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Liberated

Shortly after Liberation Day I liberated myself from writing news about asset-based finance for a couple of weeks, and what a window to take holiday! The underpinnings of the dollar-based global financial system are now audibly creaking under the strain of unpredictability and lawlessness from the Trump administration. Risk was most definitely off, and now possibly on again because the Fed chair isn’t getting fired. What a time to be alive.

Clever people (including at 9fin) have been trying to trace the impact of the tariffs across companies and markets, only to be forced into redoing the analysis with every tweet, rumour and counter-rumour.

The read-across to European asset-backed markets isn't obvious. The path from more expensive imported steel in the US to, say, lower prepayment rates in Spanish auto loans isn’t direct. But risk-off is risk-off, and relative value is king. If HY is 100bps cheaper, BB-rated mezz should be cheaper too. If CLO equity sells off, shouldn't SRT spreads widen (very much a live question)?

And if real market levels are in flux, what's the best way to execute a credit-intensive deal with a multi-day bookbuild window?

The best way is to, ideally, not be in market prior to the sell-off. Asimi Funding 2025-1, launched on 31 March, was slated for pricing in the week of the 7th and settlement last week, but pricing message comes there none.

It's not a slam dunk plain vanilla deal. Originator Plata Finance has been moving up the credit spectrum but it’s still off-the-run unsecured (it's the spicier portion of the old Zopa book). Still, there's no real tariff exposure in there, and it would have sailed through in happier times.

More surprising is Balbec Capital’s Spanish RPL transaction PRPM Fundido 2025-1, which launched a public offering on 8 April (the bottom…so far), and proceeded with an ordinary public bookbuild. This is not an asset class which typically attracts a wide audience, so it may be that some of the bonds were spoken for at launch… but it got chewed up a bit in syndication, with the mid 200s and mid 300s talk on classes B and C landing at 300bps and 400bps respectively, and the seniors at 210bps from talk of mid-100s to 200 area.

When we spoke to the sponsor last year, it was clear Balbec values access to securitisation markets and prefers a rated, distributed structure as the best form of leverage — but private placement is always an option, and a widely used one is RPL transactions.

European securitisation doesn’t necessarily stop when there’s market volatility, it just ducks below the surface. Preplaced transactions can avoid the public pressure of a deal hanging out in syndication, but it’s a different dynamic from other markets.

In, say, leveraged loans, a market shakeup means CLO managers often pause while direct lenders step in, offering solutions for hung deals. In ABS, it’s the same accounts, just with more NDAs, and less price transparency. Public execution changes the level of price tension, but it doesn’t necessarily have a massive impact on what the overall distribution looks like.

Many deal sponsors also have the option of buying bonds themselves, financing them and distributing them at a more attractive moment.

Waterfall Asset Management opted for discretion in the execution of SBOLT 2025-1, a UK SME ABS backed by Funding Circle loans, with the senior tranche structured as a loan, and Waterfall funds buying bonds down the stack. It will surely want a fully levered transaction when the time is right, but not at any price.

Commentary from TwentyFour Asset Management said the widening in asset-backed markets was most pronounced in European consumer assets, which is not a view shared by all.

“We have been disappointed with AAA continental consumer ABS; despite being short-dated, spreads in this sector disproportionately softened and an overall lack of depth was evident, including rather poorly from the issuing banks themselves”.

There’s clearly a few vociferous Bloomberg chats behind this remark, but that doesn’t mean it’s untrue. EU economies might be more likely to see a tariff drag than the UK, thanks to the supine and conciliatory tone from the UK government, but that’s unlikely to be what’s going on here.

Instead, a more likely culprit is the different structure of issuance. UK asset-backed markets skew to non-bank specialist lenders, with big banking groups arranging deals, warehousing, and hedging. EU-area consumer ABS supply, meanwhile, is dominated by bank-sponsored deals from a relatively small group; BNP Paribas, Société Générale, Crédit Agricole and Santander loom very large indeed in the volume figures.

If the investment bank arranging these transactions for its own consumer finance subsidiaries doesn’t want to make active markets, these shelves have less of a following from the other desks on the street.

Still, it doesn’t seem to have put euro-denominated buyers off. Santander’s SC Germany Consumer 2025-1 was unfortunate enough to have launched prior to “liberation”, but after something of a delay, it seemed to be steaming through the market at the time of writing.

That’s a hopeful signal. The senior only deals launched last week (two German autos and Italian consumer ABS) show that there’s a bank and official institution bid around; a smooth landing for SC Germany shows the asset managers are ready to buy again.

May is typically one of the busiest months in European securitisation, with issuers clearing the H1 decks and shooting for conference bragging rights. It looks like deals can get done now, but it’s still morning in the US as I write, and Trump hasn’t started posting yet. It’s going to be a long four years.

Brookfield cleans Haus

Brookfield (and advisor Brookland) has been the busiest sponsor in European CMBS, addressing three chunky deals over the past month, all with their own idiosyncratic problems.

We talked about Salus (ELoc 33), the CityPoint deal, two weeks back. Despite the equity being underwater based on last year’s sale process, investors hung in there, with the vast majority of noteholders accepting a deal involving three years of extension, in return for modest margin increases, a slim equity injection, plus PIK payments on exit and some upside notes.

The original Ulysses deal (a pre-crisis CMBS financing the same asset) saw a massive barney and fight for control of the building, instead of a sedate A&E waved through. Perhaps CMBS has lost its mojo.

Viridis (ELoC 38) financed the Aldgate Tower, visible in the distance from my desk, and the ingredients for a refi were in place last year, after a little wobble in September when China Life, which owns 90% (Brookfield is a 10% minority shareholder as well as the asset manager) couldn’t come up with the money for the planned equity injection.

It managed to get internal approvals in place before the deadline, but the actual refinancing transaction still wasn’t in place early this year, and a couple more extensions were needed to get us to the present situation, where China Life has put in £66.4m and Viridis has been taken out with Citi-arranged Pine Finance 2025-1, with the financing cost tied to the clearing spread of the CMBS notes.

This takeout was priced on 4 April, with class A/B/C at 195/250/350bps over Sonia respectively, some way back of the 120/160/190/280/385 on Viridis, but the deal is done, and the asset is stabilised. The building had some idiosyncratic issues on top of the typical office distress; one tenant was collapsed law firm Ince Gordon Dadds, another was a big WeWork let.

The latest Brookfield restructuring is another challenged transaction, Haus (ELoC 39), a German multi-family portfolio. When we last wrote about the deal, we cited Fitch’s robust opinions on the matter, and it bears repeating:

“Were it not for recurrent sponsor subsidy, the multifamily housing securing Haus would be producing negative net operating income due to its high rate of vacancy. The financing is facing an interest rate shock, and without a swift turnaround in operating performance, including a capex programme mired in delays and cost overruns, we believe all classes of notes will incur losses”

Multi-family hasn’t had the same structural challenges as office, but it is supposed to be halfway to resi, and the original deal priced accordingly, with senior notes at 65bps. But the Haus portfolio was more of a fixer-upper, requiring renovations and reletting to address persistently low occupancy rates. Being multi-family, it’s also low yielding, meaning it was hit particularly hard by rising interest rates.

Since last September, how’s the fixing up going? Not great!

Occupancy rate is 48.5%, interest cover on the loan is 0.61x (0.48x without the hedge), and debt yield is just 2.34%. Valuation came down 4.85% as of the last valuation date in November, to €475.76m. Buying the building at this price gets you just over €15m of rent, or 3.3% — now above Euribor!

Loan maturity isn’t until July 2026, but it doesn’t look like investors want the keys. This week, they voted unanimously for a deal which included new equity of €34m, three-year extensions to loan and note maturities, and exit payments accruing from next year and ramping up from 2029. There’ll be a permanent cash trap, and a requirement to put in place hedging to bring up ICR to 2x (though the hedge balance can be reduced to 75% of the loan).

A cleansing presentation circulated with the deal announcement show net operating income increasing from €0.8m per quarter to €4.4m by June 2029, with much of the increase supposed to be delivered by cost cutting. The business plan also includes a dribble of sale proceeds.

Total senior debt is €318m, so if the portfolio really is worth €475m there’s a ton of equity in it. But a portfolio that’s a fixer-up with Brookfield doing its best fixing for four years will be even more of a turnaround challenge after a contentious restructuring has taken place, and €34m of equity makes a powerful case for the sponsor’s commitment.

Whatever was supposed to motivate Germans to rent these properties and bring occupancy back clearly hasn’t played out yet, but here’s hoping it turns up before 2029!

TwentyFour joins the ABF party

TwentyFour Asset Management is a remarkable institution. Founded in 2008, when the securitisation market was basically a rubble-strewn bombsite, it zigged while others zagged, starting a securitisation-focused retail asset management boutique while most institutional investors were terrified of the very word.

It worked, and worked well. TwentyFour (named for the offices at 24 Cornhill) became a key player in European asset-backed markets, was sold to Vontobel in 2015, and now manages more than £21bn. It’s not a Pimco-style whale, but it’s enough of a big beast for cognescenti to recognise “TwentyFour stips” in a CLO document, and to be an anchor account for issuers it likes.

But it has had to struggle uphill against several long term trends.

First, securitisation in Europe (in its ISIN-bearing tradeable form) never recovered properly from 2008. The market is big, much larger than can be demonstrated by the public issuance statistics, but most of the bulk comes in the form of private warehouses, asset-based loans, and private portfolio sales. A market that had recovered to pre-crisis or US levels would clearly have been a better backdrop for the original TwentyFour thesis to play out, though this hasn’t stopped the firm diversifying into other mainly public fixed income assets classes, including financials, HY, corporates, government bonds.

TwentyFour recognised early on that the portfolio sale / private market would be important, and targeted these deals with the launch of the UK Mortgages listed vehicle in 2015. This bought sold and levered multiple mortgage portfolios, but suffered from a second long-term trend: the decline of the London equity market and particularly that for investment trusts.

Persistent NAV discounts plagued and continue to plague the sector (Saba Capital’s Boaz Weinstein is currently waging war on perceived poor governance in UK investment trusts) and all the while “private” capital, in unlisted closed-end fund format from private equity or hedge fund money, took up more and more of the market in asset-based products. UK Mortgages was folded back into the flagship TwentyFour Income Fund in 2022.

A more buoyant retail investor market, a more dynamic equity market, and deeper more adventurous money could have lifted the boats of many money managers with UK listed vehicles, but the listed asset-backed sector has dwindled as the alternative asset management giants have taken over.

That doesn’t mean the firm will only do public deals. Even within the Income Fund, TwentyFour has historically done some deals which are close to the public-private boundary.

Among the 20 largest holdings disclosed are a position in Charles Street Conduit, Together’s main warehouse facility, and Habanero Limited (a Pepper Money warehouse, being a variety of chilli pepper). Then there’s VSK Holdings, a lending facility to a Venn Partners entity, and a couple of the more liquid (but still not very liquid) SRT programmes — Deutsche Bank’s CRAFT and Lloyds’ Syon Securities.

These deals are all absolutely within the 24AM wheelhouse — if you like buying the mezz in Together’s TABS deals, why wouldn’t you like the mezz in Together’s warehouse? — but they aren’t exactly tradeable in the same way as public mezz.

Anyway, TwentyFour is now launching an asset-backed finance fund — arguably the new cooler name for securitisation. Other investment firms appear to prefer asset-based finance (I have also changed my job title to reflect this) which I suppose sounds a little looser, or perhaps covers structures like asset-secured recourse lending, ownership, prefs, warrants or HoldCo debt for asset originators, or contractual cashflows without much direct recourse. Would you rather be based or backed? One for the marketing teams I suppose.

This fund will “invest primarily in a range of consumer and corporate asset portfolios across Europe’s resilient and conservative market, accessing the assets either through acquisition, partnerships or structured exposures so as not to limit its potential universe”.

This presumably gives 24AM more flexibility than hitherto to participate in portfolio bidding processes, though it’s a tough hunting ground out there. Outbidding Pimco for any sizeable book of performing assets is a challenge.

TwentyFour certainly has decent relationships to start off with. Having been large and active ABS bond buyers since the crisis, it’s well covered by the sellside, and has deep and longstanding issuer relationships. That doesn’t necessarily mean it has origination teams running around early stage fintechs pitching them warehousing, but I’m sure it’ll be well placed to look at asset books from the usual suspects.

Is ABF just marketing hype? Maybe. But so what, jump right in!

Me on the internet

I moderated a very enjoyable webinar session this week on subscription line SRT transactions, with James Parsons of PAG, David Saunders of Santander, and Etienne Pecnard of NatWest.

It’s a curious market: the lowest coupons on offer in an SRT universe that’s already too tight. And yet, it’s an enormously attractive market on a risk-adjusted basis. There have been two defaults in the sub line universe, both cases of outright fraud, and so the risk-bearing SRT investors might not get paid as much outright spread as in a corporates deal, but on a risk-adjusted basis they’re laughing.

SRT deals also suit the sub line product very well. Subscription lines can consume a lot of capital, with their excellent performance working against the product in some cases. Regulators are disinclined to believe PD=zero when a bank is putting together its capital model.

They’re unfunded, and often don’t pay, or at least don’t pay an economic rate. Banks like the business as an excellent way into sponsor wallets, so aren’t screwing the last basis point out of clients.

So distributing these exposures in synthetic format works well. The SRT coupon is delinked from the underlying asset yield, and investors charge little to take on these low risk exposures, but a lot of regulatory capital can be released. Given the concentration of large GPs and LPs, banks also find themselves running into internal limits more frequently with sub line books, creating incentives to do these deals purely for limit relief.

Yet there are difficulties, chief among them confidentiality. Big alternative asset managers (the largest GP exposures in sub line portfolios) don’t want their peers to have oversight of their portfolios, so there’s a very tight line to walk between disclosing enough to get investors comfortable and maintaining confidentiality.

Risks arise not particularly from the product, but from big picture geopolitics. Large LPs from politically controversial jurisdictions might not be able to remain LPs under certain combinations of sanctions regime. I can’t believe I have to type this, but what if the US sabre-rattling against Canada steps up? Is there a scenario where the big Canadian pension funds can’t invest in US-sponsored PE funds?

Anyway: don’t listen to me, listen to the experts. The recording can be found here!

Barcelona bound

The first Barcelona invites have started landing in my inbox, and we always very much appreciate it!

Writing about asset-based finance is thirsty work and requires the support of the industry. You know it makes sense, do not delay, invite a journalist today! Before 10pm we will be on our best behaviour.

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