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Make hay

Everything remains dysfunctional and bad but markets are good again, for some reason. Has the US administration become more normal and law-abiding, or are we a couple of Truth Social posts away from another descent into madness? The FT is calling the temporarily benign conditions the Taco trade (for Trump Always Chickens Out), following his further carveouts for the US car industry on Wednesday.

Either way the sun is currently shining and it's time to make hay.

Deals that slammed into the early April volatility are now navigating their way out, with Waterfall Asset Management reoffering the class B and C notes in SBOLT 2025-1, a UK SME ABS of Funding Circle loans, and Asimi Funding, the Plata Finance-originated unsecured UK consumer ABS, now circulating belated IPTs and showing off a 1.3x done senior tranche.

Meanwhile, public trades which launched more recently are storming the market; BMW’s Bavarian Sky German Auto Leases 9 and RCI’s Cars Alliance Auto Loans Germany V 2025-1 are both as vanilla as ABS deals come, but BSKY was upsized by €200m, while Cars screamed in from h60s/70a IPTs to land at 62bps on the seniors, reflecting the improved backdrop (as well as the extent to which price discovery is still a work in progress).

Price is everything. If 2025 contains a couple more headline pukes (at least), then pricing ought to build in some cushion. It's a credit environment where deals can get done, but doing deals in the tightest quartile of post-crisis pricing is probably not a goer. Keep issuer expectations low, and the dealflow can continue — as demonstrated by new issues from the UK specialist mortgage sector, Braccan Mortgage Funding 2025-1, a mixed collateral BTL/OO RMBS from Paratus and Castell 2025-1, a second charge RMBS from Pepper Money.

Neither deal has talk out at the time of writing, but the Paratus transaction offers an interesting test case — with 144A docs (and an issuer who pressed the flesh at the Vegas conference), will the US bid help it fly out of the door?

UK issuers were in Vegas in force this year, but it’s still an uphill struggle. Convincing US investors with a ton of their own dealflow (which widened more than European product after Liberation) to take a view on UK macro, and take a look at UK product which might only be available in small size requires getting them paid for the extra work, and the levels where US accounts care might well be levels outside where specialist lenders can execute with European accounts.

Paratus has a further backup, with shareholder Apollo able to take down bonds (having done so in the past), though on the face of it, this is a fully levered deal with all tranches on offer, as is the Reg S-only Castell deal.

Both deals feature pre-funding (£50m in Castell and up to £88m in Braccan), which also tells a story about market timing, and the potential for further upsets as the year winds on, since it suggests there’s no need for these issuers to clear out their warehouses, and that they’re happy to lock extra funding at current levels. It might get worse before it gets better!

Wider spreads hurt particularly where there’s no room to wiggle. Reperforming deals which have to stretch to offer step-up coupons, and which are replete structural workarounds like yield supplementation reserves (use principal to pay interest) and net WAC caps, may find investors sucking their teeth and stepping away, unimpressed by calls which are out-of-the-money from day one.

Such was the fate of the privately marketed Miravet 2025-1.

Morgan Stanley filed the 15G notice on 9 April, and the deal, which finances a Spanish RPL portfolio owned by CarVal was sounded in the background during April, but may have to come back around the block later on.

We couldn’t dig up much detail on the structure, but the typical Morgan Stanley refinements usually serve to enhance equity optionality, pare down call incentives and get as close as possible to a day 1 bond sale > portfolio price exit.

We’re not snobs about it — good client service if you can get it done — but April probably wasn’t the time. Does the name “Project Scrabble” indicate the careful building of structures tile-by-tile with effective use of multipliers, or an attempt to “grab or collect something in a disorderly way”?

The Balbec-sponsored PRPM Fundido 2025-1, which we touched on briefly last week, was also an RPL deal without much in the way of excess spread (and a fair chunk of NPL collateral), but it had the distinction of actually getting done. The bottom of the stack, retained at the time, may slip out if current supportive conditions remain.

It probably wasn't the ideal execution window in hindsight, but Balbec deliberately opted for a less aggressive structure, with horizontal retention and sequential amortisation.

There’s a double call in there, with optional redemption a year before the minimal step-ups, but there’s no attempt to get cute with this one — the deal will delever, and Balbec will be incentivised to re-rack sooner or later.

The US fund sees securitisation market access as strategically important, and wants to build a following, as well as opening up the investor base for its future RPL deals. Pre-marketing ahead of launch saw the deal c. 80% covered; the switch to public marketing was a deliberate attempt to dig up more marginal accounts which may be reluctant to play RPL deals in general.

There’s a certain logic here. Buying RPL portfolios funded by securitisations is fundamentally a kind of arbitrage activity — if the predominant buyers of RPL securitisations are the kind of smart aggressive hedge funds which also buy RPL portfolios, this will tend to limit the available arbitrage.

Broadening the investor base to include more real money asset management or insurance money, with different incentives and less involvement in buying portfolios themselves should mean better pricing, and more attractive economics for said portfolio buyers.

When the forward flow doesn’t flow

Forward flows are all fine and good when they work, but awkward when they don’t.

The classic way to trip up is to set terms which aren’t flexible enough to work in different market conditions — the buyer of loans will generally want to purchase cheap loans with high spreads and a tight credit box, while the originator of the loans, wanting to write as much business as possible, will want flexibility to go down the credit curve, pricing which is competitive, and an offtake agreement to sell them as expensively as possible.

So the parties negotiate, striking a deal somewhere in the middle, and any headbutting in the early phases is quickly forgotten as a “partnership” agreement is announced to the market.

This partnership may well go beyond the buying of loans; a big forward flow deal with a brand name asset manager is generally value-accretive to the originator, and the forward flow partner might want a piece of that upside. Or, the asset manager in question might feel that the supply of assets is more secure when it holds a piece of the equity, or might feel that the bulk of the business is really the assets it originates, and it ought to have control of the asset-lite originator entity as well.

This sets up an inherent tension. If the asset manager buys loans cheap, it will do well on its asset IRR. If it buys them expensively, that makes its equity stake more valuable, but at the cost of IRR on the asset portfolio.

So what should an originator do if the forward flow terms no longer work? What happens if the forward flow provider is also a shareholder?

All of which brings us to Finance Ireland, the largest specialist lender in Ireland, active across small balance commercial lending, SME finance, auto lending, and, uh, milk loans.

Until recently, it was also offering mortgage loans, but officially stopped lending earlier this year. The trouble had been apparent for a while; the company’s 2023 annual report notes that “the residential mortgage division…had a difficult year as rising wholesale funding costs were reflected in new mortgage rates”.

The Irish Times reported at the end of March that Finance Ireland’s best rate, on a seven-year fix below 50% LTV, was 5.35%, 235bps outside the best rate available in the market.

Finance Ireland’s residential lending was funded by a forward flow arrangement with M&G, which was regularly taken out through the Finance Ireland RMBS shelf and this seems to have been the issue — the “rising wholesale funding costs reflected in new mortgages”.

The arrangement worked well for a long time — more than €1.8bn originated, €715m in 2022, but “new lending in 2023 and 2024 impacted by higher rates”, according to the originator.

The flow, in short, had dried up, thanks in large part to disparities in funding costs between the capital markets, the exit for M&G, and exceptionally low deposit rates passed through into mortgage rates offered by the Irish banks.

Fundamentally, it’s hard to do UK-style specialist mortgage lending in Ireland.

The proposition for UK lenders writing non-conforming, seconds, or other spicier product often revolves around doing it at low enough LTVs to get comfortable. This only helps if there’s a plausible route to actually getting hold of the property if it all goes wrong, and in Ireland, it’s very difficult.

Finance Ireland / M&G’s books were therefore essentially prime, bank-style lending. Portfolios feature lots of first-time-buyers, lots of self-employed, but with basically clean credit — so origination was in direct competition with the regulated banking system.

Finance Ireland sought replacement forward flow arrangements earlier in the year, we understand, without success. The ideal arrangement for any lender is to keep lending; customer brand and broker relationships suffer quickly when there’s a hard stop.

Now M&G is marketing the residual notes in the deals which remain outstanding — a further exit from its legacy exposure on top of the exit from the forward flow. These positions are in principle attractive to almost any asset-backed investor used to playing at the bottom of the stack, but at what price?

What adds further complexity is that M&G is also a major shareholder (44%), alongside Pimco (50%). Kris Kraus, who heads Pimco’s private strategies in EMEA and Asia-Pac and co-heads asset-based finance, is on the board, as is Josh Anderson, who leads the global ABS portfolio management team. Rob Scott, of the M&G specialty finance team (and formerly Pimco) is also a director.

Pimco bought its stake through the Bravo II fund, which is now a little long in the tooth, having launched in 2013. Current disclosures, however, show that the Pimco shareholding is now through TOCU IX, a total return vehicle.

The mortgages, though, are already serviced externally, making M&G’s residual sale that bit cleaner. Finance Ireland started its mortgage business with the purchase of Pepper’s Irish origination business in 2018, but the loan servicing stayed with Pepper. Earlier this year, JC Flowers bought the rebranded Pepper Advantage, which retains the servicing contract for the Finance Ireland back book.

A further article in the Irish Times suggests the whole company may be in play, if questions of valuation can be ironed out, with PTSB reportedly putting in an unsolicited bid earlier this year.

Clearly the lender would be a more attractive target if it could offer all of the business lines including mortgages, but at this point it’s been making most of its money from other business lines, particularly the fast growing on-balance sheet auto lending proposition, since at least 2023.

Pimco gets more money

Lest one think that Pimco is a little underpowered and struggling to rustle up cash for portfolio purchases, there’s a new pot of capital coming online from the West Coast Asset Manager!

This Wednesday, Pimco announced the launch of its “Diversified Private Credit Fund”, which is very much an asset-based fund under the hood.

The diverse investment universe targeted includes “private loans secured by hard assets, residential mortgages, consumer credit, corporate credit, and commercial real estate loans. Loans secured by hard assets include consumer-related credit (such as auto, equipment or residential loans), non-consumer-related credit (including aviation finance and data infrastructure), and residential mortgages” — corporate credit gets a look in, but it’s clearly not going to be just a pile of sponsor-backed unitranches, but target the full suite of asset-based product.

It will be an evergreen fund targeted at wealth investors across Europe, and sit within the Pimco alternatives business — not the Income Fund complex which has bought many of the large mortgage portfolios snaffled up by Pimco over the years.

It’s not clear from the initial release whether this fund will invest unlevered, as with the Income Funds, use the structural (securitisation) leverage of most other firms, or other fund approaches such as NAV lines or back-leverage on individual positions, but it matters a lot for Pimco’s origination effort, and it matters a lot for Pimco’s competitors.

Being able to buy unlevered has represented an enormous competitive advantage for Pimco in winning mortgage portfolios; it simply does not have the same return thresholds or capacity constraints as most of its competition.

A pool of mortgages bought unlevered still represents a nice trade for the Income Funds, which have to run at speed just to stay still. Most of Pimco’s competitors need securitisation leverage to hit their (much higher) return thresholds, and ideally a deeper discount to protect their thin equity positions.

One assumes the wealth management clientele want something a bit spicier than the 6% dividend yields coming off the Income Funds, and, if the fund is going to be playing a lot in mortgages, that suggests it will be securitising.

But does that mean it will behave more like a KKR, Apollo or Blackstone when it bids? Will it distribute much needed bonds to the market, or to other Pimco pockets? Which Pimco entities get the most attractive economics in any given acquisition?

Billion-plus portfolios that move the needle for Pimco don’t come up every day, and more internal mouths to feed means more complex decisions about which funds bid which assets and where they end up.

One thing’s for certain; the origination team will have to run even faster.

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