Most of these fit the big picture theme of banks becoming senior financiers, and deconsolidating junior risk to credit funds (see here for 9fin’s guide to asset-backed private credit, but we’ve written tons about it). Barclays generally hangs onto the senior in these deconsolidation/portfolio sale deals, which is a pleasing risk-reward proposition for a bank balance sheet, with the usual array of asset-backed funds taking the junior or junior and mezz.

But Barclays is also out there actively buying junior risk in its own right. This week, it signed a forward flow with Funding Circle, alongside TPG Angelo Gordon, allowing it to fund wholesale UK small business lending.

Those with long memories might remember the original pitch of Funding Circle and the other marketplace lenders. This was essentially “UK banks aren’t lending to small businesses, marketplace lenders can do a better job of channelling UK savings into business lending”.

Now the, uh, Funding has come full Circle and you have a UK bank funding small business loans through the platform!

Barclays has, to be fair, been active on the Funding Circle platform in the past. It was one of the most active senior financiers of the Covid-era CBILS loans, a ton of which were written by Funding Circle, with junior risk from Chenavari and Sixth Street, among others.

For purposes of irony, we’re eliding the differences between the parts of Barclays. Whichever part of Barclays UK branch banking wasn’t lending money to SMEs in the early 2010s, it’s miles away from the Barclays securitised products group which was providing senior warehouse financing to FC and is now in the forward flow deal. Lots of the incentives are different.

But not completely different! Non-performing Italian loans, high LTV mortgages which aren’t on Advanced Internal Ratings Based Approach, unsecured consumer lending, not nice capital treatments. Senior securitisation positions, low LTV UK mortgages, UK SME lending, much better.

The Funding Circle deal is a partnership arrangement; Barclays and Angelo Gordon are tying up to buy the loans, with Barclays also providing leverage to Angelo Gordon on its portion. Presumably some negotiation was required to ensure the forward flow terms worked for both parties, but their interests are aligned. They both want good quality loans paying decent yields, they don’t want to obligation to buy at an off-market rate but equally want to make sure FC is feeding them plenty of product.

The partnership model, though, is an interesting one for banks that do want to fire up a principal finance business and take some junior risk themselves. Having a partner participating in the junior risk avoids concerns about consolidating loan portfolios, and helps a bank with the heavy lift on capital charges, especially once a portfolio is securitised. Another pair of eyes helps sense-check assumptions and due-diligence, while a thinly staffed fund might appreciate working alongside a bank desk full of structuring expertise and with enough warm bodies to do the required grunt work.

One of the most long-standing and successful partnerships in the European market has been Ellington and Morgan Stanley, which have done a ton of trades in non-performing and re-performing markets. It’s not exclusive, it’s not formal, it’s just two sides that work well together.

The latest revamp of the Barclays investment bank said securitised products trading would be a focus area. This doesn’t necessarily mean that there’s a ton of new balance sheet available for ABS flow market-making (though the budgets have been ratcheted higher!), more that the UK bank wants to do more in agency RMBS and whole loan trading.

In Europe, in practice, that has to mean principal finance-securitisation type activities. Originate via forward flow or secondary portfolio buying, exit via securitisation, rinse and repeat, same as it ever was. That can potentially deliver better returns to a securitised products business than market-making rarely-traded mortgage bonds, but it does rely on the bid-offer between whole loans and securitisation being wide, and preferably consistent.

That’s less obviously true that it once was, as the ultimate capital providers are now the same. If a bank buys a portfolio and wants to flip it out to securitisation, it will be offering the junior notes and mezz to the same funds it beat to buy the portfolio in question; why would they want to be the wrong side of the arb?

Health, wealth and happiness

My distressed debt colleagues have been spending lots of time on the public bond-funded real estate groups, because that’s where the action is. Consider the chaotic decline of Adler, the abrupt unwinding of the Signacomplex, the pressures on Sweden’s SBB, and the way the firms still standing are trying to distance themselves from their stricken peer group.

The trouble really started for SBB when short seller Viceroy Research published a report in early 2022, and the period since has encompassed regulatory investigations, activist hedge funds, management turmoil, and a ton of financial structuring.

But when a company has a lot of assets, that’s an opportunity for asset-backed funds. If that company is desperate for money and has no real market access, the opportunity gets even better.

So on Monday, SBB announced that it had struck a funding deal with Castlelake, supported by Atlas SP Partners. The deal basically transfers SBB’s elderly care business, and other healthcare assets in Finland, into a joint venture between Castlelake and SBB, which is financed by a senior loan from Castlelake, paying 500bps over Stibor/Euribor on the Swedish/Finnish portions respectively.

The elderly care portfolio paid around 5.3%, according to SBB’s last accounts, meaning most, but not all of the portfolio income is going to debt service. Care home and healthcare assets tend to split credit opinion. The positives tend to be some government linkage, rental guarantee, and inflation-linkage…but operating assets can be a difficult collateral proposition. Names like Four Seasons Healthcare and Southern Cross serve as reminders that government-linked incomes can still be a problem for creditors.

But being sensible on leverage goes a long way to protecting a lender. Castlelake is coming in at 55% LTV. Reasonable people can probably argue about valuations, but the properties went in at market value, presumably as verified by Castlelake as JV partner.

Atlas SP Partners, in turn, provided a loan-on-loan facility to Castlelake, which is noteworthy for being one of the first big disclosed trades from Atlas in Europe. Atlas was the Credit Suisse securitised products business before being sold to Apollo.

The question of whether an Apollo-owned senior financing business would be in a position to win mandates from Apollo’s many competitors has been much discussed; on the basis of this deal, one would say “apparently yes”, so hopefully much more will follow.

Naturally, though, the unsecured bondholders are not particularly happy. The proceeds will go to amortising SBB’s bank debt, rather than their bond positions, but no bondholder is going to love being primed. The strength of asset-backed credit is getting close to the assets; sorry bondholders, you lose this round.

Bridge, financing

I will be attending an event I’ve never been to before next week, DDC’s Global Investor Summit 2024, which looks like a packed agenda of private credit, asset-backed finance, NPL investing, distressed debt and more.

I’m particularly keen to get a temperature check on the NPL universe, which seems like it’s at an inflection point in Europe.

Many of the big bank-driven primary portfolios are already sold, and many are underperforming. Distressed debt / NPL firms like Intrum and Lowell are casting about to figure out if their business models still work; financial investors which went hard on NPL portfolios in the 2016-2019 period are going to be thinking about exit routes.

Anyway, it’s being held at Chelsea Football Club’s Stamford Bridge ground (as good a symbol of globalised investing as any other), and should you wish to join me, you can find information about the event here, and register here.

Watch my colleagues

I don’t really do much CLO coverage around here since my colleagues Tanvi, Michelle, Sam and Charlie joined 9fin to launch a fully fledged CLO news service. If you’re hankering for some content and aren’t quite yet ready to buy a subscription, I’d recommend global CLO head Tanvi Gupta’s webinar next Thursday, with Saffet Ozbalci, head of structured credit at BlackRock, and Edwin Wilches, co-head of securitized products at PGIM — sign up here if you’re interested.

Fixing the UK housing market with more leverage

This isn’t a UK politics newsletter, thank god, but it does seem like the UK government has been stuck for a decade on the same basic dilemma. House prices can’t fall too much, because they tend to be owned by voters, but other voters can’t buy houses at all, because the prices are too high.

The UK government has repeatedly tried to bridge the gap by making it easier to borrow the money for a new house, while UK regulators have essentially pushed in the other direction, making the large banks less willing to offer high LTV and high income multiple mortgage products.

Thus we have had the Help to Buy scheme on the books since 2013, amended into the Help to Buy: Equity Loan scheme, restricted to first-time buyers only, but basically extended out to the point where it only ended last year. Covid prompted further support in the shape of the mortgage guarantee scheme, launched in 2021. With the lapse of the scheme last year, various private sector solutions were kicked around, including “Deposit Unlock”, an insurance scheme via Gallagher Re. Deposit Unlock hasn’t disclosed many client names so far, though one familiar to securitisation folk would be Bluestone Mortgages, now a part of Shawbrook Bank.

The regulators still seem to be pushing in the opposite direction — the PRA’s treatment of a partially guaranteed mortgage loan as a micro-securitisation meant that these assets couldn’t be securitisation funded without creating a banned resecuritisation.

Now, with the housing market still difficult for first time buyers, the government is trying the same thing again — most of the nationals report that the Chancellor is considering a scheme to get 99% mortgages off the ground. Base case, this doesn’t happen (the ruling Conservatives are polling more than 20 points behind) but the idea is worth kicking around.

Jamming a load of government-backed junior risk into the market seems likely to push house prices up overall, but obviously a 99% mortgage means very little wiggle room if they go the other way.

Borrowers can be protected by structures like Perenna’s long-term fixed rate mortgages (so borrowers don’t take refinancing risk), or other long-term fixed products. Periodically the idea of pushing out fixed rates for longer, funding by some other capital source than deposits or securitisation; consider Rothesay’s funding facility with Kensington (not sure what’s become of the product offering since Barclays bought the front book and Pimco the back).

But it’s not obviously that 99% mortgages would unlock the housing market where 95% mortgages have failed. Are there really so many young voters first time buyers that can make 99% work and want to take the gigantic negative equity risk, and can’t make 95%? Maybe?

If you’re planning to own a property for the long term, perhaps you can wear the negative equity and just hang in there, but the other problem with the UK housing market is that people don’t move enough — there’s not a housing crisis in aggregate, just a housing crisis in the richest parts of the country with the best employment prospects. A 99% mortgage which might make it harder to move homes is a very mixed blessing.

Perenna aims at nothing less than a complete reworking of the UK mortgage market and the establishment of a Danish-style covered bond market, and by coincidence, has been trying to get this off the ground for about the same length of time as the UK government has been trying to subsidise mortgage guarantees.

That’s a big lift for a single startup, but it’s certainly intriguing, though the shine is coming off some of the other covered bond-funded housing markets in the current environment — Sweden, for example, has managed to have a housing bubble even without the involvement of securitisation, and the cover pools of the German covered bonds banks are coming under increased scrutiny (because they’re stuffed full of CRE loans where the mark-to-market is dubious at best).

The other key advantage of a long-dated fixed, and especially fixed for life, is that it makes income stress tests more bearable, so the ceiling for borrowing volume should be able to increase.

This is true as a matter of financial structuring; whether young people at the start of their careers will want to lock in a 40 year mortgage consumes a large portion of their income is another matter. It’s not just about getting to the highest possible leverage point; these loans need to be cheap enough not to be a painful burden on first time buyers for their entire working lives.

No easy fixes here, but one obvious tension remains the policy desire for lenders to make high LTV mortgages to those with low incomes, and the regulatory desire to basically stop this happening anywhere in the regulated banking system. This can either be resolved by loosening up the regulations, or ensuring there’s a deep pool of capital outside the banking system which wants to fund these mortgages.

A decent number of the UK’s biggest lenders have executed risk transfer deals of some sort on their high LTV portfolios; Pavilion for Barclays, Syon Securities for Lloyds, Blitzen for Santander. These deals cushion the impact of the dramatic capital cliff effects on mortgages over 75%, but they basically represent an admission that the capital regime for banks doesn’t support the kind of lending that the government wants to see.

Best of all, the UK could do some housebuilding! One of my panellists at DealCatalyst’s European private debt conference was Paul Watts, CEO of Lenuity, a fintech which is essentially trying to bring captive financing to the homebuilder space, such that homebuyers can buy a new house with financing attached. Or there’s also “Own New”, a platform business which channels some of the housebuilder incentive budget into cutting initial mortgage rates.

There are lots of smart people involved in structuring and funding mortgages; if they can help stimulate a little more housebuilding that’s got to help.

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