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Owen Sanderson

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

Now that events have caught up with my news from late September that Atlas SP Partners was looking for a rating, we can take a beat to consider what’s in it.

Atlas really is the most fascinating of all the firms I take an interest in, because it’s part of a gigantic experiment about what financial services might look like.

As a reminder, it’s the former securitised products business of Credit Suisse, bought by Apollo in 2023. There’s been much discussion of whether it’s a trade or business (see here for some of my thoughts), but we’ve barely scratched the surface.

Structurally, Atlas at this point is a nest of funds, which are levered by banks (including BNP Paribas, but Atlas has engaged with the whole street and partnered with many more). Certain facilities, such as the BNP Paribas loan, are rated (here’s Arc Ratings’ AA- on “AGF WHCO 2-A”).

But it’s reworking this capital structure, and has now obtained its planned unsecured investment-grade rating for Atlas Warehouse Lending Company, which issues bonds.

According to Fitch’s rating, this vehicle will “grow to serve as the main funding platform for Atlas SP Partners”, while Moody’s expect this vehicle to grow from $6bn to approximately $30bn as it takes on more of Atlas’s overall funding. There are other details on the planned cap stack — secured debt to total assets from 65% of total assets initially to 45% within two years, with about 50% of total debt being unsecured and the majority of secured debt being non-recourse.

Revolving credit is currently a $1bn subscription facility and a $1bn revolver, with the revolver expected to become unsecured and increase to $3.5bn as assets are transferred in.

So we had something which started as an investment bank division, morphed into a collection of funds, and seems to be on a journey to being something more like a corporate broker-dealer (Atlas SP already has a regulated broker dealer, Atlas SP Securities, though this is a division of Apollo’s existing broker-dealer Apollo Global Securities LLC).

But as the legal packaging evolves, the activities inside remain the same. As the Atlas SP bankers did at Credit Suisse, the business remains lending mostly senior, mostly IG warehouse facilities to specialty lending institutions of various kinds.

Atlas can generally offer more aggressive and more flexible terms than its banking competitors, who in turn finance it at a 90%ish advance rate, allowing the regulated institutions to stay in the safest part of the capital structure.

The last 30 years or so saw the gradual consolidation of the finance industry into ever-larger banking groups to a high point of the financial crisis. The big banks had broker-dealers, retail banks, insurers, commodity traders, infrastructure investments, direct real estate investments, CLO managers, hedge funds, private equity all under the same roof.

2008 put that abruptly into reverse, and all of these activities disaggregated — and now the big alternatives firms like Apollo are recombining much of what used to be under the roof of the investment banks, steering carefully around the boring “regulated bank” part. If you can do the securitisation parts of banking without being in a bank, so much the better.

The agencies cite a planned debt-to-equity leverage ratio of around 9x, which is low for a bank — but perhaps reasonable for a securitisation division?

If you combine a BDC doing 6x levered corporate debt, which has its own 2x leverage, with Atlas doing AA-ish specialty lending at 9x, with one of the UST automated trading shops at a number much higher, that’s a thing that looks quite a lot like a fixed income division in an investment bank — and maybe comes out with a leverage level much like one?

Congratulations also to Atlas on the appointment of a new chief executive, after the summer saw Jay Kim depart. Carey Lathrop, who has been interim CEO and chair of the executive committee since Kim’s departure, has been made permanent. Before Atlas, he was chief operating officer of Apollo’s credit business, and before that, co-head of markets at Citi.

Next Tuesday will see me moderating a hopefully great session on how to place esoteric assets in the public securitisation markets, a collaboration with DealCatalyst ahead of its global asset-based/specialist finance event on 25 November.

I’ve got a great panel, featuring Gordon Beck of Barclays, Tom Cochran of Latham & Watkins, and Matt Jones of S&P — more details here and free signup here.

Trade receivables securitisation is simultaneously the most vanilla, standard COB sector of the market, and the sector which throws up scandal after scandal. This is not a coincidence! It’s precisely the uncontroversial routine nature of most regular-way trade receivables deal (a company secures debt on its invoices, yawn) which makes it especially attractive to bad actors.

That, and a receivable is pretty much just a PDF. You tend not to get mortgage deals where there’s just no house involved — even the pre-crisis “liar loans” generally didn’t lie about the existence of tangible real estate. Some of the NPL portfolios have pretty hairy stuff in, like hotel loans where the hotel isn’t built yet. One correspondent told us about a Romanian NPL collateralised by a herd of pigs, where the pigs were in fact, not present. But NPL investors tend to have their bacon saved by buying at a discount. This is the sort of thing you expect and diligence for (”show me the pigs”).

So we’ve had Greensill, big enough to have a book called “Pyramid of Lies” about it (Greensill was involved in regular receivables finance as well as supply chain finance or reverse factoring). Smaller scale problems seem to have occurred at Gedesco, which we’ve covered a lot around here.

The latest update from the issuer in Gedesco Trade Receivables 2020-1 noted: “According to the information the issuer has been provided with, many of the receivables are alleged to be ineligible for the securitisation (e.g. transactions with related parties), or are alleged to be non-existent, already paid or otherwise irrecoverable. The aggregate amount of the allegedly ineligible, non-existent or irrecoverable receivables appears to be very significant and, as a result, potential recoveries in respect of such receivables are uncertain and will be dependent on factors which are presently difficult to ascertain.”

Still unfolding is the situation around Petra Management, a factoring and receivables firm — find some coverage here, and an exploration of the firm’s, um, fashion empire here.

Now we have a French version, with the AMF laying out a string of sanctions related to FCT Smart Tréso. The fines cover the investment manager, Smart Treso Conseil, Entrepreneur Invest, the asset management company which marketed the fund, as well as the fund’s depository and EuroTitrisation, the SPV manager.

The fund was established to invest in short term receivables acquired from SMEs, which were to be insured and sold into the structure. In fairness, from the AMF complaint, available only in French, the behaviour of the various securitisation parties seems to have been lax, rather than fradulent — the investment advisor is accussed of having “failed in its obligation to act honestly, fairly and professionally with regard to the shortcomings identified in terms of the eligibility of the receivables included in the fund's assets”, while the fund’s marketer “failed to act in an honest, fair and professional manner by continuing to market the fund, even though it was aware that its assets included ineligible receivables”.

The actual bad actor seems to have been a lift maintenance company, L2V Ascenseurs.

EuroTitrisation told investors in 2021 that the fund had been “the victim of a system of organised fraud ” taking the form of “the use of false invoices drawn on entities that had never entered into contracts with it [L2V]; fraudulent transfer of real contracts, but which were only at the tender stage; multiple transfers of the same debt; payment of previous debts with the proceeds of new transfers; outflows to “phantom” companies created for the occasion and liquidated shortly afterwards” [all credit to Google Translate].

This fraud was to the tune of €37m, and really displays the variety of receivables problems available. Making sure you’re receiving real receivables!

Fund finance feels like it’s having a moment, a little like mid-2023 in the SRT market. Like SRTs, the basics have been around for a long time; credit lines to private funds to manage drawdowns from LPs, leverage against the fund’s assets, leverage against portfolios of LP stakes, credit to GPs secured on fee stream; all these things and more are possible. Private equity firms are adept and enthusiastic users of leverage, it would be odd if they hadn’t explored the various possibilities.

What seems to be shifting at the moment is the proportion of non-banks involved, and the complexity of the financial structuring — it is increasingly now an institutional market, rather than a bank-relationship market. Goldman’s Capital Street Master Trust 2024-1 inaugurated a public securitisation market for subscription lines, while in Europe, the tie-up between Ares Management and Investec stands as a sign of things to come.

I’ve written a separate piece on the trade, expanding a rather skinny public release, but the deal is basically a levered forward flow for middle market PE sub lines. When Investec originates something that fits the eligibility criteria, into the SPV it (mostly) goes. In the SPV is junior capital from Ares, plus mezz and senior funding sourced from the market.

Investec and Ares say it’s a market first, and I’ve no reason to doubt it. Syndication of sub lines or portfolio derisking through SRT transactions is one thing, but the complexity of negotiating a partnership arrangement like this are considerable.

Both sides are solving for future states of the world. Ares wants to give Investec enough flexibility to keep originating assets (and at attractive levels), but enough restrictions to protect its investment. Investec wants confidence it has the capital to fund its originations, an off-take agreement that’s priced appropriately, and enough flexibility to structure facilities to suit client needs.

A mortgage or unsecured loan forward flow has to strike this same balance, but subscription lines are more complex facilities with many more parameters at play — so eligibility and approval have to be more complex as well.

Like any forward flow, this gives the lender much more capacity without consuming much capital. Investec will keep skin in the game, but Ares (via its levered SPV) is putting up the bulk of the funds.

It’s interesting, though, that the partnership has been struck between these two institutions. Ares is an alternatives monster, and has been deploying capital in size into fund finance (here’s a white paper on how it sees the fund finance space).

Investec is…..well, it’s South Africa’s biggest investment bank. But that translates into a total UK loan book across all products of £16.6bn and a South African book of £14.3bn. When you have the big PE shops raising funds of $20bn+, it’s going to be hard to offer them the sort of size required to be relevant.

Let’s just say, Investec often does its best business in sectors where the bulge bracket aren’t bothered, heading down the size and obscurity spectrum. The deal in question here explicitly references mid-market sponsors, but I’d be surprised if Investec is lead arranger on many sub lines for like, KKR — its fund solutions website says it works with funds between £200m and £3.5bn in size.

The mid-market focus probably works well for Ares. Any securitisation structure works best if it’s more granular and diversified. The smaller the tickets and broader the range of LPs the better (up to a point; sub line structures may haircut or discount commitments from high-net-worths or family offices. If you raise a fund purely from your mates, don’t expect to lever their commitments very effectively).

This has been evolving (see here for a discussion of the current state of play) but it’s still broadly true.

Anyway, Investec is a keen and active fund finance shop, but it’s definitively more capacity and capital constrained than, let’s say, BNP Paribas, or really any large investment bank. As such, it’s in the sweet spot for investors looking to sign these partnerships.

Ares is coming to the table with a capacity-expanding solution, so it makes sense that the best terms would be available from an institution which is maximally motivated to have its capacity increased. Other banks are doubtless looking at the structure, or similar ways to derisk NAV lines or hybrid facilities; every institution of whatever size wants to optimise its balance sheet.

The mushrooming market in private credit tie-ups offers an example of the likely path to come — but behind the releases, these come in many different flavours, with different levels of involvement from the credit funds providing the capital. Some deals are more like portfolio sales, some are derisking, some are genuine partnerships. Sometimes the credit fund is in the room, sometimes it’s a syndication partner — sometimes it’s just the fund which a particular bank calls first.

But we’d be curious to see if banks with much larger portfolios (and active SRT programmes) go down the cash-forward-flow route pioneered by Ares in this deal. It’s an exciting time for the future of fund finance!

Say what you like about Blackstone, but god bless ’em for keeping the life support machine for European CMBS plugged in — all four of the year’s CMBS transactions have been Blackstone-sponsored. That’s two logistics deals so far (another one on the screen this week) and flexible offices.

Meanwhile, the non-Blackstone section of the market continues to shrink — two Brookfield deals have recently dropped out. The Aldgate Tower, in Viridis (ELoC 38) got its refi done, after a twinge of uncertainty about JV partner China Life’s equity commitment, while the big box retail parks in Agora Securities 2021 have been sold and the deal redeemed.

It’s an unusual situation for any market to find itself in. European CMBS (now a subsidiary of Blackstone Inc) has been small since the crisis, but really small since the pandemic.

Large ticket offices were particularly suitable for capital markets funding, but valuation uncertainty has stopped many of them trading. Real estate debt has managed the transition to an institutional fund-based market without the need for packaging in rated bond format. It’s easy enough to syndicate out CRE debt positions without a CMBS. It’s not like a CMBS is a more flexible or user-friendly structure, quite the reverse, and the pricing isn’t even better.

That still doesn’t explain why the only issuer is Blackstone, and it remains a bit of a mystery. It’s a very large real estate sponsor, so it needs a lot of funding, but on the other hand, lots is available!

Estates Gazette puts Blackstone at #5 globally, behind Brookfield and some Chinese firms, but Blackstone, one imagines, does not struggle to gain the attention of potential CRE lenders. And that still doesn’t explain why there’s no crop of Nuveen and Starwood CMBS.

Blackstone is particularly prominent in logistics assets (as illustrated by three out of the four CMBS deals this year) and has built out two massive logistics platforms, Logicor (now sold to China Investment Corporation) and more recently Mileway, focused on “last mile” assets.

In euros, Mileway has put together a corporate issuance platform and a lot of bank debt — arguably the biggest CRE debt deal ever seen in Europe, while the £2.8bn sterling piece for Mileway was underwritten by Barclays, and partly taken out in UK Logistics 2024-1.

Logistics are kind of the polar opposite of prestige offices — the pandemic pivoted underlying demand away from offices and towards logistics. We’re all sitting at home ordering off Amazon and dialling in to Teams these days.

But they’re also opposite in terms of granularity and cap rates. The new deal, UK Logistics 2024-2, features 63 assets, split between Mileway and Indurent (the combination of Blackstone’s Industrials REIT buyout and St Modwen Logistics).

As Scope notes in its rating report, Blackstone has quite the track record in logistics deals — “Since 2018, Blackstone has sponsored 17 European CMBS transactions backed by 20 loans secured against logistics properties, including nine transactions in the UK. Blackstone has managed to improve each of these underlying loan’s debt yield during their term. Eight of the 20 loans have already repaid or been refinanced, and there has been no default or extension to date.”

The properties in this deal were largely acquired over the last 12 months — the build continues!

PS: Owen Sanderson is hosting a webinar, in collaboration with DealCatalyst, on how to take esoteric assets out in public. For more information, and to sign up, click here.

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