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Excess Spread is our weekly newsletter, covering trends, deals and more in structured credit and ABS. Find out more about 9fin for structured credit.

European securitisation is breaking records, and the market would be celebrating (if it wasn’t too busy printing trades).

As of right now, we’re tracking at the highest public issuance level YTD since the 2008 financial crisis, so we’re on course for a record-breaking 2024. That matches the strong vibes in Barcelona this year, though with a contentious and uncertain US election season coming into view, there’s probably more than a few deals that have been brought forward from October executions into the busy September season. I’d expect a precipitous decline in the pace of supply at the back end of the year (though November/December is hardly the window of choice in most years).

Also encouraging is the quantity of bank supply, which is running at more than double 2021 and 2022 levels, according to S&P (thanks for the invite to the excellent and well-attended European Structured Finance Conference on Thursday).

That’s evident in the market this week — two separate Santander units with live deals, BBVA and Sabadell transactions bookbuilding, plus Credit Agricole / BPM joint venture Agos Ducato. “Bank-originated” probably also includes the captive auto lenders, from which we have two Volkswagen units, RCI Banque and Porsche Bank with live deals in the past week.

The surge in supply seems to be settling down well — senior subscription levels in the 1.2-1.6x range on the euro deals suggest sensible pricing and strong support (there’s usually little fluff in ABS senior books), though the UK specialist lender deals (big beasts Foundation Home Loans, Together, and Belmont Green are all in market) seem to be generating more excitement. FHL’s Braccan Mortgage Funding tightened from IPTs of 90 area to land at 84bps, on a book of 2.1x at IPTs, while Belmont Green’s Tower Bridge Funding 2024-3 gathered a 3.5x book, and priced at 79bps from mid-high 80s IPTs.

In a time of decent base rates, securitisation is a high-carry kind of product, which probably provides a lot of technical support to the market. ABS funds should be benchmarked to a floating rate to match their floating rate investments, but that doesn’t mean base rate effects just disappear — the actual cash from Euribor at 3.5% and Sonia at 4.9% still lands in fund accounts and is available for reinvestment.

Whether or not we actually see meaningful new allocations to ABS or new investor entering the market, the sheer flow of coupon payments supplies strong support to periods of heavy supply. While the number of issuers has steadily crept up, some market stalwarts have disappeared, which may also help spreads; no Kensington means four or five fewer RMBS deals per year, and more money looking for a home with other non-bank lenders.

But we also hear whispers of investors joining the market, particularly in the UK. Challenger, neobank and builder treasuries are becoming increasingly active in parts of the UK RMBS market; institutions which led with deposit-gathering need to find something yieldy to put on the other side of the balance sheet.

With tighter spreads come risks. Buying deals at levels close to long term tights means that a post-call step-up of 1.5x or 100bps is more likely to be out of the money, baking in extension risk. Front-book securitisation-dependent regular issuers have tended to call deals in good times and bad, as long as there’s a refi available, but this is much less true for legacy collateral owned by financial investors.

It would be nice to think that structure could offer some protection, but environments where spreads are tight are also environments where investors can’t push for such protection. Headline step-up spreads are highly visible, but strong conditions also tend to erode deal aspects like reserve fund amortisation, sequential pay trigger levels, and debt-friendly features of waterfalls.

Longer term, the market’s health relies on a supportive regulatory environment, and perhaps this time really is different. The first launch of “Capital Markets Union” a decade ago wasn’t really far beyond the crisis, and there wasn’t much of “normal times” track record for post-crisis securitisation; the clean-up of 2008 ran straight into the sovereign crisis.

It also suffered from a basic contradiction. The high level idea was to reduce the proportion of bank lending in the economy and replace it with market funding, but monetary policy at the time consisted of stuffing banks with unlimited money in the hope of encouraging them to lend. The weight of €2.5trn in newly created euros easily beat out the half-hearted regulatory encouragement for securitisation.

Now, however, the coalition of the willing seems wider, and includes influential central bankers and important member state governments, not just a technocratic clique at the Commission. There’s a track record which shows clearly what worked and what didn’t work in the Securitisation Regulation, and enough data to make a case for changing the bits that don’t.

There’s also far less flux in the overall financial regulation environment. The years 2008-2020 saw sweeping reforms in every area of markets and banking regulation, often with unpredictable or at best pointless effects (aren’t you glad that every deal announcement includes the line “THE JOINT LEAD MANAGERS ARE GETTING PLACEMENT FEES ON THIS TRANSACTION”. Personally I feel safer every time I read it, having previously assumed that investment banks did it for the love).

But these changes have mostly worked through the system, the dust has settled, and now regulators can, in theory, target the tweaks that matter.

While cash deals might be crowding into September, the rhythm of the SRT market is different. Deals take longer to execute, and closings tend to cluster before H1 and FY balance sheet dates, leading to furious activity to get deals done in December, when the rest of the market is tucking into turkey.

This year, the rhythm has been different — issuers launched more processes earlier in the year, capitalising on the rush of SRT excitement to get transactions done. Q2 2022 and Q2 2023 were blown off course by war and banking crisis respectively, but a relatively benign backdrop in 2024 meant these could work through earlier in the year.

The market is also maturing and expanding rapidly. This week, we touched on leveraged finance deals, looking mostly at Deutsche Bank’s latest LOFT deal. Coming in with a 1,050bps coupon (on a thick 0-18% tranche), this looks tight compared to a similar slice of a CLO capital structure (we worked through a similar comparison for LOFT in 2022).

But as SRT is maturing and the dedicated investor base grows, this relative value comparison matters less than it once did.

Several of the funds which historically played in SRT deals were multi-asset funds with large exposures to CLO equity — Axa IM’s Volta Finance or Chenavari’s Toro are two listed examples, for those who enjoy poring over fund disclosures — but the SRT-dedicated market is growing rapidly. The marginal SRT investor without a dedicated mandate is just as likely to be an “asset-backed private credit” fund, comping SRT returns to mortgage or consumer loan equity, as a CLO equity fund.

Investors grumbling about SRT deals coming tight to CLOs, therefore, are free to simply not buy the deals — there’s plenty of money out there.

It’s also not quite a fair comparison. Large cap leveraged finance SRTs tend to focus on RCFs, as these are the portion of LevFin capital structures most often retained by banks (the TLBs are distributed to CLOs and other loan funds).

Even if an RCF is theoretically pari passu to the TLB (and often it’s super-senior), recoveries are likely to be better. RCFs generally still feature maintenance covenants. Even if these “spring” into action only when the facility is drawn, they give lenders an earlier seat at the table, a position only strengthened by the custom of setting the RCF maturity inside that of the TLB. More concentrated lender groups, which are often mission-critical relationships for sponsors, also tends to help RCFs navigate restructurings with minimal damage, or at least, without principal impairment.

CLO structures also feature an inherent tension — equity return is driven basically by the credit spread of the underlying portfolio, giving an incentive to invest in higher risk assets, tempered by limits like WARF and triple-C bucket. SRT deals have a set coupon; the lower the credit risk the better. SRT structures don’t allow investors to sell on bad assets in the portfolio, but on the other hand they can usually toss out the crap before they even close.

We liked this paper from Man Group (which is involved in both markets, via different pockets) for a more scholarly run-down of the differences. But the crucial point is, SRT is growing up — it’s a market that’s self-sustaining in its own right, not one which relies on relative value against comparable asset classes.

S&P’s conference touched on several new asset classes, some of which we’ve mentioned here — solar, data centres, energy efficiency loans for example — but there’s definitely something in the air about bridging loans.

This has long been a securitisation-adjacent asset class, with the securitised product groups at investment banks providing bridging warehouse facilities to securitisation stalwart like Together and LendInvest. Asset-backed investors have been prominent in buying and funding bridging providers (KKR owns US-based giant Toorak, while Elliott Advisors has a funding and JV agreement with Tenn Capital).

Together recently announced that it had increased its Delta Asset Backed Securitisation 2 bridging facility from £400m to £600m; corporate filings suggest that it has Citi and BNP Paribas in the senior, with Goldman-related funds in the mezzanine.

There’s much for mortgage people to like in bridging. Pricing is juicier, and stickier, than in the hyper-competitive vanilla BTL and owner-occupied resi markets. Regulated bridging is usually for chain breaking, while the typical use-case for unregulated bridging is funding property development or refurbishment. This should be lucrative enough that borrowing at 10% or 12% for six months doesn’t make or break the business plan, while chain-breakers, by definition, are more driven by execution than pricing.

But these assets have yet to come out in public securitisation format.

S&P wrote a good primer on the market earlier this year, noting “as bridging lenders have wanted to increase their funding diversity, enquiries on potential securitisations have increased. Although many bridging lenders lack the scale to efficiently use securitisation technology, some do.”

We’d probably bet on one of the institutions above as a potential debutant — their bridging books are large enough and their treasury teams have a ton of securitisation expertise — but I’ve no information either way.

The challenges are formidable though. The collateral is lumpier and more heterogeneous than a residential pool, but too granular to underwrite like a CRE deal. It’s hard to value properties which are going to be heavily refurbished; valuations pre-refurb look a little harsh, but lenders may be reluctant to accept the rosy estimates of property developers, so the “gross development value” concept is as much art as science.

A further challenge is that interest tends to be rolled up and paid at redemption, after six or 12 months. By definition there is no payment track record, and the loans are not self-liquidating; they rely on being refinanced out with a term mortgage (or through property sale).

High margins, however, can solve many problems. Excess spread is the essence of securitisation (hence the name of this column) and on this basis, I’d bet on a bright future for bridging.

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