Excess Spread — Across the bridge, off-the-run

Owen Sanderson

28 November 2025•10 min read

Off the run

Monday saw DealCatalyst’s always-excellent Specialist Lender Finance conference at the Royal Lancaster in London, fizzing with lending platforms looking for funding and credit funds searching for the next opportunity.

My “Off-the-run” session went ok (I hope!), with some interesting discussions on residual value and leasing — while lease ABS as an idea is pretty vanilla, it can quickly get exotic, depending on what you might be leasing and how you manage the residual values.

On the panel, I had Richard Fulton of Raylo, a circular economy tech subscription firm, who has a particularly interesting perspective.

Grover, another tech subscription firm, hit the buffers at the back end of last year and is now owned by Fasanara, provider of its largest asset-backed facility.

Part of the problem at Grover was effectively mismanagement of residual value, with the monstrously levered asset-based facilities owning the underlying tech, on optimistic assumptions about the second-hand marketability of electronic goods.

Raylo, by common consent, is a very different beast in both management style and business model, and is careful to separate out its residual value and manage the exposures both practically, through refurbishment and reuse, and financially, through separate and prudent management of RV exposures.

Even in much more vanilla asset classes, residual value can still cause trouble. Bridgepoint-owned Zenith, a UK leasing provider, has been struggling for a while, and reported miserable numbers this week, thanks to price pressure on battery electric vehicles.

Its “senior secured” bonds (senior to, uh, equity, but junior to more than £1bn of securitisation debt) were downgraded from CCC+ to CCC by S&P at the beginning of November; this rating was then withdrawn at the issuer’s request, though it preserves a Moody’s Caa2.

Sponsor Bridgepoint injected £50m into the securitisation in March, in the form of a zero coupon junior mezzanine note, a cash injection which was intended to bridge the collateral gap in the securitisation following a price decline in BEVs. That worked, and got the structure through a successful refinancing, but the BEV pain continues. The company reported quarterly EBITDA down 33.7% for the three months ended 30 September 2025 versus the same period last year, driven largely by a nearly £5m swing in the impact of RV from vehicle sales, which went from a £4m profit to a £1.1m loss.

This is all electrics. The loss on BEV sales for the three-month period was £6.1m, and ICE sales made a £5m profit. This translates to an average of £4,132 loss per BEV and £2,086 profit per ICE sale.

If the RV calculation is struck at the wrong level, it’s a tough spot to get out of. Zenith is trying to amortise this over a longer period, encouraging lessees to keep leasing their BEVs, but fundamentally, it has a lot of very levered car price risk, and there’s been a lot of uncertainty about used BEV prices.

It might be able to offload some of this risk — but the price could be too high compared to toughing it out with equity injections or forcing HY bondholders to share some pain.

Crossing the bridge

Elsewhere at the DealCatalyst event there was much discussion of bridging, on the back of the first placement of a European RMBS deal containing bridging loans.

We talked about the transaction, Fairbridge 2025-1, when it was first announced in early November.

It’s had a bumpy ride to market (full discussion here), as illustrated by the time lag between announcement on 4 November and pricing on 25 November, and it’s probably best to think of it as a BTL RMBS with bridging in, rather than a bridging loan RMBS — only 8% of the portfolio is bridging.

Different market participants have very different reads on what that means. If you’re in the business of writing bridge loans and levering them already, some of the loans in the Fairbridge deal look quite vanilla. For investors who are generally in the business of buying BTL-backed bonds, they look spicy.

Credit-assessing bridge loans requires different kinds of disclosure from regular mortgages; they can be lumpier; and where they fund refits or construction, they’re vulnerable to the outcome of said development work. Even investors who are happy to do private bridging facilities as well as public RMBS bonds generally want to be paid more for the former.

It’s almost certainly true that the deal would have cleared faster and cleaner if it hadn’t had the bridging in.

The move from whispers of low-mid 80s to final senior spread of 97bps shows investors finding reasons not to do a deal.

When there’s a ton of competing supply, potential buyers can go pens down easily, unless the spread is too juicy to ignore. Other investor gripes included the lumpy portfolio with high concentration, high proportion of mixed-use collateral, first year pro-rata amortisation, high leverage, and low DSCRs on some loans. None of these are fatal to a securitisation and the market has digested all of them and more, they’re just cumulative reasons to ask for another few basis points.

It’s unusual to do this price discovery in public, but there really was a level – once sole arranger Natixis found it, the senior notes ended 1.6x done with 20 accounts involved, a very respectable performance.

Views are varied on whether it does blaze a trail.

Banks generally like funding bridge loans, get paid well to do so, and a bank facility has much to recommend it for an asset class which isn’t very homogeneous and which revolves quickly. Financing banks would generally like to see more bridging lenders writing more loans, rather than ship these precious, yieldy exposures out to market.

While the deal found a home eventually, specialist lender funding teams will not want to spend nearly a month in market. Fairbridge shows it can be done, but some of the conversations about bridging deals are likely to focus on whether it can be done better.

A 100% bridging deal, or even a 50% bridging deal, would also need to solve different structural problems, since it would need a proper revolving structure, with all of the implied haggling on replenishment criteria, and the pool would have to be presented in rating agency-favourable fashion. Fairbridge sidestepped, rather than solved, these problems.

Still, at one of the afternoon panels at the DealCatalyst event, Steve Vance, director of capital markets at Paratus AMC, said: “Maybe some parts of bridging fit better with the securitisation exit, because it’s a similar product. But it’s very interesting to see it in the market. I think my answer probably a month ago would have been ‘No, bridging doesn’t fit,’ but now I think we look forward to discussions.”

So there we are: green light to pitch Paratus the first sterling one. Good luck everyone.

We also had a small wager over this topic at my mortgage funding webinar in September. After Fairbridge, I’ve called it in favour of LendInvest’s Hugo Davies, who predicted a deal within six months.

Cockroach squad

Losing €200m tends to focus the mind a bit, and inculcate a strong desire not to do so again, especially if you’re in the business of collateral-backed senior secured securitisation lending, and really shouldn’t be getting to single-digit recoveries.

Doubtless the banks involved in Stenn have tightened up procedures and credit-reviewed other exposures, though the cockroaches keep coming. Barclays and JP Morgan, for whom Stenn had been too tight, took a bath on US subprime lender Tricolor later this year. Recoveries haven’t been firmed up for collapsed UK energy firm Prax, but the lenders into the facility where “material irregularities” were identified included HSBC, Citi (both also in Stenn), JP Morgan, RBC and NordLB.

So it is that securitisation banks are now banding together through the Association for Financial Markets in Europe (Afme) to look at some of these situations, establish the facts, share best practices and try to learn from them.

An Afme spokesperson said: “We can confirm that a working group has been established to draw together the facts relating to instances of corporate fraud. At this stage, the group’s work has no predetermined outcome or deliverables.”

It’s clearly not as simple as “try not to do deals that turn out to be frauds”. While this is a good general goal, the details are difficult. Specifying the exact mechanics of audit procedures is crucial: what information should be provided and when? What kind of verification access to servicer systems should lenders expect? What recourse do lenders have if information isn’t forthcoming?

It’s not practical to do a line-by-line examination of every invoice in a receivables facility, but the difference between verifying a random sample of the loans (provided by the borrower) and a random sample of the loans (randomised and chosen by the lender) could be, well, €200m. Procedures matter!

Securitisation lenders could also do with refreshing the playbook in case of servicer insolvency.

The theoretical essence of securitisation is to separate financing from origination, and issue delinked non-recourse debt outside a corporate bankruptcy estate. But as well as providing protection, this adds vulnerability.

Stenn and Prax collapsed incredibly fast; in both cases the receivables facility was essentially the only substantial source of capital and housed much of the potential value of the business. But these were outside the opco insolvency estate and by design difficult to push into administration, meaning the adminstrators of the servicer weren’t necessarily working in the interests of by far the largest economic creditors to these business.

In Stenn, lenders ended up partly funding the administration process for the servicer, but the formal obligations of the administrators are to the creditors of the opco, not to the securitisation. It’s delinked non-recourse debt!

For securitisation lenders, acting quickly to recover as much as possible from a fast-liquidating receivables facility is the most important thing; more important for preserving value than forensic examination to establish fraud and make a case for going after other sources of value.

What is a fund anyway?

The SRT market is at the sharp end of a broader debate about what credit investing looks like. A hot new (old) product, a wave of capital and AUM up for grabs, a market ripe for disruption?

Hoping to take advantage of these trends are several different categories of investment firm, with very different incentives. There are a few pure-play SRT shops (CRC, Chorus), SRT strategies within credit boutiques (Cheyne, Pemberton), SRT strategies within securitised products (M&G, Waterfall, 400 Capital), SRT strategies within multi-asset credit (Blackstone, KKR, Ares).

The purer SRT shops resented the arrival of the multi-asset guys; as soon as relative value looks juicy, they swoop in. Whatever your concept of relative value is. Different funds also used different benchmarks to assess this — should SRT be comped to CLO equity, CDS index tranches, mortgage residuals or junior mezz?

Wind the market forward a few years, and what does this landscape look like? You’d be a fool to bet against the big shops.

The top-tier Blackstone/KKR/Apollo types have a well-oiled fundraising machine enhanced further by the branding effect. Even if returns might be worse than AN Other LLP’s offering, you’re not going to look stupid allocating to one of the big guys. Ability to fundraise is ultimately the determinant of a given investment firm’s longevity. Track record is nice (because it helps fundraising and gets partners paid) but fundraising keeps the lights on.

The broad trend in credit investing seems to be towards consolidation — as well as the comforts of a big institutional fundraising machine, the big shops also benefit from captive insurance AUM and even, increasingly, from retail fund flows.

But consolidation of what? Buying an investment firm is partly buying the people, especially if it’s a partnership (but potentially non-partners can be hired away), partly buying the track record (but does it continue in a different institution?) and partly buying the existing AUM and portfolio.

For a heavily SRT-focused shop, is it a good time to sell?

There’s still plenty of excitement around the market, and some investment managers are starting businesses (Crescent Capital, with the hire of Juan Grana in September, is the latest).

So you’d think at least some potential consolidators would be ready with bids for smaller SRT-focused platforms, as an easy way to buy their way into the SRT boom. That doesn’t mean they’ll get many offers though. For a big multi-asset firm, SRT is just another asset class. For partners of a veteran SRT hedge fund, it’s a way of life; now their market is having its time in the sun, they’ll be after a very rich exit.

We gather that at least one well-known SRT name was exploring the market earlier this year, though didn’t opt to pursue a transaction.

One on the other hand… Glennmont Partners, an infrastructure boutique with a portfolio of infra-related SRTs and other infra credit, was bought by Nuveen in 2021, and rebranded Nuveen Infrastructure.

Several of the staff, though, headed to Golub Capital in recent years, and now even the fate of the portfolio is uncertain — Celeste has a story about what’s in the book, and what’s happening to it.

The point is, an investment firm, to a large extent, is the people. Buy a boutique firm and there’s always a risk that when earn-outs and lockups are expired, everyone walks.