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We suggested before Christmas that the mighty West Coast Asset Manager might be looking to distribute some of the risk in the Project Jupiter refinancing (the final slug of the UK government’s legacy crisis-era mortgage portfolio).

This matters because the weight of Pimco in the market has been so significant — entire transactions disappear to a single buyer, multi-billion portfolios get hoovered up, and the tradeable universe of European securitised products is thus reduced. 

That’s not to hate on Pimco; clearly at a high level, Pimco has seen a nice trade (UK mortgage risk characteristics being far better than the US) and put it on in market-changing size over years and years. The Pimco bid is useful for originators and arrangers who want to derisk execution, and it’s at a reasonable price. In the words of one syndicate manager: “This is not a back bid we’re talking about, or a last resort if you can’t get it done — it’s a helpful offer at competitive levels”.

Pimco isn’t like Nochu in CLOs, a weird whale with a range of baffling stips and habits, which can be overlooked as long as it’s a decent way through the market. It will look at more or less anything, price up the risk, and return a meaningful bid in size and on market terms. This may involve waiting for the fund managers of different Pimco pockets to return and aggregate their bids, but it will happen.

But nonetheless, Pimco’s activities have mostly involved draining bond-buying opportunities from the wider market, rather than creating them, as with other portfolio buyers that require securitisation-based leverage.

The Jupiter refi, happily, was different — it wasn’t just a tentative market-testing exercise to see if anyone would bid above Pimco’s reserve, but a meaningful attempt to distribute a capital structure to the market. Admittedly it was executed in private, with the deal preplaced, but it’s a safe bet that all the accounts that can speak for size in UK mortgages got a look.

We also note Bank of America’s support for the deal via a £400m senior loan note. This is not totally unprecedented — there was a similar ticket supporting DK’s slice of the portfolio before Christmas, at wider levels and with more credit enhancement, and a £314.67m senior loan in TwentyFour’s Oat Hill No. 3 last July.

BofA seems to be taking a somewhat different approach from likes of Citi in its pomp, which was anchoring primarily new issue front book transactions, and across a broader range of deals. BofA’s exposure is to specific legacy transactions which it has been involved with long-term (it financed the Oat Hill No.3 portfolio when it was bought in 2017).

New issue European CMBS has been quiet, with just three deals last year, and two the year before (excluding small balance deals from Together, RNHB, Finance Ireland). The bright spot, such as it is, comes from Blackstone’s continued build up of logistics assets for its giant Mileway platform, the biggest last mile logistics platform in Europe.

The numbers are stupifying, if a little challenging to aggregate — Blackstone executed a €21bn recapitalisation of the platform in early 2022, the largest private real estate transaction ever. At the time, a release stated that it had over 1,700 last mile logistics assets, amounting to 14.7m square metres. At launch in 2019, the figures were roughly 1,000 and 9m respectively; since early 2022 it has grown further.

Two of last year’s three CMBS deals in Europe were financing Blackstone’s logistics acquisitions (Last Mile Logistics 2023-1 and Stark 2023-1). At the time we noted that most of the asset spread was going to pay bondholders, leaving precious little for the sponsor — but Blackstone is clearly playing the long game here, aiming to grow the business and benefit from being a one-stop shop for last mile logistics in Europe.

A flood of CMBS notices hit the tape this week (while I was waiting for the Gedesco servicer transfer to be announced), with full prepayments expected on the Fulham Loan in Taurus 2021-4, Taurus 2019-2, Scorpio (EloC 34), Usil (ELoc 36) and Pearl Finance 2020, as the sponsor is “in the advanced stages of arranged a potential financing transaction”.

Despite the hodge podge of SPV names, these are all Blackstone logistics deals for Mileway, and the “potential financing transaction” is an absolute monster, likely to be the largest underwritten commercial real estate debt deal ever seen in Europe.

It’s a combination of euros and sterling, provided by a syndicate of banks, some of them top CRE shops, others RCF lenders and relationship banks, totalling around €7.5bn.

I’ve written a bigger paywalled piece here, but even beyond the size — edging out the pre-crisis GRAND deal for Deutsche Annington on €6.86bn — it’s a very cool transaction.

The £2.8bn sterling piece is a massive underwrite for sole lead Barclays, and is structured as a true CRE financing based on mortgages and classic asset security (with some interesting structural tweaks we will pick up post-closing). 

On the euro side, it’s more of a hybrid animal, a little like an old-school UK WBS — there’s asset recourse via mortgages across many jurisdictions, but corporate security as well, and the platform is structured to be flexibly tapped in future. Banks are the initial lenders, but the platform can be used for long dated bonds, private placements or other financing sources.

We’ve discussed the full opening of the US SRT market a fair bit in these pages (see here for a 9fin Educational on Significant Risk Transfer). JP Morgan’s corporate deals were the blockbuster opener, with $2bn in placed notes and a $22bn portfolio, across five separate transactions. The bank was said to be asking for a $500m minimum ticket size; clearly the average size here is $400m, but it’s certainly true that the bank wanted to deal with counterparties who could speak for size — doing five bilateral SRT deals into year-end is a heavy lift already, without multiplying the investor base further.

The US bank didn’t rely on the Fed’s CLN FAQ, but used an SPV structure, as it has in previous deals. It’s likely to issue more from the programme this year — and if the other US major banks jump in for similar size, that could easily add 50% to market volumes. That’s without considering the US regionals, which are expected to follow the lead of the money center banks and access non-dilutive, competitively priced SRT capital rather than risk a rough ride in the equity markets.

All the lines are going up and to the right, but it’s up for debate whether increased supply comes quicker than increased demand, and hence where spreads are likely to go. Views on the issuer and investor side diverge, you’ll be shocked to hear.

Fund LPs are certainly asking how they can access this hot new asset class, while more funds are turning their attention to SRTs. It’s a key part of the “asset-backed private credit” universe; buying junior risk in a portfolio of corporate loans sits easily in a fund alongside junior risk in a book of personal loans.

It’s not an easy asset class to break into, though — even for funds with the relevant skillset and cash to deploy, deal marketing processes can be sewn up quite tight. The SRT market is, by culture and habit, very secretive and very clubby, though it will surely need to loosen up a little to accommodate new flows of money.

Meanwhile, the banks are all racing to issue — despite the continued lack of efficiency under US regs. The JP Morgan portfolios are mostly investment grade, with a smattering of sub-IG to spice things up. 

Similar deals in Europe might require placing a 0-7% tranche, but a simple average on the JPM numbers suggests 0-9%. This could even be an understatement; US regulations have generally required a 0-12.5% tranche to be placed to do SRT trades, a number which might just about fit if you haircut the overall $22bn portfolio to reflect risk retention positions and undrawn facilities.

Either way, the magic of the SRT market, from an investors’ perspective, is that the bank’s motivation for issuance is fundamentally non-economic. They are paying far more to hedge the risk than the risk itself should justify — we hear spreads in the S+800s for the JP Morgan deals.

This is tighter than most SRT deals in Europe, reflecting partly the huge interest in doing these deals (and partly the considerably lower leverage), but compares to a US investment grade default rate which is so low as to be essentially unmeasurable. 

According to S&P corporate default study, the US investment grade default rate was 0% every year from 2012 to 2018, rising to 0.14% in 2019 and back to 0% again in 2020-2022. The five year cumulative default rate was 1.79% for triple-Bs, looking at the whole period 1981-2022.

In other words, even if a wall of money hits the burgeoning SRT market, you are still very much getting paid.

The Financial Conduct Authority announced last Friday that it was reviewing UK motor finance, potentially opening the door to widespread settlements and compensation payments if firms are found to have acted inappropriately.

UK consumer finance commentator Martin Lewis described the potential impact of the claims as “PPI type scale” — which is probably too much hype.

PPI mis-selling was a giant scandal affecting UK banks, which paid out around £40bn to affected customers. It gave rise to an entire ecosystem of ambulance-chasing legal firms helping consumers to claim compensation for PPI mis-selling, as PPI had been applied to almost all consumer borrowing in the relevant period.

Other estimates for the potential impact are lower — but still large (up to £7bn at the top end) — and auto finance originators are studying their potential exposures.

The basic claim is this — brokers and car dealers were incentivised by some lenders to push higher cost car finance products on the forecourt, so customers ended up paying higher finance cost than they needed to.

It’s a potential scandal that’s been rumbling for a while. The FCA started a market study in 2017, sent a severe “Dear CEO” letter in 2020 and banned “discretionary commission” in auto lending in 2021.

More recently, it has started to morph into an ambulance-chasing class action, with filings against Santander Consumer (UK), Black Horse Limited (a part of Lloyds), and MotoNovo Finance (now owned by Aldermore). The claim form for Santander gives a loss estimate of £156m, with £581m for Black Horse and £194m for MotoNovo.

These are big numbers, but Santander and Lloyds can certainly take them on the chin. The full figure for Aldermore would wipe out most of the bank’s annual profit, but wouldn’t threaten its stability.

Anyway, as momentum around the issue has grown, more and more customers have been filing complaints with their lenders, hoping for redress, and many of these have been rejected. After rejection, customers can then approach the Financial Ombudsman, who might uphold their complaints (as in two examples laid out on Friday) or reject them.

The FCA notice on Friday is actually supposed to stop this process — it basically puts a pin in the whole complaints procedure, pending some kind of market-wide solution.

In the FCA’s words, the regulator will “identify how best to make sure people who are owed compensation receive an appropriate settlement in an orderly, consistent and efficient way and, if necessary, resolve any contested legal issues of general importance.”

This is all by way of preamble — what does it mean for securitisation, I hear you cry.

Probably nothing. Most of the affected loans have been repaid by now; auto loans have a short life, so auto ABS bonds tend also to have a WAL below two years. It’s also unlikely that the claims would travel with the loans; any redress measures could force originators to pay out compensation, without affecting securitisation SPVs.

If PPI is indeed a relevant analogy, this kind of bears it out — even if PPI was sold alongside a mortgage, the banks themselves paid out the PPI claims; the PPI contracts were separate and didn’t travel into securitisation SPVs. UK clearers paid out billions over PPI, while RMBS remained totally untouched.

Even if the eventual remedy is calculated in relation to loan interest — perhaps lenders will have to pay customers any excess interest, wiping out their historic profit on these loans? — that doesn’t mean that any of the loans themselves (of which few are outstanding) are likely to have their interest rates adjusted.

The clearing banks are the favoured punchbags of the UK regulators, and will probably end up taking most of any comprehensive settlement on the chin. 

To the extent that there is a risk with the FCA probe, it’s via the stability of auto originators — some of the smaller players are thinly capitalised entities without much cushion to absorb major compensation payments. Review your backup servicers, cross your fingers, and hang tight!

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