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Irish exit

We’ve been looking things up on the internet in a quest to figure out just how lucrative Morgan Stanley’s principal finance operations can be — initial findings are here, but the TLDR is: pretty damn good, at least in the period 2020-22.

Our back-of-the-envelope on some of the firm’s Irish RPL deals suggest securitisation of these assets made 9-10 points on one trade, and more than 15 on another, in reasonable size too.

It helps to be able to buy in primary from a motivated seller, and for that it helps, in turn, to be a bulge-bracket investment bank with a flourishing FIG practice.

It also helps to keep the economics in house. A hedge fund wanting to bid on a portfolio needs leverage and structuring work done, and probably only has a team in the single digits. If an investment bank can bid on a portfolio, do all the structuring work on the takeout and distribute the bonds itself as well, the full package of fees and profitability stays under one roof.

For the top-tier shops, the binding constraint tends to be person-hours, not balance sheet — what is the most profitable activity in which securitisation bankers can be engaged? Scouring the market for specialist lenders who will take your financing at 120bps over is time-consuming and not that lucrative; buying and flipping old mortgage books can really make it rain.

But if it’s that good, why isn’t everyone doing it? Goldman Sachs, the closest peer bank, most definitely was, although it’s been a little quieter lately. A single deal back in the day (Project Walnut/Swancastle) was big enough to move the needle for the bank-wide P&L! The principal businesses at JP Morgan and Citi seem more focused on clean front book assets than aggregating RPL pools.

The RPL game has also changed (the examples we dug up were largely from 2022, as the data isn’t there to back out reliable figures for more recent transactions).

Normalised interest rates give money a time value again, so the anaemic CPRs on RPL pools look more punishing. Higher base rates mean higher liability costs, which RPL pools may be ill-equipped to absorb. The arbitrage between the value of securitised pool and whole loans, never particularly durable, may have become more squeezed still, and the sellers are less likely to take a bargain basement price.

Put these things together and the buy-and-flip business model of yore is harder to execute. At least MS cashed in while they could!

That’s no moon

Congratulations to Juan Grana for playing a blinder and successfully stage-managing his move to Crescent Capital. The ultra-clubby SRT market, of which Juan is a leading member, managed not to leak his destination until he was practically in the door, despite our best efforts.

Back in the day (18 months ago) all the talk was of generalist credit shops getting into the SRT game, with much sniffiness from longstanding funds about the specificities of SRT and the danger of tourist money degrading deal terms.

Crescent’s approach of hiring dedicated SRT talent and launching a dedicated strategy, doesn’t fit into that box, but the world has also changed a lot since 2024, and the expected wave of US issuance looks more like a ripple.

But Crescent, in a way, stands for a broader trend; once a firm has made the first move into SRT investing, it will be shown deals, and participate in the market. If the new initiative proves successful, this may encourage other firms in private credit and CLOs to make long-term, considered moves into SRTs, and staff up accordingly.

Given current market conditions, new US entrants might end up doing more European deals than when their strategies were first conceived, but that’s no bad thing. Spreads might be tighter, but a broader market is a healthy market!

Don’t feed the insurers

Among the big beasts of asset-based finance, different sources of capital drive different investment approaches.

Pimco’s ability to do unlevered deals is a direct consequence of its investor base and the structure of its funds.

For firms with captive insurers, there’s a great deal of noise about how this is driving them to manufacture investment-grade risk from their asset-based portfolio. There are thinkpieces and interviews aplenty on this topic (we have done a couple).

The basic idea is that by buying portfolios of, say, consumer assets, it’s possible to manufacture attractive positions that qualify for investment-grade ratings which can feed the likes of Athene or Global Atlantic, while keeping a high-returning junior piece somewhere else with the alternative asset manager’s ecosystem.

But if you look at the actual trades some of the big players put on, their revealed preference appears to be shipping in external leverage wherever possible.

We talked about NewDay last week, which will surely be one of KKR’s largest European positions; it’s already levered to the absolute hilt, the culmination of nearly a decade of carefully optimised funding. Per the last investor report for H1 2025, average group advance rate was 89.7%.

PayPal Europe’s BNPL forward flow was a large deal, but all the leverage was external (four banks and a Canadian pension fund).

Apollo owns asset origination platforms all over the world and talks up its insurance cooperation, but Foundation Home Loans and Haydock Equipment Finance run fairly typical levered specialist lender capital structures for the most part.

At first Apollo didn’t buy much at all from Foundation. Even when Foundation did a fully preplaced deal in 2023, this was sold to Apollo rival Pimco. That looks to be changing a little bit — most of the firm’s funding still comes from a traditional warehouse structure, Orion Funding, with a fairly traditional set of senior leverage banks (BNP Paribas, Deutsche, Lloyds, Natixis, RBC and SMBC).

But there is at least one forward-flow arrangement, and the firm has disclosed that when it called buy-to-let RMBS Twin Bridges 2020-1 in March 2024, it sold the assets into an ‘affiliate’.

Still, these are small crumbs for firms the size of Athene or Athora. Whether an alternatives firm owns origination channels itself, like Apollo, or owns the assets, like KKR, the positions look like traditional levered private equity style trades.

If you take away the insurance, but keep the scale, what’s left?

Ares doesn’t have a captive insurer (or at least, not a big one; Aspida Re had a $9bn balance sheet at the end of 2023) and it does indeed have a different view of the market.

It mostly disdains the scrum of bidding for consumer books, and has carved out some large transactions in unusual niches.

Disclosed trades from the ABF team in Europe include a subscription line forward flow with Investec, a project finance/digital infra deconsolidation and forward flow with ABN Amro, preferred equity in size for the Quintain/Lone Star real estate development in north west London, a collateralized fund obligation-type structure with Coller Capital Coller Capital.

There have been a lot of SRTs as well — but, as we wrote earlier this year, less so in the ordinary corporate space and more with a fund finance angle.

The Ares transactions also reveal a preference for structural leverage, just as much as firms like KKR and Apollo with captive insurers on hand — and, if anything, senior positions in fund finance or real estate are probably more suitable for insurance money than senior positions in consumer portfolios.

Some of these deals definitely involved a private distribution of senior risk, most likely to insurers — KBRA is cited as providing the rating for the Coller deal, an essential step for distributing debt to US insurers using the NAIC lens to manage their investments.

So, beyond the talk, it’s all about the leverage — from captive insurers or otherwise, but at the cheapest cost.

Talk more about mortgages

Team 9fin will be well represented at DealCatalyst’s UK Mortgage Finance conference on Monday, at the Landmark Hotel (deep in BNPP country). Say hello if you’re going, come along if you’re not!

If you’re aching for some mortgage content and just can’t wait, here’s the replay of the webinar I did with some of the best-informed people in UK mortgage finance.

Excess Spread is our weekly newsletter, covering trends, deals and more in structured credit and ABS — subscribe to this newsletter here.