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Private Credit 

Owen Sanderson

Securitisation is the business of connecting bite-size retail-friendly finance to the mass of funding available in the capital markets, and a big part of any new issuer or asset class emerging is scaling up.

A new lender needs some critical mass, some capital, and some track record to approach an investment bank about a meaningfully-sized debt facility. Specialist funds and a few banks will do early stage deals, charging accordingly for the risk and accepting the smaller ticket size, but in general there’s a chicken-egg problem for new lenders; finance is available in spades once a platform has already shown it can use it.

The tension is made explicit by HomeTree boss Simon Phelan, discussing the residential renewables installer’s new £250m facility with Barclays:

“The problem with the capital markets is they’re a bit like 1990 supermodel Linda Evangelista and her famous line ‘we don’t wake up for less than $10,000 a day’ — but in the capital markets case, they’re not really interested in deals that are less than a few hundred million dollars in size — given the transaction costs just don’t stack up for smaller deals.”

This is a problem for residential decarbonisation, as the average project size is in the tens of thousands of pounds, making them uninvestable for the capital markets on a standalone basis”.

£250m is very much in the sweet spot, and this is partly enabled by HomeTree’s own business model, partnering with individual installers. Those wishing to upgrade their home’s energy efficiency, can get the full package via HomeTree; finance, maintenance, installation in a one-stop shop.

That throws up a structuring problem. The tendency of businesses old and new is increasingly to bundle fees, maintenance and interest — XYZ as a service — wherever possible but the financing is generally simplest when only a loan or lease is placed in an SPV.

So there’s a negotiation to be had with prospective financing partners; if loan servicing relies on maintenance and capex controlled outside the securitisation, how does one mitigate the risks of servicer problems, while giving fast-growing negative EBTIDA fintechs the runway to grow? Finance counterparties gain comfort from each other. HomeTree might be a startup, but it’s backed by Legal & General, and a debt facility provided earlier this year (before HomeTree bought and renamed financing business BeWarm) came from BlackRock.

But not all of these products are being offered by startups! Also on the books of the Barclays asset-backed team is a deal for HomeServe, a massive UK institution taken private by Brookfield Infrastructure for more than £4bn.

HomeServe has been combined with Boxt, a company providing financing for various home upgrades, and which is launching a subscription product for boilers, Boxt Life.

Pay about £30 per month and your heating problems are solved, as this bundles maintenance, installation and the device itself, until the end of its useful life.

Subscription services are really just thin-sliced leases, and in a sense it’s evolution not revolution — companies, including HomeServe, have long offered packaged insurance and care solutions to customers purchasing boilers.

The key is to structure the product (and its financing) to manage terminations and residual value risk. In a car business, that’s vital, but there are also widely used datasets on used car value, and it’s pretty easy to drive a car away. It’s much harder to rip out an unwanted boiler, and removing one for non-payment is a sure fire way to end up the target of a Martin Lewis campaign.

So the contracts have an 18 month initial term, and hefty termination fees thereafter, stepping down to their lowest level at 60 months. There’s also a removal and return fee to cover the plumbing required.

Barcelona two years ago coincided with an unpleasant market puke, but featured a bit of foreshadowing, with a keynote speech from Michael Sheren (at the time a Bank of England senior advisor, latterly with the World Economic Forum). Sheren said: “All our homes are extraordinarily expensive tents. They’re leaky, they’re draughty, they’re ridiculous. The UK has the most energy inefficient housing stock in Europe by far. It doesn’t just need heat pumps, it needs insulation, it means a variety of other things as well. The challenges for how to get that financed are going to be huge, and securitisation will be part of the solution”.

And now we have a heat pump deal in Sweden (Aira, discussed last week), HomeTree, HomeServe, solar deals in Germany and Spain, and doubtless more to come.

Public distribution will be the next test. Browsing the attendee list for Global ABS shows Aira, HomeTree and HomeServe all represented, while solar leader Enpal had four people on site.

This is all looking particularly good for the team led by Gordon Beck, who’s now head of corporate and sustainable securitisation at Barclays. Beck spent several years in the US, working on deals including data centers and solar ABS, returning to Europe in 2020, in part to help widen the canvas of European securitisation and bring some of the US technology over here. It’s not always been smooth sailing, but three debut asset classes (boilers, residential renewables and the Vantage data centre deal) in the space of two months is not bad going!

The European securitisation market often suffers from a marked inferiority complex compared to the US, especially in CMBS, where Europe is running at less than five deals a year with no sign of improvement.

But the first post-crisis loss on a European triple-A bond looks set to come a mere month after the US!

All of the “no subprime crisis here” research about the quality of European securitisation tends to look best if one ignores CMBS, which was an absolute bombsite after the crisis. Some of the worst deals are still staggering on.

Post-crisis CMBS is generally much better quality, with lower LTVs, better properties and more stable structures (no grotesque swaps mismatches, better X note drafting, better procedures for amendment and noteholder voting). But not all of it.

The deal facing triple-A loss is the unfortunate Elizabeth Finance 2018, issued by Goldman Sachs, which has been a basket case for years — the larger of the two loans in the deal, Maroon, was transferred to special servicing for an LTV breach in early 2020, and then the pandemic struck, collapsing the value of the secondary shopping centre collateral. The special servicer granted a standstill for a year, but the sponsor, Oaktree, couldn’t provide a workable exit plan to repay the loan (perhaps the pandemic didn’t help), and the loan was accelerated in October 2020.

It’s not purely a tale of Covid-woe. The issues were baked in from the beginning — the deal was issued when the problems in UK retail were already glaring. CVAs, a form of debt restructuring which hits landlords particularly hard, were already coming thick and fast; during 2018, when Elizabeth Finance was issued, ToysRUs, House of Fraser (a common shopping centre anchor tenant) and Carpetright executed CVAs, while New Look, Select, Byron Burger, Jamie’s Italian and Carluccios agreed deals. Debenhams went through a CVA in 2019.

The CMBS structure also exacerbated the weakness, as it applies principal sale proceeds pro-rata, leading Fitch to warn at the time that the structure could not support AAA or AA ratings. Fitch’s report flags the MCR loan, backed by a non-core Manchester office, as the weaker of the two, though this paid back without issue in 2020.

The shocking part is the extreme decline in shopping centre valuations. Special servicer Mount Street expects just £31.5m in proceeds, from a portfolio valued at £104m in 2017. This would be insufficient to repay the £33m senior note, but Bank of America’s research desk, in a note published Wednesday (19 June), said that junior classes would still receive some of the sale proceeds, as deferred coupons rank ahead of principal payments.

Not all shopping centres are equally bad, however. The Elizabeth Finance collateral (three centres in King’s Lynn, Dunfermline and Loughborough) was considered secondary even at the time. Footfall in local town centres might have collapsed, but pan-regional assets still represent a big draw.

That’s certainly what Lloyds hoped for during syndication of the new money provided into SGS.

We discussed the deal a little bit here. It’s part of the old Intu portfolio, very much a Covid casualty, and includes the prime quality Lakeside asset, one of the UK’s largest shopping centres. A restructuring in 2021 failed to really grapple with the issues (eventually PIK interest catches up with you), so another restructuring was agreed earlier this year which dug much deeper.

The centrepiece was £395m of senior loans due 2028 with a £50m capex facility, paying 8.5%. It’s a big ticket for Lloyds alone, so it’s been distributed, apparently with some success — real estate lenders can feel confident that the best shopping centres, at least, are worth looking at again.

We have readers right across the securitisation industry, so let’s take a quick poll — please write in if you’ve ever traded a bond with “Startrader”.

If you have no idea who Startrader might be, you are not alone!

Nonetheless, Startrader Credit Opportunities (Global) Investco II Sarl has filed a lawsuit against SecRep, one of the two main data repositories for European securitisation.

Its claim form says it is a “multi-purpose investment vehicle, formed on 13 March 2013, investing and seeking to invest in listed and unlisted securities, including but not limited to asset-backed securities issued by English incorporated public issuers”.

The president of Startrader appears to be one Ajayan Shankar Kumar, also a new name to me, and not one that appears to be FCA-authorised. Startrader Credit Opportunities (Global) Investco II Sarl doesn’t appear in the Luxembourg Company Registry, though Sarl vehicles are used in other Francophone jurisdictions. Perhaps it is a Madagascan investment fund?

The gist of the claim is that SecRep is in breach of its obligations under the Securitisation Regulation to grant data access to potential investors in securitisations.

The claim form itself is quite something.

“It is averred that the wholly invented and increasingly tortured, disingenuous and inherently implausible (mis)representations tendered by the Defendant as to its prerequisites, prayed in paragraphs [13] and [15] herein, being symptomatic of the matters pleaded directly hereinabove, and as to other the impropriety and bad faith adopted by Mr Bates against the Claimant, and other persons in a similar position to it.”

The defence pleading responds — ”Paragraph 26 is embarrassing for lack of clarity. It comprises a single and lengthy sentence which makes no sense. The Defendant is unable to plead to this, save that any allegations intended to allege impropriety on behalf of the Defendant, are denied”.

SecRep essentially denies every substantial claim, and points out that it has followed its FCA-approved procedures for vetting potential investors (and that it has only dealt with UK-registered Startrader Pro, rather than the Lux or….other….vehicle filing the claim).

I’d encourage you to read both documents, ping me if you’d like a copy.

Longtime readers might have a sense of what’s coming. Unrecognised SPVs, correspondence addresses at letterbox locations, hair-trigger lawsuits, and an unhealthy interest in securitisation documentation?

Startrader Pro, the UK vehicle, is a defunct FX and crypto brokerage, which still, for now, has an FCA licence (it has applied to cancel).

Its current director is listed as Gary Fung, who was linked to the Rizwan attack on Hurricane Energy. Fung’s correspondence address is a corporate services letterbox on City Road, and it is unclear if they are a real person.

On the FCA register, Mark Winters is listed as a contact point.

Per the defence pleading, “the Defendant was unable to satisfy itself that Startrader Pro Limited was a potential investor due to the paucity of information available about the company. The Defendant pleads in terms that Startrader Pro Limited was the author of any request for access and that this was made without any reference to the Claimant or its alleged relationship with the Claimant. The FCA Register was marked as having contact details out of date for Startrader Pro Limited. The Startrader Pro Limited website linked on the FCA register did not work. The internet archive of the Startrader Pro Limited website did not disclose any history of investing in securitisations. The contact listed on the FCA register (Mr Mark Winters) was contacted by Dr Stephen Walker (CEO for the Defendant) by email on 26 March 2024. A phone call betweeen Mr Winters and Dr Walker subsequently took place. Mr Winters denied having had involvement with the company, Startrade Pro Limited, for over 12 months”.

The very fact that Rizwan-linked entities are exploring securitisation data is interesting.

The basic format of the most recent attacks on securitisations involved purporting to become a director of a special purpose vehicle, and using this position to attempt to direct enforcement or administration.

Generally these claims, after considerable cost, are thrown out by the courts, and have no real basis for success. The actual details of the deal documents, or the performance of the collateral, are irrelevant to this method of attack. What does it matter how close a deal is to its sequential pay trigger, or whether the class X is switched off, when the plan is just pretending to be a SPV director? But it appears that “Startrader” et al consider this information vital.

The attack on Business Mortgage Finance alone generated 16 separate suits and countersuits, by my count, drawing in transaction counterparties, SPV directors and more. This is not what the market needs right now.

Is the golden age of NPL investing behind us? Depends on who you ask. Several of the big corporate NPL buyers are in a tight spot. Intrum, Lowell and iQera have called in the capital structure advisors and bondholders are gritting their teeth.

The state-sponsored securitisation support schemes in Italy and Greece unquestionably succeeded in getting NPLs out of the banking system, but the small tickets put in for GACS and HAPS juniors are mostly out of the money, existing deals are underperforming, and as the government in Italy hasn’t renewed GACS, it’s impossible to re-rack deals and eke out some leverage efficiency.

The smart money is also exiting the picks and shovels business.

Lone Star’s Start Mortgages in Ireland has shut up shop, with contracts transferred to Arrow Global subsidiary Mars Capital. Cerberus slipped out of Spain’s Haya Real Estate after a restructuring, leaving Intrum holding the bag. Elliott Management is merging Gardant with doValue, Davidson Kempner has sold Prelios to an ION Group subsidiary (9fincompetes with ION’s financial news division). Illimity Bank, which formerly specialised in NPL purchasing, has pivoted away from the market — the bank’s FY 23 presentation said it would exit NPL direct investment and evolve into asset-based financing, with 82% of the divisions year-end balance sheet in this business, up from 59% at the end of 2022.

The 2015-17 vintage funds raised to invest in deleveraging Europe’s broken banks are in realization now; primary supply has been minimal, and most opportunities are coming out from secondary sales. Who’d buy in such circumstances?

It’s partly about what’s being bought and at what price.

The underperformance of the GACS and HAPS deals is making servicers into motivated sellers, pushing out small ticket secondary portfolios to try to catch up to overoptimistic business plans. Debt buyers under pressure to become “capital light” might offer out reperforming loans, which can be financed on far better terms than non-performing assets. Small balance portfolios might trade bilaterally, without the price pressure of a widely circulated auction process.

But you need to be nimble in this environment, aggregating portfolios and painstakingly building relationships.

For the premier providers of NPL picks and shovels, this environment will prove difficult. Arrow Global has already made the pivot into being an investor of third party capital, and is diversifying into private debt and real estate.

But what’s the pitch for the likes of Intrum, which unveiled one of its restructuring proposals on Thursday? It wants to do third party servicing and buy less of its own assets, but partnering with capital providers who do still want to access NPLs.

Intrum can use its relationships for the flow of small balance unsecured NPLs, but the large scale portfolio sales (and the associated servicing mandates) may be mostly in the past. From the other side, how much institutional capital is exploring this opportunity? As base rates have moved up into healthier positive territory, performing assets are now paying decent yields again, and there’s less reason to reach for yield. NPL portfolio IRRs have also adjusted somewhat, but without the reach for yield

The actual restructuring proposal looks a little thin. 9fin’s distressed debt team have put together an initial reaction, but the headline is that most of the near-term debt gets par, the super-senior RCF gets extended, but with better security and some paydown, and most of the unsecured bond debt from 2025 outwards gets reinstated into instruments totalling 90% of the currently outstanding amount.

There’s a few goodies like lockup fees and equity, and €400m of new money to be used for discounted buybacks, in an attempt to juice the rather limited deleveraging.

There’s still quite a lot more debt than the book value of the portfolios Intrum owns, and a little more debt than the seven year estimated remaining collections (ERCs), the usual debt purchaser measure.

Intrum prefers to look at the 15 year ERCs, where the total is definitively higher than its liability stack, and its restructuring proposal offers good details on what these look like. But still, much will turn on the valuation of the servicing business. Intrum said it has another proposal in the wings, supported by near-term bondholders, so there’s everything still to play for.

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