond-buying asset manager. 

As we suspected though, the Kensington sale is most likely going to be bad news for UK RMBS investors — whichever deep-pocketed institution ends up owning the Kensington book, it’s unlikely to be such a regular visitor to the RMBS primary market as Kensington has been under Blackstone/TPG ownership.

Looking further into 2022, we think there could be a new asset class on its way (S&P gave a hint in its European Securitisation Outlook session) — shared ownership RMBS. 

These are properties partly owned by the seller, usually a property developer or housing association, and partly owned by the mortgage borrower, who pays rent on the portion they don’t own. The contract often includes provisions for the borrower to raise their stake as they build equity. It’s a way onto the housing ladder in the UK, particularly in inner London, where a two bed flat at £400k+ is out of reach for most regular workers early in their career.

Shared ownership mortgages have been a feature of some RMBS pools in the past (at least one of Together’s deals) but it’s possible we’ll see a full shared ownership pool at some point this year. RMBS funding is generally most efficient when the pools are homogenous, so lenders tend to segregate products types once they’re large enough — Together is a fine example, carving out its debut first-lien only RMBS last year, and achieving better execution than the mixed collateral pools in the past.

Bigger than CLOs

Leveraged loan CLOs have been the big success in European securitisation, with record-breaking issuance and more managers lining up to join the market.

But I hadn’t realized that the SRT market (Significant Risk Transfer), aka Risk Sharing, aka Synthetic CLOs, aka balance sheet CLOs, aka capital relief deals, is much much larger still — and growing faster.

Accurate market sizing is much harder to come by, with many trades bilateral, often without even an ISIN, but a highly credible estimate from Pemberton, which is launching a risk transfer fund under former Citi banker Olivier Renault, is that over $12bn of junior tranches were placed with investors last year.

The size of the total portfolio protected in this market last year, therefore, could well be around $150bn (assuming an 8% attachment point) — much larger than the European CLO new issue market at €36bn last year, and even exceeding the total including resets and refis (another €56bn).

To put it another way — assume the €92bn of CLO supply is ~13x levered (€30m of sub notes supporting a €400m deal seems pretty standard). That means just over €7bn of CLO equity active in Europe doing new issues or refinancings in 2021, compared to the $12bn of first loss in SRT.

The comparison is slightly unfair, in that SRT is now becoming increasingly global, while I’ve only been discussing European cash CLOs — but even knocking out the 20% or so of SRT transactions out of North America, it’s a striking difference.

It’s sometimes a lumpier market than cash CLOs — BNP Paribas recently closed a massive €8bn portfolio transaction from its Resonance shelf with the big beast of the market, Dutch pension fund PGGM, working with Sweden’s Alecta — but the absolute scale is extremely impressive.

Unlike leveraged loan CLOs, there’s also a big regulatory tailwind behind the SRT market now — the EU “STS for synthetics” regime tweaks the formula for calculating risk transfer, with the happy result that banks can claim their capital relief through selling risk on a smaller tranche of a portfolio, cutting deal costs and making the market more attractive to issuers. The BNPP deal referenced above was the first by the French bank to take advantage of this treatment.

That’s a new feature though, and even without it, the number of active issuers has grown 5x in the decade to 2021.

SRT is also a pretty friendly market — see you at IMN’s Significant Risk Transfer event on March 31, hosted, as usual, in Clifford Chance’s capacious and comfortable audience chamber (with the drinks on the top floor!).