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Owen Sanderson

It’s hard to buy portfolios when Pimco is around, because the West Coast Asset Manager has a nasty habit of paying the most for them.

The general playbook, as we’ve extensively discussed, is to buy asset pools unlevered, but structure them into fully subscribed securitisations. Thus are created bonds, which can live happily in the Income Fund complex, to the chagrin of the rest of the securitisation market, which would appreciate the chance to buy and possibly even trade them.

Because Pimco buys unlevered, it also puts itself in a strong position to pay the most for portfolios. A hedge fund that buys assets and levers them 20x will just mechanically end up with a more sensitive exposure than Pimco buying unlevered.

Buying at an asset yield of 5.5% instead of 5.7% can really ruin your day if you’re holding resids only and trying to juice it to a 30% return; but unlevered, if it meets the hurdle rate, do the last 10-20bps really matter?

Bonds were sold in the refinancing of Jupiter Mortgage No. 1 last year, and most recently, off the back of Barclays’ Pavillion Consumer 2025-1, as first reported by Richard here.

Behind this is probably the diversity of different Pimco entities and approaches. Although the Income Fund, public side of Pimco has led the charge in several recent portfolio transactions, it’s not the only Pimco pool of asset-based capital — there’s the Pimco Tactical Opportunities Fund, an open-ended hedge fund; Pimco Flexible Credit Income; Pimco Private Income Fund; the Pimco Diversified Lending Fund; Pimco Diversified Private Credit; and Pimco Specialty Finance Income (supposedly targeting a $5bn raise). I’ve probably missed a couple.

But the point is, there are different pools of capital with different requirements. Some of them want a returns profile that looks more like a hedge fund or PE shop, some want to outperform corporate bonds, some just want SOFR / Euribor plus a margin.

With a securitisation, this can be tailored — simply sell down the structure until the desired leverage-return profile is hit.

In the case of Pavillion, this involved selling some of the investment-grade mezz and keeping the bottom of the capital structure — not quite maximum leverage, but more than usual. Even keeping the bottom of the stack involves a sizeable set of exposures, equivalent in nominal terms to roughly an entire specialist lender RMBS.

Below IG level there’s a £52.5m class E, £43.75m class F, and a £122.5m class Z. We don’t know whether the £61.25m class X was distributed or kept, but it’s a 0.27-year bond, bearing the wildly split rating of A(h)/B-, so does it matter much either way?

In recent years, banks have increasingly opted to do deconsolidations of assets in securitised format. Securitisation is the legal technology best suited to separating legal titles from economic ownership in loan pools, and a prestructured securitisation has other advantages: locked-in leverage levels the playing field and simplifies negotiations, as well as broadening the possible universe of buyers.

So banks structure up their portfolios into securitisations, keep the triple A, market the equity in private, and fill in the mezz afterwards. At least, that’s how it works sometimes, including in the Barclays-Kensington revival trades Finsbury Square 2025-1 and Gemgarto 2023-1.

Funds can bid the equity, and if they like the mezz too, they’re welcome to bid that, but the deal is fully baked and it’s distributed at the direction of the issuer.

Pavillion, a massive £3.8bn consumer portfolio, was sold in a relatively narrow process. Accounts needed to speak for size and take down the whole deal (minus triple-A). Pimco can undoubtedly do this, but still wanted a more levered exposure, and therefore engaged Bank of America to backstop the IG and distribute it in a secondary sale.

Portfolio sales used to mean a full sale of the assets, with buyers sourcing and arranging their own leverage, plus any bond takeout. Then they started to mean sales via securitisation, with prebaked leverage. And now we have a synthesis — pre-formed securitisation, but still featuring an investment bank underwrite and distribution.

For the broader market, though, the most important distinction is whether bonds are available or not. We’re not privy to the Pimco decision-making that sends a portfolio process to one fund or another, but sending more of them to leverage-seeking pockets would be a massive boon to European securitisation supply, and we should celebrate it. Perhaps with a nice bottle of Italian red?

KKR’s investment in PayPal’s European BNPL origination has clearly been successful. The deal was first struck in 2023, and serves as a paradigmatic example of the sort of thing asset-based finance’s big beasts are supposed to get up to — solving a corporate balance sheet problem in size and gaining access to a unique source of origination. There’s even a case study about the trade!

The case study account slightly soft-pedals the actual process for striking the original deal, which was a highly competitive auction pitting KKR against several investment firms, including underbidder Elliott Investment Management.

But still, there were significant barriers to entry. It was undoubtedly a complex deal, and, as the case study notes, it “required KKR’s technology team to create coding software capable of analysing hundreds of millions of data points and adjust pricing quickly based on changing conditions”.

This was kind of table stakes for the investment firms playing at this ticket size, but that doesn’t stop it being very cool.

The original deal, project Danube, was originally financed by Citi, BNP Paribas, Société Générale, RBC and Natixis, with CPPIB and Kennedy Lewis in the mezz. It’s been amended since, and other banks have joined the senior lender group.

Possibly the banks that have joined the group were disappointed to miss out first time, or they were keen to show KKR their commitment, or felt more comfortable after a year or so of performance history.

Possibly they also really liked the returns. The accounts for the Danube luxco show a class A facility of up to €2.5bn, paying 155-185bps over one-month Euribor or Sonia. Try getting that doing prime BTL warehouses.

The €170m max Class B (the mezz notes) coupon is 887.5bps over Euribor or Sonia, while the class C (KKR’s portion) is €265m max.

So, great trade for the lenders. But what if it was much, much bigger?

Happily, the forward-flow commitment is now €6bn, enabling KKR to quote the truly enormous figure of an up to €65bn purchasing commitment. The release notes that KKR Capital Markets arranged the debt for the transaction; we haven’t dug up details but we think most of the banks already involved are rolling and increasing their commitments.

While the original arrangement might have been a hard fought auction, this upsize really is the good stuff — an extra €3bn of asset exposure originated off-market through an existing relationship.

Still, original underbidder Elliott is hanging in there somehow — the day after the announcement of the Danube upsize, PayPal’s recently floated BNPL rival Klarna announced a $1bn Elliott forward flow, pairing nicely with Elliott’s deal last year to fund Klarna’s UK origination. There was no steer on the size when this was first announced, other than a suggestion that it would fund £30bn over some undisclosed number of years.

Last year I wrote about the pre-marketing of a cow-based securitisation, which I celebrated by extensive punning and by the eventual hiring of Mr Richard Met-Calf to join my team.

But beyond identifying that it was a French deal marketed to banks and arranged by Alantra, I struck out on the actual deal deets, and moved on with my life. I guess you could consider this a year-long curing process, but I think I’ve finally identified the trade and intend to milk it as much as possible.

The deal is in an SPV called Astra Funding DAC, where corporate filings indicate it’s a financing for French dairy group Lactalis, a family-owned but extremely large dairy and milk products group. If you’ve eaten a Président brie or a slice of Leerdammer, you’ve enjoyed a Lactalis product. Financial history fans may also be pleased to know that it owns Parmalat, once the biggest fraud in European history.

It was indeed a bank investor taking down the deal, specifically CIC, via its Satellite conduit. Being a bilateral deal there’s not much structural disclosure, but the Irish corporate filings suggest that it’s more like a dairy-sales-receivables structure than outright security over the bovine beasts themselves.

While we’re on the subject of cheese, one of the famous ‘esoteric’ asset classes out there is of course aged parmesan. Credem lends against it, and you can even do a parmesan bond. It’s a neat piece of working capital finance — parmesan is expensive, ties up capital while it is aging, and appreciates in value, giving a natural mechanism to pay the interest costs of any facility.

The same dynamics apply to whisky, and here there seems to be a thriving retail financing opportunity. Do your own DD though — I once rang up one of the whisky retail bond sellers to ask about their structure, and the speed with which they put the phone down when they realized I was a journalist does not inspire confidence.

Inventory and working capital finance in Italy, though, should be ready to bloom, thanks to a new law being steered through the Italian legislature. Marta has a great story digging into it, but the skinny is that the new securitisation law will allow bankruptcy-remote SPVs to directly acquire, hold and manage rights and goods.

This can be combined with receivables in a dual-SPV structure, or standalone as a vehicle in which an SPV can directly acquire and hold non-registered moveable goods.

There were previous workarounds, but none of them were ideal — either they didn’t segregate assets, weren’t flexible enough, or had challenging tax treatment. Streamlining inventory finance should open up inventory securitisations to more borrowers; perhaps the parmesan market can move beyond mini-bonds to true securitisations.

9fin’s asset-based finance team will be out in full force at DealCatalyst’s Specialist Lender Finance conference on Monday — if you’re going, come say hello, and if you’re not, get registered! I’ll be moderating a session on Off the Run Credit: High Yield or High Risk, with a great panel including Richard Fulton of Raylo, a circular economy tech subscription service, Christopher Bosworth of Finclusion, a new UK auto lender; representing the buyside, Christoph Pfundstein of Golborne Capital and Joanna Scott of Growth Lending; and rounding out the lineup, S&P’s Doug Paterson.

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