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

Gone but not forgotten

Interpath, the administrator for stricken trade receivables platform Stenn, has published its proposal, and it is not pretty.

The UK entities have £1.89m in cash with which to satisfy £91.93m in creditors. Admittedly some of this is £58m to Stenn’s Luxembourg entity, now in its own process, but recoveries are not going to be good. HSBC Innovation Bank’s revolver is mostly toast, as is the £2.65m apparently owed to founder Greg Karpovsky.

Interpath does not expect recoveries from the Stenn group companies in other jurisdictions, and the office furniture isn’t worth much either. It’s a $900m company up in smoke. Interpath flagged that the most likely exit from the administration was liquidation.

The assetcos, though, are a different matter. The lenders to Stenn Direct Funding ($119m of receivables pre-admin) have already replaced Stenn as servicer with Atradius, but the rump of the company (44 employees) are still working on collections for Stenn Asset Funding, the larger vehicle, which had $978m of receivables just before the administration.

Given the effective disappearance of Stenn, these creditors will likely have to fund the collections process. Per Interpath, “as the vast majority of shared costs of Stenn International either have been or will be incurred to enhance recoveries for the benefit of [Stenn Asset Funding], in due course, we consider the majority of costs should be funded by StaF noteholders”.

The question is, how deep do problems run? Invoice payments are due to flow through to Stenn Asset Funding, but some obligors may simply decide to chance it and decline to pay. Others may have concerns about potentially paying into an insolvency estate. The asset issues could be deeper. Bloomberg reports some firms on Stenn’s client list deny doing business with the firm, and the judge in the administration was apparently satisfied there were deeper problems.

Granting the administration application, Mr Justice Adam Johnson said: “As to Stenn Assets UK Limited, its financial statements have been prepared on the footing that its entire business is legitimate and sustainable. The witness statement of Mr Sheehy [a banker at HSBC Innovation Bank] is consistent with the idea that neither of those propositions is in fact accurate.”

But there’s a fair bit of protection underneath the senior lenders — $100m of mezzanine in Stenn Asset Funding, plus Stenn’s equity, so there’s room for some suspect obligors and a few failures to pay. The mezz lender may feel less confident though.

Private credit CLOs, the debate

Last week my colleague Synne Johnsson moderated a webinar on private credit CLOs. I’ve been writing about this not-quite-existing market more or less since I joined 9fin, but now there’s an actual deal on the table, and other managers waiting in the wings.

Anyway, it was a great session with Cécile Mayer-Levi, head of private debt at Tikehau Capital, Nicholas Nedelec, partner at Eurazeo, and Andreas Botterbusch, senior credit officer, structured finance/primary at Moody's Ratings — for a replay, head here.

Cheeky devils

If you’re playing conference bingo, you absolutely want to have “the devil is in the details” on your card. Rarely does a panel go by without a wise industry expert highlighting the importance of reading the documents closely. Of course, nobody will sit on stage and say their investment process relies on feng shui and good vibes, but documentation, be it in securitisation, leveraged finance, CRE lending or SRT has a habit of loosening regardless of good intentions.

My colleague Celeste wrote a deep dive into some of complexities around SRT documentation, including how credit events get defined — and attempts by some banks to include language allowing them to cover losses related to selling distressed assets.

This is an understandable desire, and arguably reflects how banks actually manage some of their large cap exposures.

For borrowers with tradeable debt, prices will reflect distress long before any sort of formal trigger can be found. Prudent credit portfolio management might point to selling loans and taking the loss, rather than hanging about for the restructuring. The proliferation of special situations, capital solutions and other forms of credit fund mean a ready buyer base, and the brain damage of going through a workout can be passed off to the experts.

If that’s the base case for a decent chunk of large corporate exposures, you can see why banks would want some kind of protection. It’s galling to pay a hefty coupon to an SRT fund, only to layer on further hedging to cover the actual economic loss. But then, SRT funds are paid for credit protection, and deals are done to relieve credit risk-weighted assets, not mark-to-market.

Investors in CLO equity, which fully expect managers to sell out not work out, feel comfortable in this mark-to-market world, and increasingly play in the SRT market — although generally have more excess spread to play with.

Still, such a provision hands a lot of optionality to a bank, and for all that ‘risk sharing’ is a partnership, it’s a partnership with guardrails. SRT investors place a lot of trust in a bank’s processes, underwriting, and workout methods; it’s a step too far to also trust a bank to get the best price in a stressed disposal.

As with other markets, however, ideal market practice sometimes comes into conflict with supply and demand. When there’s a lot of money chasing very few assets, issuers have the upper hand — it has ever been thus.

Fun in fund finance

DealCatalyst’s Future of Fund Finance conference on Tuesday was a great chance to dig deeper on fund finance. It's a market rapidly changing, becoming more complex, institutional, and focused on distribution of risk rather than relationship lenders.

Subscription lines, the largest product category in the broad spectrum of fund finance, are hit hard by regulatory change. Once dominated by the largest banks, which could risk-weight these using their own IRB models, smaller institutions have rushed in, eager to use the fund finance relationship as a driver for broader client relationships. As the fund and private assets ecosystem widened, so too did the range of clients looking for sub lines and banks willing to lend.

But for a bank using standardised risk weights, subscription line portfolios are hit particularly hard. There’s no specific fund financing provisions in the Basel capital rules, and none taking into account subscription lines face (generally flush) LPs rather than funds. During the period of greatest sub line usage early in their lifecycle, these don’t really have much in the way of assets.

So your standard sub line is capitalised like an unrated corporate exposure (100%), even though, when rated, it often comes out in the double-A region. Unsuprisingly, banks have flocked to obtain such ratings, usually in private, since this limits disclosure about the fund in question, but drastically cuts the capital consumption of these exposures. Banks can also structure SRT trades referencing sub line books, sell them outright, or grind away to get the coveted IRB rating.

This last option is under threat by the Basel Endgame (if it happens, wherever it actually happens) since this explicitly tries to close the gap between the IRB banks and standardised banks. Somewhat perversely, it takes the random capital number assigned as a standardised risk weight as the starting point, not the capital number coming out of IRB banks… generally the most experienced well-established institutions in a given lending product.

Still, the point is, especially at the largest fund finance bank, sub line capital requirements are going up a lot, if and when the endgame lands.

This is a powerful tailwind helping turn the market from bank to institutional capital, but the deep question facing the fund finance sector is really one of matching product to capital source.

Subscription lines are very low default rate, revolving, often undrawn, facilities that don’t pay much. They might be struck on uneconomic terms in hope of building sponsor relationships. All things considered, they’re a perfect bank product… but capital requirements point the other way.

The deepest and hungriest pool of institutional capital demanding product in the double-A risk range has to be insurers. The perfect product for insurers is fixed rate term debt, preferably structured to fit within the matching adjustment (fixed cashflows). Even the newly loosened UK regime only allows 'highly predictable' cashflows, not the unpredictable drawings of a sub line.

If this enormous gulf can be bridged, there’s money to be made, but structuring can only push away payment variability, not get rid of it. The great question for the institutionalisation of sub lines is, who eats the variability. Perhaps the final synthesis is a combination of bank and insurer? Or term debt and commercial paper together? Some funds specialise in variable products like RCFs. Maybe one day there’ll be a fund that specialising in eating the variability of sub lines. Probably it would need a flexible sub line of its own.

Cheapest money?

Together Financial Services is a fine client to have, and a good indication of where the wind is blowing (and oh my it has been blowing this week). With one of the biggest books in UK specialist lending and one of the biggest treasury teams, it’s worth paying attention.

Last week, it announced it would split its flagship private mortgage facility, Charles Street Asset Backed Securitisation 2, into two, segregating the second charge assets into Wilmslow Asset Backed Securitisation and housing first charge in Kingsway Asset Backed Securitisation.

This mirrors the public shelf, where TABS deals come in first charge and second charge flavours, allowing the wider audience for first charge RMBS to, in theory, push this tighter and lower funding costs overall.

That relies on having a chunky second charge book to get to sensible deal sizes — other lenders offering this product might blend it in so that they can recycle warehouse capacity faster.

Anyway, Together now has BABS, KABS, WABS, DABS, AABS, HABS, LABS and TABS. The treasury team has been busy, raising or refinancing over £3.5bn since July 2024 (and there's more to come, with a new second charge TABS set to price next week).

What stood out for us, though, is the new banks joining Kingsway / Wilmslow. These are MUFG, via its Albion Capital Corporation conduit, Santander, SMBC, and Wells Fargo — all firms that have been beefing up their securitisation activities in Europe, although they are not all new to banking Together.

Wells already funded Fairway Asset Backed Securitisation, a late 2022 post-Truss private term deal. That acts as a part-replacement for an ordinary RMBS takeout against the difficult market backdrop following the LDI crisis. Wells and MUFG bought the senior bonds in Together Asset Backed Securitisation 2023-1st2 in September 2023.

Moving from buying senior bonds to lending senior private facilities against the same assets seems like an obvious move, and committing £100m+ tickets tends to improve relationships, so it’s not a total shock — but it might serve as an indication of which firms are keen to commit balance sheet to European securitisation at competitive rates.

These firms have been making moves. Former Barclays banker Mateo Ferrario joined MUFG in 2020, tasked with building up securitised products, and is now head of FIG, sponsor coverage and leveraged finance. Santander launched a revamp when it hired Matt Cooke in 2021, now joined by several former Lloyds colleagues, while the Wells effort kicked off under Francesco Cuccovillo from 2021.

Public dealflow arranged by MUFG and Wells is still a rarity (and longtime Together bank BNP Paribas is doing the new deal) but it’s a good client to have for firms looking to flesh out their lending businesses with more distribution.

Excess Spread is our weekly newsletter, covering trends, deals and more in structured credit and ABS — subscribe to this newsletter here.