Owen Sanderson

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When we were drawing some threads together for Year of the Cockroach Part 1 and 2, one part that leapt out is the importance of doing the basics. The kind of due diligence which isn’t just looking at a loan tape, or even dropping in for an office visit.

The kind of due diligence which actually involves more than a vigorous afternoon of googling, with perhaps a little search on PACER, the US court system, thrown in as well.

The dust hasn’t fully settled on Stenn yet, and certainly not on First Brands (though the former CEO is in cuffs), but nonetheless if you had googled either founder, there were plenty of a priori red flags waving.

We’re all in favour of second chances, rehabilitation and reform, but in a sort of criminal justice sense. Like maybe if you do a fraud, then become a primary school teacher or something afterwards.

I’d still think twice about lending money to someone indicted for fraud, even if not ultimately convicted, and I’d still think twice about lending money to the trade finance platform run by someone who previously ran a trade finance platform which collapsed into fraud.

So: would you lend money to someone with this on their curriculum vitae?

Wiederhorn has also been accused of other misconduct in the past: on top of a 15 month prison stint for a $65m shareholder loan he took (and never paid back) to his previous company in 2004, a federal grand jury also indicted him in 2024. That 2024 indictment concerned allegations that he took a $47m shareholder loan from the current debtors into his personal investment company, Fog Cutter Capital Group, using the proceeds to fund lavish personal expenses — never paying it back, and failing to report it as taxable income.

We should note that there’s another side to this. From 9fin’s other coverage:

"As I have said for years, there were no victims, no losses, and no crimes in this case,” said Douglas Fuchs of Gibson Dunn, who represented Wiederhorn in the criminal proceedings. “FAT Brands made loans to Fog Cutter for sound business reasons, and FAT's minority shareholders were fully compensated for their share of the loans.”

"These charges were dismissed by the government, and the allegations in this lawsuit are totally divorced from the facts,” said a spokesperson for FAT Brands in an email to 9fin. “The reality is that these transactions occurred years ago and were disclosed long before any of these bondholders lent a dollar to FAT. Many of the named bondholders purchased $750m in FAT bonds after the government announced its investigation." 

Still, the standards of proof required in a court of law and the standards of proof required to bin something in investment committee are very different. Credit investors with an eye to the downside may prefer to pass on deals with even a hint of legal noise behind.

We’re discussing the chief executive of FAT Brands, which bought up chains like Fatburger, Johnny Rockets, Fazoli’s, Smokey Bones and Twin Peaks (this one not that one) over the years, funding them through five different whole business securitizations.

When it filed for chapter 11 bankruptcy protection last week, it had $1.45bn of fixed rate WBS debt outstanding — all the details can be found here, and the corporate structure, better appreciated as art than science, is below.

The US version of WBS is a little different from Europe; European deals tend to be hard-asset or property heavy companies — ports, airports, rolling stock, utilities and pubcos, which combine real assets with low returns (and corresponding high leverage appetite). Structuring the real assets into a WBS gets you long-dated investment-grade bonds which suit UK real money, though treasurers who inherit these structures may find them less congenial.

The bulk of US deals are franchise-based operations, predominantly restaurants and fast food but extending to massage parlours as well. The deals are much more similar to a classic ABS (granular cashflowing assets packaged up together) than the UK variant, which is better thought of as an infrastructure deal with enhanced security arrangements.

Both, however, tend to be a little more complicated than a standard ABS, because cashflow arrangements must go in both directions. Restaurants and utilities alike both have capex and opex needs, spawning a series of reserve accounts, maintenance budgets and more designed to divert cash around the structure to meet corporate needs, rather than simply flush it out to debt and equity.

In theory, WBS of both kinds should benefit from better protection than regular corporate debt. In the UK utility deals, for example, they are supposed to lock up for the benefit of bondholders before any regulatory intervention or traditional insolvency process hoves into view.

That…didn’t work for Thames Water, which is still going through a complex restructuring process.

It remains to be seen how well it will land for FAT Brands.

The first day declaration after FAT Brands filed fingers the securitization structure itself as causing some of the problems.

“The securitization debt has starved the business of liquidity and forced the use of restricted cash, according to the CRO. The declaration describes a capital structure in which escalating penalty interest and amortization obligations consumed cash flow, leaving insufficient residual cash to fund corporate operating costs. Liquidity deteriorated after the securitization waterfalls began to ratchet penalty interest and penalty amortization, resulting in more than $72m of penalty-related payments since 2022. At the same time, management fees payable to the parent managers under the securitization structures proved insufficient to cover centralized operating costs, forcing the parent companies to subsidize operations through non-securitization debt, equity raises and retained notes until those sources were exhausted.”

You could argue this is a feature not a bug. The reason WBS financing comes with more leverage and cheaper rates is precisely because management can’t do what it likes. The whole point of the triggers, penalty interest and accelerated amortisation is to enhance protection for debt holders.

FAT Brands also engaged with its WBS creditors back in summer 2025, and some individual funds over the course of 2024 — so the secured structure worked to get bondholders to the table early, and the WBS bondholders were able to wield a big stick.

From the first day declaration: “The WBS Ad Hoc Group indicated that, absent a chapter 11 filing, it would direct (i) the issuance of a notice of foreclosure on the collateral securing the Securitization Notes, (ii) the termination of the Managers, and (iii) the exercise of control over the Debtors’ deposit accounts. Accordingly, the Debtors have determined that filing chapter 11 is the best path forward for the Debtors to achieve a comprehensive and value-maximizing solution for their capital structure.”

The filing included all the securitization SPVs as well — they might be ‘bankruptcy remote’ as a legal term of art, but they are very much in the bankruptcy — but things went south very quickly, with noteholders accusing the CEO of looting the company and running up more than $200m of improper payments to insiders since 2021.

So is this the case of a company overburdened by the massive debt burden it took on (facilitated and encouraged by the WBS market)? Or is it a company which the founder used, as the bondholders claim, as a ‘personal piggy bank’?

The two aren’t mutually exclusive. Constraints imposed by the securitizations might have encouraged management to play fast and lose with the cash in the various WBS accounts. High leverage means pressure to cut corners, but high leverage also brings in a lot of other people’s money.

The WBS, so far, has partly worked as expected — but will the recoveries validate the structure?

nb I use securitization for US sits and securitisation for UK/EU. That might make the piece above read a little schizophrenic.

The basic idea of securitisation used to be that tranching up a portfolio and turning it into tradeable securities makes it worth more. Liquid instruments have been created out of illiquid whole loans, and there should be better market demand for bonds than for pools of whole loans. The liquidity, coupled with the structuring, also lowers the risk of individual investors’ exposure, allowing borrowers to lever up — or so the thinking goes.

Regulation since the crisis has pushed the other way — the point of the ‘p factor’ is to make sure that bank capital held against a full stack of securitisation bonds is higher than bank capital held against the same pool of whole loans.

The rise of private credit has also pushed back against this basic move. There’s now a large weight of capital seeking whole loan pools, which can be levered privately through non-liquid warehouse lines, private mezz or even private first loss tranches. It’s no longer true that there is obviously better demand in public fixed income markets than in private credit.

And yet, it’s still possible to pull off the move, as demonstrated by the number of banks with active principal finance shelves.

Citi’s longstanding Jubilee Place Dutch BTL shelf was in the market this week, JP Morgan’s UK BTL shelf Pierpont the week before. Citi is exploring a takeout on a consumer pool it owns (more details for subscribers). Deutsche Bank’s principal finance business is amping back up again, Barclays recently took out pools of loans from Nua Money and Admiral Financial Services. Jefferies started up in the past few years, Goldman Sachs and Morgan Stanley never really stopped, and both certainly own various securitisable assets (GS bought back Parkmore Point, and owns the Finance Ireland mortgage back book, for example). Even BofA is active selectively, and might become more so.

In an investment bank forward flow-to-securitisation journey, the risk the bank is taking is ramp risk — it is on-risk as a portfolio builds up, marking assets to market, and potentially stuck with the loans if conditions aren’t right for a takeout.

This can certainly be more profitable than acting as a senior lender, though it’s more capital intensive. For a bank with plentiful capital and substantial risk appetite, it’s a better use of the personal time of the bankers than simply lending — the task of structuring and taking out a principal deal isn’t that much harder than doing a client deal.

But it does exacerbate the scarcity of assets problem still further. A billion-dollar asset-based private credit fund buying portfolios with (conservative!) 10x leverage needs $10bn of portfolios to get fully deployed, and that’s hard to find in Europe.

Buying the junior tranches of IB principal deals is a shortcut to finding assets, but, all else being equal, it should mean lower returns. The investment bank wants to get paid for the ramp risk, and profit from the securitisation takeout. They’ll be selling residuals at a price where some of the juice is already squeezed out.

Investment banks should also have an advantage in originating assets. Lots of asset-based finance funds employ skilled originators with great relationships (often ex-sellside) but they still aren’t coverage operations in the same way that an investment bank is.

So run these trends forwards, and how does the market look? Is it a turn back to the before times, before ‘bank retrenchment’ and the rollout of private credit, followed by its apparent dominance?

Depends on the bank and depends on the asset class. The counterargument is that investment banks concentrate their efforts on portfolios which grow fast and lend themselves to securitisation. If the juice comes from crystallising the takeout rather than the carry, better ensure takeouts are fast and smooth.

Distressed debt investing with CMBS characteristics

Last year we wrote about The Squaire, the largest commercial property in Germany and a firm fixture in the CMBS market since its construction in 2011. If you’ve ever been through Frankfurt Airport you can’t miss it — it’s the massive non-square curvy groundscraper right outside, sitting on top of the train station.

As the marketing blurb for potential lessors runs, it’s extremely well connected — fast trains into Frankfurt and indeed across Germany, 10 minutes from the gate in Frankfurt Airport — but nonetheless, anchor tenant KPMG, which has its German headquarters there, is vacating in 2028 when its lease is up, moving into central Frankfurt.

That’s a problem. Much like some of the Canary Wharf exits, this is a trophy building with a ton of space, and there just aren’t that many re-lettings at the top end of the market. While it’s not an old building, it was still constructed before the current round of environmental regs (the Energy Performance of Building Directive came in across in the EU in 2024) and, 15 years in, could use a facelift.

The current financing is a 2021 deal, Taurus 2021-3 DEU, securitising the loan which allowed current sponsor AGC Equity Partners to buy the building in 2019. At closing, the valuation was €832m, though this reflects the shockwaves of Covid — AGC was reportedly willing to pay €1bn in 2019, but the securitisation valuation was done by Knight Frank in September 2020.

The latest valuation, in March 2024, was €756.9m, and as of September, there was €510m of debt against it, for a respectable 67% LTV. That’s probably not the real mark-to-market, but it’s probably not totally underwater.

In a recent cleansing presentation, there’s a note that the sponsor has €397m of cash equity in the building, which perhaps it does based on purchase price….but that money is not all coming back.

Still, without an anchor from 2028 it won’t be able to wash its face on cashflow, and, like other CRE financings, base rate hikes since 2021 have not been fully matched by rent uplift.

The CMBS loan was already extended once, to December 2025, and extended for a further three months to fix up a more permanent arrangement.

The proposed remedy, supported by noteholders representing more than 75% of each note class, shares some features with other CMBS restructurings of late.

Don’t let short term cash drain climb too high — incentivise noteholders to kick the can with backloaded exit payments and contingent value rights. Divert cashflows to amortising debt, switch off dividends, and lock the structure up tight.

CMBS hedging is also a tricky topic. Pre-crisis deals were often wildly over-hedged, allowing derivatives structurers to book handsome day 1 profits. Post-crisis the pendulum has swung the other way, with deals verging on the under-hedged. A simple cap to the first loan maturity date is a common structure, which leaves loans unhedged if they’re extended (particularly troublesome given the interest rate rises in 2022), and sponsors out-of-pocket to procure a new hedge. Naturally, the restructuring terms address this, with robust requirements for at least 95% of the loan to be hedged, under specified terms.

The most interesting feature, however, is a large chunk of potential new money. This has not been offered or agreed as yet; instead, there is a “hollow tranche” contemplated in the capital structure — under tightly controlled terms.

In corporate distressed investing, the trade of loan-to-own is on the way out; covenants are loose enough that it’s a rare sit where the lenders can take the keys outright. Instead, the economics of this strategy come primarily through providing new money on extremely attractive terms — super-senior, tight covenants, hefty fees on entry and exit, make-whole premia and the like.

That’s partly a function of those same loose covenants; sponsors are able to incur this kind of debt because existing lenders lack sufficient levers to stop them, and the rise of LMEs / “creditor-on-creditor violence” is partly about cramming down existing lenders and creating room for new money.

Covenants in CRE lending have also lightened up a lot in recent years, but commercial mortgages are still mortgages with fairly tight asset security, even if trigger levels and events of default have eased off. CMBS restructurings in Europe typically include minimal new money, enough for a lick of paint and some reletting fees, generally not enough for a full building revamp.

The new money in the restructuring proposal for The Squaire / Taurus 2021-3 must be more than €3m but less than €100m, must sit below the existing senior secured debt and mature outside it, and pay less than 20% coupon. There are tight limits on the juice which can be extracted via OIDs, commitment fees, exit fees and make-wholes.

Crucially, the new money also has to pay PIK, to avoid adding further to the heavy interest burden on the structure.

One presumes these terms have been drafted with an eye to market standard terms in distressed CRE debt, and won’t prove disqualifying, but it underlines the difference that can be driven by a solid debt stack which can stand firm. Instead of a super-senior piece with enhanced economics, it’s effectively a mezz layer incorporated into the structure, and kept firmly in its box.

This will have to be at a fairly frightening LTV — even believing the March 2024 valuation, a €100m mezz facility would attach at 80%.

It’s not a fact pattern that’s likely to be repeated everywhere — each troubled CMBS has its own dynamics, and the Taurus 2021-3 DEU rework is solving for a very specific problem. It’s a potentially valuable building, which needs a refurb and relet to be able to realize this value, and will be eminently financeable if it works.

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