Last week saw a pause for a round of central bank activity, but the strong open on Monday brought forth a German lease deal for LeasePlan, Bumper DE 2013-1, a German consumer deal for auxmoney, Fortuna Consumer Loan ABS 2023-1, a French credit card ABS for BPCE, FCT Purple Master Credit Cards 2023-1, and a UK master trust RMBS for Santander UK, Holmes 2023-1. These deals were joined on Tuesday by Koromo Italy, an Italian auto ABS for Toyota Financial Services Italy.

This looks remarkably like a high-functioning, efficient capital market that’s lining up for a strong year. Admittedly we all thought that in early February 2022, but the hiking cycle and the war should now be priced in.

Deals are getting done, but the credit spread backdrop is still elevated.

Auxmoney handily demonstrates the point, as its 2022 outing, taking out a Chenavari/Citi warehouse, slammed pretty hard into the ugly market in May and June. The final books down the stack in 2022 were, um, 1x/1x/1x/1x… including trading desk interest from the leads. As we noted at the time, 1x is all you need, but this was not an easy deal to get done.

Initial price thoughts were 75-80/h100s/m200s/300a for class A to D, with final pricing landing at 80/225/375/522, just to underline the pain involved in placement. It probably wasn’t the ideal time to switch to a pro-rata payment structure, in retrospect.

For the new outing, books were a far more pleasant 1.7x/3.4x/3.4x/1.4x at the second update, with talk at 82-83/250-255/330-335/540, and final pricing 80/250/330/540/850… in other words, not miles off the unfortunate 2022 deal, and over a considerably wider Euribor benchmark.

The deal was announced with the class A 1x done, and the rest of the stack subject, so somewhat derisked, but in the event there was plenty of demand from a broad investor base.

So we could say that market has indeed adjusted quite handily to the new spread backdrop. As we said in 2022, the market can handle a jump in credit spreads, but it can’t swallow the huge volatility that we saw last year.

But absolute credit spreads do matter.

Being consumer lending, the margins on the underlying Fortuna collateral are relatively juicy — but do not seem to have followed rates upwards over the year. The 2022 deal featured a weighted average interest rate of 9.9%, now cranked up to, um, 10%, against a backdrop where one month Euribor is more than 250 bps higher than when the last deal priced. The collateral is juicy, but it isn’t subprime credit card juicy… 250 bps is a fair bite to take out.

Auxmoney, or rather deal sponsor Chenavari, aren’t eating all of the rate hike from the 2022, but it is eating a lot — it doesn’t have a fixed floating swap, but a Euribor cap from BNP Paribas, struck at 2% (so now in the money!). The new deal also has a cap, with strike that we couldn’t find in the premarketing materials but which is presumably somewhat wider.

We’d already heard some investor concerns about the impact of rate stresses on the Auxmoney transactions; given the books on display here, those concerns have been swallowed. Or perhaps the buyside is just getting paid properly?

If we consider the Fortuna 2023-1 Double-B notes, these priced at 850 bps. That’s exactly the same level as the double-B notes in Santander Consumer Germany 2022-1… but SG Germany priced on 30 September, in one of the worst market backdrops since March 2020, while this deal came in buoyant conditions.

The collateral is about as different as two German consumer loan books can be, but on ratings at least, you’re getting paid LDI-era money for this one.

Getting ahead

One prediction we had for the year was that we’d see more attempts to push out WAL tests. As we said in the CLO Outlook 2023… CLOs can no longer be expected to reset indefinitely; the hotly contested provisions on deal WALs will be increasingly necessary.

It’s not a hugely bold call — if managers and equity can’t do an economic reset but want to keep some reinvestment flexibility, the obvious move is to push out the WAL Test. Most deals contemplate the possibility within the documents, and it’s a relatively cheap way to get some extra runway.

One deal isn’t a trend, but we’re pleased to see Tikehau IV getting ahead of the (possible) rush, with an attempt to get another 12 months of headroom.

It’s not there yet… but the process is beginning.

The Issuer hereby announces that it has been informed by the Collateral Manager that it is currently assessing certain available options which may ultimately result in the modification of the Weighted Average Life Test definition by extending the date contained therein by 12 months

According to the latest trustee report, it’s down to 0.46 years of headroom on the test — the portfolio has a 4.79 year WAL against a maximum of 5.25 years. It looks as though Tikehau has already been trying to turn the portfolio to avoid smacking into the test… the portfolio WAL has been cut from 4.86 in October and November down to 4.79, and headroom dipped to 0.39 years the month before.

Collateral sold in December included Sebia’s TLB, which was extended from 2024 to 2027 in November, plus a selection of other loans at or around par (most likely profit-taking).

Tikehau IV, happily, belongs to the vintage of transactions where the WAL Test can be pushed with only Controlling Class (senior) consent, provided the extension is 12 months or less, so this is likely to be a relatively straightforward conversation. Later vintage deals, especially 2021 and 2022 deals, tend to have a tougher consent mechanic, bringing the mezz into the picture as well, which is much more likely to have changed hands than the senior anchor.

That said, we have been having a screaming rally these past few weeks. Generic CLO triple-A is now through 170 bps; new primary is testing tighter still. The “200 bps barrier” is a distant and unmourned memory from, uh, a couple of weeks back.

So the condition “if managers and equity can’t do an economic reset” is looking a little shakier than it did. I mean, credit spreads in CLOs are still wide of basically any period in the past five years apart from post-Covid (and all those deals already reset), but the CLO market is finally cooking with gasoline.

A few of the sellside houses put fairly nominal guesses for CLO resets into their 2023 Outlooks (more for the potential option value than with any conviction)… perhaps those guesses are looking more plausible now. Rally on!

Sticky labels

The crop of deals this week offer a nice illustration of the labels one might include (or not) in European ABS.

Toyota’s Koromo Italy deal is “backed by a granular static pool of auto loan receivables fully comprising of hybrid, plug-in or electric vehicles.” This is the sort of transaction that’s been bandied about on every “ESG” conference panel for years — Toyota has been raising US green ABS transactions for the best part of a decade, as the US offers a large enough origination opportunity to put together a purely green transaction. In China, too, green auto ABS has been getting off the ground.

But in Europe it’s proved difficult to collect enough collateral into one portfolio to print a purely hybrid and EV transaction. Split the European market by country and by manufacturer and it’s a struggle to reach the right size for a public securitisation (the new issue has a €412m portfolio, which is decent, but Toyota’s Prius model has been top of the hybrid charts for years).

However, the new deal doesn’t have an explicit green label attached to it, despite the evident greenness of the underlying collateral.

There are a few explicitly “green” RMBS shelves out there — Kensington has a green Finsbury Square, there’s a green Prado and green Belem from UCI, and Obvion has green Storm. LendInvest has a green bond framework, and originates green BTL mortgages (branded EPiC), though we’re yet to see a green Mortimer deal emerge.

But perhaps we’re past the high point of labelled debt?

The European Union’s Sustainable Finance Disclosure Regulation has remade the ESG investment landscape in Europe (see 9fin’s webinar on the subject), but in such a way that there’s far more onus on investors to do their own work. Buying a bunch of green bonds is fine, but it doesn’t particularly help to meet the standard for a “light green” Article 8 SFDR fund, which “promotes, among other characteristics, environmental or social characteristics, or a combination of those characteristics, provided that the companies in which the investments are made follow good governance practices”.

There’s a few of these funds active in European ABS — NN Investment Partners (now part of GSAM) has one, Morgan Stanley’s Global ABS Fund is Article 8 designated, Aegon has one, Amundi has one. Various multi-asset credit funds also bear the Article 8 label and play in structured credit (BlueBay’s Total Return Credit Fund, for example).

But for a look at what this actually involves, turn to Aegon:

“Potential investments are analyzed and categorized by the Manager using a proprietary ESG questionnaire and 5-tier ESG risk classification system. Only investments in the 3 ESG risk categories presenting lowest risk are eligible for inclusion in the portfolio; and engaging with issuers by applying the active ownership principles described in the Prospectus”.

Absolutely nothing, in other words, about labelled green bonds — so is it worth going through the effort required to obtain such a label?

Having said all that, Auxmoney has once again applied the “social” label to its Fortuna deal, in line with the previous issues. Like Kensington’s “social RMBS” Gemgarto, or indeed Yorkshire Building Society’s recent Brass deals, it doesn’t involve much/any change in origination approach, but labels aren’t out of the picture just yet.

Bumping along

We also wonder if this week’s Bumper DE 2023-1 transaction could be the final outing for the shelf. Sponsor LeasePlan is going to be acquired by Société Générale subsidiary ALD, in a deal announced more than a year ago. ALD has its own lease ABS programme, under the broad SG branding of Red & Black, and presumably the plan is to integrate the businesses — which would point towards a farewell to Bumper.

The acquisition has been held up in competition discussions — it was originally intended to complete by year-end, and UK authorities cleared it last year. The European Commission cleared it in November, but conditional on divesting ALD’s operational business in Ireland, Norway and Portugal, plus LeasePlan’s businesses in Czechia, Finland and Luxembourg.

TLDR it’s taking longer than expected, and the timeline is now “hopefully Q1 2023”. The Bumper mandates are now nailed-on for SG’s ABS team, but LeasePlan wasn’t in market that often, so if the Q1 timeline sticks, it could be bye bye Bumper.

There’s potentially a wrinkle about the residual values though. This part (the value of the vehicle after the lease is over) is generally the most complex credit element in lease ABS deals, and deals including residual values price wide of lease-only pools.

The Bumper shelf has always included residual values, but ALD’s programmes are a mix — the last German deal did not, the deal before that did, the last French deal did not.

ALD seems to be moving towards funding itself separately from the wider SG group, issuing its own bonds as well establishing the lease ABS shelves, so at some point it will need to grapple with the residual value issue… either by folding them into the term deals, or following the captive auto originators and setting up a separate private residual value shelf to finance in the bank market.

Another little Bumper wrinkle we note is the presence of Kroll on the ratings side (alongside Moody’s and DBRS). As far as we know, this is the first flow auto ABS rated by KBRA in Europe; the agency started up operations over here in 2017, and much of its business has been in off-the-run asset classes (it rated Goldman’s NPL/RPL RMBS Parkmore Point, for example, and has been working hard to get a solar ABS market off the ground here).

Competition is good, though, especially in ratings, so more power to them.

Hold up

It’s finally here! Apollo has unveiled the rebranding for the Credit Suisse securitised products business, and it’s going to be “ATLAS SP Partners”, a solid slice of Greek mythology to add to the extensive Apollo stable.

We’ve been fascinated by the process from day one — it’s a radical attempt to remix the different component parts of modern finance. Instead of banks intermediating the flow of assets and financing, Apollo is attempting to draw a direct line from origination engine to capital source.

Flip through any sort of credit fund marketing materials, and you’re pretty much guaranteed to see something about the proprietary dealflow, unique origination platform, asset sourcing capabilities and so on. That’s for a very good reason; outside of syndicated markets, the top tier funds get first look at the best assets; by the time a deal’s been shown to a lower-ranked fund, you can bet that the brand-name institutions have already passed.

What’s usually missing, though, is much of an actual origination function. Most credit funds, whether they do corporate credit or asset-backed/specialty finance activity, simply do not have the suite of coverage people that the investment banks can bring to bear. Their business is asset management; fundraising and credit work are the key skills, and the number of warm bodies out there on the road sourcing new deals is usually small.

But if you can, say, bring in 200 or so investment bankers from one of the top securitised products shops, then you really do have a plausible claim to proprietary dealflow, unique origination and so forth. Credit Suisse has made a habit of being early into new niches, partnering with new platforms and giving early stage fintechs the capital they need; now this will be used to feed the Apollo beast.

In case there was any doubt where the capital fuel was coming from, the release underlines that Atlas SP Partners “primarily originates high-quality, investment-grade assets that are highly desirable to a broad range of investors and align with the balance sheet needs of Athene and other retirement services companies”.

The business proposition is outlined in the release as “helping specialty finance companies, financial sponsors, corporates, REITs and a variety of other clients access structured financing and portfolio solutions”, which sounds fine, if a little US-heavy. It “serves hundreds of clients throughout the growth lifecycle from early stage to mature public companies, providing asset-backed warehouse financing, forward flow and asset purchases, and capital markets and distribution services”.

So that’s all good. The release also leans heavily on the investment-grade orientation of the group, with two mentions of investment grade and one of high grade. That’s kind of expected (senior warehouse financing is indeed investment grade-type risk, whether rated or not), but also fits with the general mood music from Apollo of late.

Take a look at the transcript from the last Apollo investor day… couple of highlights from CEO Marc Rowan here:

“Our job is to offer clients excess return per unit of risk for giving up liquidity. That is not to grow assets, it's excess return. If we forget that, we commoditize. And so I step back and look at what businesses are scalable where I can offer clients excess return. For us, it has primarily been fixed income replacement.

Think of that as investment grade, things that used to be on bank balance sheets, credit. It's scales because it is scalable inherently…and there's way more—the pile of assets in the world that yield 20% is this big. The pile of assets that yield 300 over in investment grade is that big. I want to play in the big pile.”

On the question of whether the CS distribution operation continues…

“Like I’ve always said, we want 25% of everything and 100% of nothing. So we syndicate to third-party clients or to syndication, the remainder of it.”

And a little more: “I think Credit Suisse could be a really interesting transaction, because we always think of lending in a corporate context. Credit Suisse is a lender to other lenders. It is essentially the provision of warehouses generally investment-grade warehouses, to 200 different lenders who, in turn, are massive users of securitization.”