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Selling from strength

The first post-crisis waves of bank disposals in Europe were products of weakness. Portfolios came from banks that collapsed (the Northern Rock and Bradford & Bingley portfolio sales) or from institutions that were tottering or took state support, such as the CaixaCataluyna portfolio.

There was also a ton of dealflow from institutions staggering along, if not actually collapsing, such as the CaixaCataluyna portfolio (recently refinanced again in Lugo Funding), the vast GE Money empire, most of the Italian GACS NPL disposals, or nearly all of the Irish sales. Even when institutions weren’t in state hands, as with the foreign banks that fled the Irish market and sold down their assets, they were in a parlous state.

The big question hanging over most of these sales was whether the seller had enough capital to eat the losses and, if not, could it be massaged with vendor financing, state guarantees, or bad bank structures.

Today, the world looks different. European banks mostly have enough capital, (even if they aren’t trading above book). Even Monte dei Paschi, The World’s Oldest Bank/perennial basket case is on the acquisition trail.

Where portfolios are trading, it’s driven by finding the best owners for assets and optimising the shape of a business. Institutions like Tesco, Sainsbury’s and Orange, financial services dilettantes, are getting out of the game; institutions like HSBC, ING and Bank of Ireland are considering their geographical focus.

But the price-to-book issue remains. You can see this, a bit simplistically, as the market telling bank management they own the wrong stuff. To take one random example, a euro of assets, managed by ING, is worth 90 cents. Better to own only the right stuff, where a bank has sufficient scale and market power, than own a diversified spread of businesses whose value bank shareholders don’t appreciate.

And so we come to the largest sale (I think?) since UK Asset Resolution shut up shop, in the shape of a €7bn French mortgage portfolio out of HSBC Continental Europe.

HSBC bought Credit Commercial de France (CCF) back in 2000, but it’s been pulling back for a while, and sold the retail operations to Cerberus at the start of 2024. Cerberus took these under the wing of My Money Bank, itself a crisis creation — it’s the old GE Money Bank France, a unit with an spicy asset book, including mortgages from La Reunion and inflation-linked mortgages.

But we digress. HSBC, as it said in its third quarter results, kept a roughly €7bn portfolio of mortgages after selling the retail operations. It said on Wednesday this had started marketing in the fourth quarter, which isn’t quite what we’re hearing, but what’s a few weeks between friends — the point is, the deal is out there.

The ticket size puts this very much in the big leagues, even if we assume a fully levered capital structure, and French mortgages are something of an acquired taste. Many borrowers choose fixed rate for the life of the product (100% of the last BPCE France RMBS), and lots of French residential lending comes in the format of a guaranteed home loan, which circumvents an onerous and expensive notarisation requirement.

Assuming the HSBC book is fairly long in the tooth, that probably means CPRs are rock-bottom (who’d refinance their rock bottom pre-2022 rate today?) and clearly this is a high duration book. That probably explains HSBC’s admission it will record a $1bn loss on the sale of the portfolio; it’s going to be fairly clean origination with little credit risk, it’s just written at the wrong interest rate.

One might, therefore, argue the natural capital source for this kind of risk is a buyer able to sit on the book for a very long time, rather than a fund wanting to lever up and make quite a swift turn.

As it happens, the recent best bid for French mortgages appears to come from Rothesay. That firm won the Orange Bank mortgage book (the shorter, juicier consumer loans went to KKR and LCM) and was best bid for ING’s French mortgage book in Project Lotus just before Christmas, although the Dutch bank declined to actually sell it.

Rothesay has deep pockets, thanks to the BPA assets it is redeploying, and it’s certainly on the acquisition trail. But that doesn’t necessarily mean there’s no role for faster money.

We talked before Christmas about Waterfall’s deal with Aviva, Lifetime Mortgage Funding No. 1 — Waterfall gets cheap leverage for its purchase of equity release loans by creating matching adjustment-eligible tranches (retained by Aviva). From Aviva’s perspective, a hedge fund willing to wear the payment variability of a mortgage portfolio can sharply improve the capital treatment of its remaining exposures to said portfolio.

There’s a great note from NatWest, which looks at this deal, other matching adjustment securitisations, and insurance asset structuring/investing more generally in a far more scholarly fashion than I can.

Firmly in the realm of speculation, perhaps the sweet spot to fund a monster book like this is the combination of hedge fund capital to take off some variability and matching adjustment money from the insurers? If it happens, you heard it here first.

SRT leverage is fun and cool

Your mileage may vary. Investors, especially those yearning for a more attractive spread backdrop in SRT markets, don’t always like competitors leveraging up, and regulators appear sceptical.

With that in mind (and following Deutsche Bank’s retreat), we recorded a podcast all about SRT leverage last week, which you can find here or here (Spotify) or here (Apple Podcasts) or indeed by searching for Cloud 9fin wherever you generally get podcasts.

…but SRT triggers are tricky

We’ve been asking around about the restructuring of French technology giant Atos, which closed at the end of last year. 9fin’s distressed debt team have done a ton of work on the credit over the years, as it tottered through turnaround plans, management changes, refinancing and sale proposals and finally into restructuring.

As a large European investment grade company with a lot of bank lending in the capital structure, it was also well represented in large corporate SRT transactions, at least those placed before the company’s condition became apparent.

We hear, though, the tortuous restructuring process (multiple creditor compacts, mandataire ad hoc, accelerated safeguard, capital raise, debt-for-equity, asset sales all featured) led to sharply varying recovery prices, and even different triggers being exercised. Single name CDS on Atos was triggered with a bankruptcy credit event following the company’s entry into accelerated safeguard (but before this had been confirmed by a court). However, some SRT transactions used a restructuring trigger, typically more flexible, and recovery determinations were all over the place; there’s a complex decision tree of possible bank approaches through the Atos processes.

It’s tricky to get granular detail, as you’d imagine for the very private SRT market, but my colleague Celeste Tamers has written an insightful piece about it — the situation stands as a symbol of all the complexities that can occur when figuring out how to determine losses.

In other SRT news, the European Central Bank’s supervisory arm announced its planned 'fast track' process for 'sufficiently simple securitisations meeting certain requirements' — presumably this refers to STS deals, since it would be a heavy lift to draft and lay out a parallel 'sufficiently simple' standard?

The supervisor also fired off a public warning shot about SRT leverage, despite all of my podcasting efforts. Per the ECB: “For example, if banks were providing leverage for credit funds to invest in securitisation, this could result in substantial hidden risks being retained in the banking system – with lower capital coverage overall. That raises prudential concerns.”

It looks like a watching brief for now, though, with the ECB monitoring market developments “to detect any adverse trends and malicious behaviour at an early stage”.

With supervisors sniffing around, it’s a good time to be as clean as possible — and so it’s worth noting the Noria / Autonoria shelf, the cash risk transfer programme from the BNP Paribas group, now includes explicit language prohibiting the bank from providing significant financing against any part of the deal. One would think the triple-A is safe enough, given it’s perfectly acceptable for a bank to retain 50% of it in a cash SRT (or 100% in synthetic), but it’s a clean dividing line. This likely mirrors established policy for trading desks across the Street, but having it down in black and white makes it unambiguous for the regulator.

The pre-emptive non-bank SRT for Chenavari-owned Italian lender Creditis, which we discussed last year, is also worth nothing — because now it’s come good. Creditis is back in the banking system, with the sale, announced last week, to IBL Banca. Always have an eye on the exit!

Data? I’d rather marry her

What could be more romantic than ESMA launching a consultation on disclosures for private securitisations, dropped just before Valentine’s Day?

It’s good-ish news for the industry, in that it offers a simplified disclosure template for private deals, cutting the administrative burden associated with doing these deals, and the templates themselves do indeed look uncontroversial. It requires detail on risk retention, credit impairments, jurisdictions, currency, size, plus the basics on deal counterparties, maturities and so on.

But the broader context is one of failure — the ESMA-mandated disclosure templates across public and private deals are rarely the first port of call for investors, and gum up the securitisation process without delivering clear benefits.

As ESMA itself notes: “Two practices have emerged: (i) the implementation of bespoke arrangements between sell- and buy-side parties to exchange the necessary information, and (ii) the development by supervisory bodies of specific notification templates to fill the gaps in the general framework.”

In general, funds get the information they need, in the format they need it — the market works. Let’s remember, some of the best-documented and most transparent securitisations pre-crisis were US subprime RMBS; disclosure doesn’t imply that nobody will do anything stupid.

As PCS notes (and many thanks for the excellent London Symposium last week), it’s also a slightly odd consultation within the broader framework of securitisation regulation. The European Commission has said it will publish proposals for overhauling the entire securitisation framework by early summer (big Barcelona reveal perhaps?) and the very definition of 'private' securitisation is also up in the air.

CLOs, publicly distributed and traded, are nonetheless privately listed on the GEM market and subject to private securitisation rules. Other 'public' deals, like many of the Pimco-sponsored full stack deals, are private in every practical respect. Clearly the dividing line is unintuitive.

PCS writes: “Are stakeholders invited to assume no change to the definition? Or should they respond based on their own preferred amended definition? Would it have made more sense to wait until the Commission's initial proposal so as to canvas the possible approaches to the potential different definitions?”

There are further headaches, with jurisdiction the biggest. These simplified disclosures only apply to European private securitisations, where all sell-side parties, including originator, sponsor, and SPV, are established in the EU.

As Clifford Chance knowledge partner Andrew Bryan writes:

“One of the main reasons market participants have been advocating for a separate private securitisation disclosure regime was to enable EU institutional investors to invest in non-EU securitisations (which would generally be 'private' for the purposes of the EU Securitisation Regulation) by eliminating the need for such investors to obtain the full prescribed EU templated disclosure. Restricting the simplified template to European private securitisations in this way would prevent the proposed 'simplification' from addressing that need.”

Bryan also points to another oddity. The consultation says the full set of public disclosures must be made available 'on request' from investors, potential investors and competent authorities.

"If true, this would completely defeat the purpose of the exercise, as sell-side parties would still need to collect all of the existing required information and put in place systems to prepare the full 'public' template reports anyway – and do that in addition to collecting the information required under the proposed new 'simplified' template. The result would be that the CP's proposals would create a higher compliance burden for European private securitisations, not a lower one. It is difficult to understand the rationale for such a proposal.”

Across the pond, by the time the consultation closes on 31 March, who knows if securities regs will even exist? The DOGE team are targeting the SEC, an organisation with which Elon Musk has some history. If it's gutted, what then? Does 144A matter? Do ABS-15G forms still go on?

A golden age of selling securities in America with nothing more than an amusing ticker and “bond=good” on the back of an envelope beckons, while Europe tinkers with its templates.

Huw Van Steenis, ex-Morgan Stanley banks analyst turned globe-trotting financial eminence, has a nice piece in the FT this week also looking at reviving European securitisation (and getting ahead of the Commission’s response to its Targeted Consultation; find the feedback here).

One thing that would really help, but falls outside the purview of this consultation, is harmonising lending regulation and actual national securitisation laws. We spoke to a lender this week with an eminently securitisable €250m loan portfolio. Unfortunately for said lender, these are scattered across four European jurisdictions, and will therefore require four separate transactions for a public takeout (and that will have to wait for the business to grow to four times the size).

While the actual legal basis for cash securitisation remains national, with an EU-level overlay on top, it’s very difficult to scale national lending (especially in smaller EU states) to a point where a public deal can possibly make sense. Even if you’re at 90% market share in Maltese personal loans, is that a business big enough to support a liquid public deal?

Harmonisation of this kind is clearly a pipe dream — it would get insanely political and require the rooting out of decades of national practice — but that’s what it would take to really light a fire under European securitisation.

So money

IYKYK

Excess Spread is in Vegas next week for the SFVegas conference. If you’re going and want to grab a cocktail, drop me a line.

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