Excess Spread is our weekly newsletter, covering trends, deals and more in structured credit and ABS. Find out more about 9fin for structured credit.

Alright Giza

Metro Bank is a curious institution that often zigs while others zag. While the UK clearers were scrambling to shut branches, Metro signed leases in prestige locations for airy, attractive branches (with the famous dog facilities). It kind of lost the argument here, and good app-based banking is now table stakes.

But it’s also zigged and zagged with its asset exposures. In 2017, it bought a book of Capital Home Loans-originated buy-to-let mortgages from Cerberus for £596.7m, only to sell them back to Cerb in 2019, after it ran into financial trouble.

By 2020 it was back on the front foot, and ready to diversify again, closing the acquisition of personal loans platform RateSetter in August (admittedly for the modest price of £2.5m). It followed up by buying RateSetter’s £384m personal loan book in April 2021, kicking out the peer-to-peer investors. Other parts of the RateSetter business were sold off (property loans to Shawbrook, car dealer loans to LE Capital, now riding high off a new £100m facility). RateSetter/Metro launched auto lending in 2023, to great fanfare, but RateSetter closed to new business at the back of the year, and now the bank is in a hurry to sell off the portfolio.

This is after the bank sold its £2.5bn prime mortgage book to NatWest last year, as part of “asset rotation towards higher yielding commercial, corporate, SME lending and specialist mortgages”.

According to Metro’s accounts for the middle of last year, it had £1bn in consumer lending at June 2024, down from £1.3bn in December 2023. Unsecured books tend to amortise fast, but even winding this forward another seven months gives a pretty decent size.

Poring over the Pillar 3 report (Metro Bank is on the standardised approach), it looks like the consumer lending is risk-weighted at 75%, and it’s not clear how much of it has been rebased to the higher rates through 2022. The same report shows Metro’s billion or so of triple-A RMBS, procured thanks to Liz Truss, is all risk-weighted below 20% for an exposure value of £129m.

Metro says this means a capital charge of £10m. If you apply the same rough calculation to the consumer loans, this suggests £58m in Metro’s capital supporting the consumer loans.

So do you earn, say, Sonia+100bp (5.45%) on £1bn of RMBS assets, supported by £10m of capital, or maybe 8% on £1bn of consumer loans, supported by £58m of capital? Easy choice!

Anyway, Morgan Stanley is managing the sale, dubbed Project Pyramid. MS continues to win a ton of sellside business, but it’s also been banker to Metro for a long time, exploring capital raise options for the bank among other things.

The sale comes fairly hot on the heels of Project Titan, closed late last year, which sold off the Bank of Ireland UK unsecured portfolio (also with MS sellside).

One might think the top bidders for Titan would also be credible candidates to buy the Metro Bank/RateSetter loans, and indeed that seems to be Morgan Stanley’s assumption. Rather than a broad process inviting all the securitisation funds, only a happy few have been invited.

GoldenTree won Titan, beating Pimco to the punch, and procured leverage from BofA, Lloyds, and staple provider Morgan Stanley — the portfolio is paying down fast, so there’s little room to take it out in term format. But as of now, it’s the most recent best bid in UK consumer loans!

But the Pimco difference is that it can buy deals unlevered (and despite this, often pays the most!). Even if the leverage is good, it’s always faster if you don’t need it.

Metro Bank declined to comment beyond its public statement, which isn’t amazingly informative, and Morgan Stanley did not respond to a request for comment.

Northern European ABS

A buzz has been building about Middle Eastern fintech for a while, as we briefly discussed in September — the three big beasts are Saudi-based Tamara, with a $350m senior line from Goldman; UAE-based Tabby, a BNPL lender to which JP Morgan provided a $700m receivables securitisation; and Astra Tech, which raised a $500m line from Citi at the end of 2024. Before JP Morgan, Tabby had partnered with Atalaya Capital Management, among others, raising a $350m debt facility.

Now there’s another asset class and another monster debut, the $690m facility raised by Saudi SME lender Lendo. (We should also mention that Tamara has just named Fabrice Susini, once the head of securitisation at BNP Paribas, to its board).

There’s a lot to like about the credit risk, or so we understand. Enforcement of personal guarantees is easy, fast and digital. The Lendo book is Saudi, but Gulf-based SMEs are also more profitable than elsewhere, and both in the UAE and Saudi are underserved by a local banking system set up more for large caps.

There are some nuances to consumer lending in the Gulf, thanks to the high proportion of expats both from Europe and south Asia — there’s a higher risk of customers skipping town. But, let’s be honest, recoveries on BNPL anywhere in the world are not great. You’re underwriting on the basis there’s enough spread to cure losses, not on the ability to enforce.

Regulation helps — Saudi regulator SAMA published BNPL regulations in December 2023, following UAE, which reworked its finance company act in September of that year.

The facilities are private, so we can’t even assess a headline spread for relative value purposes. Anecedotally, there’s a bit of spread pickup vs a regular-way EU facility, but the risk profile is better. Perhaps more important is the ability to do size, and without too much competition.

These really are punchy tickets for debut bank lines. As warehouse lines they won’t be fully drawn at once, and a lender in a European context taking its first steps from credit fund to bank line is very unlikely to take $700m in one go. Instead they might spread it across multiple institutions. A formal RFP process, possibly run by an advisory firm, could drive tight competition and narrow spreads. Over time, this would lead to debut securitisation to reload capacity, with a cycle of 'rinse, repeat, extend' continuing over the years.

Competition is also a curious situation. It’s common for big financial institutions to have a Dubai presence, but the strength of Saudi establishment varies wildly. The run-up to the Aramco IPO in 2019 prompted all manner of investment banks to parade their newly minted Saudi credentials, but this doesn’t translate into banking fintechs through securitisation. Banks like HSBC and Standard Chartered, with long regional histories and big Middle Eastern footprints, might not be willing to write half a yard for a debut issuer (or at least, might take longer to get comfortable).

My colleague Sayed Kadiri has been on the ground at DealCatalyst’s Middle Eastern Private Credit conference this week, where much of the talk has been of the importance of a local presence and local connections. That probably tracks for the smaller, earlier stage tickets from credit funds — consider Channel Capital’s investment in FlapKap. The debt portion is undisclosed, but the total debt and equity package was $34m (pre-Series A) and this kind of business probably requires being deeply embedded in the local fintech ecosystem.

On the other hand, the JP Morgan banker quoted on the Lendo deal was George Deves, co-head of Northern European ABS — if it’s a choice between relying on local presence and getting a huge $690m financing in place, it’s clearly the money that talks.

One advisor active in the region compared the situation to UK fintech c. 10 years ago. At this point, Funding Circle had been lending for around five years, but was pivoting to institutional capital, with its first public securitisation in 2016. Many of the fintechs which are now familiar issuers in securitisation were nothing more than a twinkle in the founders’ eyes.

But unlike the UK, there’s a major government effort behind it. Saudi Arabia wants fintech unicorns, it wants them fast — The Vision 2030 plan contemplates at least 10 — and the government tends to get what it wants. Along the way, they’ll all need funding, so time to fire up those Northern European ABS teams.

New members in the club

My colleague Celeste Tamers has been delving into the thorny questions of SRT distribution this week — her piece here — talking to two of the market’s big banks, BNP Paribas and Santander, about how to manage investors, maintain relationships, and deal with the influx of new entrants.

The issues in SRT distribution are kind of similar to those in all illiquid and complex products. Whether it’s selling a package of infrastructure lending, sub-participating CRE loans or distributing subscription lines, there’s no liquid market, no good pricing benchmarks, potential for bespoke negotiation on terms and a lot of work to do.

At many institutions (including BNP Paribas), SRT distribution sits within a broader alternatives/illiquid syndicate structure, whose exact perimeter varies, but where the skillset is much more specialist than drawing a fair value curve and accurately judging new issue premium.

The difficulties are particularly heightened in SRT because the market has attracted a lot of new entrants in recent years. New allocations to a market generally help shift deals, but established SRT investors are more familiar with the process and may be easier to deal with. Allowing only SRT veterans into a process eases the brain-damage, though potentially at a cost. Still, both institutions Celeste spoke to recognise the importance of bringing on new investors and getting them up the curve, perhaps by opening up larger, on-the-run transactions to a wider audience.

We’ve talked before about a two-tier market emerging, with regular large corporate transactions increasingly standardised and widely syndicated, with only minor negotiation on terms.

These shelves aren’t going to be liquid, but maybe they end up like CLO equity at least. In the background will sit bespoke bilaterals in less usual asset classes. CRE and infrastructure deals need their own specialist skillsets, which may not be present in a typical corporate-credit focused multi-asset fund.

But right now, with the US regulation subject to, uh, considerable uncertainty, the expected supply isn’t necessarily going to be coming through, and well-established issuers in Europe are going to be delving further into their balance sheets and bringing more off-the-run asset classes.

That will encourage investors who have got comfortable with the large corporate deals to start exploring further — if they’re allowed in the club!

UCITS fits

By now the gripes about securitisation capital treatment are fairly well established. A sound case can be made that capital cost under the bank and insurer regimes in Europe unfairly penalises securitisation compared with economically similar products; an insurer can tranche a mortgage pool and find the senior tranche eats up more capital than the whole loan pool would have done.

That seems persuasive to me. Who knows if changing this treatment will unlock new vistas of investor capital for the market (and whether this would be met by sufficient issuance volume) but it’s a well-understood issue.

Less prominent has been discussion about the UCITS [Undertakings for Collective Investment in Transferable Securities] regime (for regulating mutual investment funds in the EU), but this seems notably important. There’s nothing directly stopping UCITS funds buying securitisation product (my colleague Michelle reported last year on the Central Bank of Ireland approving 100% CLO exposure in UCITS vehicles), but it sure makes it awkward.

UCITS stipulates that a UCITS fund can only hold 10% of a given issuer’s securities. The ceiling is low, but the intuition is easy to understand; the funds are supposed to invest in transferable securities, and allowing these funds to be the sole lender or sole equity holder (or part of a small club) essentially opens the door to private equity or private credit by the back door. Perhaps that’s a good goal (the big private credit shops are all sniffing around retail fundraising) but it moves away from the essentially liquid character intended by UCITS. It probably wasn’t supposed to be a particularly restrictive constraint when it was originally drafted — for funds buying large cap stocks or public investment-grade it’s not easy to get to 10%.

But it is restrictive for securitisations, because each represents a separate financing vehicle, and because the investor base is concentrated. If an issuer has five outstanding securitisations of €400m each, the biggest single ticket from a UCITS fund has to be €40m, rather than the €200m you might think. Schroders, in its response to the European Commission, raises the issue here.

Meanwhile, Pimco, which raises enormous sums from retail and institutional money alike in its Income Funds, can buy entire deals, entire tranches, or portfolios specifically to be turned into securitisations. We asked before why other institutions were not trying the same unlevered portfolio investing strategy as Pimco, and this is part of the answer; for the cash in EU UCITS funds, only small slivers can be invested in securitisation at a time.

This problem is exacerbated by other features of the market. Regulatory due diligence obligations on investors are onerous, but securitisation investing also generally needs special people and special kit as well. You need a PM with market experience, and ideally Intex as well. Funds playing in securitisation therefore need to be able to do size to make it worth their while, so opening up this limit might genuinely move the needle.

The problem is unfortunately the same as with all European regulation — it’s incredibly painful and difficult to change. UCITS was already amended last year, and it’s an old, hoary, barnacle-encrusted piece of regulation with a huge range of stakeholders. Unfortunately “just make this simple tweak” isn’t really an option. But we can hope!

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