Lloyds even took the unprecedented step of announcing the Permanent mandate between Christmas and New Year, hoping to avoid a super-compressed execution timetable by giving investors a heads-up that the deal was coming. 

This clustering of funding trades is very covered bond behaviour — it’s very likely that all the treasury teams involved knew the other prime deals were going to be out at the same time, especially given the overlap in JLM groups.

The part that’s still a bit mystifying for these prime deals is the still-slow execution timeline. There might be 30 investors or so in a UK master trust RMBS, and absolutely none of them are new to securitisation. 

If you have lines for UK RMBS at all, surely you know the big master trusts reasonably well, and it therefore should be just a pricing exercise, the work of a morning? Nobody should be re-underwriting the (expansive) documentation underpinning the trusts, or going loan-by-loan through the pool. Do you want some Perma at Xbps should be a straightforward question that doesn’t require a two-day bookbuild plus presounding (Santander’s Holmes started sounding at the back end of December).

Pricing, indeed, seems attractive. Permanent and Holmes both came at 55bps for five years (honour can only be satisfied by an identical spread), which is some way back of secondary seen in the mid-40s. TwentyFour Asset Management discusses this as “an attractive new issue premium of 10 to 15bps available to those investors willing to make the switches. It is also a positive nod from the issuers in leaving some value on the table.”

As ever, it’s questionable whether the secondary prints are meaningful vs £750m new issues, and both issuers opted to upsize rather than squeeze on price, but the 55bps level set Lanark’s three year trade up to start wide, with mid-50s talk.

The commitment to stick at £500m (and maybe a slightly greater depth at the three year point) meant that leads managed to blow straight through this level, with a £900m book at the second update, guidance revised to 52a, and spread then set at 50bps with a £1bn book. Lanark has traditional traded a touch wide of the others, but there you have a nice 3-5 curve established in UK prime — where will Nationwide choose to drop its first bonds?

Excess Spread is back

I mean, I am back writing this column after the Christmas break and a bit of truncated week last week, so that’s nice.

But more important is the actual economic excess spread that’s coming back into deals! 

As rates expectations start to turn, we’re now into an era where securitisation increasingly makes sense again. If you originate fixed rate assets and place liabilities a few months later, a rising rates cycle tends to squeeze deal economics — especially if it’s accompanied by a few chaotic technicals, such as LDI and the Russian invasion of Ukraine.

If we consider the non-prime supply lately issued — that’s Fortuna 2024-1 from Auxmoney and Hiltermann Lease Groep’s Hill FL 2024-1 in marketing, Together’s Together Asset Backed Securitisation 2024-2nd1 (TABS X), likely priced by the time you read this, you can see that we’re cooking with gas again.

TABS X, for example, has a weighted average interest rate of 8.9% in the pool, vs 6.8% in the last second lien outing from Together in 2022 — forming the foundation for a nice healthy partly-investment grade X note to be marketed to fund the reserve, in contrast to the 2022 deal, which saw the zero coupon class X retained, and the reserve fund covered out of Together’s own resources.

Auxmoney’s unfortunate 2022 transaction, Fortuna 2022-1 (taking out a forward flow with Chenavari) still has payments to its (retained) X note switched off, and it’s been in sequential amortisation since January 2023. Perhaps the class D and E notes were not the bargain I thought at the time. That deal featured weighted average interest rate of 9.9% at closing, compared to 12% in the latest transaction.

Turning to Hiltermann Lease, the capital structures can’t easily get much more attractive from an advance rate perspective. The retained class E note is only 1.2% of the capital structure, vs 1% last time. The risk retention is vertical (and repo-financed), so there’s not a lot of money down from the originator on day 1. But you can see the yields picking up from deal to deal. Hill FL 2022 had a discount rate at 5.93%, Hill FL 2023-1 had 7.28%, while the latest deal is at 8.5% (potentially a touch higher, with October and November’s origination at 9.3% and 9.6% respectively).

So balance has been partly restored to securitisation markets. When collateral yields are going up, and bond credit spreads are going down, it’s going to be a good year.

Belmont Green’s Tower Bridge Funding 2024-1, priced, counterintuitively, just before Christmas, is a slightly different animal, as much of the collateral (54%) comes from older deals. According to S&P, this comes from called deals (2020-1 was called in the spring last year) and where loans were repurchased because product switch limits were reached in the transactions (my emphasis).

Product switching, we think, will be an increasingly important consideration in UK RMBS this year — lenders can switch borrowers onto a new mortgage without reunderwriting the loan, a crucial get-out clause in a high rates environment. 

Redoing affordability checks on a high interest specialist loan when Bank Rate is >5% means computer will say no; softening house prices are another threat. Offering a product switch keeps volumes and origination fees coming, but at the cost of a loan book that’s going to get worse. Some of the borrowers themselves are sort of stealth “mortgage prisoners”; if their lenders fall over in the tough times ahead, they won’t be able to refinance elsewhere without going back through affordability and underwriting.

Still, at 110bps on the senior, the deal itself had strong execution in private format — we suspect the pawprints of a West Coast Asset Manager are all over this one. Significant investor language in the deal docs suggests separate tickets for the class A and for the mezz, though, so perhaps there’s another private buyer offering compelling levels.

Too beautiful to last

This is very much a securitisation newsletter, but sometimes we steal a glance at other markets. 

Just before Christmas, the restructuring of AnaCap Financial Europe (AFE) was announced, a pre-baked deal which will see one of Arrow Global’s third party funds take over the whole portfolio, and the high yield FRN bondholders push out maturities for six years, but without taking any par impairment. Arrow’s fund will put in some super senior funds, allowing AFE to refinance out the RCF lenders.

Anyway, the reason why I’m writing about it now is because AFE was originally a superb example of the “sell bonds for more than the value of the portfolio” approach occasionally practiced by securitisation sponsors. It’s a sort of high (or low) water mark for NPL businesses funding themselves in leveraged finance markets, rather than through securitisations.

Most of the firms operating as debt purchasers are some sort of hybrid between fund management institutions and corporates providing a service; if you look at Arrow Global today, for example, it’s raised a ton of third-party money through funds and through securitisations, as well as financing its own capital investments through high yield markets. Intrum is somewhat earlier in its journey, but is hoping to attract third-party funds, and sell of some of its back book.

AnaCap was and is a financials-focus private equity firm, which launched a credit arm doing NPL portfolios directly (subsequently split off and rebranded as Veld Capital). It even owned debt purchaser Cabot Financial for a period.

Unusually, however, its visit to high yield was not to finance the broad corporate group, but secured against a specific portfolio. We use “secured”, though, in the loosest possible sense of the word. AnaCap Financial Europe, the bond issuing entity, raised €325m plus a €45m revolver against a portfolio which was bought at €317m. How was this price determined, one might ask? Well, the portfolio was bought from AnaCap’s existing funds, at a fair market value no doubt.

So even in the best case scenario, there was essentially no equity in the transaction. The original sources and uses looks like this:

The rationale for doing this apparently equityless “senior secured” bond is kind of the whole debate about the debt purchasing business in microcosm. While there’s no day 1 equity as such, the NPL portfolio had a whole lot of estimated remaining collections — the LTV covenant in the bonds references the 84-month ERC figure. This is a little bit finger-in-the-air, but it’s supposed to give confidence that the bonds are eventually covered, and there’s plenty of cash coming off in the meantime.

But consider this compared to doing a securitisation! 100%+ advance rate, light disclosure obligations, full flexibility to rotate assets in and out (started out heavily unsecured NPLs, now full of office buildings), six year financing (12 years now post-restructuring), no risk retention. You cash out day one, but you can still switch stuff in and out and see if there’s some upside to come a few years down the line. Dreamy!

And they would have gotten away with it too, if it hadn’t been for that pesky Vladimir Putin. AFE had a partly-baked refinancing bond ready to go in February 2022, with Credit Suisse (RIP) running the deal. But the tanks were massing on the border, and the trade never got over the line — with the result, late last year, that Arrow’s fund AGG Capital Management was able to take over, paying a princely 51c for the equity, along with putting some super senior PIK notes to pay down the RCF lenders. Still, at least AnaCap Credit’s downside was already protected!

Probably the worst deal in a while

Prompted by a couple of stock exchange notices, one saying “we can’t find the servicer” and a subsequent one saying “we found the servicer but they won’t do the servicing any more”, I thought it was a good week to check in on Gedesco Trade Receivables 2020-1. I’ve dived into the details in a bit more depth here.

The deal was branded, at the time of sale in 2020, as a highly innovative SME/midcap CLO securitising a bundle of factoring facilities, promissory notes and direct lending facilities in Spain, and it was a minor project of mine in Barcelona last year.

The sponsor, Spanish non-bank lender Gedesco, is embroiled in a complex multi-directional and multi-jurisdictional legal fight. 

Here are some of the elements: JZI, the private equity which owns Gedesco, is suing current management and founders/directors, alleging self-dealing for personal enrichment. Current management and founders/directors are suing JZI and founder David Zalaznick, alleging a malicious campaign to destroy the company. Current management are trying to dissolve the company, without the permission of majority shareholder JZI. Current management are also suing Maximo Buch and Ernesto Bernia, founders of Stator Management, an investment firm alleged by JZI to be involved in the self-dealing, and claimed by Gedesco to now be owned by Gedesco.

Confusion is probably the right response — the competing claims aren’t just differences of emphasis, they’re on basically different planets, and go right into the heart of issues over who actually controls a company.

For securitisation investors, the results of this conflict have not been good — but unpicking causation and correlation isn’t easy. 

The portfolio deteriorated rapidly following the end of the revolving period at the beginning of 2023. So what’s the explanation? Was this because there was some truth in the self-dealing allegations, because the servicing was disrupted due to the legal fights, or because the fundamental credit quality wasn’t good in the first place?

There’s some reason to suspect the latter — the most likely explanation for the rapid deterioration is that these were mostly short-term facilities out to borrowers with very few alternative options. From the beginning, Gedesco was lending 11%ish secured money for terms under one year, economics which don’t exactly scream quality. 

Once Gedesco didn’t have a revolving securitisation in place, it couldn’t roll the loans either, and calling them in caused a wave of defaults. The best borrowers likely managed to go elsewhere, with these repayments amortising the senior tranche almost to nothing. All the factoring facilities in the deal have now defaulted, which isn’t really supposed to happen — traditional factoring should be more or less self-liquidating, if the invoices backing the facilities are in to proper, credible companies. The only undefaulted collateral left for class B downwards are a few larger ticket promissory notes (Pagares), which are unsecured instruments, but seen as high quality. They can be presented for payment to a bank, which will honour them more or less like cashing a cheque, if the company has money in its account. Failure to pay causing a cross-default.

Anyway, the likely next steps for Gedesco are for backup servicing Copernicus to step in, which will be enormously interesting — to what extent can more vigorous servicing, from an institution which isn’t mired in legal trouble, improve recoveries from the factoring facilities? 

A further option is sale of the portfolio, though what we’re not clear about is who exactly would sign the sale agreement — the legal fights go to the heart of control of Gedesco, so presumably any potential purchaser would have to have the stomach for a bit of litigation.

For now, it seems like Gedesco is probably going to become a bit of a byword for securitisation disaster in the modern period. There are a few names where a mere mention of the SPV name is enough to bring up war stories of securitisation carnage past, deals like HEAT Mezzanine, Gemini (Eclipse 2006-3), Windermere XII, and Fairhold Securitisation (write in with your suggestions!). Gedesco looks like a worthy addition to the club.