The Bloomberg story also says that KKR is working with Morgan Stanley on the deal.

Morgan Stanley is around most portfolio sale processes — often sellside, though a local boutique ran the process here, freeing MS to back a bidder.

Rothesay, meanwhile, is an… unusual name as a provider of financing, being a life insurer and not an investment bank. It’s been an active buyer of whole loan portfolios and of securitised bonds, and many in the market assumed it would step up further still. Among the insurance universe, though, it has a reputation for being early to new trends and opportunities.

What an insurer can bring to the table, however, is term financing. We understand the Orange Bank mortgages are at low and fixed rates (around 1.6%, according to a source who looked at the deal) and are prepaying very slowly, because why on earth would you refi your 1.6% fixed mortgage right now short of death, divorce or departure?

This is not an especially attractive proposition for a traditional securitisation.

Cash coming off assets is the life-force of securitisation structuring, and low WAC pools stretch the structurer’s art to its limits — that’s where you get net WAC caps, deferrable coupons, carefully massaged step-up incentives (or lack thereof), bits of principal paying interest, complex and contingent reserve and liquidity support. A whole suite of complexity designed to finance a pool that fundamentally doesn’t pay very much.

For a long-lasting pool like this, a fine-tuned structure ends up extra risky, because it will have to be called multiple times to remain efficient. Step one is taking out the bank facility, then there’s market risk every 3-4 years for every re-rack. When the structures are sensitive and mezzanine bonds prone to extension, you really need strong conditions to place these deals; if spreads slip then the whole structure needs to be recut, because there’s such little wiggle room thanks to the low WAC.

What, therefore, if you could find a financier that will lend for the long term? An experienced securitisation shop but with capital that likes exposures 10 years or longer?

Any bidder on the pool could therefore model their return without worrying about the market risk on their financing package. Sure, the loans might be better or worse than expected, but there’s no need to take a view on the conditions in securitisation a decade in the future.

Rothesay recently installed Nim Sivakumaran as co-head of origination and underwriting, and much has been expected since his arrival. He was the head of Morgan Stanley’s international principal financing and mortgage trading operation, and thus knows more about financing mortgage portfolio acquisitions than basically anyone — and, one presumes, would be able to have a productive working relationship with the team at MS assisting KKR on the bid.

Should Rothesay wish to cut out the banks entirely, Nim et al would surely have no trouble tracking down likely bidders on other mortgage processes, but it’s probably good to have a bank around. The many hands available at a large investment bank help deals go smoothly and can grind through tough structuring work; KKR, its competitors, and Rothesay are not really staffed up to do this solo.

We haven’t seen the deal structure, but one way to make this trade work particularly well would be creating a matching adjustment (MA)-eligible tranche. If you can create a tranche with fixed cashflows, it gets much better insurance capital treatment. The basic structuring problem for matching adjustment deals is volatility in prepayment rates — because the MA tranche needs to be fixed (bullet or amortising are both fine) CPR volatility has to go into another tranche of the structure.

Less volatile CPR (because there’s no reason to refi the loans) means a potentially larger MA portion, with better capital treatment — and a more profitable trade for Rothesay.

UK insurers like Rothesay are set to benefit from a major reform to the Solvency capital regulations, giving improved capital treatment to assets with “highly predictable” cashflows, rather than fixed cashflows, as in the previous rules inherited from the European Union. But even if this isn’t yet applicable to the Orange Bank facility, it could still be a nice bonus.

Does it matter for the banks? It looks like a new competitor in town, and one which will mean less securitisation to come. Each re-rack delivers a deal fee, more bonds are created, traded, financed and the ecosystem grows. But even in the Rothesay model, there’s still balance sheet-lite structuring and advisory business to be done.

This portfolio is also particularly unusual, because it features French fixed rate collateral. Most legacy mortgages are floating, and more securitisation-friendly than Orange Bank’s book — so the edge that comes from term financing is less important.

On the other hand, one of the most perceptive securitisation heads we saw in Barcelona pointed out that the “bank senior / credit fund junior” model for asset backed markets might not work if insurance money fully comes on line — businesses that today rely on financing and carry might need to become pure play structuring / broking / distributing fee businesses. The Orange juice is being squeezed!

Where’s the beef?

Europe doesn’t have quite the same “securitise everything” mentality as the US, and the public markets in particular don’t stray far from mortgages, credit cards, autos and personal loans. But there are pockets of creativity in private!

Alantra, we understand, is working on a deal securitising cattle, financing an agricultural cooperative in France. I haven’t seen the structure (it’s a private deal marketed to local banks) but I understand it really does mean the animals in question. We’re not just talking about a package of farm mortgages to predominantly dairy farmers; the cows are in the deal.

One lawyer away from the situation said that a “chattel mortgage” (Chattel shares the same root as cattle; “goods and chattels” means your stuff and your livestock or slaves) could be the route to do it, since this French law concept allows you to grant security over livestock. I don’t know much about farm finance, but I imagine most of the machinery is leased, and its easy enough to encumber land and building — meaning the obvious remaining unencumbered assets are probably walking around the fields.

Presumably there’s some ability to rotate specific cows in and out (essential for beef herds, unless you want very low WAL) and I don’t know whether the lending comes in at herd level or cow-by-cow. Apparently a cow might cost c. €2,000, so it’s a level of granularity familiar from consumer lending books, and there are also subsidies to consider — are you getting an EU-guaranteed coupon plus principal whenever the cows are sold/slaughtered? How is it serviced? How to get your seat at the farmyard when you have to enforce? Many questions still remain.

I packed all of my good puns into this piece published Wednesday, and I’m struggling to think of any more on the hoof. But I suppose if Alantra succeeds in calfing up the deal between multiple financing banks and building a bigger audience for this bespoke deal, then the emerging asset class could be a nice cash cow. The first institution pioneering a new structure generally has a big steak in the market, butter not slip up between now and closing, which is likely to be after the summer.

Ex-Factor

I’ve been poring over rating reports and court documents trying to figure out what went wrong for a firm named Petra Management, the programme manager responsible for nearly $1.5bn of receivables-backed bonds — there’s a more detailed story behind the paywall but these are the broad strokes.

On Monday, Morningstar DBRS published three releases finding that all of its programmes lacked sufficient assets to support the bonds, downgrading every instrument to ‘C’ and then withdrawing these ratings on lack of information.

The three programmes are NATF Americas, securitising receivables from US-based truckers, Humboldt Americas, backed by Latin American trade receivables, asset-based lending facility and factoring, and Cubitt Global, backed by UK SME receivables.

The rating updates certainly don’t sound good. Cubitt Global received an event of default notice in May, which referenced, per the release:

“Missed payment of £10,000,000, as well as additional EODs, including the failure to deliver audited consolidated financial statements, failure to deliver settlement reports, acquiring noneligible receivables, failure to ensure all receivables are insured receivables, and failure to purchase eligible receivables from the purchaser.”

The trouble must have started earlier, but 2023 saw Petra looking for new liquidity. According to court testimony from Russell Schreiber, a director of Petra, the firm had discussions with Toesca, a Chilean asset manager with a factoring fund, over a $400m deal which would have seen Toesca take over Latam factoring operations from the Humboldt vehicle, but potentially also stablised the firm.

Some of its creditors had concerns early on in 2023, and FTI was commissioned for a review of the Humboldt programme. By mid-2023, creditors were working with Akin Gump, and struck remediation deals across the three programmes, delivering enhanced creditor security (including share pledges), restricting cash movements and improving investor disclosure — and appointing representatives from AlixPartners to the board.

But these agreements seem to have blown up a deal with Pimco, which owned Series 5 issued by Humboldt, a Colombian peso note. The original 2022 maturity of the note was extended to 2023, in line with a contractual option, but according to a lawsuit filed by Pimco, Petra / Humboldt (there’s common ownership and directors) asked for a further extension to August, and then continued to ask for extensions / miss payments, until Pimco’s patience ran out in January 2024 and it filed a lawsuit in New York court.

Pimco says it struck a deal in 2023 to ensure that any cash into the Humboldt vehicles would go to pay down its bonds, but Nuveen and Kuvare, which held other note series, dispute whether cash from one series could go to pay Pimco. The lawsuit, which is ongoing, also turns on whether the cash in the vehicles could be used to continue purchasing receivables, the relief the court should grant, the appointment of a temporary receiver, and the involvement of other parties, including Apple Savings Bank, which bought a $70m Humboldt note.

In most overcollateralised securitisation vehicles, there should be enough to go around — stop purchasing new loans, collect the old ones (and collect any insurance payments), pay down the bonds, and you should have something left over.

The lawsuit disclosures do throw up some control issues — though regrettably, much of the material is sealed and redacted.

From Schreiber’s testimony:

Q: Prior to appointment of the CRO, how did [Petra] ensure that the three receivables programmes were operated separately?

Schreiber: We had a treasury function that was supposed to oversee such cash movements.

Q: Who was in charge of that treasury function?

Schreiber: Nial Ferguson.

Q: Did cash ever move between the different receivables programmes?

Schreiber: Yes.

Q: That wasn't supposed to happen; correct?

Schreiber: Correct.”

He said that he knew of $5m which went from Humboldt, the Latam programme to Upstream, an originator for Cubitt, in 2020.

Elsewhere, he also noted that he’d seen reports in which Humboldt had around 85% of receivables insured, compared to the 100% required in the programme documentation.

Factoring and receivables financing should be at the duller end of the securitisation spectrum, and it mostly, is. Most deals most of the time are companies managing their working capital with secured bank or conduit facilities — ordinary course of business, wholesome, motherhood and apple pie, real economy stuff.

But the most spectacular recent meltdown in European securitisation is Gedesco, which was also in the business of non-bank factoring for SMEs. That also featured a heavy duty lawsuit, but the collateral doesn’t seem to have been quite as “secure” as first hoped.

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