As of Q1 this year, EBITDA is in positive territory, and so is net income (€1m for the quarter).

It’s been so much worse for Auto1’s peers. Cazoo, a UK-based used car marketplace and dealer once valued at $8bn on the New York Stock Exchange, collapsed into administration last year. Cinch, a similar business inside the Constellation Automotive (BCA Marketplace) umbrella, has also plunged in value — here’s the latest available accounts for the HoldCo. Looking at the US market, consider Carvana and CarMax!

The nuances are different, but all of these businesses promised essentially the same thing — they would be dealers, rather than brokers, offering immediate liquidity to vehicle owners. Cinch’s sister brand WeBuyAnyCar is perhaps better known, and pretty much explains the business model in the name.

The appeal is obvious, but the pricing is difficult.

Just like any bond dealer, there’s an inherent tension between making tight markets and doing volume, versus making wide markets and making money. If the source of capital is VC money that wants to see revenue and scale rather than profits, it’s an easy decision to go for tight markets! But this only exacerbates the pain when used car prices slide, as they did in 2023.

The assets in this kind of company are basically brand, website, and absolutely loads of used cars — so it very much matters how these used cars are funded. Auto1’s relatively better ride through the tough times could be considered a strong result for the securitisation markets, because it has funded huge amounts of its inventory in ABS format.

Cinch, as far as I know, doesn’t have any ABS. Cazoo had a €50m facility with BNP Paribas, while Auto1 has a €1.035bn monster arranged by Credit Agricole, and featuring Barclays, BNP Paribas, Citi, Deutsche Bank, Goldman Sachs, HSBC, Intermediate Capital Group and Royal Bank of Canada.

These are reproduced alphabetically, as in the Hogan Lovells press release, but it seems most likely that ICG is taking the €35m mezz and the banks are doing the senior.

The facility has been scaled up a lot since closing in 2021 — initial cap stack was €400m senior, €35m mezz and €50m junior, per the press release. Now maximum sizes are €800m senior, €35m mezz and €200m junior, paying 175bps, 450bps over Euribor and 5% per the end-2023 accounts. The facility was also extended to 2026 earlier this year.

One might also observe that the advance rate has come down in the intervening period. Senior financing now comes in at 77% instead of 82%, the sort of prudent trimming one might like to see if used car prices had dropped by nearly 10% from their peak. The exuberance of 2021 is behind us!

Only €475m is utilised as at December 2023 (only!) but this is clearly a monster trade.

Being ABS-funded makes Auto1 more leveraged to used car prices, but far less capital-intensive. it has funding to 2026 for its purchases, it can ride out volatility, and it doesn’t need to burn more precious equity just to own its cars. I’m sure if it were to market the equity in the facility, the price would reflect market conditions in used cars, but as a matter of accounting balance sheet, it can probably just sit there causing no trouble to anyone.

The inventory deal is enormous, and very cool, but Auto1 is much more than an inventory business — I’m writing about it this week because it’s out with its public market debut, terming out its consumer financing book.

This is a much better understood business proposition than “buy all the used cars” and sits very nicely within a broad offering of car marketplace, car buying, and dealer financing. Exactly how it works depends on Auto1’s strategy — it could offer cheaper finance to consumers so it can churn its inventory faster, a little like an OEM captive finance arm, or it could price it more expensively because the convenience of a one-stop shop prevents customers shopping around too much. Or neither, and just match market levels.

It formerly provided this service via banking partners

The proposed deal, FinanceHero 2024-1 (hopefully not a hostage to fortune; the online car sales offering is called Autohero) has plenty of excess spread, which can heal most things in securitisation. The borrowers aren’t quite as creditworthy as those who are showing up to buy their new BMWs from the dealer, but nor are they subprime; they’re just regular Germans who want to buy a car.

It’s a static sequential pool which isn’t too levered, and there’s a lot of rarity value too — this will presumably come with a spread to the German captive auto ABS shelves and the likes of Santander or BNP Paribas’s auto finance arms, and it has the “Simple Transparent and Standardised” designation.

Longer term, Auto1 probably wants to stay friendly with the investor community. Auto1 CEO Christian Bertermann wrote in the annual report that “over time, we intend to offer our internal financing solution in all Autohero markets as we expand our refinancing options and maintain capital discipline”.

That sounds to me like a firm that’s already a great securitisation client and wants to be an even better one!

Greener pastures?

Don’t enforce in Italy is often good advice. But it depends on the alternative.

Emerald 2019 is an Italian shopping centre CMBS sponsored by Kildare Partners, which is not in good shape. The loan backing the deal matured in September 2022, but has been in standstill since then, accruing default interest while the sponsor markets the assets.

Based on a April 2023 valuation, the LTV was up to 120.2%, with the reported value down 41% on the June 2022 figure to €78.91m.

Now, noteholders have been invited to agree terms on a restructuring proposal for the deal, which will push out maturities to 2027, set the loan interest to 405bps over Euribor (actually a cut, since there will be no more default interest), while tightening up distributions — there will be a cash sweep, and funds from disposals will be paying down creditors.

The restructuring includes a new sale strategy, but this does not seem to be particularly urgent — under the proposals, the borrower has to “consult in good faith with the Agent and the Delegate Special Servicer to agree and implement an appropriate sales strategy”, and if this doesn’t work “shall appoint a sales agent no later than 15 January 2026”.

Essentially, this is extend and pretend — hopefully Italian shopping centres will be more valuable over the years ahead.

The sweetener to get this over the line comes in the form of contingent value rights; noteholders will be granted “10% of net excess proceeds collected by the CVR Issuer after the Loans and the other creditors of the Borrower have been repaid in full”.

This is split down further — of the 10% excess, class A gets 37.4%, class B 12.9%, class C 26.5%, class D 23.2%.

Based on the current status quo, this doesn’t seem an especially generous option. There’s still €87.66m of investor-placed notes and €4.61m of retention notes. Throw in deferred and default interest and there’s €93.56m accrued and not paid.

If the shopping centres are worth €79m, value is breaking well into the rated debt. If by some miracle the collateral jumps to €100m, then if I read it right, the noteholders will be splitting €650k through the CVRs.

Class C has been the controlling class since last year and has appointed an operating advisor. It’s not easy to parlay this straight into owning the building, but you have to wonder why they’d want to help the out-of-the-money class D to get paid. If the current class C bought in cheap enough, maybe they make a quicker turn by taking the sponsor deal than fighting to own the buildings….but the disposal timetable is fairly chill so it might not be that quick.

Sponsors, understandably, do not want to put everything on the table day one. But don’t dig deep enough, and you risk losing the asset entirely, and losing control of the process.

Frosn 2018, a Blackstone-sponsor Finnish offices/mixed CMBS, is instructive in some respects. It probably didn’t need to go into loan default at all — the extension and consent process was fairly last-minute and ropey — but having entered special servicing, the consensual restructuring agreed last year looks a lot more generous than that on Emerald, for an asset that’s in much better shape.

At the last valuation, the Frosn loan was at around 87% LTV — not readily financeable and not much good for the mezz loan, but still in the money. Blackstone offered 20% contingent value rights, rising to 25% later. With LTV <100%, these were in the money day one, and there was a meaningful margin bump of 150bps, plus a partial sponsor guarantee. Vacancy rates are high, but that means there’s some potential upside in the deal; it’s not just a case of waiting for something to turn up.

One deal is not like another, and one set of bondholders is not like another, so perhaps this will go through fine. But if I was a betting man, I’d be expecting a canny CMBS investor to become the proud owner of some Italian shopping centres.

More cows

For those of you disappointed that Alantra has yet to invite them into the data room on the French cow ABS, help is at hand!

It was very remiss of me not to study the data tapes for Haydock Finance’s Hermitage 2023 when it came out last year, but it turns out there’s an appreciable amount of cow finance involved.

It’s £1.6m in collateral value of the £700m+ backing the deal, and this includes generic “livestock” as well as “dairy cattle” but that’s not nothing!

There are also, it turns out, actual Australian cow trades — 2018 saw StockCo do a warehouse deal with Goldman Sachs as pointed out to me by IFR’s Richard Met…calf.

The Haydock data is a little confusing; when it says “number of individual assets”, presumably this must be herds, rather than individual animals. There’s a £150k single asset cow line item in the mix, which seems expensive to me. If you’re £150k bid on a single cow, give me a call, I back myself to source you the asset!

Sadly the cows appear to have gone from the 2024 outing, and it’s not clear if the opportunity for primary cow supply will come again in sterling.

But the rest of the Haydock transactions also provide a joyful mix of wholesome real economy lending.

Hermitage 2023 also has more than £4m of Fairground Rides as collateral (hopefully valuations aren’t on a rollercoaster ride!) and a single Portable Toilet lease (not too crappy). Equipment finance remains undefeated.

Who’s in charge at Thames?

Thursday was a day for celebration across much of England, as football took a meaningful step on its road home Wednesday night. But elements of the sterling investor community involved in Thames Water were probably less cheerful, as water regulator Ofwat published its plans for the next regulated period between 2025 and 2030… and it’s not looking great for the giant utility.

Essentially, Ofwat’s draft says that the Thames plan from October 2023, which envisaged massive price rises and a £3.25bn equity injection, is no good. “Inadequate”, in fact. Ofwat is willing to see a price rise of £99 on average, vs £191, and a big boost to infrastructure investment, but also wants to see equity come in.

Equity, however, has not just packed its bags, it’s already on a plane. At the end of March, the shareholders said Ofwat’s plans were uninvestible and walked, defaulting on a HoldCo term loan and triggering cross-defaults on other holdco debt. The restructuring advisers are already on the board of the HoldCo entities!

Ofwat suggests a listing or a split of the company could be a path to a sustainable financial structure, but both seem challenging. The draft Ofwat plan allows a return on capital (the regulated value of the business) of 3.72%. So the IPO pitch is something like — please stump up £3bn for a return that’s lower than Gilts?

Ofwat is putting Thames into a new “Turnaround Oversight Regime”, which basically means enhanced reporting and an agreed remedial plan. The securitisation is about to enter lockup following a “Trigger Event”, which also means enhanced reporting and an agreed remedial plan (with bondholders).

Part of the idea of a WBS is that, when the company’s performance goes south, it can kind of sit there and deleverage itself, effectively running for the benefit of creditors — who have very different interests from those of the regulator.

No doubt it will be interesting to see whether the remedial plans proposed to Ofwat and to bondholders correspond to one another.

With the shareholders well out of it, there are three main parties involved here — bondholders in the WBS have pretty much all of the economic value of the company, and it’s locked up fairly tight. Creditors to the HoldCo have share pledges they can exercise, but they’re well out of the money, and have no desire to put in equity. The regulator is frustrated with Thames and wants to direct the company’s actions itself.

But there’s a ticking clock with the company’s rating. It’s on the cusp of IG status, with downgrades pending depending on equity support and relations with the regulator. Lose IG and it’s in breach of its licence conditions. A removal of its licence would trigger an Event of Default in the WBS, putting creditors firmly in charge… but to what end? What are the odds of getting £15bn-equivalent of debt to agree a coherent direction?

There isn’t really a party left with skin in the game and a mandate to perform major surgery like splitting Thames up; hopefully the company’s hapless management can justify their substantial salaries and somehow stagger on through the mess.

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