Market Wrap

Excess Spread — Happy couple, missing CDOs, Ribbon refi

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

Happy couple

We wrote about Deutsche Bank’s leveraged loan SRT deal last year, but hadn’t quite appreciated the extent to which Deutsche and Goldman, which successfully priced a deal at around the same time, were the tip of the proverbial iceberg.

We were chewing over the asset class this week with an investor who plays risk transfer and CLOs, who said that, in effect, every established SRT bank looked at the product around the middle of last year.

It’s not like that meant every bank was trying to derisk its hung LBO book by the back door…..but capital is fungible, and any way that a leveraged finance business could free up some risk-weighted assets (by selling risk on the good stuff at a decent price, rather than dumping the bad stuff for a loss) would help banks stay competitive and free up capacity.

Most of these transactions did not come to pass, for various reasons. In some cases, banks with established large corporate SRT programmes were able to tuck a little LevFin risk into the limited sub-IG buckets these deals include. In other cases there’s still a levloan SRT that might emerge, and in others, the price discussions proved too punishing to proceed.

The pricing issues track all the way back to the CLO market, unfortunately for the banks. For much of last year, SRT pricing generically was well inside cash CLOs, thanks to the existence of multiple funds which are SRT-only specialists, joined by a couple of new raises early in the year which had to get deployed.

But when it comes down to the leveraged loan SRT sub-asset class, the pricing competition gets very direct indeed. If you’ve got the structuring skills and corporate credit expertise to do levloan SRTs, you’re not going have much of a fund bidding for the two or so deals a year…you’re going to be doing cash CLO equity and probably junior mezz as well, and constantly assessing relative value and risk between them all.

As the investor put it: “The CLO guys all ran for the hills to go buy cash equity, but by the time they’d gone, the risk transfer-only funds could see what they’d been hoping to get paid.”

We also heard of a rather interesting insurance-based trade, also aimed at freeing up capital in leveraged finance. In this case, insurers have been using credit insurance or financial guarantees to derisk hung LBOs positions — not with an instrument-based wrapper, like a monoline, but by a contract with the bank in question to move some credit risk.

Like insurance investment in SRT deals, this shows up as an insurance liability, not an insurance asset, resulting in a considerably more attractive treatment for riskier sub-IG or structured situations. More fulsome coverage for subscribers.

Big picture, this stuff matters because investment bank underwriting capacity is one of the missing parts in the leveraged finance and CLO value chain at this point, and represents a pretty big hole. Banks are bruised and bloodied by the last year. Some have slashed their teams, some have taken a beating from their regulator, nobody’s getting paid, and nobody wants to underwrite big deals without a clear line of sight to the exit.

But the basic raw material for a financing bank is risk-weighted asset (RWA) capacity — balance sheet — and it looks like these alternative risk transfer methods are being thoroughly explored.

Bold as

Bridgegate is very much its own trade, without much read across for broader securitised markets, but all eyes this week have been on the Brass No. 11 remarketing. It’s a senior-only prime RMBS from Yorkshire Building Society, and stands as a nice symbol of the progress of the market over the last few months.

The deal was originally announced on 22 September 2022, against a healthy post-summer backdrop, which would be spectacularly torpedoed the very next day by then-chancellor Kwasi Kwarteng’s notorious “mini-Budget”.

Abject chaos followed in securitisation markets, and less than a week later Yorkshire bowed to the inevitable and announced “owing to exceptional volatility in the broader GBP markets following the announcement of this transaction, the issuer has decided not to proceed with a publicly placed transaction, and as such will be retaining the transaction in full.”

Last week though, with a strong market backdrop, vigorous backdrop in IG, and full of the optimism of the New Year, Brass returned with a remarketing of the £500m or so three-year tranche. The originally planned dollar piece (along with the 144A docs and mighty dollar house Bank of America) are no longer in the capital structure, but what has been placed seems to have gone down a storm.

Barclays and HSBC announced with the deal 1.3x done already, so presumably a certain amount of private work had been done to derisk it, but books ballooned in syndication, with the deal 2.4x done at 70a IPTs, 2.9x at 66-67 bps guidance a day later, and still 2.9x at the final spread of 63 bps.

We kind of knew prime deals could get done — Lanark 2022-2 landed at 82 bps in October, once the dust had cleared — but the useful signal is to what extent the big UK real money accounts have successfully licked their wounds from September/October and turned up with money to spend in the New Year.

Anecdotally, we’d heard they’d been sniffing around (even Insight, the most severely impacted), but there wasn’t much supply in primary or secondary in the back end of last year. Distribution stats for Brass show 44% went to asset managers, with 29 accounts allocated. That sounds like pretty much the bulk of the sterling RMBS investor base, which is extremely encouraging….and sure enough the following day brought another prime RMBS announcement from Coventry Building Society.

Away from prime RMBS, we’re aware that a specialist lender pipeline exists, and can probably get placed given current conditions…hopefully without too much pre-placed or any expensive loan notes. Central bank decisions and data could easily close the window, so arrangers are probably pushing hard to go soon…but the medium term issue is likely to be lack of collateral. The enthusiastic borrowers of the United Kingdom in particular have been a fine source of securitisation market collateral, but some will find themselves priced out at current levels.

With that in mind, we’d like to quickly return to Together’s Fairway ABS facility, priced just before Christmas (and mentioned around here). Unusually among Together’s private facilities, it’s an amortising deal, rather than a revolving transaction, so fulfils essentially the same role as a public RMBS in the group’s capital structure.

So why close this off in December if there was a decent chance of a full market reopening by mid-late January? Well, the deal brings in a new banking partner, which appears to be Wells Fargo. We talked about the Wells buildout a year ago, in much happier times (I suppose I’d better write a “Who’s Hiring in 2023” piece any day now). Together is surely an excellent client to have, not least because it does a lot of deals….perhaps the offer they got from Wells in December was just so good there was no point waiting for a public trade?

Gated community

If you want to sell a lot of old UK mortgages, who do you call? It’s not difficult — Pimco is going to be right at the top of the list. So it is that the year’s opening deal, Bridgegate Funding, appears to be placed to the West Coast Asset Manager, with the exception of the triple A class. At least, that’s what we’ve heard, and, to be fair, it pretty much screams Pimco.

The market has a habit of assuming that anything large and mysterious has the hand of Pimco behind it, an assumption which would seem ridiculous were it not for the fact that Pimco continues to do large and mysterious things. We wondered if eating the elephant of the Kensington back book would finally sate Pimco’s appetite but it seems not.

Bridgegate Funding is a £2.8bn deal, and basically transfers the whole back book of origination from “The Mortgage Business”, a Halifax subsidiary (so now within the Lloyds Banking Group perimeter). It’s been a closed book since 2008, and previously securitised a big slug of assets in Deva Financing, a securitisation which was unwound in 2021.

The mortgages are very seasoned but, uh, not great. Like really pretty hairy stuff.

It’s BTL and non-conforming mixed, nearly 90% interest only, 12% of the pool has missed more than three payments, and there isn’t even good data on some of this stuff. Per Fitch’s rating report, there was no rental income data provided for 42% of the BTL loans.

Hairier still is that fact that 7.5% of the pool has already passed maturity and failed to pay. But apparently, given that lots of these borrowers are current with their interest payments, a portion of this 7.5% is still marked as “performing”. This problem gets worse very quickly, with roughly 4% a year of loans passing maturity each year until the call date in 2026. Based on the fact that these mortgages haven’t refinanced in the decade and half since the financial crisis, with interest rates on the floor, I’m going to go ahead and assume that more or less nobody is getting refi’d out of here either.

But surely if the mortgages are so risky they must be paying huge amounts of interest, right?

Glad you asked. Excess spread in the deal in 0.11%, according to Fitch, sufficient for the agency to award a “CC” rating on the class X note, indicating “default of some kind seems probable”. As of the first interest payment date, there will already be a substantial mark on the principal deficiency ledger (Fitch reckons £6m).

Now, these are mortgages, and current LTVs are <50%, so actual credit losses are still going to be pretty remote, but the deal almost looks more like an NPL/RPL-type situation, where the returns are going to be driven from loan workouts, payment plans and the occasional foreclosure. Kicking out owner-occupiers en masse is going to be pretty toxic (Lloyds is not going to have struck a deal where that’s in the business plan), but who will shed a tear for the BTL landlords?

That sort of approach usually requires vigorous or specialist servicing, so it’s also a little strange that the originator “The Mortgage Business” will remain in place — but perhaps this too has been sold as part of the package.

It’s a little strange that this portfolio has been hanging around for quite so long as it has. Halifax and subsequently Lloyds Banking Group had a pretty rough financial crisis, but did most of the cleaning up and balance sheet fixing at least a decade ago. Most of the other big legacy portfolios traded for the first time more than five years back, and are on their second or third refinancings by now.

We think the top of the capital structure is also interesting. The deal announcement from arrangers Citi and Lloyds said these bonds were not offered (and the disclosed pricing makes them look pretty tasty). The obvious thing to do is for Lloyds to hang onto them. They’re structured to triple-A level, eminently repo-able, and quite a nice position in their own right. Lloyds treasury has been an active senior bond buyer in the past few months, we understand, and this particular issue is structured on generous terms.

But then….what’s Citi bringing to the table on this deal? Citi has done several of the Pimco portfolios in the past and it is certainly a top RMBS shop. But it has usually done the risk retention as part of those Pimco roles, whereas this time Lloyds is holding it. Presumably it has plenty of skilled structurers, but Lloyds isn’t short of good mortgage people.

In the past year, Citi has, we think, managed to get some pretty attractive economics on senior securitisation exposures, leading the charge on the “loan note” structures which have helped specialist lenders get their deals away in tough times. But these tickets, though large, have been in the £200m kind of range, rather than the £2.3bn seen here…

Tied up

Embattled German real estate firm Vivion Investments continues to collect headlines (and analysis from us at 9fin; here’s Part 1 of a deep dive for subscribers) following the release of a report by activist short-seller Muddy Waters in mid-December.

But it seems to have cleared out its most immediate maturity, with Ribbon Finance 2018, a hotel-backed CMBS linked to the group, announcing on Thursday that it would be redeemed this January, ahead of the April 2023 loan maturity.

Vivion has been saying since at least September that it’s been working on a refi of the portfolio, and we’ve also heard vague rumblings of a sale process (may have simply been an exploratory exercise). The Ribbon portfolio has a fairly low LTV, the structure has been heavily supported by the sponsor and the mezz debt was cleared out, so what’s left ought to eminently financeable.

The question, though, remains who has financed it and how? Goldman Sachs arranged the last deal, and held the risk retention; it’s certainly possible that another CMBS could emerge, but we’d think the noise around the sponsor would point away from a public process. Single investors with courage and conviction in their credit work are needed for this kind of thing, and Vivion is surely smart enough to pay whatever the going rate is to get this cleared out.


Thanks to the fine folk at EuroABS for flagging one of the weirdest announcements we’ve seen in a while to me (basically since the last round of Rizwan).

This relates to a pre-crisis CDO of ABS, Cavendish Square Funding, which has been merrily minding its own business and deleveraging over the last decade, to the point where the class C is now triple-A rated. Indeed, it’s pretty close to fully paying off the rated notes.

Anyhow, as of last month, the collateral administrator reached out to the manager, AE Global Investment Solutions, to sign off the monthly report, and received no response. This created a cascade of unfortunate effects….the report can’t be sent to the various counterparties, the note valuation report can’t be created, and therefore payments cannot be made….and there’s now an event of default outstanding.

“The Issuer and the Collateral Administrator have made repeated attempts to contact the Collateral Manager to finalise the October Monthly Report, and in turn the Note Valuation Report, however to date no response has been forthcoming.”

We haven’t been able to dig up good performance metrics on the deal — according to the rating agencies, it was mostly backed by Spanish RMBS, presumably of the pre-crisis variety — so hard to tell if AE Global Investment Solutions, whatever that is, is walking away from peanuts or a fortune, but it’s extremely odd behaviour nonetheless. What do you do if they just….stop answering? One thing to contemplate in future drafting, I suppose.

There doesn’t seem to be much of a website for AE Global Investment Solutions, though there’s a tantalising link to a password-protected area. But Companies House reveals it is run by one John Daly. If you see John, ask him if he wants his CDO back, I guess?

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