Owen Sanderson

Excess Spread is a little truncated this week as the pandemic finally caught up with the author. Normal service hopefully resumed next week.

There was a time, not so very long ago, when ABS and RMBS primary would open up in January at a genteel, relaxed pace, unfurling like an early snowdrop once other fixed income markets were already at full bore. Obvion’s Storm shelf and VW might start off proceedings, accompanied by one of the UK master trusts, setting floor levels for the rest of the market to price over.


That’s….no longer the case. There’s a smorgasbord of supply on screens, led off by the UK specialist mortgage lending sector, and the multiples of oversubscription suggests the buy side has come into 2022 with their buying boots firmly on.

First out the gate was Belmont Green with Tower Bridge Funding 2022-1 and Citi with its multi-originator Dutch BTL shelf Jubilee Place, both priced last week. Citi’s principal finance team (apparently they’re branded Full Financing internally) got straight back on the primary trail after Jubilee Place, looking to sell the residuals in Canada Square 6, its UK BTL shelf.

This week should bring Davidson Kempner’s Stratton BTL Mortgage Funding 2022-1, Foundation Home Loans’ Twin Bridges 2022-1 (first deal under Apollo’s ownership), West One’s Elstree No. 2, and Nationwide’s Silverstone 2022-1. 

Finance Ireland is pushing its treasury team hard, with one RMBS, Finance Ireland No. 4, slated for this week and investor meetings for its second small balance CMBS, Pembroke Property Finance No. 2, while Optimum Credit (Pepper) mandated Polaris 2022-1 on Wednesday.

Optimum Credit is shortly to be renamed to the ungoogleable “UK Mortgage Lending Ltd”, which will help me stop mixing it up with Co-Op Bank’s old “Optimum” portfolio (securitised originally in the Warwick Finance transactions), but make it much more likely that I will mix it up with TwentyFour Asset Management’s UK Mortgages Ltd fund. Bit more creativity pls?

Before we get into what the executions so far are telling us (good news!), it’s worth noting that these are all front book transactions — newish origination, post-Covid in many cases — a meaningful contrast from previous years, when legacy collateral has loomed large. 

The legacy deals haven’t gone away, of course, but they pay down year over year, lots of the big performing UK portfolios have already been bought by Pimco, and most are already inside securitisations.

Some of these deals are now coming up for call. Ripon and Harben, the giant securitisations of old Bradford & Bingley buy-to-let mortgages, sponsored by Blackstone Tactical Opportunities and Prudential respectively, are due for call in late February (and scrambling to put in place Sonia coupons for the last Interest Payment Date). 

When these deals were first done in 2017, they were financed by the “consortium banks” — UK clearers that were part of the UK Financial Services Compensation Scheme — but these institutions have largely traded away by this point. BWIC data from Deutsche Bank’s research team show Ripon’s class A notes as the most actively traded bond in European securitisation, with the B notes also inside the top 10.

While it’s nice to see front book deals, the concentration of these deals at the start of the year might reflect a desire to avoid getting run over by the Ripon refi (£6bn+ outstanding) if smaller BTL sponsors wait until February to fund. 

Buy-to-let is notably prominent in the visible pipeline, accounting for five of the deals in the market. Two more of them, Elstree No. 2 and Polaris 2022-1, also have hefty BTL slugs included, mixed with second charge in Elstree and first lien owner-occupied in Polaris.

Now onto the executions. Belmont Green’s BTL deal managed to come well inside IPTs, with senior notes priced at 72 bps, from 80 area guidance and the class D at 170 bps from IPTs of  high 100s, 200 area. The book of 2.5x, 6.6x, 6.7x and 4.9x on classes A-D underscores the strong tightening.

Citi’s multi-originator issues are perhaps more of an acquired taste, but books of 2.1x, 4.7x, 4.5x and 3x down the stack for Jubilee Place, and senior notes at 72 bps from high 70s IPTs still shows decent appetite. The bottom of the capital structure was a little stickier, with spreads already set on the class ‘D’ ahead of a test tighter for the rest of the bonds, and the ‘E’ notes placed at 92, but it still stands as a positive signal.

Finance Ireland’s STS and LCR-eligible prime RMBS, set to price on Thursday, will offer a test of the other end of the euro-denominated market — and perhaps clarify the appetite of bank investors for bonds with a full suite of regulatory benefits in place. Coverage was 2x, 3.7x, 3.3x, 2.7x for classes A-D at the first book update, rising to 2.7x, 6x, 5.3x, 3.6x later on Thursday, with another day of execution left — a promising precedent for follow-on euro issues.

Final Elstree book at the third update were 2.1x, 4x, 4.8x and 3.6x, showing a little sensitivity as pricing tightened — the previous update was at 2.1x, 5x, 4.8x, 5.4x

Subscription levels for mezz aren’t always terribly meaningful, as the multiples can rise very quickly given the small tranche sizes, but to cautiously draw conclusions….it looks like upper investment grade mezz is the real sweet spot. Subscription levels seem consistently higher on class ‘B’ and ‘C’ notes than at the bottom of the structure, even though ‘B’ and ‘C’ tranches are usually larger than ‘D’ and ‘E’.

It remains to be seen, though, whether arrangers respond by pushing harder on class ‘B’ and ‘C’ pricing for follow-on deals — clearly some demand fell out of the Elstree book on the road from class B IPTs of low-mid 100s to a guidance spread of 110a over Sonia, so the levels shouldn’t get silly too fast.

Silverstone 2022-1 also tells us something interesting — the strength of the dollar market for UK RMBS. 

Dollar tranches occasionally pop up for master trust RMBS (as well as in NewDay’s ABS deals), but at the first book update, the chunky $1.2bn of demand for Silverstone’s first pay 1A tranche at SOFR+45-50 bps underscores the massively greater depth of investor appetite that can be dug up in dollars, for issuers willing to make the marketing, 144A and currency swap effort. UK paper is a niche product for US buyers, but even a niche in dollars can blow sterling out of the water.

Not that the sterling book is looking shabby, far from it. The sterling 2A had a still respectable £625m at the Sonia+low-mid 30s IPT level, and delivers Nationwide more useful five year funding, compared to two years for the dollars. A book update later on Thursday revised the dollar book to $1.9bn, a massive 7.6x done, with sterling up to £1.1bn.

Italy, hamstrung by awkward lending rules, is increasingly using securitisation to allow non-bank lenders to participate in the country’s real estate, infrastructure, and acquisition finance markets — with the first deal for an acquisition loan via UniCredit’s Agora Finance shelf announced last week.

We’ve covered this in a separate article, looking at the issues in structuring Italian LBOs, but the short version is: these aren’t real securitisations with tranching, risk retention and so on, but they do use securitisation SPVs as a neat way around a difficult financing problem, and we appreciate clever regulatory structuring round here.

Read more here: Are the days of the “Italian FRN” numbered?

Luxembourg’s bid to win back some CLO business is set to step forward this year, according to my former colleague Josie, with parliamentary approval for a draft amendment to the securitisation law in the country, allowing active management of securitisation vehicles. 

The amendment was introduced in May 2021, and has been working its way through the legislative process ever since. Ireland became the home jurisdiction for pretty much 100% of the European CLO market in 2020, after tax changes in the Netherlands essentially cut off Dutch structures. These changes applied a 21% VAT to management fees, a real punch in the wallet for managers, particularly as Ireland was right there as a jurisdiction which didn’t add this tax.

Sure enough, pretty much every outstanding deal was redomiciled to Ireland over the next few months, a legal headache which managers and lawyers really didn’t need in the tough times of 2020, but which resulted in a fairly clean situation where you could count on pretty much every deal being done through an Irish SPV.

Luxembourg is a big securitisation jurisdiction, and perhaps the amendments will shift some activity, but we can’t help wondering if anyone will bother to move so soon after the Dutch-Irish shift. According to law firm Ocorian, the attractions include being able to use Luxembourg GAAP rather than IFRS for preparing financial statements….which seems fine, but hardly transformative, and certainly not worth upping sticks all over again.

The move from the Netherlands was driven by a very big stick in the shape of tax rules — how much activity can a small accounting-based carrot shift to Luxembourg?

Cayman SPVs may shortly cease to be a part of the toolkit for European securitisation, as the European Union has now formally proposed to add the tax haven to its Anti Money Laundering (AML) blacklist — which stops European-regulated entities establishing and dealing with SPVs there. 

This was flagged ahead of time last June, when the Financial Action Task Force (a global institution) put Cayman on its “greylist” (the blacklist is very short and contains just Iran and North Korea, neither of which are historical hotspots for international non-recourse financing structures).

In terms of market impact, this is probably most significant for EU investors in US CLOs, many of which use Cayman vehicles. Per Clifford Chance’s excellent note “It is unclear whether divestment would be required where an investor already held a securitisation position in a Cayman [Securitisation Special Purpose Entity]. But even assuming they didn't have to divest, liquidity would still immediately be affected as EU investors would cease to be buyers in the market for any Cayman-issued securities.”

However, Cayman is far more common as a listing venue, rather than incorporation venue, in European securitised products — it’s common to list risk transfer notes, private warehouse financings, trade receivables shelves, aircraft ABS, insurance-linked securities, and various other slightly off-the-run assets in Cayman, even if the SPV itself is incorporated in Ireland, Bermuda, the UK or elsewhere.

While it’s a pain for issuers and investors to have to work through new rules (especially while the benchmark rate switch is still working through the dollar market), we can’t say we’re particularly disappointed — as an occasional hobbyist browser of listings, SPVs and other ephemera we rather like the transparency associated with an onshore EU listing (Dublin and Vienna have room for improvement), and there’s a public perception benefit too. 

At a time when securitisation is trying to present itself as squeaky clean to the regulators, a proliferation of tax haven-based companies surely distracts from the overall message?

Perhaps this is just sour grapes though — years ago, on the trail of a Goldman-sponsored second charge deal, I tried to request some docs from Cayman, only to be informed they were available for inspection in person should I visit Companies House in Grand Cayman. My employer at the time, sadly, did not feel up to paying the expenses for this particular trip.

Excess Spread — Smorgasbord on screens, Lux life, world's smallest violin

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