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Owen Sanderson

Looks like the CLO market has done the obvious thing, and drowned the delicate rally in a flood of supply. The European CLO investor base is growing, but it’s not huge, and it’s easy for it to be overwhelmed in hot markets, especially when broader fixed income conditions are softening. 

Last week was definitely sizzling, with more than one deal a day; now the visible pipeline has calmed down as spreads have softened.

But there’s still some deals we should discuss, most notably CVC Cordatus XXV-A, which was priced on Friday. CVC Cordatus XXV ran headlong into the LDI troubles in October, with triple-A anchor Norinchukin stepping back and the deal, therefore, on pause.

CVC already had its SPV sequencing tangled (XXVI came before XV, in August 2022), and has since further muddied the waters with the CVC Cordatus Opportunity Loan Fund, effectively a private bank-financed term CLO we discussed in December. There’s a healthy pipeline of Cordatus deals to come, with XXVII-XXIX already incorporated and warehouses open.

XXV-A is not simply a dusted-down version of XXV though — it’s a new SPV with new docs. The interesting part, we think, are the stipulations imposed by the triple-A. 

Turning to S&P, the deal includes “a condition whereby the issue date class A investor would have to consent, in writing, before certain provisions of the documentation can be used”.

Examples include: not being able to run the class F interest coverage ratio test to avoid interest smoothing unless consent is obtained, carrying long-dated restructured obligations at zero without consent, or collateral value with consent, 5% limit for workout obligations without consent, 10% with, consent to interim payments, and consent to waive the S&P weighted-average recovery test.

Without getting too deep in the waters of CLO documentation, this is just an extra layer of protection, and a way of partly squaring the circle of senior investor restrictions. Better to have a doc that can be flexible with consent, rather than one that’s locked in as either too loose or too tight.

The debate over the treatment of workout obligations has been rumbling for a while, with CLO managers and arrangers typically arguing that flexibility here benefits the whole capital structure, while triple-A accounts tend to adopt more of a “grudging acceptance” type approach. A written consent kind of squares the circle — yes there’s flexibility when it’s needed, but not automatic. Triple-A isn’t giving up control, except when it has conviction. 

Obviously this is kind of annoying for manager and equity (both CVC Credit in this case), but on the other hand it probably saves 5 bps at least (the 170 triple-A print is inside both the top tier manager benchmark of 175 bps and the 180 achieved by Cross Ocean).

Given a modelled excess spread of 107 bps, according to S&P, every little helps — the rule of thumb for nice healthy CLO arb is 200 or so, so this is a little skinny.

Elsewhere in primary, we thought Cross Ocean Partners’ Bosphorus VIII was an interesting deal. It’s the second deal since Cross Ocean bought the old Commerzbank CLO operation and effectively relaunched the Bosphorus shelf, and it follows the last deal in September. The warehouse was only established in November, so it’s full of recent vintage high coupon collateral. Senior notes landed a touch outside other recent new issues at 180 bps, but perhaps that’s the price for a widely distributed senior rather than an anchor.

Bosphorus is very unusual as a shelf in actually using Moody’s to rate the full stack — the market has been pretty much reliant on S&P and Fitch for more than a year, as the Moody’s WAL test treatment is generally reckoned more punitive, delivering a less levered capital structure through the class ‘F’. There have been a few Moody’s ratings on senior notes, tailored to specific triple A accounts that require it, but precious few lower in the capital structure.

Eyeballing Bosphorus, though, it doesn’t look terrible? Credit enhancement is 9% on the lowest debt tranche, vs 8.5% for the last Blackstone deal and 9.5% for the latest Whitestar, both S&P and Fitch transactions.

Anyway, the other less usual feature also concerns the class ‘F’ — specifically, that there was one, fully placed to external investors. We’re still seeing retained or delayed draw tranches dominate the market, but it’s clearly good news if there’s an acceptable bid at the bottom of the capital structure, as this helps open the market to managers with a limited supply of equity. You have to have a fair bit of spare cash to accept a deal that only places down to double-B. If you’re doing delayed draw, that implies high conviction that the market will recover enough to place this…..but when will that happen?

On the CLO asset side, 9fin’s distressed debt team have been spending a fair bit of time on Hurtigruten, a TDR Capital-owned Norwegian cruise and ferry operator. It’s been wobbling since Covid, and unveiled a more fullsome restructuring proposal last week — here’s an analysis of the terms, and here’s the release. AlbaCore Capital, which has a productive relationship with TDR, often doing second liens on TDR buyouts, is stepping in with €200m.

It’s a fairly widely held credit, despite the wobble, with a main facility of €575m plus bonds and various smaller loans, and a bunch of CLO managers will have to consent to get the deal through and give the company some runway.

The interesting part, we think, is how the company and sponsor have structured the deal. We spent a bit of time the other week digging into CLOs and A&E requests (I wrote a big piece, available on request), and one interesting point was the extent to which CLOs often wanted to consent to A&E but weren’t able to do so, especially if out of their reinvestment periods or facing WAL test constraints.

There’s a provision in CLO docs which is meant to control portfolio maturity by preventing managers voting for an extension…..but if the loan agreement allows it, CLOs who “snooze” and do not vote can be dragged along (delivering the extension and improved economics which they probably wanted). 

So, should such a manager receive the consent fee for doing, in effect, nothing? 

Naturally the managers think the answer is yes, and TDR Capital seems inclined to agree. CLOs which can prove they are restricted from voting yes, and simply snooze, will be paid the same consent fee as the rest.

This will surely help to keep lenders sweet and maintain good relations (for a price!) but it has certain administrative downsides….restructuring and extension negotiations are complicated enough already without having to review a ton of CLO documentation as well.

Still, Hurtigruten is unlikely to be the only company needing to get creative in finding ways to get consent in the year ahead. We’re still some way from CLO resets being in-the-money, so the pile of post-reinvestment transactions is only going to grow — and this procedure could become increasingly popular.

One last bit. Do you want to read a poem about CLOs? Written by AI? No???

There’s one here anyway, courtesy of former GSO PM Po-Heng Tan. Enjoy!

Word has reached us of a decent-sized portfolio of UK mortgages up for sale, and we think it’s an interesting one. Foundation Home Loans, one of the UK’s biggest buy-to-let specialists, is selling roughly £1bn of recent vintage mortgages, derived from three portfolios — two of 2022 origination, and one from a warehouse vehicle used to call an older Twin Bridges RMBS transaction.

Potential buyers are asked to bid separately on each portfolio and submit bids for the whole portfolio, and Foundation is able to accept offers for everything, each portfolio, or none at all. The portfolios are being offered ex-swap, with Foundation willing to break its swaps.

It’s a fair-sized trade, but it’s also very illustrative of where the market’s been this year and last. The sale process kicked off in mid-January, when the green shoots in securitisation were very small indeed — Belmont Green’s Tower Bridge Funding 2023-1 was announced January 17 with class A already spoken for, and the strong execution on the mezz wasn’t apparent until the following week. Even then, it didn’t prove the market was wide open and screaming for a £1bn transaction.

But securitisation aside, Foundation expected a strong bid for mortgage portfolios — not necessarily from the standard securitisation-funded sponsor or hedge fund accounts, but from deposit-taking banks. Sale of the portfolio was a straightforward profit-making exercise; there was a bid, it could be hit.

We’d expect the keenest bidders to be the digital / challenger / neobank type accounts. Banks which started out with whizzy apps, top grade customer service, and brand-building to raise retail deposits, didn’t do much “lending”, and now need to get some net interest margin in the door. Other challenger banks have highly flexible balance sheets which are reliant on the certificate of deposits market — and so can be rapidly ramped up when there’s an attractive buying opportunity out there.

Fast forward to early March, and securitisation markets are looking much healthier. 

But that may still be too little too late to get the financial investors fully back in the game. The likes of M&G, DK and Pimco have dominated the bidding for performing UK mortgages over the past decade or so, but the deposit-takers are in charge for the moment.

The Apollo angle is also worth consideration. Apollo bought Foundation through its Athene insurance vehicle in 2021, in a deal which was touted at the time as “providing Athene with attractive investment opportunities in high quality yield assets”.

No doubt the FHL mortgages are both high quality and yieldy, but it doesn’t seem like Athene has been going particularly hard on the investment opportunity in question. 

FHL hasn’t simply plugged its origination into Athene’s balance sheet; it’s continued to use the standard mix of securitisations and warehouses, just like it did under Fortress’s ownership and just like most of its competitors. Presumably Athene had first refusal on the mortgage book that’s up for sale; the fact that it’s a broader sale process tells you what you need to know.

Of course, it’s not necessarily a clean split between the funds and the banks…sometimes they’re one and the same. 

Elliott Advisors-backed Chetwood Financial, a regulated bank, is said to have its buying boots on; accounts for the year ending March 2022 show that it bought a £158m portfolio of performing BTL — quite a sizeable purchase for a firm with £323m in customer deposits at the end of March — and Companies House records show it’s still increasing its capital base (Elliott injected £55m in the year to March 2022).

KPMG is said to be handling the portfolio sale, which is also a rather interesting detail! Apologies for reprising my greatest hits, but KPMG were intimately involved in one of the many Rizwan Hussain debacles — and played a role which led, quite rightly, to fury and a total blacklist from Foundation / Paratus AMC.

At the back end of 2017, shortly before really bursting onto the scene with the Clifden Holdings tender offer, Rizwan mandated KPMG to sell a portfolio of RMAC mortgages in “Project Grosvenor”.

The minor detail missed in due diligence, however, was that Rizwan did not, in fact, own the portfolio. Paratus did. Hence the fury. I have written, um, quite a lot about all this so won’t retread it all. But the TLDR is, KPMG’s portfolio advisory team haven’t been winning a lot of business from Foundation for a while, so it’s quite a significant move.

The European securitisation market has a strange relationship with Vegas — not the city, but SFIG Vegas, the largest securitisation (ok, “securitization”) event in the world, cinematically depicted in The Big Short and truly something to behold. The 4000 or so attendees at Global ABS are dwarfed by the 7000+ showing up in Vegas (though the discrepancy is much smaller than the relative sizes of the two markets would suggest). 

You do generally get a few European market visitors showing up, but it’s a different world out there. Issuers who might run the biggest shelves in Europe are bit-part players; European product distributed into the US simply isn’t that significant. Where US funds do buy, it’s often through London operations anyway.

The issuers that do head out there tend to skew UK — they’re more likely to do 144A or, very occasionally, dollar-denominated transactions, and the mortgage systems are mutually comprehensible. Indeed, the UK market kicked off this year with Tower Bridge 2013-1, which had 144A docs though on a sterling tranche. Prime RMBS borrowers from the UK, the most likely issuers to do deals swapped into dollars, get comped to unsecured credit card ABS spreads in the US, which smarts in principle but can still save basis points if the cross-currency is favourable.

Hitting the 144A bid is also very worthwhile for issuers that simply have a lot of wood to chop — Kensington always made the trek historically, and we understand the treasury team has been out in Vegas again, despite the, uh, reduced issuance schedule since it was sold to Barclays.

There’s also a regular poker game for European market participants trekking out to the gambling-based city, so that’s probably enjoyable too.

This year it’s probably particularly important to preach the good news from the UK market — the political and economic debacle of Liz Truss’s brief premiership, and the attendant blowout in ABS and CLO markets probably needs some explanation. 

Expect to see “The UK — still a developed market?” in some pitchbooks. Seriously though, liquidity in European securitised products is already a concern for US investors, and, although the LDI supply was, on balance, well absorbed, the BWIC volume that blew out the market in Europe is like, an average Tuesday for US securitization. 

Anyway, whether Vegas-driven or not, there’s been a bit of an air pocket in the furious primary pace this week. We understand that supply may swing back from the euro-denominated STS issuance seen the past couple of weeks, and UK specialist lender deals are potentially back on the table, provided the collateral is recent vintage. Indeed, thanks to the rally so far this year, some of them are being re-racked to take advantage of the much-improved spread backdrop this year. Rating agencies use coupon assumptions to calculate interest coverage and excess spread, so if the market improves, you can recut a deal to give more efficient tranching.

Looks like the last minute slapdash attempt to extend the loan in Blackstone’s Finnish CMBS Frosn 2018 has failed. 

It’s hard to say from the outside whether this comes down to fundamental credit or simple incompetence, but it seems pretty sloppy to call a bondholder meeting the day before loan maturity. The servicer stuck on a couple of short term extensions after the bondholder meeting missed the threshold to consent, but these expired on 1 March, and now it’s in special servicing. 

There’s not a lot of European CMBS outstanding, but a very large proportion of it is sponsored by Blackstone, so hopefully this will be a salutary lesson on addressing the rest of them. 

Pietra Nera Uno (Italian for Black Stone One, ho ho), an Italian shopping centre transaction, is looking pretty shabby (everything except the senior is now sub-IG), though it has managed to push out its May 2023 maturity by a year.

S&P has a nice run down on some of the upcoming loan maturities in CMBS, which is somewhat reassuring — there are a fair few extensions to negotiate, but LTVs are mostly low and deals are, in principle, refinanceable.

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