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Last week the abrupt administration of Stenn Technologies caused much headscratching. We inclined to the view that it was an example of too much expansion and not enough capital, but more details have been dribbing out. Bloomberg reported that there are indeed concerns about portions of the portfolio, and furthermore that chief executive Greg Karpovsky seems to be overseas in an undisclosed location — not a great look under the circumstances.

The FT lifted the lid further, successfully getting Karpovsky to talk, and explaining that the probe into potentially suspicious transactions followed mentions of Stenn in unsealed US indictments, while Global Trade Review reports that Citi froze the group’s bank accounts.

We’re not quite at full explanation stage yet, but this fills in some of the blanks. A document from Interpath, the Stenn administrators, said that the companies entered administration because they were “not able to repay [Stenn Assets UK Limited]’s revolving credit facility (guaranteed by [Stenn International Limited]) on demand. They were therefore unable to meet their obligations as they fell due.”

That’s more of a mystery than a solution — why did HSBC Innovation Bank call in the loan? Was it an uncommitted revolver repayable on demand?

A sanction-type issue would explain the pattern of events quite nicely. HSBC (via the GBM division, the largest funder in Stenn Assets, and via HSBC Innovation Bank, the corporate lender which called the default) has had a fairly chequered history with money laundering ($1.9bn fine in 2012!) but that probably makes it even less tolerant of anything that goes close to the line. Get a sniff of sanctions and it’s shoot first and ask questions later.

Receivables, where there were concerns of this nature, would be ineligible collateral and ineligible for insurance, so would have to be bought back by the over-extended corporate.

For a non-bank receivables platform, administration is pretty terminal. An administrator is charged with maximising creditor recoveries, but the business is self-liquidating, just like the collateral.

Clients for the non-banks are often firms which struggle to get factoring lines or facilities from mainstream banks, and once they’ve started factoring / selling receivables, they’re unlikely to be in a position to suddenly catch up on their working capital position.

A Stenn-related court case in the US gives a flavour of the client types; Stenn sued Dackers Trading LLC, a Brooklyn-based import-export business, to collect on invoices factored by EasyClean Co and Kushan Koolcare Technology, China-based manufacturers of cleaning products and heat therapy products respectively.

Anyway, as soon as these clients are onboarded on another platform, they’re not coming back to Stenn in a hurry! It’s a sticky process and relatively painful; a funding platform ought to manually verify at least a sample of the invoices going via the accounts payable departments, to prevent the very obvious “submit worthless PDF for hard currency” form of receivables fraud.

The funding vehicle has probably headed straight into amortisation, with every invoice payment going to pay down the senior. The administrators said that unutilised facilities were unavailable, which sort of matches with this conjecture — no more drawdowns after servicer default.

So the likely outcome is for the business to melt away. Clients will walk and the funding platform will wind-down, leaving the expensively-opened offices, a software platform and some computers to repay creditors. By the time the administrators produce their statement of affairs, there probably won’t be much left to put in it.

This is almost too on the nose, but as an illustration of the rapidity of the collapse…. as recently as mid-November, Stenn was recruiting for an “accounting and tax manager”, whose key responsibilities included managing the group’s external audit process and preparing consolidated and standalone statutory accounts.

It does seem that there’s just something about non-bank receivables platforms, especially those which are valued as “fintechs” on breakneck growth. There’s obvious adverse selection (the clients with access to bank factoring would use bank factoring) and often a nexus with commodities and emerging markets. Diligence is conducted as a random sample, rather than every individual invoice being verified.

Rapidly scaling a business while performing careful diligence on every new client is difficult, and the more pressure there is to sign ever-more clients, the more pressure there is to be flexible on the basic boring stuff like KYC, AML which might protect against these kinds of situation.

The credit quality in receivables deals generally looks good, and the returns as well, and in theory funders can turn off the taps at a moment’s notice, but if there’s some major problem with the platform itself, these deals can still blow up. The advance rates are high, there’s little equity in receivables deals, and statistical approaches can only take you so far.

The sector also attracts serial entrepreneurs.

Stenn’s Karpovsky previously founded Eurokommerz, which, in the words of hedge fund HBK Investment, was “an enormous fraud”, though Karpovsky told the FT that “any potential wrongdoing in that business is proved to have taken place long after my departure from the company”.

Greensill’s senior executive group are also back in the game, minus Lex Greensill, with an operation called Silver Birch Finance, backed by TDR Capital.

The CEO, head of receivables finance, head of inventory finance and head of origination all previously worked at Greensill, though curiously this fact has been left out of their bios.

What look like various financing SPVs have recently been incorporated (Agri Pro Commodities Limited, SB Harvest Trading, Bulk Agri Trading Limited, Silver Birch Finance Nominee) so presumably the capital raising is going well? Watch this space for more receivables entrepreneurship!

Funds which are big league players in asset-backed markets have to contend with a difficult question: how to beat Pimco?

There is a simple answer, which is to pay more than Pimco, but that is generally unsatisfying. For Pimco, AUM and cash deployment has a charm all of its own, but for a hedge fund being judged ruthlessly on returns, overpaying is not a plan.

So what are the levers that can be pulled? Find deals that nobody else can, great, cool, worth a try, but the list of good quality lenders who can deliver size and don’t want to run a competitive process is short. If you can get in early that helps, but that requires heavy duty origination efforts (and small tickets). One could be faster and more user-friendly than Pimco, and finance lenders for speed is paramount, but this again narrows the field.

Owning platforms outright is another route to obtaining assets, but can quite quickly create distractions. Do you want to buy assets at a price which makes the originator look good and allows it to write a lot of business, or do you want to buy assets at a price which makes the returns of an asset-backed fund look good?

This is a problem yet to be solved, with Pimco hoovering up more than £2bn of UK mortgages in the final weeks of the year.

One of its purchases is Project Frankie, which we discussed here a couple of weeks ago, and touched on back in September, which hit the “market” on Wednesday as Valley Funding.

Now the deal is out, we can examine the collateral a little more. With average seasoning of 14 years, these are post-crisis loans, but dating from the period before the fun police arrived with 2014’s responsible lending rules.

Hence we have 24% self-cert loans and 57% interest-only, a profile more reminiscent of pre-crisis non-conform than front book bank-sponsored owner-occupied. 57.2% of the book has been restructured or had an “arrangement to pay” applied in the past, 30% have historically been through a litigation process. As KBRA notes, “servicers typically use litigation as a tool to engage and/or motivate borrowers”!

You’d have to say Pimco has been favourite since day one, having won the other Lloyds disposals, but nonetheless, securitisation funds went once more unto the breach. It’s not like Lloyds is doing sweetheart deals for these processes; Pimco’s strategy for winning involves paying the most money. A deep pool of competitors keeps the pricing honest, which is nice for Lloyds and painful for the underbidders. Still, that’s the game, you win some, you lose most.

The other big Pimco trade appears to be a more limited process at least, by which nearly all of the £1.25bn PMF 2024-2 has been sold to the West Coast Asset Manager (OSB is retaining some senior).

The deal gives a small boost to CET1 into year-end and according to OSB, “is expected to reduce the potential impact from changes in customer behaviour in the reversion period. Funds will be used to support the repayment of drawings under the Bank of England’s Term Funding Scheme for SMEs”.

Selling loans will indeed tend to reduce the impact of those loans on the balance sheet, but there are plenty of funds who’d like to get their hands on big pools of prime buy-to-let. Pimco might have reversed in with a compelling price, but equally, most treasurers know that it stands ready to take full deals when they’re available.

That very much depends on who you ask, and what’s considered a securitisation. For those deals which still circulate distribution statistics (I feel like this generally helpful practice is on the decline) you will look in vain for an insurance disclosure, though these might well be hiding in the “real money” or “asset managers” line — BofA research provided a helpful crunch through distribution trends for 2024 in a note this week.

Look in the statistics provided by lobby groups (and no doubt being sharpened by the European Commission’s hunger for evidence in its Consultation) and you’ll see that the percentage of European insurer assets allocated to securitisation is miserly.

Turning to another strong BofA piece from June, it notes around 4% of European insurers’ fixed income allocation in structured finance, with non-life at around 5% and lifers at 2%, low by historic standards and very low by global standards. The picture probably improves a bit adding the UK back into the stats, but there’s a real truth here. Insurance money used to be enormously important buying regular asset-backed product, and still is in the US. Now it’s a marginal activity for most firms.

But broaden the scope and broaden your mind and insurers are everywhere. The big well-known trades are equity release / lifetime mortgages for the UK lifers (which are mostly turned into internal securitisations) and longer-dated and whole loan pools for the Dutch (likewise internally structured). Then you could add in the fund management mandates. How much insurance money do the likes of M&G and Axa IM allocate to securitisation and securitisation-like product?

The symbiosis between captive reinsurers and alternative asset managers is also well-known, and finds its way into asset-based credit of all kinds. Athene-Apollo and Global Atlantic-KKR are the best known tie-ups, but there’s a bunch of them. As BofA says “there are increasing differences in allocation to SF products between traditional listed insurers, where it remains relatively limited, and PE-backed (private) insurers, where “other” credit investments command a bigger share of asset allocation. Structured and alternative assets represent a much bigger share of US insurers’ investment portfolios than that of their European counterparts.

Here’s McKinsey scoping out the territory:

“In the United States, according to McKinsey analysis, insurers backed by private-capital firms have gathered nearly $700 billion in assets through 2023 and now command 13% market share in the insurance industry, up from 1% in 2012.”

This doesn’t depend on a regulatory arbitrage, though it is true that Bermuda is quite thinly staffed given the size of its insurance industry. There are 273 employees in the total regulatory, monetary and financial authority, of which only a subset work on insurance. This happy few are supervising a reinsurance industry of $1.6trn in assets!

The flywheel, as McKinsey calls it, works for US-domiciled firms as well, and can be made to work in the EU, despite the best efforts of the Solvency II rules. Apollo’s Dutch-headquartered insurer Athora is pursuing much the same strategy.

Less well known is Elliott Management’s MedVida Partners, a Spanish insurer that’s been growing rapidly, and has, according to some reports, helped Elliott to victory in recent bidding processes for Spanish RPL portfolio processes — it scored a success in Unicaja’s Project Pinsapo earlier this year, for example.

According to its latest accounts, it has a swap-based exposure to various Elliott-sponsored Luxcos, which pass through a return based on the yield of Spanish mortgage portfolios. The structure is unusual, and doesn’t appear to be a matching adjustment arbitrage, based on the solvency report for MedVida.

But whatever the trade actually is, insurers are where the money is — if you can get your hands on one, it’s well worth having.

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