For all that the conference produces good discussion, refreshes relationships and fertilises market activity in European securitisation, absolutely nobody last year had a clue about the biggest event to hit the market in 2022 — the LDI-driven disgorgement following the UK mini-budget in September. One can argue that this represented a relative triumph for the market; bonds got taken down, risk recycled, and the reason asset managers were selling ABS was precisely because it had held in close to par through the tightening cycle of the past year. But it still came as a total bolt from the blue.

Scary surprises aside, what will be the hot topics this year?

There’s a somewhat optimistic panel on CRE CLOs on day one, despite the market holding fast on its single deal (Starz Mortgage Securities 2021-1). The market was indeed poised to burst forth following the Starz transaction (we knew of several others in the works), but 2022 happened, and there are ominous signs in some corners of the CRE market. The can has been kicked for lots of assets, but CRE debt maturities are closing in, rising rates are depressing valuations, and there’s yet to be a true reckoning in the sector.

We like the sound of “Esoteric Innovations and Opportunities for Europe”, a session on the Wednesday — European securitisation has a long way to go to catch up to the asset class diversity in the US, where containers, aircraft engines, railcars, music royalties, solar loans, fibre networks, fast food franchises and much more besides can be publicly securitised. 

One can detect early stirrings for some markets over here (we’ve written plenty about solar, for example, and there’s a dedicated session next week as well), but these are still early stage for the most part.

As ever, regulation will cast a shadow; to what extent will the EU and UK diverge? Exactly how irritating are the extra-territorial aspects of EU regulation? How can reporting be streamlined and focused on what’s important? How will ESG regs apply to securitisation? I’ve been coming to Global ABS for 13 years, and somehow, amazingly, regulation’s always a big topic.

In my notebook are the usual questions of scurrilous gossip — which banks are on the front foot? Who is hiring? Who is buying bonds? Who is shipping cash out of the door? Who’s pulled in their horns? How is the furious tumult of competition treating market participants?

I’ll be around with my colleagues Laura Thompson and Dan Alderson — come say hello!

We also note the short arms and long pockets of Jefferies, who again seem to be missing from the sponsor roster. This is bad, I think, for broad market reasons. 

Many of my 9fin colleagues spend their time mostly on leveraged finance, and there the major in-person events of the season are walled gardens run by the top tier arrangers. 

Like Global ABS, these are driven by speed-dating for issuers and investors; but instead of everyone coming together at a single place and time, they’re spread out through the year. That’s less efficient, and probably less fun as well. It’s a public good for an event like Global ABS to exist, even if the public good is monetised by IMN and Afme (full disclosure: I used to work for Euromoney plc, the parent group of IMN). Too many free riders=no more conference.

Money taps

But the money taps are clearly on for hiring and for client entertainment; the Jefferies business has been raiding Citiagain with the hire of Raquel Pacheco. She joins a group stuffed with alumni (Laura Coady, Luis Leoncarsi, Hugh Upcott-Gill, Mark Collier, Pradeep Krishnamurthy, Steven Tubb). We’ve heard there’s a golf day on the Friday, for those who aren’t slinking back on Thursday, and presumably, a party on Wednesday (NFI).

The Jefferies angle in consumer products, we understand, is providing mezzanine warehouse funding. 

Most banks tend to concentrate at the senior end of the capital structure; cheap funding and lower capital costs mean the sweet spot is senior and upper mezz, maybe down to single-A or thereabouts. Mezz tends to a speciality of funds; most veteran ABS investors have a sleeve or two for private strategies to complement public bonds.

Jefferies has an unusual balance sheet for a bank — it’s not really a bank at all in the traditional sense, and internal funding costs are miles over those of the deposit-takers. 

So in CLOs, for example, Jefferies sources senior warehouse financing from European banks without a CLO shop of their own, but does have various US partnerships with managers to provide equity to their shelves. No point going toe to toe with Citi or BNPP for a mortgage warehouse, but bank-provided mezz is a nice angle, and could come with benefits for the issuer. 

One example of the strategy is KKR-backed Oodle, regular securitisation issuer through the Dowson shelf and lender at the more exciting end of the UK car finance market. Jefferies appears to have climbed aboard a financing signed in May, alongside longtime Oodle warehouse banks BNPP and Citi.

Also turning on the money tap is NatWest, which is engaging in some very active anchoring and bond-buying activity. Co-placement roles on three recent CLOs send a strong signal, while NatWest also bought big slices of the senior notes in recent RMBS deals for Belmont Green (Tower Bridge 2023-2) and, somewhat further back, West One/Enra’s Elstree No. 3 deal. This week, according to a couple of sources, there have been some big tickets going into the recent Funding Circle / Waterfall Asset Management SME transaction SBOLT 2023-1.

For UK clearers, the ring-fence and where it sits is crucial. The group treasuries in the ring-fenced banks are awash with liquidity, though somewhat restricted in what they can buy. 

The non-ringfenced parts of NatWest and Lloyds have historically been somewhat anaemic balance sheets, with much of the corporate lending from the bank fka RBS originated by NWM bankers but funded from the ring-fenced unit. 

But recently it’s been the investment banks themselves splashing the cash in securitised products. 

What’s changed? I don’t think there’s been a group level charge back into investment banking. The mood music at NatWest group (right down to the name change) is much more “friendly retail bank that lends mortgages and handles savings for cheerful cast of creditworthy Britons” than “investment bank looking to juice returns”.

The relative value proposition for senior tranches of securitisation, however, has changed. Banks assessing the rewards of owning securitisation bonds look at funding and capital as inputs.

The ABS credit spread to Sonia hasn’t moved anywhere wildly exciting (prime master trust maybe 30 bps back from the post 2008 tights?), but the big deposit takers are funding miles through Sonia (check your current account!). Nothing at all has changed in capital; the risk-weighting is the same whether Sonia is at 0.1% or over 4%.

So it’s just the bald fact that the returns are compelling. Ring-fenced banks might be restricted by asset class, but investment banking arms can swing for a little more credit spread, buying BTL at 115 bps or CLOs at 185 bps over a Sonia or Euribor that’s now looking quite healthy.

Primary paradox

We wonder if the bank bid partly explains a recent primary paradox — conditions are strong, book coverage seems good on public deals, but processes are being run in private. 

Funding Circle / Waterfall Asset Management’s SBOLT 2023-1 was announced on Wednesday to be priced in preplaced format by the middle of the day Thursday (with big tickets from NatWest, we understand). 

Business credit card lender Capital on Tap’s debut, London Cards No. 1, was announced last Friday and priced Monday, with the senior tranche locked up as a loan note and classes B to F pre-placed. 

BBVA Consumer 2023-1, a Spanish consumer transaction, emerged fully privately placed on Friday.

There are valid reasons for caution, to be sure. Headlines have caused plenty of trouble this year, and Capital on Tap is a debut issuer bringing a new asset class to market (business credit cards have been securitised in the US, but not yet in Europe).

However, it’s not necessarily caution about public execution, so much as the strong levels on offer in private that make this route preferable. If there’s an anchor order at a compelling price, lock it up, fill in full, and don’t trouble about syndicating it.

In Capital on Tap’s case, there are also plenty of private relationships with funds that play in the mezz. Most big securitisation investors can and do look across private warehouse facilities as well as public bonds, not necessarily for the same fund, but it’s essentially the same risk. If you have an existing warehouse relationship, why not roll into a tradeable bond with the same underlying?

We wrote a short bit about Capital on Tap back in 2021, on the back of a warehouse signature with BNP Paribas and HSBC and mezz funding from Atalaya Capital Management. At the time we suggested a debut transaction could follow in 2022, and that “By 2023 we should see the company established as a regular issuer in term securitisation markets”. Close enough!

Business credit cards are a meaningfully different asset class from consumer credit cards; they pay off far more quickly, and pay a far higher rate of interest, of which a large chunk comes from interchange fees rebated by Visa. So total yield is about 35%, of which about a third is interchange fees. Monthly principal payment is more than 60% — these loans are essentially rapidly revolving credit for SMEs.

The disappearing Triple-C

Triple C buckets in CLOs are often used as a sort of generic proxy for deal riskiness, a short-hand for finding out whether a manager is swinging for the fences, while the effects of exceeding the bucket (having to hold lowest priced loans at market price, switching off cashflows down the stack) encourages managers to trade out of deteriorating assets rather than delay and pray. 

But the European loan market is narrow, manager overlap is enormous, and what today’s Triple C buckets mostly tell you is whether a given manager is involved in a handful of high profile basket cases.

We think it’s particularly interesting that many of these situations could well be addressed, for better or for worse, by the end of the year. Last week saw Genesis Care and Diebold Nixdorf (cancer care and ATM maker respectively) file for Chapter 11. The week before, French supermarket group Casino entered conciliation, a French restructuring process.

According to Bank of America, five issuers account for 22% of Triple C debt held by European CLOs — Casino and Genesis, as discussed, plus Finastra, Keter and Hotelbeds — while the top 10 takes you to 37%.

While Genesis and Casino are on the way down (and out of the Triple C), Hotelbeds has just been upgraded following strong results, and it has launched an A&E transaction this week looking to push maturities from 2025 to 2028.

Keter and Finastra, meanwhile, could go either way, with refinancing discussions underway at both firms. 

Keter has maturities this year, and had two previous shots at a refi. Discussions now are said to focus on the size of sponsor injections from BC Partners and PSP. Finastra is in talks with private credit firms over a monster second lien PIK, as reported, and may look to private markets for the first lien debt as well.

So how does this all shake out? There should be some vigorous par destruction coming out of the Genesis and Casino processes, though this already be baked into MVOC, as both companies have been traded at deeply distressed levels for months, exacerbated in the case of Genesis by a highly restrictive whitelist keeping distressed funds out of the cap stack.

But there’s actually some potential upside from the other processes under way. You could argue the European loan market is in the process of barbelling — the distressed companies are fully sinking, while the merely stressed now have a route out, as signalled by Hotelbeds. This should hollow out Triple C buckets — pending another round of downgrades of course.

We also think the long-awaited A&E transaction for EG Group is interesting, just because it’s a massive borrower. Following last week’s announcement that Asda is buying the UK and Ireland operations, it’s now addressing €5.6bn-equivalent of 2025 maturities. 

For European CLOs, it’s likely the €2.12bn euro TLB that matters most — a 100 bps margin boost here (similarly rated Hotelbeds is talked at 500 bps vs the 400 bps existing margin) is a ton of cash dropping straight through to CLO returns, at a time when it’s particularly needed.

Retained deals are cool and fun now

Perusing Bank of America’s research we noted one interesting throwaway comment about what happened to the very large quantity of retained transactions in the European and UK markets as central bank support rolls off.

The team note: “there is another possible route [vs restructure or reissue] — a private bi-lateral repo, which appears to be getting increasingly crowded”.

There’s nothing new about repo deals on retained transactions — it’s been an active business since at least the sovereign crisis, and there’s also repo on guaranteed NPL tranches to consider as well. But while the ECB was there with a TLTRO or a PELTRO or other extraordinary liquidity scheme it was unlikely that banks with eligible ECB collateral would be able to match those terms in the market. 

As these schemes roll off, can the private sector step up? 

ECB stats give €372bn of ABS collateral pledged at the central bank at the end of the first quarter, clearly a number well beyond the market’s capacity to finance. If it’s already getting crowded, and there’s more than €300bn to follow, that will absolutely swamp the market.

I’m sure there are some big balance sheet banks eager to wade into the market and finance senior tranches at the right price, but replacing a central bank is a colossal task. 

You could also ask whether the securitisation industry has capacity to attack the pile of credit claims pledged to the central bank (€850bn or so). Credit claims are just the precursor material to securitisation, and will be almost no use in raising private repo; structuring them into securitisations will make them much more useful as financing tools.

Lots of this central bank funding will come out in other formats — senior unsecured, covered bonds and so on, but however you slice it, there will be a ton of work for securitisation shops here, either restructuring deals or offering repo or both.

The market has been complaining for as long as I can remember about the presence of the ECB distorting supply and market structure, now it’s time to see how whether it can step up once the central bank is out. 

This discussion has been unhelpfully bound up with the regulatory discussion — The Securitisation Regulation inaugurated the “STS” label, which was supposed to ignite the supply of bank-originated clean top quality securitisations. It’s hard to discern any particular increase in supply or demand off the back of STS, despite the burden associated with it, but it’s been hard to disentangle from the provision of cheap central bank money. There hasn’t really been a fair test of STS’s effect on the market, but maybe one is round the corner?

Lots of words about debt purchasers

I’ve published a fairly chunky introduction to the debt purchasing segment —firms like Encore, Arrow, Lowell and Intrum — for 9fin subscribers. I’ve been looking at market drivers, the broad business model, and how to think about these firms. Are they more like funds, banks, or real economy companies? How should we think about earnings and LTV? Are NPLs raw materials or financial assets?

The eventual conclusion I get to is that these firms will probably look towards securitisation more in the future — bond yields for some of these companies imply they’ll face a tough time refinancing, and point towards a squeeze on the business model, as liability yields reach or even exceed underwriting IRRs on NPL purchases. Securitisation ought to play a bigger role as a cheapest-to-deliver funding source to allow them to address their capital structures going forward.

Anyway, drop us a line if you’d like a copy.