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Heading south

Even if Dallas-based subprime auto lenders aren’t your bag, unless you’ve been living under a rock for the last couple of months you’ll have now heard of Tricolor Holdings, the buy-here-pay-here dealership and auto lender which collapsed into Chapter 7 amid allegations of fraud.

Recoveries aren’t looking encouraging.

Fifth Third Bank, a warehouse lender to the group, took a $178m provision in Q3, while JP Morgan took $170m and Barclays £110m-equivalent. Tiny Origin Bank took a $29.5m hit on its $30.1m exposure.

Supposing you’d spotted it, what could you do about it?

It has no public stock, and it’s not easy to efficiently express a negative view through an ABS structure.

If the public ABS bonds see the same level of write-off as the warehouse lenders have recorded, then everything is toast and shorting the senior bonds might have been possible. But even in a fraudulent situation, there’s still a chance that there’s enough good collateral mixed in to make senior bonds whole.

The most exposed tradeable instruments are the junior notes in the public ABS deals — the class Es in Tricolor Auto Securitization 2025-1 and class Fs in Tricolor Auto Securitization 2025-2, currently marked in the single digits.

Last week saw some unusual trading across these tranches.

According to TRACE, $10m in class E notes in Tricolor Auto Securitization Trust 2025-1 changed hands at prices of 7 and 91.249 in trades that were both recorded at 9:45am on 27 October.

The class F notes in Tricolor Auto Securitization Trust 2025-2 saw similar moves. A $1.3m clip printed at 92.088 and 7 at the same time at 9:45am on 27 October, while TRACE also records $9.74m printing at 92.144 and 7, one minute apart at 9:57am and 9:58am.

These are clearly paired trades. While it’s theoretically possible that some enterprising broker found an account that 1) was axed for deep mezz in subprime autos and 2) had no idea what was going on with Tricolor and made a killing, this seems a bit of a stretch.

More likely this is one leg of existing short position, closed out through the paired transactions.

These bonds are tiny — the volumes here represent 34% and 63% of the outstanding notes — so putting on a conventional short by borrowing bonds, selling them and buying them back lower would be extremely difficult.

But a short contract of some kind seems most likely. That’s also a bit of a mystery though — who would take the other side? It’s one thing to manufacture a synthetic short where it can be hedged by an index, or even fudged a bit with a stock or CDS, but Tricolor is an idiosyncratic situation with no tradeable securities except the ABS bonds, and who’d want to go long a possible fraud?

We present this here as an interesting puzzle — if you have a possible structure in mind, let us know!

White smoke

There’s been a bit of a shake-up in structured finance syndicate this year, with two of BNP Paribas’ rising stars, Rob Low and Charles Hatton, heading off to pastures new at Goldman Sachs and Natixis respectively — and leaving the BNPP CLO machine somewhat understaffed.

Mr Hatton got his FCA authorisation at Natixis last week, and came strong out of the gate this week with a complex RMBS deal to place, Fairbridge 2025-1, a multi-originator pool of Dutch buy-to-let loans packaged together by Cerberus.

It’s an interesting collateral mix. The three originators backing the deal have relatively limited track records. Mogelijk, which has been writing BTL for longest, started in 2020 while Hyra started in 2023.

There’s also a small slug of bridging loans (8.3%) originated by Pontifex Bridging in the pool, which is rarely seen in term deals. Many BTL originators have bridging businesses and finance the loans in private securitisations; it’s a massive market for the securitised products industry as a whole.

But there has yet to be a term deal in Europe. Partly this is down to structural issues (bridging loans are usually short-term, so a revolving private facility works better than a three-year bond) and even if these can be resolved, banks and funds alike will give great terms in private, so there’s limited incentive to go public.

Eight percent of the collateral doesn’t exactly make this a bridging deal; it’s more likely an artefact of how Cerberus has gone about assembling this particular collateral pool. But it’s an encouraging sign nonetheless.

Cerberus is a veteran sponsor in European and US securitisation, but it’s not necessarily a debt-friendly sponsor, favouring highly levered structures with limited skin left in the game, and maximum optionality to keep the leverage point high. In the Granite deals, for example, it includes a SORD (subordinated optional redemption date), allowing the sub notes to be retranched without calling the deal and redeeming the class A.

It also has a track record of missing its FORDs, delaying the call in Vantage2 and holding off on calling Auburn 13 and 14 until Bank of America stood ready to refi the book into Auburn 15.

We’re not going to be moralistic about this — they have a job to do, and they’re taking the optionality that’s available in the market at the price investors decide — but it adds an extra layer of spice to the transaction.

Memories can be short, though, and arguably each new deal is a chance to assess extension risk afresh.

A few months after the Auburn non-calls at the back end of 2023, Cerberus did its Edenbrook deal, securitising the front-book collateral left over from the sale of CHL. If investors did price in any extra extension concerns, you’d have needed a microscope to see the spread impact.

Flight risk

Aircraft lease ABS is a little outside our usual wheelhouse — plane financing people get really into planes, in a way that even the most enthusiastic mortgage person doesn’t get about mortgages, and the market has a whole separate lexicon of engine types and body types.

But Marta, who joined team 9fin last month, has a great piece on the largest aircraft lease ABS since the financial crisis, an innovative deal for Griffin Global Asset Management which reworks the standard structure.

First off, it’s a master trust. The first aircraft master trust deal was done by Carlyle in 2024, and has been tapped twice this year.

As Phoenix American, managing agent on the Carlyle deals, put it:

“The emergence of the Master Trust structure marks the next major step in this evolution: a structural innovation purpose-built to support scale, transparency and repeat issuance in a maturing market.”

As with any securitised asset class, creating a master trust makes issuance more flexible. Aircraft leases are pretty lumpy collateral — even Griffin’s chunky $1.44bn pool is only 25 aircraft — so any incremental scale and diversity is helpful, and most of the aircraft lessors are repeat players, in the game for the long term, and therefore able to benefit from a structure that makes repeat deals easier.

The other structural innovation comes down the stack. Unlike other aircraft deals, it’s structured to separate cashflows and residual values, with a class Y note (rather than a B) protected from residual value fluctuations, which are borne instead by the equity, subscribed by Griffin and Bain Capital.

Griffin has not previously financed itself in securitised format, relying instead on the unsecured corporate market, arguably more suitable for younger aircraft. As the portfolio aged, though, a securitisation began to make more sense, as this terms out funding and reaches a higher leverage point.

Marginal gains

The Santander-industrial complex is still going very strong, with two issues in market this week, Auto ABS Italian Stella Loans 2025-2 from Stellantis Financial Services Italia (a Santander JV) and Kimi 14, from Santander Consumer Finance Oy. Surely we’re entering the final straight now; cash deals generally find execution tails off after Thanksgiving, so there’s only a couple of weeks to get something else announced. Are there any Santander Consumer entities left to do cash SRTs?

Anyway, this much issuance is a heavy lift for structuring and execution desks, and there are signs that Santander is trying to streamline things. Richard has a story about the switch to using luxcos for Santander transactions — Kimi, for the first time, is being issued by a luxco called SC Nordics, rather than a double Irish DAC, while Austria also made the switch a couple of weeks back.

Analysts will be working on their year-end reviews right about now, and a big component of the bid-offer for next year’s issuance volume is basically “what does Santander do”. If the luxcos are any kind of signal, the answer is probably “a lot”.

Explore our collection of market wraps here.