We’ve never had it so good — liquidity in loans

Capturing a concept as elusive as liquidity isn’t easy, especially when the data is as patchy as it is in the leveraged loan market, but there’s a decent argument that we’ve never had it so good. 

When we talked to the boss of Investcorp’s Credit Management unit, Jeremy Ghose, who after 34 years in the market ought to know, he made this exact point — and it makes a lot of intuitive sense. 

Institutional investor participation in European leveraged loans has never been higher, and not only are there more CLO managers than ever, they’re also an increasingly sizable and diverse group, and there are also more SMAs and other funds active in the market. More institutions means more active trading, more diverse points of view, and a greater range of structural constraints — liquidity is weakened if all the accounts in a market are buy and hold, and if they all have the same point of view (rush for the exit at the same time).

If data is your jam, the Loan Market Association has been collecting survey results and settlement ticket info — according to the LMA, individual trade ticket volume has trebled over the last four years, while 34.8% of survey respondents in 2021 agreed that “increased primary flow will lead to higher volumes and greater liquidity”, while 39% agreed “supply/demand imbalance set to continue, secondary to remain well bid” (these were mutually exclusive choices).

The survey also echoes a common CLO manager complaint — the KYC-related problems with loan settlement (each CLO SPV has to go through a separate KYC process). I first wrote about this in 2018, and was probably late to the game, while the acceleration of the CLO and leveraged loan markets has probably worsened the issues, despite well-meaning attempts to improve matters.

Nonetheless, a healthy spread of long-term money to buy the dip, a mix of credit opps, special sits, par funds and CLOs, plus some well-capitalised banks should make for more resilient markets  — liquidity that doesn’t disappear at the first whiff of smoke.

If this is a permanent structural shift, though, what does it mean for CLO investing?

Better liquidity in loans, all else being equal, should mean that the most actively trading managers do relatively better — the drag of trading costs should be lower, and the flexibility to shift portfolios should be greater. Managers in general will be tempted to increase their trading, aiming to show differentiated performance, which should create a positive feedback loop.

But the kind of liquidity available in the loan market is also important — if “better liquidity” means a tighter bid-offer in SFR loans that’s one thing, but if it extends to a €200m facility for a no-name sponsor that should have really been a unitranche…..that changes the game for managers seeking to harvest the historic “illiquidity premium” in this kind of segment. 

Easier trading should mean more manager tiering, with more chance for certain managers to shine — and less compulsion to simply buy the primary market during a deal’s warehouse and ramp period. Indeed, as the market adjusts to a structurally higher level of liquidity in loans, that ought to mean more compressed warehouse and ramping, and perhaps even the emergence of a more viable “print and sprint” market, beyond Fair Oaks’ single 2020 deal.

Better secondary liquidity also helps shift some power away from sponsors. A few years back, managers thinking about launching a European platform were well advised to make nice with the PE shops, with primary by far the most important route to buying loans in size below par. With more liquidity in secondary, it becomes easier to ramp a deal even if you aren’t getting the allocations you want in new issues.

Greater liquidity in underlying loans may also change how CLO investors think about different manager sizes. There’s arguably a sweet spot between small shops with limited track records and the megafunds with double-digit deal counts, whose positions in a given name across their CLOs may be so large they cannot really hope to trade out of it — the best they can do is underweight vs the index. 

While dumping €100m at a time is still going to be a challenge, more liquidity overall means these larger funds can be more nimble than in the past.

None of this is new exactly — it’s a trend that’s been developing for years — but it all points to a more grown-up European CLO market, and it may be time to shake up some long-held assumptions. 

Big picture, it makes Europe look more like the US — a market 4x the size. That’s got to be a good thing.

When it was ‘21, it was a very good year

It’s the time of year when bonus pools are allocated but yet to be paid, when desk heads are seeking new staff (but before the resignations start), when business priorities for the year ahead are set. 

Investment banks as a whole had a cracking year in 2021, with the best ever first-half revenues (in banking products), and it looks like the financing/origination end of securitised products did the same — we’re hearing one large-scale business was up 50%, though of course 2020 was a bit of a strange comp. 

In the words of one securitisation head…. “If you went limit-long financing in January 2021, by November your year was looking very good indeed”.

Sales and trading we understand is down, but again, that’s not too surprising, as wide bid-offers during the market disruption, plus the storming rally from the depths of March 2020 would have made 2020 a difficult year to beat.

The big question, for firms that did crush it in 2021, is how much of that to pay out to staff — revenues up 50% sounds good but if banks don’t make payouts to match, that will inevitably leave disgruntled bankers. 

We hear good juniors are a particularly scarce commodity, partly thanks to the poor graduate pipeline post-2008, but also as fintechs and specialist lenders have staffed up their treasury functions at the expense of investment banks. A startup with smoothies in the fridge, a foosball table, and a juicy warrants package might offer a better work-life balance AND more money than grinding away at the bottom rung of an investment bank.

NatWest is first out of the gate announcing a senior hire, bringing on securitisation stalwart David Basra as head of sponsors and specialist finance. Basra spent 20 years at Citigroup, finishing as “head of debt financing EMEA”, before joining specialist mortgage lender Belmont Green as CFO in 2016, a role he left in 2020.

The gig will be inside the UK bank’s ring-fenced entity, which owns most of the lending balance sheet which supported the NatWest Markets (outside ring-fence) securitisation and banking business. He will be looking after not just securitisation-related lending, but anything with a whiff of structural complexity to it — leveraged finance, commercial real estate, project finance, infrastructure lending — matching the broad set of financing products he was responsible for at Citi, and report to Andrew Blincoe, head of large corporates and institutions. 

Also likely to be on the hiring trail is Lloyds, which is looking to rebuild its ABS businesses under Miray Muminoglu, formerly of the Barclays treasury team and before that an ABS syndicate banker at the UK institution. Lloyds took the strategic decision to award donuts in thanks for the hard work from its bankers through 2020, an awkwardly timed move when lots of other firms were in build mode, and plenty of people voted with their feet. 

Muminoglu has stepped into the big shoes left by Matt Cooke’s departure for Santander, but will have to fend off any raids on his team as well as building back up — director Romain Mathelin has already followed Cooke to Santander. 

The big picture Santander strategy is probably to do something similar to what Cooke did at Lloyds, and turn an ABS team that spends much of its time servicing a massive internal client into a genuine third-party franchise. The difference, though, is that Santander’s reach across Europe is so much larger than Lloyds could ever hope for. There’s a Santander entity in most European countries, often one which is already doing deals, and the platform has the breadth to cover the whole continental.

We’d also say it’s worth watching Jefferies (it usually is). Longtime securitised products head Craig Tipping might be out, as of last year (co-head structures have a well-deserved reputation for short lifespans) but the firm clearly has plenty of ambition. Ankur Goyal, an MD in the group, is said to have left for Wells Fargo, hired by fellow ex-Lehmanite Francesco Cuccovillo, leaving a senior-shaped hole. Tipping’s future plans are unknown, but he’s one of the Lehman alumni as well….

Credit Suisse we’d think will be looking to replace people — the investment bank as a whole had a miserable year, buffeted by the Greensill scandal and Archegos collapse, but securitised products (the star business, with levfin) has been charged with earning back some of the bank’s lost money, and we’d think has probably had a very good year in financing (despite very few emerging in public format).

It lost Arun Sharma earlier this year, who headed back to Barclays, and a couple of other bankers too — so may have appetite to build back up.

We might see further action from SMBC Nikko and Standard Chartered, both of which have been pushing to build up European securitisation businesses in the last couple of years. Standard Chartered has bought a lot of deals for its treasury book, but also built out a market-making business across ABS and CLOs, and is winning increasing numbers of primary mandates, while SMBC has been laying out some warehouse balance sheet, gathering an increasing number of co-manager roles, and making its way up the table. 

It’s above the line as a joint bookrunner on the latest deal from West One, Elstree No. 2, with NatWest Markets arranging and JP Morgan (which has £750m of facilities out to the group) also a JLM.

CLOs start strong

Big picture, we haven’t really changed our view from December’s CLO outlook — it’s looking like another good year. Credit Suisse, we understand, has a punchier forecast than the banks we discussed in the December piece, expecting issuance up 30%, as compared to “good but not quite as good as 2021” from the four outlooks we discussed in December. 

We’re hearing up to 70 warehouses open, which feels right, with 50+ active managers and most of the big managers having multiple active facilities, so that underlines the point. Spreads are tighter at the top of the stack from year end — Prytania Solutions pegs triple-As at 3.24 bps tighter so far — and the flow of refinancing has begun, with Carlyle 2015-2 in market with a reset and Man GLG VI with a refi, and several refi notices filed.

Talk on Carlyle looks to set a strong tone, with seniors guided at 92-94 bps at the time of writing. 

There have also been several consent processes for WAL extensions running lately, including Dryden 51, Avoca XV, and Jubilee 2017-XIX — looking to add another year to deal lifespans. This isn’t a new trend, but may prove irksome to the mezz investors in the market, as deal docs typically allow this provided equity and seniors agree, meaning mezz can find themselves extended without their consent.

We’re hearing this is an increasingly important docs point in new issue CLOs — mezz would like the optionality of a reset if managers want their deals to stay outstanding for longer.

Big cheque from Bayview

We’ve been pretty interested in the rise of the CRE CLO market in Europe to its dizzying heights of one deal (so far), partly because its a symptom of the broader shift from bank financing to non-banks in CRE (and everywhere), and partly because it’s a cool new product line which should be set for expansion in the years to come.

So it seems worth flagging the £450m three year forward flow line Bayview Asset Management has signed with Octopus Real Estate, a UK-based specialist lender, which will fund two-to-five year senior commercial investment debt, generally smaller tickets below £25m against core or core-plus assets.

In short — a granular single-jurisdiction portfolio in decent size, which could make the ideal portfolio to take out in the capital markets. It’s undisclosed whether Bayview will in turn leverage the origination from Octopus, but it would seem like an obvious move…and then locking in term debt is surely the next step.

Bayview is best known in Europe as an NPL investor — it’s had an in-house servicer in Italy since 2016, and is now monetising portfolios as well as bidding on new books. But its US activities are far wider in scope, and include, among other structured finance activities, its own CRE debt origination platform, looking at large and small loans alike.

This is its first move into performing UK CRE debt, though, a space where we understand it has been looking for a partner for a while. Octopus partnered with Bayview through a competitive process run by PwC, in what a source close to the deal called “a meeting of minds”.

Bumped

LeasePlan is an all-round capital markets darling, a client of practically everyone in DCM, with a majestic €23bn in outstanding debt, mostly in the investment grade market. It’s got EMTNs, US MTN, Aussie dollars, green bonds, and AT1, plus some holdco high yield notes issued from Lincoln Financing. 

It’s also a mainstay of securitisation markets, issuing lease ABS deals under the Bumper brand, secured by UK, Belgian, Dutch, French and German collateral, and generally including residual values, boosting yields nicely vs some of the captive auto deals — it has around €2bn of outstanding securitisations.

So the news that Société Générale is buying the company from TDR Capital, merging it with its ALD Leasing unit, might prompt some sadness in certain quarters — even if LeasePlan continues to fund separately, rather than relying on SG cash, it’s a safe bet that SocGen is going to be leading all the deals.

The ABS shelf, however, is probably the safest part of the cornucopia of LeasePlan debt products under the new ownership. The deals will surely remain outstanding (autos roll off pretty fast anyway), and ALD itself is an increasingly frequent issuer, doing French, German and Italian lease ABS deals in the second half of last year alone — the Italian deal a €1bn deal sold down the stack to class ‘D’.

Bringing a ton of extra lease collateral into the SG group, therefore, doesn’t mean it will disappear from the market — LeasePlan origination will, most likely, land up in SocGen branded Red & Black deals instead of Bumper.