However, the cool and fun part of securitisation, which is attracting most of the attention and most of the fund-raising, appears to be “asset-backed private credit”.

That’s the bit KKR thinks is going to be a $7.7trn market by 2027, which Blackstone is hyped about, and which Apollois raising five yards for. Strip away the marketing, and realistically this means forward flow and warehouse equity and junior mezz. The “private” element adds a frisson of mystery and excitement, but presumably these funds are perfectly capable of participating in public securitisations if the price is right.

Anyway, put it together, and it looks like there’s plenty of junior capital available in securitisation or securitisation-adjacent markets, and more crowding in. Real money demand from the usual suspects seems more than adequate for the IG mezz, but persuading the natural senior buyers to put cash to work seems more challenging. These natural buyers are leveraged; either banks or funds taking leverage. The absolute pool of banks active in the market, though, falls far short of potential; treasury teams in some of Europe’s largest institutions have been stunningly conservative.

Let’s take Société Générale — not to pick on SG, but just as an illustration. Decent securitisation bank across products, big ABS shop which sees plenty of flow (and did a ton of deals this month), big user of synthetic securitisation, active trading and financing franchise, active in CLOs, CRE etc etc. To throw around some numbers, according to last year’s Pillar 3 report, it had €50bn of securitisation exposures in the banking book, much of which relates to SG’s conduit financing. It has €18bn of SRT synthetics outstanding!

Looking over to the “institution acts as investor” column, and it’s tiny. There’s €1.39bn of non-STS exposure (probably the investment bank supporting its deals), and just €202m of STS (the kind of stuff you’d expect in a bank liquidity book). Unencumbered ABS which qualifies as HQLA comes to €44m. 

So there’s clearly a disconnect between how SG’s investment bank considers securitisation (enthusiastic!) and SG’s treasury investments. To the extent this is replicated across other big European banks, there’s an absolute ton of room to potentially grow the senior investor base.

We should also talk about the official sector. The “end of the ECB” narrative partly obscures the continued involvement of official institutions in securitisation markets. Latvijas Banka, the little central bank who could, holds around €1bn of mortgage-backed securities in its investment portfolio, according to its balance sheet, and it’s been a buyer for years.

“A trade wouldn’t be a trade without a €4m ticket from the central bank of Latvia,” as one of our correspondents put it. 

Lativa probably accounts for the 1% “official institutions / central banks” in Polaris 2023-2, and potentially the 1.6% in TABS 9.

Anyway, this is all very nice, but kind of underlines how much room there is to grow in the official sector — as investments, not as some kind of special support. If all the eurozone central banks took a similar view to Latvia, you’d have €100m of senior demand right there and ready to go! An institution like the Bundesbank or Banque de France could even do a little more!

On the supranational side, there’s securitisation investment as a policy support measure (EIF guarantees for SME synthetics, cash purchases of SME ABS, supra purchases of African solar deals, British Business Bank warehouse guarantees etc), but also securitisation investment as…investment. Supranationals fund through Euribor and run large liquidity and investment books; high quality ABS is a natural place to park some cash. 

Neil Calder’s team at the EBRD has 4.2% of the €30bn or so treasury portfolio in asset-backed securities, as far as we could discern from the annual report; we understand that it's most helpful in the most liquid asset classes, senior master trust RMBS and high quality captive autos. 

The recent Sabadell Consumer Finance Autos 1 deal lent heavily on supranational support for much of the preplaced capital structure (the class E note was marketed separately to a select group of junior mezz buyers). 

Regulatory treatment is more complicated. Some policy banks are actual banks, with banking licences and subject to CRR and other banking regulations. Others choose to abide by these rules voluntarily to demonstrate capital strength and safety.

The other lesson from Super September is that there’s a fair bit of depth to the market. The flood of supply might have exhausted portfolio managers, but it hasn’t exhausted their cash reserves, and we might be on track for an Outsize October to follow. This week had Santander Consumer Spain Auto 2023-1 bookbuilding (with a sensibly preplaced senior note, partly bought by JLMs HSBC and ING), Ginkgo Personal Loans 2023, and new announcements from Stellantis (Auto ABS French Leases 2023) and Qander Consumer Finance (Aurorus 2023). 

My unscientific poll of the sellside suggests a healthy slate to follow, perhaps with more of a slant back to sterling. Keep up this pace, and shake off the sleepy rep of European securitisation!

Missing ingredient

We do make some sketchy calls around here, but when we get them right, we’d like everyone to know. So we were pleased, after wondering when HSBC would get back in the CLO arranging business, to note that Nikunj Gupta, formerly the head of EMEA primary CLOs at Deutsche Bank, has joined the UK bank. 

As we reported last month, SG has now hired Michael Malek, formerly of Credit Suisse, to run its own primary CLO operations, so that’s two banks of considerable heft looking to get into the arranger game in a serious way. One could also consider Mizuho’s hire of Hernan Quipildor last year as head of CLO and loan fund financing, or RBC’s CLO expansion under John Miles, or bond-buying and placement agent combos from NatWest and Standard Chartered…..it’s getting to be quite a crowded market out there. 

Financing heft and anchor tickets are one way to break into the club, especially if it can be paired with active trading, repo financing on tranches, and active loan trading and levfin underwriting. But a lot of the economics of the business depends on cross-pollination. Doing one or two deals a year is not going to keep the lights on for a credible CLO primary operation, unless it’s also helping loan trading to be more active, and helping primary levfin get better distribution. As Quipildor’s title suggests, there’s a lot of fund financing to do in private, building mid-market or private credit leverage structures that look a lot like CLOs and distributing them in private, if at all.

So we have plenty of arrangers, and now we have one more manager, with Pemberton’s pricing of Indigo Credit Management I this week via JP Morgan. At 178bps on the senior (sweetened by a make-whole) there’s a bit of debut manager premium in the price — Pemberton is best known as a private credit shop, though it also has strategies including risk transfer, trade receivables, and corporate credit in other formats, so it’s not a huge leap to do syndicated leveraged loans.

We’ve also got a Cross Ocean reset, plus new issues marketing from Palmer Square, Ares, Blackstone, CVC, Invescoand Man GLG, so there’s a decent spread of primary to consider.

But the missing ingredient continues to be new money leveraged loan supply. 

In September we’ve had a few crumbs — €130m of add-on from Cognita, €65m from Kersia, €185m from Upfield — with the only chunky new money in euros priced at the time of writing being €500m of the Worldpay package, €700m from Cegid and €620m from Infra Group. Several of the A&E transactions will effectively incorporate a lot of new money, and BME Group’s decision to massively upsize its A&E from €750m to €1.35bn and take out its TLA should probably be counted. 

But still, European CLOs already priced this month come to €2.78bn, and there’s another six in bookbuilding. It’s no wonder the loan market has been rallying. We’ve seen this dance several times over since the Russian invasion of Ukraine; markets thaw, CLOs rush out, loans go bid-only. It takes months to get a leveraged buyout together (and there are precious few suitable assets) but a partly warehoused CLO can come straight to market.

This cycle usually ends with the CLO arbitrage breaking or an exogenous market puke of some sort — how does it play through this time? There’s a natural ceiling on loan pricing, given the ease of calling and repricing, and we’re getting towards that point. We happen to have one of the investor packs open for one of the deals currently in market, and the modelled purchase price is 98.55; primary deals are pretty squarely in 98-par territory. There’s just not that much room for a leg up in OID (though repricings may eventually gather pace).

Balance can be restored by CLO liabilities tightening, for which the most obvious catalyst is a slow-up in new CLO formation, but there’s no sign of that happening. Welcome to the new manager, welcome to the aspiring arrangers, but things are getting very crowded.

Howdy partner

We’ve written a few times about the business model of the debt purchasing firms — at some length, in this piece for subscribers, and snippets here in Excess Spread. Our credit team have another piece out this week looking at Intrumand Lowell.

The basic questions are about what shape and wrapping should be around the business of buying and collecting on NPLs — and how these different models respond to a higher rates environment. 

For the NPL buyers in corporate clothing, funded through high yield bonds, there’s a challenge. Credit metrics tend to look good on a cash EBITDA-debt basis, but their prospects are more complicated — refinancing corporate bonds at current yield levels would put a massive squeeze on the business models, with debt yields at or above IRR levels for new portfolio purchases. 

Capital markets funding has adjusted rapidly to the new rates environment, and debt purchaser funding costs are increasing as old debt rolls off. But IRRs available on new portfolio purchases hasn’t moved as fast, with sellers preferring to sit on their hands rather than accept a lower price. Debt purchaser accounting bakes in a discount rate at the time of portfolio purchase; rather than marking these portfolios lower as interest rates rise, they sit on balance sheet at book value; marking to market would see a savage cut in the asset base of these companies.

Anyway, Swedish giant Intrum is seeking a route out of the squeeze, intending to raise capital externally and pivot its business model towards servicing, away from the capital-intensive business of owning portfolios.

That’s a well-worn track — Arrow Global is a long way down this road, while AnaCap was always a complex hybrid of fund management and outright NPL owner.

But it’s not going to be easy. The plan is less capital deployed on its own purchases, a “capital partnership” with a third party, and a sale of a big chunk of the existing back book. Collect fees, clip coupons, and avoid the pain of funding 15% IRR investments (per Q2 numbers) with bonds yielding 14%.

Now the crucial questions are — who is out there buying, and for how much? Intrum’s entire market cap as of Monday was around €650m, though we can add to that some €5bn of net debt. FY22 cash EBITDA was €1.13bn, for a less than stellar 5x multiple. As chief executive Andres Rubio noted at the Capital Markets Day, Prelios, a servicer in Italy formerly owned by Davidson Kempner, was sold to the Ion Group for around 10x earnings.

Clearly Rubio would prefer to be up in double digit territory, hence the capital-lite pivot.

It’s potentially complex to find the right kind of capital partner. 

There are plenty of funds still keen to be involved in NPL investing, and Intrum’s servicing capabilities genuinely are a pan-European jewel-in-the-crown, once-in-a-lifetime type thing.

Intrum has lots of joint ventures (the Intesa portfolio, Project Savoy was a JV with CarVal, Piraeus with Pimco), but if it has a permanent “capital partnership” with, say, Pimco, it will be a less attractive partner for every other fund offering a servicer mandate. 

Intrum management said the back book sale would be around book value, a worthy and understandable aspiration — but not necessarily an achievable one, given the big move in interest rates over the last year. The company did take a big writedown (€384m) on the Project Savoy portfolio (€10.8bn of GBV), triggered by JV partner CarVal’s sale of its stake. Insult was added to injury with a €92m cost to unwind a clean-up option to buy out CarVal.

Anyway, book value on this portfolio is presumably a more achievable target, given that CarVal recently forced a mark to market, so perhaps that will be on the block.

What’s the future of the broader debt purchasing sector? 

Under all of the capital structure stresses is a necessary business, with some distinct incumbency advantages. Valuing and collecting unsecured NPLs is a volume business, a data business, a (cringe) tech business, where scale and stability has a value. It is possible to do it as a trade, but there is a comparative advantage to doing it as an industrialised, commoditised process with long term partners.