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Owen Sanderson

Everyone wants to do "asset-backed private credit" now (Arini is starting a fund, among others, and has hired Nabil Aquedim and Mustapha Zahi).

It looks like Royal London Asset Management wants to amp up its activities as well. Will Nicoll joined from M&G last year as head of private debt, promoted this year to head of fixed income.

More recently, RLAM has hired a team from Insight led by Jeremy Deacon, which should staff it up for asset-backed success. Insight successfully straddled public and private ABS, as most investors do today, though it was one of the hardest-hit firms by the LDI crisis in 2022, providing some of the monster BWIC flow during that period.

Asset-backed private credit pitches often talk up the off-the-run assets which are available, and we’re seeing some of this come out to market.

Aira, for example, has a private ABS backed by heat pumps subscriptions, the first such transaction, with BNP Paribas in the senior note. There’s no equity or junior investor disclosed, and this may mean that Aira is keeping it — it’s a well-funded startup with Temasek participating in its last round earlier this year. My former colleague Kat reports that Fortress has done a chunky £750m dentist-loan forward flow.

This sounds like an interesting trade — per her story, “Tabeo will receive a fee for managing the debt, mostly interest-free loans, and monitoring that borrowers pay on time.“

So maybe it’s a BNPL-like offering originated via the dentists, who presumably can do higher value treatments as a result of bundling the financing. What are the credit characteristics of customers with (formerly) bad teeth? How does this stack up against a diversified consumer loan book?

Much of asset-backed private credit, though, still focuses on good old-fashion mortgage financing. This still provides an attractive risk-return profile, with liquidity, transparent pricing, and a stable legal backdrop — so in actual practice, there’s probably a lot more funds looking to do private mortgage warehouse mezz than there are funds putting on music rights deals.

Certainly the issuers we spoke to in Barcelona felt they had their pick of financing providers, should they wish to lever up their facilities.

This is an easier sell that signing away a forward flow, and easier to structure as well, but the absolute volumes available are not large — a £300m warehouse facility is substantial but the mezz might only be £30m.

Non-bank mortgage lenders do generally have a mighty appetite for leverage, but it’s a delicate balance. Some funds doing warehouse mezz want first refusal on mezz allocations in public bond format, which is not calculated to delight public markets players in RMBS mezz. Allocations for mezz are always difficult, but it’s much worse if a big chunk is already spoken for.

Particularly intriguing is the interest shown by some Australian funds in private RMBS mezz — names we heard a couple of times are Realm Investment House and MA Financial. These look like pretty serious shops.

Australia in general seemed to be a theme of the conference.

Australian issuers have long made the trek over for Global ABS, running a mini-conference of their own before the main event.

There’s a vibrant non-bank lending market, and issuers have always wanted to broaden their investor base beyond the relatively concentrated Aussie banks and the big funds. The legal basis for mortgages and lending is relatively familiar to UK investors, and the Australian consumer has a similar penchant for property speculation, creating meaningful opportunities for non-standard mortgage lending.

The natural move, for Aussie issuers willing to stick in a currency swap, is to hit the much deeper dollar market, rather than the less consistent euros or sterling. But coverage of Australian markets still falls within the international ABS segment of most investment banks, and several London-based securitisation businesses have been eyeing up the attractive risk-adjusted returns on offer lending to Australian clients.

Even if the eventual takeouts still end up in dollars, this looks like an important source of business — and European investors are increasingly looking to Aussie-denominated product in its own right.

As TwentyFour Asset Management noted in its conference roundup, “Australian RMBS/ABS issuance year-to-date has been significantly higher than the comparable period last year, with a number of these deals having good levels of participation from the European investor base looking for a healthy spread pickup and diversification. Before coming to Barcelona, many Australian lenders stopped over in London for an Australian-only mini conference, highlighting the growing market and investor base”.

It’s not just about buying bonds or lending across borders. We’ve discussed Molo in these pages at length, but the ultimate in cross-border involvement is following the ColCap (or Pepper!) route and buying or building in the two markets.

Time to figure out that reporting trip…

Every Global ABS I attend fewer panels, but I will always make time for the trader panel, an excellent opportunity for the Street's finest market makers to face off (and to talk their books).

Are the top trade ideas that shake out their real high conviction plays, or the risk they'd rather shift? This year saw Eric Huang of Barclays, Colm Corcoran of Santander, Josiah Jarosz from Goldman Sachs, Eric Benoussaid from Société Générale face off, with Harry Choulilitsas of Natixis giving a primary market perspective.

One of the ideas which stimulated discussion was Jarosz’s argument about legacy non-conforming mezzanine.

Like any good trade idea, there's a good deal more upside than downside. Older deals have often seen deteriorating performance through the rising rates cycle, and are paying sequentially. If the worst of the performance is in the past, they should flip back to pro rata, and who knows, maybe even get called? Either way, good news if you can buy the bonds priced to full extension now.

Older UK transactions had the overhang of the Libor transition to deal with; while the primary market moved relatively smoothly to Sonia, getting investors together and voting on legacy transitions was a long and painful process, which is now mostly in the past. Investors with less flexible mandates might have been unable to add Libor-linked product, restricting liquidity in Libor-based legacy RMBS.

Reasonable people can disagree about the underlying premises (have the arrears really played through?), but one big problem with this kind of deal is actually putting it on in size. There aren't many of these bonds, they weren't big to begin with, and cherry-picking transactions where there's a real upside via triggers or a real possibility of call isn't easy. This is the territory of the highly specialist broker, who will, naturally, wish to be compensated properly for their services.

Situations like last year's unwind of part of the East Lodge portfolio can therefore be something of a treasure trove!

If there’s no natural seller, though, a more complex approach to getting hold of legacy assets can involve breaking open a legacy structure.

One such example is Cavendish Square Funding, a 2006 vintage CDO originally managed by Aegis Investment Management. Early last year, the trustee announced that the investment manager could not be found, setting off a chain of events which blocked payments and pushed the deal into payment default.

That doesn’t mean it’s full of bad stuff; it’s been deleveraging nicely over the years and the class C is now the most senior class. But the defaults were real enough, and an enforcement notice was put in at the back end of 2023, directed by the class C holders. The receivers have been called in, and Alvarez & Marsal is going to be selling off the collateral through BWICs beginning 24 June. Noteholders in the class C or subordinated notes can participate either in cash or through their existing noteholdings — there’s still decent equity value in the deal, despite the technical default from the investment manager walking.

Plenty of CDO unwinds have been contemplated over the years. The initial post-crisis wave petered out the best part of a decade ago, but many of the vehicles have continued to exist. Showing a CDO portfolio out on BWIC doesn’t necessarily mean it will trade. It could be a book-marking exercise, giving a transparent price on the collateral (naturally, funds and trading desks that suspect they’re being asked to price up a bond for free may not be putting their best foot forward).

But pricing is difficult! Documentation for some of the old CDOs isn't always helpful.

In Cavendish Square, for instance, specified dealers (for CDO tranche pricing) include Bear Stearns, Lehman Brothers, Credit Suisse First Boston, Dresdener Kleinwort Wasserstein, Merrill Lynch, Royal Bank of Scotland and Calyon. There are banks which still exist on the list, but one of the deal mechanics (admittedly, relating to the now-paid Class A1-D note) relies on getting five bids from among these.

For the collateral itself, there's somewhat more flexibility; bids can be sought from the arranger of the portfolio collateral, or from a pricing service, provided the rating agencies agree.

Much of the performing collateral left here is pre-crisis Spanish RMBS, which isn't unheard of, and the two main collateral arrangers were BBVA and BNP Paribas, according to deal documents. How much legacy RMBS has BBVA traded lately? You might be waiting a while for the relevant marks to come in.

But in these illiquid and neglected securities lies opportunity — there’s still some juicy pre-GFC morsels to be had.

If, like me, you missed out on pre-2008 securitisation, you may have heard stories of the legendary lavishness of Global ABS in the days when it was still hosted at the Hotel Arts. Parties serenaded by the likes of Girls Aloud and more.

There’s still food and wine aplenty to be had, and booking the likes of Carpe Diem for a few hundred hard-drinking bankers doesn’t come cheap — but the sense of competitive bacchanalia has certainly receded.

My colleagues just returned from SuperReturn in Berlin, the private equity and private credit conference held the same week, where one of the parties had Flo Rida and FatBoy Slim providing the tunes. There’s precedent for some top level musical entertainment at Super Return, with Usher doing the honours at the March 2020 event.

Based on these two facts alone, which market is most threatening to financial stability? Where’s the bubble? Global ABS isn’t exactly a model of sobriety and good sense, but when you’re booking Super Bowl headliners you know something’s up.

In the absence of festival-level headliners, I have to mention the intriguing story from eFinancialCareers, of a Nomura salesman’s misadventure. Many questions remain, but the market is discussing little else!

A spectre is haunting Europe(an securitisation). The regulators are trying to help again. The paper from Christian Noyer, former governor of the Bank of France, has a recommendation “to relaunch the securitization market to strengthen the lending capacity of European banks and create deeper capital markets. This objective implies a quick correction of the regulatory and prudential framework to unlock the growth potential of the securitization market in Europe.”

There's about to be a major consultation launched on securitisation regulation, soliciting views on whether the current state of securitisation regulation is fit for purpose.

Around 2014, the mood music was remarkably similar. A new European Commission stepped into office, with a financial services file led by Jonathan Hill, a pro-European technocrat Conservative of the sort which has been extinct for half a decade.

The big plan was called Capital Markets Union, and aimed to deepen and unify European capital markets. This was to drive European economic growth, promote resilience (critical in the aftermath of the sovereign crisis) and reduce the reliance of European business on a banking sector which was still shattered across much of southern Europe, and subscale everywhere else (except France).

Look around, and it’s pretty clear that it hasn’t achieved its ambitions. One of the main non-securitisation outputs was tinkering with listing and prospectus requirements, of interest primarily to structured note issuers and offshore listing venues.

Insolvency processes were tightened up, but the decision to do this as a directive, rather than a regulation, meant that there’s still no unified European approach to distressed corporates.

Securitisation was a centrepiece of the whole project, with the paper launching the initiative saying that “A sustainable EU high quality securitisation market relying on simple, transparent and standardised securitisation instruments could bridge banks and capital markets”.

If the goal is to do more bank-style stuff with a smaller banking system, you can't really avoid tackling securitisation, and this was recognised at the time. It was supposed to “promote the growth of secondary markets to facilitate both issuance and investments”.

Thus was the project which became the Securitisation Regulation launched, with implementation in 2019. Less than two years later, the flaws were so glaring under the pressures of the pandemic that the "Quick Fixes" were rolled out, amending rules for NPL securitisation and XYZ.

Quick Fixes or not, it's clear that it’s failed.

Non-bank capital markets have indeed flourished in the past decade in Europe, but the bulk of this activity has used structures which skirt around the Securitisation Regulation where possible. The disclosure and data requirements are a tick box irritant rather a useful tool for investors; the “Simple Transparent and Standardised” designation is useful because of the regulatory benefits it grants, but it’s had little to no effect in encouraging more investors to join the market.

To the extent that bank liquidity buyers have returned, this is driven by base rates returning to positive territory and a desire for high grade floating rate paper. The STS / non-STS cliff on capital treatment doesn’t act as a source of comfort.

Risk retention started from a confused place, and has only got more confusing.

The original concern was basically about eliminating deals that were “designed to fail” — synthetic CDOs where the protection buyer chose the underlying securities. If regulators required the originators of securitisations to hold onto a piece of said securitisation, they wouldn’t be tempted to put all of their rubbish into securitisations, securitisations would perform better, the stains of 08 would be expunged.

But one reason to securitise is precisely to get exposures out of the banking system. Distributing risk from depositors to adventurous capital markets investors is a good thing! If we consider, say, the programme of Lloyds disposal transactions to Pimco (Bridgegate, Performer and Barrowby), the idea is to get something off the Lloyds balance sheet.

It doesn’t mean the deals are designed to fail, it simply means there’s a risk that it’s more efficient for Pimco to hold than Lloyds. If Lloyds has to keep holding 5%, this just adds pointless grit in the machinery of risk distribution.

So the status quo is that risk retention is irrelevant for those using securitisation for funding, who have always preferred to hold their own junior risk, and an inconvenience to be bypassed as much as possible for those distributing full stacks.

The problem with the drafting of the Securitisation Regulation was that policymakers evidenced no real interest in what the users of securitisation would have found useful, not through want of trying from the industry.

The SR reforms were addressed to an (imaginary) constituency of potential securitisation users. Here’s the press release from December 2018 launching the new regulation.

This EU-wide initiative on 'high-quality' securitisation will ensure high standards of process, legal certainty and comparability across securitisation instruments through a higher degree of standardisation of products. This will notably increase the transparency, consistency and availability of key information for investors, including in the area of SME loans, and increase liquidity. In turn, this should facilitate the issuance of securitised products and allow institutional investors to perform a thorough due diligence, which helps to identify those products that match their asset diversification, return and duration needs.

Investors actually active in the securitisation market had no problem with the already-existing information available to them, and oddly enough, the prospect of punitive fines for failing to tick the right due diligence box hasn’t prompted a rush of capital into the newly “transparent” market. Nor does the prospect of a fine up to 10% of global turnover for originators who don’t comply encourage potential debutants in the market.

So now that regulators want to help again, what can we expect?

The Association for Financial Markets in Europe has put together a wishlist of five regulatory amendments, to be taken together, for the forthcoming consultation. These are worthwhile reforms, drafted with a careful eye on the art of the possible, and avoiding special pleading for deregulation.

Increasing risk sensitivity within the bank prudential framework;

Reviving demand from the insurance sector;

Adjusting the treatment of securitisation within the Liquidity Coverage Ratio;

Introducing proportionality for investors conducting regulatory due diligence; and

Fine-tuning regulatory reporting requirements and simplifying STS criteria for both traditional and synthetic securitisations.

Read more about the proposals here. The problem, once again, will be the politics. People are rushing to the barricades to defend capital non-neutrality frameworks, but European policymaking has its own internal logic which is hard to parse.

In the consultation on the original SR, of the 120 published responses, most were from industry associations, with a smattering of individuals and academics. The two NGOs to respond, Better Finance and Finance Watch both advocated tough regulation (Finance Watch suggest 15% risk retention). Both of these organizations, however, are funded by….. the European Union.

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