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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, and sign up for the newsletter below.

We’re deep in July but the spicy trades are still coming to market, with two new shelves on screen this week, following last week’s FinanceHero announcement (and a successful syndication this week).

Asimi 2024-1 securitises the portfolio of Plata Finance, which was spun out of Zopa, a pioneering marketplace lender in the UK, in 2022. Zopa had its own securitisation shelf back in the day, MOCA (Marketplace Originated Consumer Assets). Like SME-focused Funding Circle, this was Zopa-branded but not Zopa-sponsored, with the deals taking out forward flows from institutional investors, including Marshall Wave unit P2P Global.

Anyway, Zopa left the marketplace world behind and became a bank, which in 2020 took over the Zopa consumer lending business.

Plata Finance was bought out of Zopa in 2022 to run off its legacy book and commence lending under its own brand — though Zopa, Plata Finance, and AG Assetco, the securitisation sponsor for the deal in market, are all under the common control of Silverstripe International, the financial services investing arm of family office IAG Capital.

The loans actually in Asimi 2024-1 aren’t the Zopa backbook — they’re mostly 2023 and 2024-vintage origination. Despite the short history of Plata as an institution, the deal sidesteps the usual requirements for three-plus years of performance data by providing the agencies with performance info on Zopa-era loans under the “Bamboo” brand.

But this is still a complex credit proposition. The majority of these loans are for debt consolidation. If you need a sense of the credit quality here, the average annual percentage rate is 25.98%; it’s not like a high margin but revolving credit card pool like say, NewDay — these are borrowers who took out term loans at 25%, and presumably had few other options available.

Bamboo, it seems, was even punchier! According to Moody’s “the same origination and servicing platforms have been in use for Bamboo products targeting near prime borrowers with average APR of 48% since 2014”.

I think this is a different definition of “near prime” than I would use, but I suppose if you can genuinely find near prime borrowers willing to borrow at 48% you should write that business all day long!

S&P estimates a “base-case default rate of 16%”, while Moody’s reckons 18%. The bottom of the debt stack, therefore, is a brave place to be, with the class G note rated Ca/ CCC out of the gate. The excess spread note appears to be a major point of difference, with Moody’s assigning A- and S&P B-, but in general there’s a fair bit of buffer built in; every class has its own reserve fund available to cover interest.

Bletchley Park Funding 2024-1 is also an unusual animal, comprising a combination of quite different CarVal-owned portfolios. In the red corner is a £207.7m portfolio of relatively clean buy-to-let from Quantum Mortgages, marking the public debut for this CarVal-owned originator, while in the blue corner is £15m of Habito’s long-term fixed rate book, a product launched back in 2021 with CarVal’s backing.

As noted in the investor book “the mortgages were (at the time of origination) the first fixed for life mortgage offered in the UK market”. It was a difficult proposition, and there were always a few questions about how popular the product would prove.

This combination adds a fair bit of complexity to the deal — there are two swaps in it, a vanilla interest rate swap with a predefined notional schedule, and a balance guaranteed swap on the Habito loans, in both cases provided by NatWest (securitisation swaps supremo Dom Jameson recently left the bank to join former colleague Rory McHugh at Lendable).

The CPR profile is also quite weird, as obviously there are some very long term loans in the book (there’s a few reversions in 2032). But the oddity of the Habito book (the “Chronos Portfolio”) is heavily diluted by Quantum (the “Carbon Portfolio”), which is much more like regular-way BTL, comparable to other front book transactions.

Quantum, one assumes, is in it for the long haul. It has written the £200m of loans securitised in the Bletchley Park transaction, remains owned by CarVal, and would probably like to keep writing loans going forward.

Naming the deal Bletchley Park sends a signal — Bletchley Park is the iconic home of the Enigma codebreakers during the Second World War, Alan Turing’s stomping group, and the spiritual home of British computer science. You can go to a lovely museum there! But it’s also now absorbed into the Milton Keynes metropolitan area, and hosting Quantum’s HQ. Just on naming conventions alone, this is positioned firmly as a Quantum Mortgages transaction.

Tacking on the Habito book is an interesting approach. The natural capital source for long-dated fixed is insurance (Rothesday funded Kensington’s long-dated fixed launch), but shopping round a £15m book isn’t going to excite many of the UK lifers.

We spoke to Scott Robertson, who runs Phoenix Group’s mortgage solutions business (watch out for a video interview to be released soon) this week. Phoenix mainly plays in equity release, not long-dated fixed, of which it has a £6bn book all held in internal securitisations; a £15m ticket doesn’t move the needle.

This portfolio is far too small to be its own public securitisation, and procuring a bank refinancing is also going to run into the size problem. Blend it into a more normal book though, perhaps accepting a little price slippage vs less complex front book BTL trade, and there’s a very neat solution at hand to finance this portfolio.

Following last week’s Ofwat draft determinations, Thames Water has suddenly got very, very live. We flagged last week that the question of who owned it was starting to get murky — the shareholders have walked, HoldCo creditors haven’t yet enforced their share pledge, and the WBS hasn’t yet hit an Event of Default (which would allow OpCo creditors to enforce their own share pledge).

But as a practical matter of corporate control, all the directors representing the Thames shareholders are now gone, with independent restructuring professionals now on the board of most of the holding company complex.

The next thing to happen is the very probable downgrade of Thames’s corporate family rating below the investment grade threshold required under the terms of its licence.

Moody’s and S&P have the company on negative watch, on the grounds of uncertainty over the equity injection and poor relations with the regulator, and neither element seems likely to be resolved in an upgradeable direction.

That puts the ball back in water regulator Ofwat’s court. It could remove the licence, triggering an event of default under the WBS docs — but what good does it do to remove the licence without an alternative plan? London’s households are still going to turn the taps on and receive water from Thames; if this is unlicenced water going to nine million customers, that’s not a good look for the regulator, so this would have to come alongside a fully baked Special Administration.

It’s slightly circular to have rating agencies downgrade a company on poor relations with its regulator, obliging the regulator to apply to effectively take over said company.

And it also wouldn’t unlock the extra powers added to the Special Administration regime this year; only a Special Administration justified by a company’s inability to pay its debts allows said Administrator to use hive-downs, restructuring plans and schemes to compromise creditors.

That said, removing the licence removes Thames Water’s right to collect water bills, which makes its balance sheet insolvent pretty much straight away, despite the fact that an Event of Default unlocks an extra £550m liquidity facility for debt service.

One of the awkward things about a Special Administration is that it would also (probably) constitute a termination event for Thames Water’s swaps counterparties, massively exacerbating the existing credit issues and leaving much of the debt stack potentially unhedged.

An event of default under the WBS docs triggers an automatic standstill for 18 months, during which creditors can only enforce a share pledge, which, crucially, also slashes capex, the exact thing which Ofwat wants to avoid. The waterfall in a standstill basically puts budgeted maintenance senior, after which comes fees, hedging and class A debt service. Capex gets whatever’s left.

This runs directly contra to the stated purpose of Special Administration, so sets up a fight between the powers granted to the Special Administrator, and the bondholder protections in the WBS documents.

There is, however, not much protection against the new hive-down powers in the Special Administration regime, though these are untested (and there’s much uncertainty about the transfer price required to transfer assets into a new subsidiary). Any Permitted Subsidiary acquired or established by TWUL is required to accede to the Security Agreement (i.e. the WBS docs)…. but is this trumped by the Special Administration powers?

Such a fight is totally unprecedented — can one unfurl one of the most complex and legally novel restructurings in British history in a manner which maintains licenced water supply through the period?

We note with interest Atalaya Capital Management’s acquisition by Blue Owl, announced this week. Blue Owl is the merged entity of corporate credit shop Owl Rock and secondaries investor Dyal Capital, and it’s a big beast. Atalaya, like most “asset-backed private credit”/”asset-based finance” shops is bigger in the US, but it has done a decent clutch of European deals, from Salary Finance to Capital on Tap, Allica Bank, Koyo Loans.

What’s interesting to me is the pricing. The release discloses $10bn+ of assets under management, and the firm traded for $450m, with a $350m earn-out on top.

Just to go through a quick back-of-envelope, let’s assume a 15x multiple (somewhere between where KKR and Apollo trade), therefore maybe $30m EBITDA. Using a KKR-ish EBITDA margin of 25% or so, maybe we’re looking at $120m of revenue. For a fund this is basically fund fees!

So on $10bn of assets, that’s 1.2% fees? One can play with these silly toy numbers and get to healthier figures, but it’s still hard to see, if you’re getting paid at this kind of level, why the big beasts of alternative asset management are clamouring to raise asset-backed funds.

The missing ingredient, we’d speculate, is our old friend leverage, which is pleasingly off the books. Asset-backed (or asset-based?) finance usually means buying the junior risk and levering up in public or private securitisation. The fund itself can report zero or modest leverage, because it’s all baked into the structure.

If we rework the Atalaya numbers assuming the AUM refers to the total size of portfolios under Atalaya control, and what the fund actually owns and manages is the junior 10%, suddenly we get to far more exciting hedge fund figures — I mean, we’ve just divided by 10, so you get 12%! There’s an investment memo from the fine folk at Rhode Island’s treasury (I can’t link because it’s not a secure site and will trip spam filters), looking at Atalaya’s Asset Income Fund V, which outlines 1.5% management fee, 15% carry and 5% preferred return, which could quite easily net out at about 12% total?

As with corporate private credit, there’s an inherent tension between doing deals and doing the good deals at the right price. Is it more important to get deployed or to shoot the lights out?

Without exception, all of the fundraising pitchbooks will say the latter, but this is not quite how funds behave. Some actual capital still needs to be deployed. So this gets straight into the difficulties of asset sourcing.

Do you have proprietary dealflow and origination capabilities? How do you pay these people? Or do you just win competitive auctions, in which case, by definition, you got a worse price than all of your competitors? If all of your positions come from auctions where all interested parties were contacted, why bother being “private” at all? Just do public trades and enjoy the liquidity.

Innovations which involve securitising more things tend to cross the Atlantic west to east, but apparently the innovation of “not securitising” is coming to our American friends, per this Bloomberg article.

Insurers in Europe have long bemoaned the Solvency II rules which make it difficult and expensive to own asset-backed securities (without fixed term maturities, they’re ineligible for the more advantageous matching adjustment treatment) but that hasn’t stopped them buying whole loan portfolios in size, especially in the Netherlands and the UK.

Dutch whole loan demand basically blew up the public RMBS market, driving prime issuance down to barely subsistence levels. The same isn’t quite true in the UK, as lifers concentrated their efforts in equity release, a niche product in public securitisation.

The complaints about insurers not getting involved in European ABS have some validity, but they’re specifically about insurers based in Europe. As the Bloomberg article makes clear, the charge into “just buy whole loan portfolios” is being led by the captive PE-sponsored insurers like KKR’s Global Atlantic or Apollo’s Athene.

These firms haven’t been shy in funding all sorts of alternative asset-backed investments, in private and public structured and unstructured format; this pool of capital is among the most significant driving the “golden age of private credit”.

While the US zigs, the UK zags; we’ve written about the reforms to UK Solvency a few times, on the grounds that reallocating even a small portion of UK lifer investment (still bulking up with record levels of pension buyouts) towards regular mortgages or securitised products would represent a massive capital flow.

It’s probably too early for firms to rewrite their investment approaches around the new rules, but it’s certainly coming, and insurers appreciate the direction of travel. Funds are already exploring structures to appeal to insurance capital under the new regime.

Whatever happens with the EU’s current plan to revitalise securitisation (we’ve heard that before), this could be a major change coming to Britain.

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