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Owen Sanderson

Mea Culpa — last week’s email edition incorrectly stated that the anchors for TABS 9 were Lloyds and Wells Fargo. The correct anchors in the loan note were MUFG, acting through its Albion conduit, and Wells Fargo.

The dealflow in consumer securitisation is still coming at a furious pace. We’ve had CIART 2023, Polaris 2023-2, Marzio Finance 12-2023, Driver UK 7 and RevoCar 2023-2 announced this week, adding to the already heavy volume of live transactions, with Albion No. 5, Sunrise 2023-2, Cars Alliance France 5, and Finance Ireland RMBS No. 6 all in bookbuilding.

I suppose the volume count should also include the Avon Finance refi for good order, though it’s a Pimco special (re-racking the capital structure on the old Warwick Finance non-conforming portfolio).

Indeed, everyone’s favourite West Coast Asset Manager was active the previous week too, taking down RMAC No. 3— a nice illustration of the classic preplacement debate we discussed last week. The busy public pipeline is a fine demonstration of market health, but the Pimco levels are decent (a touch inside TABS 9 at the triple-A), so why take a chance?

With so much competing supply, the key questions for issuers and arrangers come down to directing traffic — is the demand pool limited? Is there a first mover advantage? Can you hold investor attention against 10 other deals? Do you need to start extra-wide to get momentum, or does the abundance of new issue prints give clearer visibility on levels?

Banks seem to have taken somewhat different approaches to market timing — Société Générale shipped some of its pipeline early, with Red & Black Germany, Red & Black Italy and Bumper NL 2023 (a LeasePlan deal, now effectively an SG deal since the acquisition closed) in the market at the same time (to the possible detriment of senior coverage levels).

BNP Paribas has also had its foot on the gas, with Autonoria Spain 2023 last week, Albion No. 5 and Driver UK 7, and Lloyds has been no slouch either, leading TABS 9 last week, co-arranging Albion No. 5, and RMAC No. 3 and the new Polaris 2023-2 issue.

Ship it in September proved to be a superb call last year, as Trussonomics blew up the market at the end of the month. This year hopefully the window will last longer, and the fashionably late banks will also get the chance to print some deals.

To an extent the timing question is driven by asset class. Senior-only euro-denominated auto ABS could be considered somewhat interchangeable; there’s very limited credit risk and the main questions are relative value ones. Same goes for senior-only UK prime. These are therefore more vulnerable to market congestion, and the early mover advantage, if it exists, surely applies more to these kinds of flow asset classes.

Some of the supply timing is pretty much set — Finance Ireland RMBS No. 6 is partly financing the call of Finance Ireland RMBS No. 2, and Polaris 2023-2 is partly financing the call of Polaris 2020-1.

One deal yet to emerge is the refinancing for Precise Mortgage Funding 2018-2B. This was the deal which missed its call in March, but it caught up at the IPD this month, and Charter Mortgage Funding 2018-1 was also called. 

Charter Court Financial Services (now part of OneSavings Bank) had already sold the residuals to a third party — a leveraged investor based across the pond — so it’s sort of out of its hands (it’ll still be servicing). There is an SPV filing for a PMF 2023-1, but presumably there’s a bridging facility in place until this one makes its way to market…

Still, after a few sticky executions last week, coverage levels for deals this week suggest we’re firing on all cylinders, and the heavy supply isn’t jamming up the market. Books #3 for Finance Ireland are 2.8x/2.9x/3x for classes A/B/C, Albion No. 5 was 3.1x done, Sunrise 2023-2 was over 2.6x done at guidance.

Levels look strong too. Albion No. 5, a standalone deal, looks set to land tighter than Santander’s master trust Holmes 2023-2 a couple of weeks back (though Holmes is two years longer). Finance Ireland seniors started at IPTs of 85-90bps, but look likely to land at 77bps — it’s a regular issuer with three outstanding deals, so it’s not like the original level represented a cautious price discovery exercise.

Admittedly, the updates for Wizink’s Portuguese credit card ABS Vasco Finance No. 1 and Red & Black Italy appear to be coming a little more slowly, but clearly when the price is right there’s a healthy wall of money.

DealCatalyst’s second UK Mortgage Finance conference was a fine day out that has filled up my notebooks in a most satisfactory fashion. Attendance was strong, particularly given the jammed primary markets — Bloomberg Anywhere was getting a decent workout in the quieter corners of the conference.

The tone was strong but the storm clouds are still there for the specialist lender sector — just on the headline numbers, UK mortgage lending in Q2 this year suffered the largest quarterly decline since 2007, to the lowest level since Q2 2020, the first months of the pandemic. 

Of the mortgages getting written, deposit-taking institutions are still most competitive in the specialist space.

One of the spicier panel sessions asked whether the banks that bought specialist lenders in better times might have “buyers’ remorse” — we’re talking Fleet-Starling, TML and Bluestone-Shawbrook, Kensington-Barclays.

It seems unlikely. Kensington’s share of the markets it competes in is apparently up some 10 percentage points since it joined the Barclays stable, to take one example. Yes, overall volumes are down, but the combination of deposit balance sheets and specialist lender origination channels seems to be working.

That leaves limited volumes available for the capital markets institutions — though the distinction isn’t quite as clear-cut as it seems. Deposit-takers funded in the brokered time deposit market are also in a funding knife-fight; it’s only the current account banks that have a major advantage.

Regulation could end up sharpening this competition. The Basel 3.1 (fka Basel IV) output floor basically limits the extent to which IRB banks can cut capital requirements using their own models.

This is likely to hit the best-performing asset classes hardest; the big UK banks have screwed capital requirements on prime mortgages down as hard as possible over the years, enabling them to continue making a return on the razor-thin margins available. 

If these capital requirements jump back up again thanks to the output floor, the capital difference between ultra prime mortgages and the sorts of near-prime, complex credit, self-employed type lending that’s the bread and butter of the specialist lenders goes away — and guess which pays better interest?

In buy-to-let, the tough environment has led to “innovation” of sorts — specifically, BTL products with a massive fee of 6%-7%. 

I discussed this pre-conference with Hugo Davies at LendInvest, but basically the idea is that this allows a lower headline rate, improving affordability when you stress interest rate versus income.

Take your two year BTL product with a 7% fee back down to a more normal 1.5% or 2% fee, and you have 2.5% pa which you can take off the headline rate.

It’s the same basic move that some of the stressed levfin borrowers used in the tough times last year — undisclosed private placement OID can cover a multitude of sins.

The fee is usually added to the mortgage, so in effect it cranks up LTV, but it has other attractions — banks funding these through a forward flow can book the “fee” as upfront revenue, even if the cashflow comes in later.

If these mortgages do end up in securitisation structures, it will take a little structural elegance to make them work — the excess fee will have to feed into the structure — but there are other clever possibilities, such as using the excess fee to buy an out-of-the-money swap attached to the portfolio.

Another topic was the recently acquired banking licence for Perenna, which intends to offer long term fixed rate products and fund these through Danish-style covered bonds.

It’s been a long journey for Perenna — founder Arjan Verbeek left BNP Paribas more than 10 years ago, and has been working with single-minded intensity towards this goal ever since. It’s no exaggeration to call this a genuinely disruptive model which could totally upend mortgage funding in the UK….but it’s also fair to say the jury is still out. 

Perenna will start writing loans in October, but several other originators (the now-defunct Habito, Kensington) have tried long-dated fixed and haven’t written a ton of business, as I understand it. Mortgage brokers generally appreciate the chance to get paid every couple of years, and there’s a strong borrower culture of choosing the cheapest headline rate and wearing the interest rate risk.

Other highlights included a session on bridging, aka “the only market with any excess yield”. It’s a curious market with much more credit-intensity than much of the mortgage space, but it’s also a spot where volumes have held up relatively well — disruptions or rate spikes in regular mortgages increase demand for bridging to break housing chains and otherwise lubricate house moves. Slumping house prices don’t do much to encourage development lending, but it doesn’t mean this market has dried up, as the returns to fixing up and reselling a property should still be high enough to handily cover the loan.

One thought-provoking question from the panel — where’s the rating methodology for bridging? One panellist pointed out that the US has a methodology for “fix and flip” loans (Americans are better at branding), and could this be ported over to Europe? Together funds its bridging origination through the Lakeside Asset Backed Securitisation (LABS) vehicle, but this is private; why not a public deal at some point?

Leveraged loan borrowers have rushed to amend and extend their loans this year, attempting to push out maturities falling in 2024, 2025 and in some cases 2026. The incentive to do this comes from the sharp repricing in credit spreads last year, which left even strong borrowers with loans trading in the mid 90s. 

This was not, however, matched by a comparable wave of amending and extending in the CLO market, the major leveraged loan buyer base. CLO documentation has a robust mechanism to stop infinite can-kicking, in the shape of the “weighted average life” test, which limits the ability of older deals to participate in extension processes for underlying loans.

Most CLOs have the ability to extend their WAL tests by either 12 or 18 months with the approval of the controlling senior class (in more recent deals this requires mezz approval too), but very few have activated this feature (Tikehau IV is a notable exception), since it requires compensating triple-A investors who would generally rather have their money back.

So borrowers have an incentive to come early with proposed amend & extend transactions, to maximise the chance that CLO managers can participate — especially if the reset market remains closed to all deals other than 2022 vintage.

Clearly, however, the CLO constraint is less binding than it might appear — specialty chemicals company Nouryon (carved out from AkzoNobel in 2018) has returned for another shot at an A&E, just four months after its last A&E, hoping to address the stubs left from that transaction.

This rapid return suggests the lenders that didn’t consent were not constrained by their documentation — otherwise why come back? — but perhaps didn’t like the price on offer or the credit at the time. The market backdrop has certainly improved, and concerns about the chemicals sector have receded, but at a higher price — talk as of Thursday afternoon had been revised to OID of 99 on both the euros and the dollars, vs 98 in May.

But the CLO constraint may still be relevant in encouraging borrowers to do A&Es at all, rather than a straight refi. After all, at 99 OID, the economics of A&E vs refi aren’t especially compelling, but perhaps it’s easier for the CLO universe to stomach an extra three years of loan maturity than an entirely new seven year facility?

The best signal of how far things have moved comes from Nord Anglia Education, one of the early A&E candidates this year. In January, Nord Anglia pushed out its main euro and dollar facilities to 2028, for a margin bump to 475bps and 450bps for euro and dollars, respectively. 

Now it’s looking to reprice these loans to 450bps and 400bps, at a 99.75-100 OID — the first loan repricing in Europe since before the Russian invasion.

Once again, this looks like loans are moving faster and further than CLO liabilities, good for outstanding equity NAVs but less helpful for new issue arbitrage. We hear some secondary triple-A has been seen as tight as 144bps (admittedly an old deal), but actively managed new issue is still coming in the 170s — Trinitas Euro CLO V on Wednesday came at 175bps.

Spire Partners is testing tighter, with talk of 165-170bps on the triple-A for the forthcoming Aurium XI (and a helpful loan note to ease the placement), but we’re still short of catalysts to bring older deal resets back into the money. CLO supply is heavy and likely to remain so (we hear strong warehouse formation), there’s no need for investors to chase deals tighter, and we still have a long way to go.

CLOs seniors are still cheaper than most consumer securitisation seniors in euros, but why would the gap close? CLO senior investors give up more optionality than those in consumer securitisation, they need to be paid for it — and plenty of managers are feeding them deals.

I found myself falling down a little rabbit hole this week, in relation to a vehicle called Oakwood Homeloans.

Confusingly this is not Oakwood Global Finance, which became Pepper UK, which became part of Pepper Global, which was bought by KKR and now might be floated again.

Instead, it’s a small corner of the Credit Suisse asset finance and securitisation operation — specifically, the vehicle used to buy non-conforming mortgage loans in the immediate pre-crisis era and the current sponsor of the outstanding Alba deal from 2006 and 2007, Alba 2006-2 and Alba 2007-1.

The main comedy aspect of this vehicle (other than the fact that all the CS-linked directors resigned last year), is that its latest accounts rely on a letter of support from Credit Suisse “to ensure the Company can meet its debt obligations for the next 18 months”. This letter was provided on March 8 this year, this being just over a week before the Swiss government forced Credit Suisse into the arms of UBS.

These are old and heavily paid-down transactions, but not totally unloved — the outstanding bonds have been recouponed to Sonia-linked, so someone must have been taking care of them.

According to the accounts, there’s around £366m of securitisations left outstanding at the end of December, and as it notes, “To conclude the call, the issuer would need to have sufficient funds to settle the remaining notes and any associated costs of interest. This could involve the sale of the remaining mortgage loan assets at that time or refinancing the structure by some other means…while there remains uncertainty over timing and valuation, it is estimated that this could arise in approximately 8 years when the aggregate outstanding receivables balance might be anticipated to be around £150m.”

I’m not qualified to do the credit work here, but in my considered opinion, this mortgage portfolio has been through the wringer — £111m of repossessions, £32m of losses on sale of repossessed properties. That said, the borrowers that are still paying, after all this time, are probably quite resilient — tbc how they hold up given the rapidly rising rates over the last year (they’ve all been on variable reversion rate for years) and, given most of them are interest only, what are they going to do at the end of the mortgage term? These are evidently not refinanceable….

Credit Suisse has been pretty much sitting on these forever — will UBS take a different view?

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