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Owen Sanderson

It’s time to hang up my lanyard for another year, peer hazily at the list of notes on my phone, and try to make some sense of the madness that is Global ABS.

The Barcelona conference tone was constructive; sellers and buyers are in balance, deals can get done, pipelines are healthy. Unlike in 2022, the market wasn’t gapping out all week! If attendance is any guide, European securitisation has never been healthier, with 5000 people registered, a record high.

Many thanks for the hospitality received from KBRA, Santander, Alantra, Bank of America, BNP Paribas, NatWest Markets, Goldman Sachs and Deutsche Bank, superb institutions whose services I have no hesitation in recommending. Wooden spoon for Morgan “private party” Stanley, proud underwriters of Gedesco Trade Receivables 2020-1, where delinquencies are running above 40%.

Special mention also for Rob Ford, who announced his retirement from TwentyFour Asset Management on Wednesday. Rob is genuinely a market legend, who’s sat on every side of the table, built a powerhouse investment business, and been a tireless advocate for securitisation (educating more than a few journalists along the way). I probably can’t do better here than the writeup I did for my old shop for Outstanding Contribution to Securitisation, but all the best Rob! I would say “he’ll be missed”, and he certainly will, having attended almost every Global ABS since inception, but he’s staying on at TwentyFour in an advisory capacity, and I wouldn’t bet against him being back in Barcelona next year.

Below the good cheer and sunshine though, the picture this year was….somewhat mixed.

Two of the staple asset classes in European securitisation (CLOs and UK specialist mortgages) are in poor shape. 

Equity arbitrage is weak in CLOs and deposit-funded institutions are out-competing their securitisation-funded rivals in writing UK mortgages. You wouldn’t particularly think it looking at the issuance stats, but neither situation is healthy for market supply. 

Let’s take mortgages first. Last year saw rapid rates moves, with originators scrambling to keep up and figure out how to hedge their offer pipelines. This year has mostly been more tranquil, but we’ve still seen some lurches wider, including this week; originators who should have been relaxing with a cerveza or two were having to redo their rates cards in between meetings. The absolute levels now are prohibitively expensive for a lot of borrowers; with two year swaps at 5.3%, originators who fund through securitisation have to write business north of 7%. With High Street BTL still in the mid-5s, there’s just not much volume coming through the door for the securitisation funders. Institutions that want to buy are in a stronger position, but potential portfolio sellers might not want to crystallise a mark-to-market loss; LendInvest’s portfolio sale to Chetwood, incurring a £10.5m loss, illustrates the problem.

Still, we hear talk of a few portfolios out there, and understand some unusual institutions are buying. It’s not just the likes of Chetwood, whose large appetites was have already discussed; some small building societies which have never done M&A of any kind are keen to gather assets.

In CLOs, it’s the same old story; liability spreads staying stubbornly wide, loans staying disappointingly expensive, and no real LBO supply to redress the balance. Primary equity returns out of the gate look disappointing, and most funds active in offering third party equity are finding better opportunities in secondary. That said, we hear CVC is close to closing another chunky risk retention fund, so it could be a case of the big guys continuing to get bigger while the small funds struggle.

We didn’t schlep up the beach to see Jefferies at the W (taxi queues can be brutal) despite their status as the hot securitisation shop on the Street. But we do hear that they’re adding another element to the already-mighty European CLO operation, and looking at providing some equity. Jefferies already has several strategic equity partnerships in the US, with CQS, Carlson Capital and TCW, so it’s not a huge reach to think that Europe is a possibility too.

We’re also hearing encouraging noises about RBC in the European CLO market. It hired Citi’s John Miles as EMEA head of private capital and alternatives in 2021, and did a private deal last year with CVC. We understand there are at least a couple more in the pipeline, but the levels on offer are the key question. In a healthy market, bank warehousing should be wider than syndicating rated bonds, giving an incentive to come out to come out to market. If conditions aren’t so good, a private option may be more attractive.

The asset class that’s really going gangbusters is SRT, which is seeing a ton of supply, and offering decent pricing as well. 

Existing banks are extending their programmes and accessing more asset pools, new banks are exploring the market, and everyone is thinking about counterparty credit risk again, following the demise of Credit Suisse (so are pricing this into their transactions). Inflation erodes bank balance sheets, and provisioning is creeping up. The big banks are well capitalised but don’t want to raise incremental capital in equity markets; SRT offers a way to lean against these trends and keep the ratios healthy. We also hear of a particularly special trade in the works; a pre-IPO challenger bank in the UK. Either way, investors in this market are grinning from ear to ear; more deals, more diversity, better pricing, what’s not to like? 

The conference forms the pivot point of the securitisation year, and it’s the event where the most interesting and unusual transactions are discussed, hopefully to see the light of day later on. Securitisation people never saw a stream of cashflows they didn’t want to leverage, and the stranger the better.

We didn’t do many panels, but one which stood out was a session on Esoteric and Innovative blah, in which Anirban Ghosh of KKR and Max Steinberg of Macdoch Asset Management (an arm of the Murdoch family office) lifted the lid of some of the weirder stuff they’ve been shown (or bought). You’ve heard of music royalties and franchise fees; how about YouTube channels? Package the revenue stream from content creators; Alphabet is good for the money as long as they keep the vids coming. Handset deals already exist but they could be bigger; subscriptions of any sort are fair game, and more and more of modern life is “something as a service”. Securitisation is a natural fit for funding energy transition expenditures; take a big upfront cost and receive the benefits over the years ahead. So housing association retrofitting, battery storage, solar installations, energy grid connections, feed in tariffs. 

Data centres are an established asset class in the US, in various forms; project bonds, construction loans, receivables, leases; you can look at it through several lenses. Would you rather buy Microsoft at 50 over Treasuries or a data centre leased to Microsoft for the next decade at 300 over? We’ve heard rumblings that these financings are coming to Europe for a while but there’s definitely something in the works now; expect it to break cover in the next few weeks, but sniff around Great Winchester Street if you want to know more.

There’s also regulation to consider. A miasma of regulatory uncertainty has hung over every conference since the financial crisis, and it shows no signs of lifting. Thursday is expected to bring good news, with the European authorities expected to approve a reduction in the “p factor” for STS securitisations, as proposed by the European Parliament earlier this year. That’s good news, but it’s part of a common dynamic with European regulation; offering, after much wailing and gnashing of teeth, a partial fix for a problem originally caused by regulation. There’s still work going on relating to SRTs, synthetic excess spread, disclosure templates and more. 

And then….there’s the possibility of regulatory divergence. 

The UK government may not have the political capital to go full Singapore-on-Thames, but nor is it likely to replicate everything coming out of Brussels. Lord Jonathan Hill, a Brit formerly in the European Commission, used his keynote at the conference to call for a reevaluation of risk; basically, loosen things up a bit to get the economy moving. Nobody in Brussels has any particular reason to listen to UK sniping, but he was the guy that promoted the whole “Capital Markets Union” concept, and he’s probably got the ear of the relevant UK authorities.

So some reasons for optimism, but I am pretty sure we’ll still be talking regulation at Global ABS 2030.

Short Spread this week, as I’m heading to the airport, but hope everyone had a great conference!

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