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Owen Sanderson

At the beginning of October, the issuer announced that, a mere year after the First Optional Redemption Date (FORD), Cerberus would be finally calling Towd Point Mortgage Funding 2019- Vantage2, and this week, co-arrangers Bank of America and Barclays unveiled the refi transaction, Towd Point Mortgage Funding 2023-Vantage3. 

The mortgage portfolio in question is an old GE Money non-conforming book, which has a lot of hair on. Sure, average LTV is 54% and at 7.7%, there’s a bit of yield coming off, but only 34.5% of the book is actually performing, and 29% is more than 90-days in arrears. It’s rated as a non-conforming portfolio, but this is halfway to non-performing.

Anyway, there’s a wee bit of structuring we should look at, because it might shed some light on Cerberus’s decision to move ahead with a refi, and the price it has to pay for the missed call (and continued absence of a call for Auburn 13).

The step / call incentives are basically the same as usual (1.5x or 100bps is on-market for UK non-bank RMBS), but the deal is full turbo out of the gate; excess interest, after paying down the revenue waterfall, goes straight into sequential amortisation of the rated notes. Only after these are paid off does it start paying the “XB” certificates, switching on the payment stream to Cerberus.

Ironically, this probably means less incentive than usual for Cerberus to call; the pre-FORD state of play isn’t much different to post-FORD. But it does mean debt gets paid ahead of equity, the usual point of this sort of thing.

There’s an unusual mechanic in the triple-A as well. The A2 notes are preplaced to a single investor (I wouldn’t bet against a ticket from JLMs Barclays and Wells) while Cerberus will hold the A1s as part of its risk retention. The class A1, however, can be increased, as long as the proceeds are used to pay down the class A2, and subject to a size limit. 

Basically, this allows Cerberus to partly rerack the deal during its lifetime, and gives it an option on credit spreads; if non-conforming senior spreads tighten, it can issue more A1 notes and amortise the A2.

We do wonder about servicing fees. The deal has a senior servicing fee, capped at 60bps. That’s 4x the servicing fee for say, Pepper Money’s front book non-conforming deals under the Polaris brand, though this is a slightly unfair comparison; this pool is so beaten up it’s better compared to RPL/NPL type deals). 

But it also has a subordinated servicing fee — subordinated to the revenue waterfall, but before the turbo kicks in to pay down principal. The servicer is Capital Home Loans, not the portfolio SPV, but it’s still a Cerberus pocket of some sort.

There’s unlikely to be a ton of excess spread to begin with; the loans are yielding 7.7%, per the rating report, while the senior notes are going to be paying 6.6% out of the gate (5.2% Sonia +140bps margin). Take out 60bps at the top and some more down below (we haven’t seen the full docs to give us an accurate subordinated servicing fee) and there’s not very much left for the “turbo” amortisation.

It’s unclear whether or not this is enough to do the job, but presumably the arrangers and sponsor have done the work to sound out the market, and this is going to clear. A preplaced senior note and Cerberus’s demonstrable ability to hold mezz if it looks too wide means there’s some kind of a backstop. You can’t really say fairer than a full turbo.

We wonder, however, how long Cerberus stays in the penalty box. The countdown for investors’ memories only really starts if and when it catches up the Auburn 13 call, but how does this affect all future deals, especially the CHL front book? Is Cerb now a turbo-only sponsor?

We’ve written plenty on the effects of deposit-takers running the mortgage business these days, and the attendant wave of M&A activity, as banks like Starling and Shawbrook snapped up smaller securitisation-dependent specialists. But the Barclays and Kensington buyout super-sized this trend; the largest specialist lender in Europe, the biggest RMBS issuer falling into the arms of a giant clearer. 

We thought this might be the end of the road for Kensington’s securitisation activities, and even wondered whether the veteran funding team were going to cash out or find pastures new. But don’t believe everything you read in the press! Kensington is back, and more exciting than before (possibly). 

It is in market looking to sell equity in a new non-prime transaction under the Gemgarto shelf something of a departure in strategy from the Blackstone-TPG days, which saw Kensington retain call rights and equity, but lever this as fully as possible.

My eagle-eyed ex-colleague Richard spotted the incorporation of the SPV over the summer, while members of the Kensington funding team hinted at DealCatalyst’s mortgage conference in September that they were looking at ways to use securitisation to transfer risk.

That can mean a synthetic, a financial guarantee or whatever else, but in this case it is selling cash equity in a Gemgarto mortgage portfolio, in basically standard format — Kensington might have largely hung onto its residual notes in the past, but the team are very well acquainted with the funds which buy its class Fs and Gs, and excess spread notes and which would happily look at equity.

It’s not just equity, we understand — senior will be retained but mezz is available, potentially for broader syndication down the road.

Joining a regulated deposit-taker basically flips the securitisation incentive. UK banks large and small have some degree of axe for triple-A RMBS these days, so I’d be surprised to see Barclays distributing this to market — this would in effect be Barclays funding itself by selling RMBS notes to like, Lloyds. Kensington these days doesn’t need to reload a warehouse and keep the origination funding taps on, but it can minimise the capital impact for Barclays of origination high LTV or complex credit mortgages. 

We haven’t laid eyes on the structure ourselves, but apparently the LTV point is a little higher than Gemgarto deals past; more around the 85% mark, where the capital costs really bite for a bank.

If we dive in the Barclays Pillar 3 report we see that at end-2022, Barclays had £10.42bn of mortgages covered by the standardised approach, after risk mitigation/credit conversion factor, and these represented RWAs of £3.89bn. Stick in Kensington, and this jumps to £12.45bn and £4.9bn respectively — £2bn of mortgages for £1bn of RWAs, respectively, clearly more risk-dense than the rest of the Barclays standardised book (average 37%, notching up to 39% with Kensington).

The Internal Ratings-Based Approach book is where the real mortgage magic happens — £173bn of exposure, down to £27bn with various credit mitigants (like, security over a house), for a sweet 15% risk weight. Given that these mortgages are 260% covered by collateral, I make that a 38% LTV, so fair enough!

Kensington presumably has the necessary data to get IRB treatment on its portfolio, but it’s still a long and complicated process.

What, we wonder, is in the rest of the standardised mortgage portfolio? One goodly chunky is surely the Barclays Italy book. There’s a mix of assets here; NPLs and the fairly horrendous synthetic Swissie loans. The sale process has been dragging, though the bank is likely to want a disposal firmed up so that it can stick some “pro forma” figures out for the year-end balance sheet.

NewDay as a borrower knows a thing or two about securitisation — it’s mission-critical for the UK credit card lender, it’s been printing deals since 2014 and it’s done £5.4bn of public issuance (with £3.1bn in private lines). So it’s worth watching the moves made during deal execution. 

NewDay Funding Master Issuer 2023-1, priced this week, was notable for its explicitly hybrid approach to bookbuilding — a phase of premarketing to selected accounts, then announcing a deal already covered to soak up any incremental demand and give less-favoured accounts or those who couldn’t come over the wall a chance to buy.

It’s kind of a pain as any preplacement process is, and perhaps harder still with a cast of thousands involved (five arrangers! NewDay has a banking group of 10, lots of mouths to feed). But it gives certainty combined with price tension, and took the senior note inside the initial 155-160bps IPT range to land at 150bps.

Potentially more interesting, though, is an obscure and slightly confusing “Regulatory Status Call Option Addendum” which was published for NewDay Funding (the direct-to-consumer master trust from whence the new issue comes) at the end of September.

In plain English, this allowed NewDay to make the pool compliant with the UK’s STS (simple transparent and standardised) securitisation regime, through buying back receivables which weren’t compliant. That paves the way for NewDay bonds to receive the STS designation (and improved capital treatment and liquidity) in future. 

It’s somewhat more straightforward to achieve STS treatment on new issues rather than already outstanding transactions, because of the attestations required around asset eligibility and underwriting, but all of the outstanding NewDay Funding deals are secured on the same master trust assets, so it’s certainly not impossible there would be a raft of STS designations coming through all at once. 

Over the last year or so, excess spread in NewDay Funding deals has been declining (10.92% in series 2021-1 per the last report, compared to 8.41% in 2022-3). Credit spreads have widened, base rates have widened a lot more, and charge-offs have increased. Subprime credit card lending isn’t a business that’s driven by basis points off the headline rate; more important is originating at a level which can cover your losses. By the same token, though, you don’t necessarily pass Sonia rises straight through to the credit card APR. STS can’t bring that into balance completely, but it can take a bite out of the credit spread end of things, and improve life for NewDay’s bank counterparties as well, if applied to the private facilities as well.

STS rules generally prohibit adverse credit history receivables, and require at least one payment to be made, but it’s not quite clear to me how substantial the impact will be on NewDay Funding; it disclosed that it sold £98m of receivables to another group entity shortly after the Regulatory Status filing, but also bought £58m from the same entity. Net £40m seems a very modest impact on a £2.3bn master trust, most of which is paying north of 35% APR, but sure, good for NewDay!

Is November the armpit of the year, unloved except by the perverse? Perhaps. But the market is open and the rush to print deals before Thanksgiving is real. If you want broad syndication and price tension, don’t hang about waiting.

So it seems in European CLOs, where there’s a run of debut issuers hoping to plant a flag in 2023. This year has so far featured Canyon in March, M&G and Signal in May, and Pemberton in September.

Now we have Sona, AB CarVal and Arini all at once, and maybe we could stretch a point and note Blackstone’s new Cumulus transaction as well. Blackstone Credit is obviously fairly well established as a loan investor, but the static CLO strategy is a new approach under a new brand. Palmer Square is the best known “intentionally static” CLO manager, with the 2022 statics from other managers born of adverse circumstances, but KKR has printed a static deal this year with more purpose to it as well.

Debut managers typically have a tougher in primary markets, with no track record to highlight, and potentially work to do to talk potential tranche investors through their management style. Sona and Arini have more of a credit opportunities background, while AB CarVal is probably better characterised as a US manager crossing the pond; AllianceBernstein and CarVal have big European presences doing things like fixed income investing, real estate lending, non-performing loan portfolios, consumer origination, risk transfer securitisations and more….but the bank loan (and hence CLO) business is mostly US-based.

As with any prudent CLO syndication, the top and bottom of the cap structure seems mostly covered off; senior notes are mostly listed as “call desk” with protection in place, while class F is delayed draw, retained or spoken for.

The loans backdrop remains disappointing in terms of new money supply — this week brings big transactions from INEOS Quattro and EG Group, but these are refinancing deals (some bonds might be taken out with loans, so not all bad). Market darling vet chain IVC Evidensia is making its dollar debut to refinance 2021’s VetStrategy acquisition, and simply pushing out its euro and sterling facilities. Cooper Consumer Health’s €1.15bn 2028 is a legit new money deal, funding the acquisition of over-the-counter pharma products, while Silver Lake’s digital HR group Silae’s €400m dividend deal also adds to supply…but not enough.

Still, an advantage of printing this year if there’s a window is actually getting something out there. The market is busy, but January may well be busier, and if you have a CLO issued and settled this side of Christmas you can hopefully be nimble and get allocated on the burst of levfin primary which (might) greet 2024.

9fin is partnering up with tech-enabled conference company DealCatalyst again, ahead of their European Specialist Lender Finance conference on Thursday next week. 

I’ve done a few interviews ahead of the event, touching on related topics — here’s my discussion with ATLAS SP Partners’ European head Jason O’Brien, KKR’s private credit head Dan Pietrzak, plus Oodle Car Finance’s chief capital officer Richard Evelyn. 

That gives us an investor/sponsor, an arranger/senior financier and an issuer, though in the realms of asset-backed private credit some of these roles and distinctions can get a bit murky….Dan’s business at KKR owns the aforementioned Oodle, buys SRT bonds, stakes forward flows (like PayPal), and can play up and down the capital structure, in public, private, bond, equity, or derivative formats. 

I asked Jason and Dan about the complexities of the current fintech environment, which I do think provides an interesting backdrop. VC-funded loss-making platforms rushing to scale up and ship money out of the door, selling the origination on at a premium to a forward flow partner? That ain’t the way of 2023. 

Providers of equity and senior leverage have to navigate a more complex landscape, and some ZIRP-era lending businesses are going to go under or consolidate. Lenders need to lend to profitable businesses, while forward flow providers can’t just do it for the trade; they need to be partners.

Anyway, there’s a ton to discuss, and I’m looking forward to the event. Register, if you haven’t already, at this link, and see you on Thursday!

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