Market Wrap

Excess Spread - Who’s anchoring, love for logistics, staying safe in primary

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

Anchors away?

Standard Chartered is becoming quite the fixture in CLOs, following the previous week’s appearance as a co-placement agent on Napier Park’s Henley VII with another two co-placement roles last week, on Chenavari’s Toro 8 and Hayfin Emerald IX.

Let us once again assume this role come as thanks for buying bonds in considerable size, probably anchoring the triple A tranche (as you’d expect from a regulated bank).

StanChart has been ramping up its portfolio for a while — according to the bank’s Pillar 3 disclosures, it had just over $1bn in what it calls “Collateralized Debt Obligations” at the end of 2020, rising to $5.5bn at the end of 2021. That’s another 18 deals anchored, or many more if it’s not been taking whole tranches, and a pretty decent commitment to the market whichever way you look at it. It’s not clear from the disclosure whether this spans Europe and the US, but StanChart has a dollar balance sheet, so US is probably a more natural choice, but it seems to be fairly balanced.

Last year saw StanChart as co-placement agent on four deals in Europe, mostly in the summer as the market widened out — if it did indeed anchor 18 overall, then that suggests a slightly skew to Europe given that the US is 4-5x the size of Europe.

There’s no better way to annoy CLO people than to ask if the product is the same as CDOs, but when you show up with a $5bn chequebook, you get to call it whatever you like in your investor reporting. StanChart’s big in the other kind of CDO too — balance sheet risk transfer deals — but these are broken out separately (it’s hedging $16bn of assets, saving itself the best part of $500m in capital in the process.

We wondered whether the presence of StanChart as a co-placement agent heralds something more...Given the bank’s buildout of CLO trading and securitised products generally, it could be the natural prelude to starting a CLO primary business....though it could just as easily be another channel to rebate some economics.

Primary deals typically come through secondary levels in CLOs, though it’s awkward to compare because of the different conventions around including the Euribor floor. But Standard Chartered is certainly standing firm at a level well inside secondary, with the two deals last week at 105 bps each on seniors. A cut of the deal fees passed to StanChart via its investment bank might well be enough to place those deals more squarely back on market levels.

StanChart is presumably able to get these terms because the competition among potential anchors has cooled in recent weeks — it’s not the kind of market where you’d want to trust to the vagaries of syndication.

It’s not the only senior investor able to command bespoke terms though, as is becoming evident in some of the capital structure carve-outs in recent deals.

There’s a triple-A buyer out there doing tranche deals without Euribor floors, but with a Euribor cap at 2.5% — wildly out of the money, there’s no maturity where forward Euribor is anywhere near that level, but, ok! This investor did €50m in Investcorp’s Harvest XXVIII last week, and further back, €25m in CVC Cordatus XXIII and €33m in ICG’s St Paul’s IX reset, all Jefferies deals so, talk to them I guess?

We can’t particularly see why a euro-based buyer would want to ditch the floor and add a seemingly useless cap, but it might make sense if the tranche is going to be packaged up with a cross-currency basis swap, since these would work off an unfloored Euribor rate. The US money center buyers are unlikely to want someone else handling their currency hedging for them, so perhaps it points to Korean or Japanese demand...

Hayfin Emerald IX also saw a chunky €75m portion carved out of the triple-A note in loan note format — a major feature of the market in H1 2021, but which hasn’t been seen since last summer. At this time, this was the favoured purchasing format for Bank of America and State Street treasuries. The Hayfin deal was arranged by BofA Securities, but it’s probably too cute to say this must mean it’s got a slug of BofA treasury money in it too — last year, BofA treasury was happy to buy from any arranger — but it doesn’t not mean that either...

The trouble for CLOs comes not from senior notes, which, after all, are not a million miles from the levels at the back end of last year, when the CLO machine was at full steam ahead, but from the mezz, which has drifted wider and wider following the invasion. It hasn’t been a total capitulation, but the fat belly of the CLO capital structure has pushed out the overall cost of debt and squeezed the arb available.

Depending on the motivations and positioning of arrangers, equity and managers, there’s still some room for the “pull to par” trade — issuing low-ramped deals and bargain-hunting, especially in bonds, but as the mezz drift continues, its going to be hard to make the traditional arb work for deals entering the pipeline.

If the leveraged loan primary market stays dry, the technical imbalance is only going to worsen, but how long does the drought last?

No full-scale leveraged loan deals in Europe since February 14, but there’s still M&A activity rumbling along, still underwriting commitments being sought. Taps, add-ons, and club deals are coming back already, with €100m for Barentz and €110m for Infinitas priced on Thursday 24 March. Banks are probably underwater on some of their longest held underwrites (where is that Morrisons trade?) but will be doing new lending with generous flex terms and lofty caps. With investment grade markets opening up again, riskier assets will surely follow soon after....but at what level?

Captive equity is going to be crucial in the next phase of the market, if Covid is any guide. Managers with committed equity returned to market faster, and printed more deals in 2020 than those that relied on third party buyers. Equity NAVs for outstanding deals have plunged, which can’t be pleasant for third party funds marking to market, but captive platforms ought to be able to ride this out.

Accunia Credit Management should be in the happy position of the bid side for CLO equity at the moment, as it is launching King’s Garden, a secondary CLO equity fund. Not too many details so far, except a target IRR of 15%+, and a commitment to “start deploying the capital over the coming months”.

WhiteStar has got busy following its purchase of the Mackay Shields Europe CLO platform...though it seems to be heading in the wrong direction, redeeming one of the two outstanding deals it bought from Mackay Shields.

Actually, though, this issue was one of the few Covid-era prints still hanging around, and so even compared to current levels it looks expensive. It was also a short-dated print, so had already exited reinvestment...presumably Mackay Shields and its equity provider declined to call last year while the Whitestar purchase negotiations were still running. Calling the deal now will be a way to reload and gain access to a ready-made collateral pool which can be the basis for restarting issuance.

Sure enough, there’s Trinitas III and Trinitas IV vehicles filed with the Irish companies register, both with warehouse facilities in Whitestar will be heading back to creating, rather than redeeming CLOs soon enough.

We note in passing that CLO managers are stepping into the shoes of the oligarchs (or at least, their football clubs) — Todd Boehly, presumably with the $615m of cash from the sale of CBAM to Carlyle burning a hole in his pocket, is reportedly front-runner to buy Chelsea Football Club from oligarch Roman Abramovich. Also in the Boehly consortium is Clearlake Capital Group, the owner of WhiteStar. Elliott Advisors, though only very tenuously a CLO manager through its Elmwood Asset Management unit, is also involved in the Chelsea sale, backing a bid from property tycoon Nick Candy.

Keep on trucking

In 2020, CMBS pretty much shrivelled away in Europe — all except Blackstone-sponsored logistics deals, as the giant real estate investor funded the build-out of its last mile logistics platform Mileway. With markets once again on shaky ground, Blackstone is still keeping the CMBS lights on, launching Cassia 2022-1, a logistics CMBS backed by Italian assets, at the end of last week.

Last month, Blackstone launched what it says is the largest private real estate transaction ever, the €21bn recapitalization of Mileway with existing investors, but this may well be overtaken by Prologis, which, according to React News, has tabled a higher offer.

Everything about the logistics transition is pretty huge. Aside from Mileway, Blackstone Real Estate also owns Logicor, by itself one of the largest logistics asset owners and managers in Europe — it describes logistics as “one of the firm’s highest conviction themes”.

Travelling north for a long overdue trip to relatives last seen before the pandemic, I could hardly believe my eyes — every 20 minutes or so up and down the arterial A1 and M1 motorways, giant gleaming logistics complexes had appeared in what used to be farmland.

This was squarely “Golden Triangle” territory — the central part of the UK, where 90% of the UK population can be reached within a four hour drive — so you’d expect new warehouse capacity here, but the scale of it was astonishing, the mirror image of all the down-at-heel high streets and half-empty provincial shopping centres awaiting conversion into homes or offices. That’s the cool thing about CRE...seeing the physical reality of market trends brought to life. Sadly I was unable to stop at any of Blackstone Infrastructure’s CMBS-financed service stations on my trip, but another time, perhaps.

Anyway, onto the deal, which finances assets for both Logicor and Mileway. Leads Bank of America and Goldman Sachs launched last week, after a substantial pre-marketing process which has been running since before the Russian invasion. Since then, it’s been particularly important to have early interest in the book, and so it is with Cassia — protected orders have been announced in the price talk.

It started life as a rather elegant and innovative structure, a little like a conduit (though not the pre-GFC multi-jurisdictional multi-asset platforms). Two loans, Thunder II and Jupiter back the initial €273m deal, but the idea was that additional notes could be issued later this year to fund the addition of either or both the Camelot Loan and Thunder I loan. The Camelot portfolio is worth €278.1m, and is currently securitised in Taurus 2018-1 IT, while Thunder I is worth €97.2m (all according to CBRE).

Adding these loans would have kicked the total portfolio value up from €394.9m to €770m, making a chunky and presumably liquid CMBS transaction in a hot asset class.

In early syndication though, this feature was removed — the collateral will just be the first two loans with no extra notes issuance to come. It was a cool feature, but probably too cool for this market — investors aren’t necessarily in the mood for figuring out new and innovative structural elements. They want top quality bonds at cheap levels in the most vanilla format possible.

Presumably this means Blackstone will have to approach the market again to finance the rest of the book — the previous long-stop date for adding the two loans was August, so expect it later this year.

The structural revisions also included stripping out the class ‘D’ notes, which were always listed as “call desk”. Blackstone had a price target in mind, which wasn’t hit during the pre-marketing or early public syndication. The intention was always to source mezzanine capital to sit below the CMBS structure, taking leverage up from 70% LTV to 75% — with the demise of the class ‘D’, this mezz piece will have to be thicker.

The deal is structured to match the loan margin to the rates achieved on the notes, meaning no excess spread built into the deal, with the sponsor committing to pay the ongoing costs of the issuer (arguably a structural weakness for debt investors). As the most experienced sponsor in European CMBS, and, y’know, the largest CRE investor in the world, Blackstone’s happy to take the market risk (and benefits) itself.

Levels look costly though — the senior tranche is talked at 250 bps, with the class B and C at 350 bps and 450 bps. Few good comps exist though, with thin liquidity in existing CMBS, and most logistics portfolios so far being sterling-denominated. Blackstone’s own euro-denominated Pearl Finance, a pan-European logistics portfolio priced in 2020, saw senior notes placed at 140 bps. These were rated higher than Cassia though, and all the assets were in northern Europe.

The whole structure looks pretty equity-friendly, truth be told. It includes what we’d call “portability”, if one of our legals team were writing up a HY bond deal or, more rarely, a leveraged loan — the portfolios can be sold with financing in place, provided the buyer is a substantial real estate investor, and keeps any capex facilities in place.

That’s a sensible move, given that the Mileway is already in play — the last thing that a €21bn+ M&A deal needs is some CMBS sand in the gears.

Until such a sale, the loans don’t feature debt yield or LTV covenants for either event of default, and there’s no amortisation until this point either. That’s been normal practice for Blackstone logistics deals, and part of the attraction of CMBS for the sponsor. Cash trap covenants exist before any portfolio sale, but get considerably tighter afterwards, while the conditions for individual assets sales also tighten up once the portfolio is sold.

Zoom out a bit, and it’s clear that this is a canny bit of capital markets financing, that’s reminiscent of the traditional interplay between high yield bonds and leveraged loans. Blackstone is using the take-a-view flexibility of the securitised bond market to procure far more user-friendly lending terms than would be available in bank debt. CMBS remains a tiny fraction of total CRE lending in Europe, but it can compete by offering sponsors easier terms away from the headline spread.

Or at least, it can in logistics. Now do a shopping mall one!

Priced in?

The headlines from Ukraine have only got more horrifying, but the market reactions are growing muted — for asset classes that have no direct relationship to the Russian invasion, the effects are now in the price, and that means primary activity can resume, provided it is cheap and straightforward.

In investment grade, that’s meant cheap hybrids from VW and Bayer, the former achieving a monster book but selling off in the aftermarket. Passed through to ABS land, the trades that work are going to euro STS funding trades, several of which launched this week, off the back of Prado X’s execution.

Prado was the first fully public ABS to reopen the market, albeit in derisked form — the lender had the option to retain part of the senior tranche, choosing to keep €75m, and stats released on Wednesday show a 24% central bank ticket. But it showed it could be done, so on with the pipeline!

Monday saw Silver Arrow 14, a €750m German loan ABS from Mercedes Benz, and Bumper FR 2022-1, a €675m French lease ABS from LeasePlan. Both are pretty vanilla, though Silver Arrow rather more so — it’s shorter, with no residual value (Bumper has 55%) and no replenishment (Bumper has one year).

Having the two deals in market side by side, though, gives a useful read on how important ECB-eligibility is. Because Bumper contains residual value, the ECB can’t buy it, while Silver Arrow will certainly see a decent Bundesbank ticket in the book.

Preliminary indications suggest that basis is pretty wide — price talk on Bumper is 70 area, compared with mid-20s for Silver Arrow. France always trades wide of Germany, residual value always commands a premium, and Bumper is longer.....but those levels are a long way apart for short auto deals.

The Bumper transaction is also notable for being the first transaction since Société Générale agreed to buy LeasePlan from TDR Capital earlier this year. The acquisition hasn’t closed yet, so the deal doesn’t definitively demonstrate SG’s commitment to keeping the Bumper shelf, but it’s a positive sign. As we predicted, SG has somehow managed to elbow its way onto the mandate, though as a joint lead with ABN Amro.

Tuesday brought more vanilla supply to market, in the shape of Harmony 2022-1, a French RMBS for CIFD, arranged by BNP Paribas and CACIB. It’s as clean as they come, well-seasoned performing prime owner-occupied, a regular well known issuer with the full suite of regulatory benefits — STS, ECB, and liquidity treatment — so there shouldn’t be too much to worry about. The 2020 deal from this shelf priced on March 11, so the CIFD treasury team know a thing or two about difficult markets. Hopefully they’re getting this one out into a reopening environment rather than squeaking through a closing window.

This was followed on Thursday by Quarzo 2022, another STS deal for Mediobanca, backed by consumer loans.

But more complex deals may have to wait for the right windows. M&G Speciality Finance announced on Monday that it was calling Dublin Bay 2018-1, its end of the Lloyds Bank Ireland portfolio sale. The call exercise is set for Thursday, a Dublin Bay 2022-1 vehicle exists.....but no new securitisation has yet been priced, so we can only assume the assets are being warehoused somewhere ready to hit the market when times are a little better. It’s presumably costing M&G a bit to pay for the facility, rather than flipping straight into a securitisation, as it did with the Harben refi, but this is likely less painful than having to execute at current levels.

Snow problem

We talked about the Spanish Aquisgran SME guarantee deal a couple of weeks back, and assumed that the EIF would shortly be rolling out the programme to other countries. It wasn’t long to wait! Last week, EIF announced it was backing in “IGLOO” (Italian Guaranteed Loan Origination PlatfOrm, truly artistic SPV-naming), another guarantee-linked SME securitisation structure.

This is actually a step beyond Aquisgran — €120m of the €170m securitisation will be funded by partners in the initiative and institutional investors, while Aquisgran stayed firmly in public sector hands.

Société Générale did the structuring and arranging this time, and the deal finances a portfolio originated by NSA, a credit brokerage which manages the process for obtaining MCC and SACE guarantees (SME Guarantee Fund and export credit agency respectively). However, unlike Aquisgran, it has yet to fully ramp up.

Two jurisdictions down — how many more to go?

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