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Owen Sanderson

Most of the heavy ABS supply this week and last has been in the ECB-eligible Simple Transparent and Standardised (STS) type segment, and it’s probably not a total coincidence that this comes ahead of the ECB’s planned withdrawal from the primary market for securitised products in Europe.

The central bank said at the beginning of February that it will pull back from primary in early March, though it will continue to buy in secondary markets to maintain the size of its portfolio. It’s reducing holdings by €15bn a month, but this is split proportionally across all of its different purchase programmes, and given the ABS purchase programme (ABSPP) is <1% of the central bank’s holdings, this shouldn’t hit too hard.

Reinvestment in ABSPP is therefore quite meaningful, especially if concentrated in secondary — a lot of what the ECB owns is short WAL auto paper; even with a relatively strong primary market the ECB hasn’t always found it easy to maintain portfolio size given the level of principal coming in the door.

Here’s BofA, whose cocktail napkin maths gives a sense of scale:

“Given the expected redemptions under the APP programme, we estimate ECB reinvestments in the ABS sector during March-June 2023 should be c.€1.8bn or c.€440m per month. This is a very small amount in the context of the overall ABS secondary market estimated at c.€32bn in 2022 (based on the €16bn BWIC estimate) or €2.7bn per month. However, given that ECB purchases were focussed on mostly AAA tranches of prime RMBS and auto/consumer ABS, potential universe is much smaller. We estimate secondary market for such securities in 2022 was c.€3.7bn or c.€300m per month. Therefore, potential purchases may be significant in the context of the secondary market universe for ECB purchases.”

In short, if the ECB has to concentrate in secondary, its ABS buying is larger than the entire secondary market in the asset classes where it’s active (and the BofA figures come from a year when secondary was unusually active).

So will the likely impact on secondary spreads be more significant than the ECB’s previous role in primary? Historically, it might have put in for 40%-50% of a vanilla transaction, acting as a confidence booster, a size booster, a permanent anchor which ensures markets stay open.

Recent deal stats suggest fairly modest central bank participation — 10% in Koromo Italy, 4.9% in Domi 2023-1, 1% in Fortuna 2023-1. These aren’t slam-dunk middle of the fairway ECB deals (Koromo has a fat senior tranche structured below triple-A, Domi is buy-to-let, and Fortuna’s loans are fairly high risk) so it’s a little unfair to draw conclusions, but it looks like the market can function quite happily without central bank buying.

The coming ECB withdrawal isn’t the only reason for the furious pace of ECB-eligible issuance lately; there’s lots of pent up desire to print from the back end of last year. The UK mini-budget and LDI selling meant that Q4 was pretty much a washout, so spread sensitive issuers with the option of waiting were well advised to do so.

Even if the ECB is out, that doesn’t mean no official sector support in securitisation markets. The plucky little Central Bank of Latvia will continue to show up, the European Investment Fund has more or less cornered the market in small bank SME risk transfer, and European Investment Bank/EIF money can be found propping up various other transactions.

The ECB change, at least, comes against a backdrop of generally strong conditions. “Viable” was the word being tossed around at the PCS (Prime Collateralised Securities) event (of which more later) — it’s a market where, provided the collateral isn’t too long in the tooth and struck at wildly off market levels, deals can get done and be economically sensible.

The other theme to draw out of the deal distributions is the high level of UK participation. Domi saw 46%, Fortuna saw 37%, DPF 56%. Koromo bucked the trend with just 10%, but it certainly looks like the more important factor is UK real money getting its buying boots on, rather than the ECB’s last gasp in primary.

One syndicate banker described conditions in CLO issuance as “euphoric”, which seems like a fair description of a week where there’s at least one deal printing every day. Spreads may not be going anywhere particularly special, but there’s clearly an open window to issue, and managers that can bring their own equity are diving through it. Since the last Spread we’ve had KKR Credit, Redding Ridge, WhiteStar, Blackstone Credit and Cross Ocean Partners priced, and it’s only Thursday.

Blackstone has printed the tightest, at 170 bps on the senior, but this deal is also notable for bringing senior par sub down to a more “normal” level (38.25%). Most of the deals through the back end of last year have had par subs with a 4 in front, or at least in the 39+ region. What matters for CLO viability is total cost of CLO debt vs asset spread, so this is another step in the direction of healthier arb.

Also notable this week in CLO primary is the return of the single-B tranche in WhiteStar’s Trinitas Euro CLO IV. It’s not clear from the deal update whether this was placed close to home, and a discount margin of 1150 bps looks materially inside generic secondary levels, but it is at least a positive signal.

But the big challenge for the market remains the lack of new issue loan supply. There were a couple of launches this week (€350m for Eviosys, an A&E for Archroma) but this isn’t going to touch the sides given the pace of CLO primary.

In loan secondary, however, BWIC activity has been firing. 9fin’s still a young company and our records don’t extend too far, but this is definitely one of the most active weeks we’ve seen.

We’ve had €139m and €79m lists on Wednesday, €67m and €119m on Thursday, and €96m on Friday.

Some of the lists out there look distinctly CLO-esque — clean portfolios with balanced tickets sizes — while others are a little spicier.

One list, for example, has some €13m of GenesisCare, the now-distressed cancer hospital business that traded savagely down last year, partly on the back of a highly restrictive whitelist which kept the natural buyer base of distressed funds from getting involved. It’s possible that a CLO warehouse active pre-2022 would have bought GenesisCare; it’s unlikely that any planned CLO would have backed up the truck for €13m.

Let’s consider some different strategies for CLO warehouse equity.

If the equity is in a captive vehicle, set up exclusively to support a CLO issuance shelf, then AUM gathering has a quality all of its own. If you’ve got a portfolio, come to market and come quickly, lest the heavy supply damage execution conditions. The transactions coming now are fairly well-ramped (Redding Ridge 15 was at almost 80%, for example) so hopefully the loan market won’t run too far away from managers as they nail down the last parts prior to going effective. Even if the returns aren’t going to be great at first, a call in 18 months might sort things out.

If the warehouse equity is in a third party fund that’s more interested in a quick buck, and you’re not very well ramped yet, perhaps you’d be minded to liquidate the warehouse — not because there’s no term takeout, but because there’s a ton of motivated buyers out there, very little supply, and it’s a good way to take some profits. Seize the moment of greatest supply-demand mismatch, sell to someone else who’s desperate to ramp, instead of hang about waiting and hoping that liability spreads catch up with loan prices.

Bloomberg has figured out one of the lists, and cites it as an Alcentra warehouse intended to supplement a Rothschild / Five Arrows deal in a refinancing. Presumably this would have refreshed Contego II, which was instead called in November, shaking loose another €100m or so of leveraged loans. That explains the preponderance of €1m clips in CLO-friendly credits on one of the lists… too small for a new issue warehouse, just right for bulking up an undersized portfolio.

Some observers also suggest that Anchorage Capital had yet to work through the overhang of BirchLane Capital-related exposures it took on last year — the flood of sub-€100m BWICs a couple of weeks back were driven by Anchorage, but it always seemed a little light given the probable size of the warehouses Anchorage took over.

Whatever the drivers, this is what makes a healthy market. European loans is too often the same way around; all the CLO managers, making up 60-70% of the demand picture, have essentially the same constraints, the same return targets and the same drivers. When they’re buying, everyone else is buying and vice versa. If the strained technical picture shakes out some proper trading, so much the better.

It’s very hard to assess the state of the private market from my seat, but one wise man we spoke to this week noted the increasing prevalence of mezz tranches in private facilities that would have once had a straightforward senior-sub split. There’s always been a private mezz market, but it certainly sounds like it’s getting larger.

If that’s accurate, there’s probably a few different drivers behind it. One big one is the rise and rise of private credit. It’s a very expansive term and lots of funds which essentially do structured credit and securitisation are now rebadging their investments as “specialty finance private credit” or something like that. Remix the words “specialist” “private” “capital” and “solution” however you like; just don’t call it securitisation.

Anyway, strip away the hype and basically what this means is funding lines for non-bank financials, and that just means securitisation that isn’t distributed. There’s a lot of money chasing this sector, and relatively few opportunities. Lenders that once would have had to scratch around to find a decent mezz partner are probably inundated with funding offers these days. Public market mezz has also been thin on the ground these past few months, so funds which can go public or private may have leaned private.

On the other side of the table, the thorough penetration of the specialist lending markets by financial sponsors creates space for mezz funding. Sponsors targeting 20%+ IRR can afford to pay away decent mezz coupons if it brings them to the right leverage point. The shaky term markets in 2022 mean that warehouse lines can’t necessarily be seen as a short term step on the way to a fully levered public deal. If you’re stuck with a particular facility for a year or more, it needs to work harder, and that means a more levered structure.

Equally interesting, we think, is that some of these mezz funds are turning around and leveraging these private pieces further using private repo. If you’ve got a specialist finance mandate and can’t find the right platform partner to do warehouse or forward flow equity, a decent alternative is probably levered mezz in someone else’s facility.

If there’s one thing the securitisation industry is good at, it’s finding ways to eke out a little bit of extra leverage — all these “private credit” speciality finance funds are probably unlevered at the fund level, but juicing returns anyway through repo.

Anyway, this is all very anecdotal — write in if you’ve seen much of this in the wild!

The PCS London Symposium on Tuesday at A&O’s HQ was an excellent event, and I was very pleased to catch up with a few readers and contacts there. The PCS team themselves are perhaps a little frazzled, thanks to their whirlwind tour of European capitals (13 countries I think?) spreading the good news of securitisation. Paris and Frankfurt still to go in March!

The event was under the Chatham House Rule, so I can’t say too much about what was discussed, but the presence of the FCA’s Anne Wrobel talking about the future of the UK securitisation regime was the highlight for most of the lawyers present. Heavy duty regulation makes me glaze over but reach out to your law firm of choice for a hot take on the future of regulatory divergence between the UK and EU.

Aside from regulation, one theme that came up a few times was the re-emergence of innovation in securitisation markets. If 2022’s tough markets saw a “flight to vanilla”, perhaps the recovery this year opens the door for a few spicier asset classes to emerge?

The CRE CLO market, for one thing, has been poised to burst forth since the back end of 2021. Autumn 2021 saw the static Starz Mortgage Securities 2021-1 deal break forth (though syndication wasn’t a slamdunk), and several larger real estate debt funds, including Blackstone, Starwood and Brookfield, were slated to follow. Some of these deals fell away, with financing banks opting to keep the risk rather than distribute into a falling market, but wind forwards to 2023 and perhaps it’s time for another shot? Aeon Investments was also prepping a series of deals via Starz arranger Credit Suisse, but now the Credit Suisse SPG operation is under new ownership and rebranded Atlas, it’s anyone’s guess whether it gets fully distributed.

Also interesting, we think, is the financing of digital infrastructure — data centres, fibre networks, mobile towers and so forth. Like most securitisation markets, this is bigger, better, and earlier in the US, where data centre deals have been coming to market since 2018.

These deals can be akin to CMBS deals, where you’re mortgaging a hard asset, or, especially in the UK, could be structured more like whole business securitisation — UK mobile towers business Arqiva still has its WBS in place from 2013. See this article from Treasurer Magazine for a comprehensive blow-by-blow account.

But you can also finance a data centre through receivables securitisation — this piece from Baker McKenzie takes a look at the benefits. The short version is, the clients for a data centre could well include the top tech firms in world, so, would you rather take the risk on a piece of greenfield infrastructure, or take the credit risk of Microsoft, Amazon, Meta, Alphabet?

The Buy Now Pay Later hype train is still chugging along — perhaps to be helped by increasing certainty in the regulatory environment (UK authorities are consulting on draft legislation). We’ve seen an SRT deal for Klarna, and private facilities for all of the large originators… which may now be looking to takeouts in the year ahead. Onwards to innovation!

This isn’t a great asset at parties, but here’s my confession: I love a bit of elegant financial structuring. It’s in that spirit that I finally decided to take a look at the deal financing FC Barcelona’s stadium, the legendary Camp Nou.

It’s a highly unusual animal, which is part securitisation, part project bond, packaged up as a US private placement. The size is large (€1.5bn), and the stadium itself is the largest in Europe… even now, before the revamp that’s planned and will add another 5000 seats. The revamp looks like it will be pretty special.

FC Barcelona needs little introduction… per KBRA’s rating it’s “a high-profile club with a large and loyal fanbase and significant social media presence playing in La Liga — one of the world’s wealthiest football leagues. This makes the club one of the most valuable in the world. The FCB museum is the third most popular tourist destination in Barcelona, which is a major tourist destination.”

I’ve never been, despite the annual ABS-related pilgrimage to the city. I do vividly remember the time I woke up to what a gold rush Italian NPLs was becoming (probably 2015 or 2016), when we heard that a servicer (Zenith) had arranged to take some of its clients for a kickabout on the legendary pitch.

Anyway, on with the clever stuff. Mostly this is taken from KBRA’s report; someone at arranging bank Goldman Sachs is probably very proud of the transaction but they’re keeping schtum for now.

The traditional problem with project finance is that you need to raise a lot of money to build a thing, but haven’t built it yet and can’t demonstrate to potential financing counterparties that it raise the revenue you expect, and successfully be constructed on time and on budget.

The traditional problem with CMBS is that you need an actually-existing asset before you can mortgage it. Also, a mortgage only takes you so far. If it’s an asset that you cannot, in practice, enforce on, the credit risk is not really the tangible asset that you think you’re secured by, but the operating business which is using it.

That’s very much the case with Camp Nou (sorry, the “Spotify Camp Nou”).

What are you going to do with the largest stadium in Europe, very much rooted to the ground in Barcelona, other than have it occupied by FC Barcelona? Who’d have the cojones to try enforcement? There would literally be riots.

So this financing walks a fine line between securitisation (of cashflows, not hard assets) and project finance. There’s a bunch of project finance-type features baked in, such as a “cookie jar” for potential contingencies and cost overruns, construction targets, a partial bank guarantee provided by the contractor, and milestones for completion on various parts of the construction.

But the basic security package is various revenue streams which will be purchased by the issuer using the note proceeds.

Turning to KBRA again, which used its project finance methodology for the deal: “Unusual for project financings, neither the issuer nor the club are expected to pledge any security to investors. This means that noteholders will not benefit from a mortgage over the stadium or security over other club assets, and will instead rely solely on the issuer’s receipt of the assigned revenues in order to support debt service.”

The revenue streams are split between “Stadium Revenue” (season tickets, ordinary tickets, museum and tours, parking, food & beverage) of which the club takes the first €100m, and “Espai Barca” revenues, which will be driven by the revamp (hospitality and VIP, sponsorship and title rights).

These won’t back the bonds right away (the stadium hasn’t been upgraded yet), but these should come in from 2025.

To throw around some quick numbers, for the first year after completion, there’s expected to be €222m of Stadium revenue, of which €122m will be available for the issuer, and €123m of Espai Barca revenue, giving €246m available for debt service (on a €1.5bn debt stack).

“The projections represent an approximately 100% increase on 2018-2019 revenues,” per KBRA. That’s a reasonable assumption, based on other comps such as Paris St-Germain and Tottenham Hotspur… but it kind of underlines the structuring artistry at work here — the clever bit, and the bit that project finance always struggles with, is securing a bond with revenues that don’t exist yet.

The KBRA report is relatively silent on the complexities of repacking a Spanish FTA structure into a US private placement note, but one assumes that’s a fairly heavy legal lift in its own right.

USPP investors have a fair bit of experience in stadium financing (Spurs refi’d its construction debt in the market in 2019, while Barca’s great rivals Real Madrid also tapped the market in December 2021). A slew of domestic US issuers, such as the LA Rams, have also leaned on this market. Here’s JP Morgan’s Zach Effron (not that one) talking through this market.

The Barca deal, packaging the securitisation structure and dealing with construction risk in a single slug, is materially more complex — best of luck for the GS bankers tasked with explaining it. It’s certainly a thing of beauty; fingers crossed for the execution.

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