It may not be as bad as all that though. The Court of Appeal judgment explicitly contemplates appeal and invites the Supreme Court to rule, so there’s every chance it takes the case and restricts the scope at least to some extent. Then there are various compelling problems with the judgment itself, which frankly I’m not qualified to walk you through — but good sources are available!

As this analysis from Gough Square Chambers (a party no more disinterested than the average car dealership, as one of its barristers acted for FirstRand) drily notes: “It will be a shock to the industry, and presumably the industry regulator, that parties who interact with a regulated credit broker must assume that the broker will breach their regulatory, contractual and fiduciary duties.”

Either way, everything is on hold now, which must be agony for the firms involved. A Supreme Court ruling could well be 2026 business, and any FCA redress scheme needs to come after that. In the meantime, people want to buy cars on finance, and lenders have to fund themselves.

While we thought the sale of the junior notes and residuals in Azure No. 3 would offer an interesting test of market appetite for these risks, the planned BWIC was pulled, and the surprisingly solid trading environment for UK auto paper has softened.

After this month’s burst of redocumentation across the auto lending industry, new origination should be compliant with anything the courts can throw, and the nice thing about legacy auto loans is they roll off fairly quick. Still, what’s the price for a lender to get a new warehouse, or extend an existing facility in the period of pre-Supreme Court uncertainty?

The new origination loans should be fine now they have all the new disclosures, but how much does the lack of certainty weigh on spreads? Difficulty in doing public deals often feeds through to warehouse terms, and even supportive relationships can be strained by the prospects of massive compensation claims.

If any FCA redress scheme does have to incorporate the full Court of Appeal approach, it probably doesn’t matter if the underlying financial instrument has already paid down. Securitisation investors and warehouse lenders won’t be exposed once all of their legacy (non-explicit commission) assets have repaid, but there’s still a non-zero chance of some liability down the road for the originator.

Businesses, especially those in growth mode, should be looking at new opportunities, building new systems, signing new clients, establishing new relationships, considering M&A, raising capital, just doing stuff.

Most of that will be disrupted or paused by the uncertainty hanging over the sector, despite the best efforts of the regulator to control the chaos. So it’s going to be a long and uncomfortable waiting process.

Of course, there’s always a competitor waiting in the wings, while the incumbents wait for certainty. Carmoola, according to Automotive Management magazine, “picks fight with dealers”. Whether that’s quite true we’re not sure, but direct-to-consumer lending with no broker is clearly out of scope here. The startup hired Frédéric de Benoist, previously an MD in Deutsche Bank’s securitised products group, earlier this year (here’s a blog about making the transition, for any fintech-curious bankers reading this) and he lost little time in scoring a £100m facility with NatWest.

On the other side of the hill, we wonder how the exposure to these court cases plays through in the litigation finance world. Sympathy in the asset-backed world for the ambulance-chasers stacking up car finance claims might be limited, but this, too, falls into the wide world of asset-based private credit.

Courmacs Legal, which describes the Court of Appeal ruling as “a win for transparency and consumer protection, but it also sets a precedent that holds businesses accountable for their practices”, has funding facilities with ECA Alternative Asset Management and 401 Capital, according to corporate filings. It also had a facility with SCIO Capital, a more familiar name to ABS ears, though this appears to relate to Japanese Knotweed claims.

A fair few no-win no-fee law firms managed their working capital through VFS Legal, which went into administration last year. To close the loop back to securitisation territory, the biggest wholesale lender to this specialist firm was OneSavings Bank, a familiar player through its RMBS shelf.

For an even tighter loop, one could consider that Close Brothers, the most heavily exposed lender to any car finance claims, and a defendant in the Court of Appeal judgment…. was also one of the biggest lenders to law firms looking to fund no-win-no-fee financial misselling claims, through its Novitas Loans unit. Novitas closed its books last year, after making a loss of more than £100m, but definitely played its part in fuelling the UK’s mis-selling industrial complex.

All I want for Christmas is a record-breaking year

The US market is closed, Mariah Carey is on the stereo and the outlook/review pieces have started to slide into inboxes. It is, in short, a good time to take stock of 2024, and on the face of it, securitisation markets did very well!

Deutsche Bank’s outlook (available now!) gives the following stats — €135bn in issuance, ahead of forecast and a post-financial crisis record, deal count up from 209 to 264, a more-than-doubling in consumer ABS, and 15 new issuers in the market, with the UK accounting for 12 of these, and RMBS specifically delivering eight.

Dig a little further, though, and this impressive debut list shrinks. Lender & Spender, which brought Mila Consumer Loan ABS 2024-1, is part of the Auxmoney group, a well-established issuer via the Fortuna shelf. Toyota Financial Services (UK) and Arval UK are simply the UK arms of other established operations which have previously been active in the market. White Rose Master Issuer is a new structure from Yorkshire Building Society, which prior to White Rose already had 11 Brass deals under its belt. Citadel 2024-1 is a new shelf name, but securitises mortgages from well-established Pepper (taking out a forward flow with Waterfall). Plata Finance, originator of the Asimi Funding 2024-1 deal, was formerly part of Zopa, which securitised consumer loans through the MOCA shelf until 2019.

Issuance numbers drop further if you strip out the Pimco-only deals, which you could consider as more akin to retained transactions (no bonds in the market, no trading, not much business to do).

While the debuts are encouraging, it’s also worth looking under the hood to consider how much business comes from a narrow set of systemically important institutions managing their capital risk. BNP Paribas, Santander, Société Générale and Crédit Agricole have, this year as last, made full use of cash securitisation as a capital management tool across auto and consumer lending, pairing it with substantial synthetic supply transferring risk on large and medium corporate lending and infrastructure.

It’s good that securitisation is working nicely as a risk transfer tool for these institutions, but the concentration of issuers points to just how much untapped potential remains in the market. There’s a smattering of supply from the likes of BBVA, UniCredit and Natixis (and there could be more!) but the second tier domestic institutions across Europe hardly touch the market.

On the basis of bonds outstanding, the size of European securitisation has increased 4% to €590bn, according to Deutsche, though disregarding CLOs, it shrank. The majority of Spanish RMBS outstanding is still backed by pre-crisis collateral, an astonishing and dispiriting statistic 16 years after the collapse of Lehman.

Deutsche also points out that retained issuance this year was €31bn, down from €108bn in 2023, which is at least an encouraging direction. “Benchmark prime European issuers have the potential to be a key drive of issuance if the retained issuance makes it into public markets an area that has been lacking from Europe in recent history” — we hope so.

This can be supported by increased involvement from bank treasuries. UK institutions from neobanks to builders to clearers are meaningful participants in UK prime RMBS books, and this pool of capital is only getting deeper, but it’s not clear that European treasuries are following suit.

Last year we briefly looked at SG’s Pillar 3 report, so I thought I’d update the numbers. Société Générale is a big bank and what’s more, a big securitisation bank. As of December, it has €13.6bn of STS senior tranches where SG is an originator, €7bn of STS senior tranches with SG as sponsor, and €28.5bn of non-STS senior tranches where it is a sponsor. Good business going on here, evidently. As an investor in the banking book… €13m of non-STS seniors. Turning to the HQLA section, we find €42m of encumbered assets and €28m of unencumbered assets in ABS.

So for a bank with €388bn in RWAs and more than €50bn in CET1, treasury investment in ABS still pretty much rounds to zero. Not to pick on SG particularly, but clearly there’s a long way to go.

So while everyone involved in this year’s record supply deserves a pat on the back and probably a well-earned rest, it’s not like the structural weakness in the market is all sorted out yet. It remains attractive funding for growing non-banks, and an attractive capital management product for a handful of giant institutions. But public deals still remain something of a niche interest.

Much harder to parse from public sources is the size of the private market — which probably does a lot more than any amount of potential low-fee prime RMBS supply to put food on the table for the securitisation industry.

ESMA’s STS register shows 35 non-ABCP private deals so far this year, across a range of asset classes, while there’s a further eight in the FCA register. But what volume they represent, and how large the non-STS private market might be, remains very difficult to backsolve.

Who needs spread?

There’s much truth in the old relationship banking joke about the 3-6-3 rule. Borrow at 3%, lend at 6%, be on the golf course by 3pm. From first principles, you’d expect the most attractively securitisable asset classes to be those with lots of excess spread and maximum available leverage.

So it is noteworthy that two of the most exciting new asset classes to emerge into public markets this year, solar loan ABS and subscription lines, are notably deficient in this most vital of securitisation resources. We spent a bit of time on the Enpal (Golden Ray 2024-1) structure when the deal came out, but in short, it has very little excess spread at closing, and this dictated various aspects of the structure and deal placement process.

A 25 year fixed-rate loan which, in practice, is unsecured is a strange beast to find in the wild. Strip out the solar / energy transition stuff and no lender would start a business hoping to write this product!

That doesn’t mean that solar ABS won’t run and run. Execution was strong for Golden Ray 2024-1, and deals will get cheaper to do. A better track record for the loans will mean better rating treatment and a cheaper capital structure. The US market, which had different dynamics driven by the PACE (property assessed clean energy) schemes, faced the same problem and structured around it, with US deals relying on a YSOC (yield supplement overcollateralisation) mechanic, which amounts to dribbling in principal to keep the interest looking good.

The main point, though, is that solar ABS isn’t a purely financial asset class. Certainly for a business like Enpal, the financing is not the point. It’s a business that sells and installs solar and energy transition equipment, and the financing is necessary to enable this to scale quickly. ABS is a growth tool, not a financial arbitrage.

Subscription lines are also an interesting phenomenon. Law firm Haynes Boone’s survey of the market pegs average spread in the mid-200s area, with 50% of responses putting one year facility margins between 226bps and 250bps. Pricing estimates seem to be all over the place though; White & Case suggest 150bps-200bps is more normal, echoed by others. Big commercial bank-provided lines to key relationship clients probably come tighter still.

If we take the wide end estimates and the Capital Street Master Trust 2024-1 (the only public sub line securitisation to date) senior spread of 135bps (down to 90%) and 160bps (on 90-95%) as a benchmark, you’re playing with excess spread of around 1%. Admittedly this can be levered 20x, which is not to be sniffed at.

But if the lower-end numbers are applicable, that’s quite a conundrum to solve. Levering 150bps assets with debt costing 136bps is the kind of thing that only seems a good idea in commercial real estate, where debt yield > asset yield has apparently been normal for the last couple of years.

As with the solar market, there’s every chance that spreads do come down. Sub lines don’t yield much because they’re low risk, so should a capital call senior tranche price at a spread to, say, CLOs? There’s no optionality to consider, not much extension risk (because the facilities pay back fast), though the advance rate is much higher.

As a new asset class, there’s always going to be a premium, but once established as a flow market, maybe it gets comped to something less esoteric. Insurers have been prominent in funding private fund finance leverage structures, and their return targets might have anchored the Capital Street spread higher than it needs to be; a more liquid market should price meaningfully inside private levels.

Chenavari finds different borrowers

Credit hedge fund Chenavari, a veteran securitisation shop active for more than a decade in risk transfer, CLOs, trade finance, real estate and more (plus as a sponsor through its ownership of Buy Way, Creditis and Dilosk) has found a potential new origination niche — and one which could do some genuine good in the world.

It announced the launch of its Solstice fund last week, with a €50m commitment from L’Oreal. It’s not levered and certainly not securitised, but it’s still an interesting move.

The point of the fund, from L’Oreal’s point of view, is to help its suppliers invest in decarbonisation. Like many blue chip firms in the public eye, L’Oreal has been working hard to cut its emissions, but most of them sit within “Scope 3” — i.e., not directly in the firm’s control but relating to its supply chain or customers. Companies can encourage their suppliers to decarbonise, apply various sticks and carrots, and offer technical expertise, but they’re still not able to control these directly.

One particularly powerful lever is access to finance. Sometimes “decarbonisation” can be pushed along quickly through targeted capex. New machinery that cuts waste or uses less energy, new buildings or retrofits, cleaner greener transportation and logistics, different growing practices for agricultural products — most of these things need money.

Hence the commitment to Chenavari’s debt fund. L’Oreal has a track record of commitments to impact investment firms promoting circular economy or environmental objectives through growth equity, but this is the first debt fund — a more suitable product for funding SME refits rather than startups with bright environmental ideas.

For Chenavari, AUM is attractive in its own right, but so is the chance to gain access to a new origination channel to lend into the SME sector. It’s genuinely hard to deploy cash effectively here; sponsor-backed mid-caps are well-served by the growing private credit markets, but smaller firms or non-sponsor businesses can struggle to access market-based finance. For funds that want to lend here, the cleanest route is probably SRT transactions, though funding an specialist platform can be another option (Chenavari offered a flow facility to the UK’s SME Capital, for one example)

The presence of these firms in L’Oreal’s supply chain, though, gives Chenavari an opportunity to offer its services, which might mean more flexible finance than is available through relationship banks. The loans won’t be underwritten on the basis of L’Oreal’s relationship, but it certainly doesn’t hurt to have an AA-rated giant as a major customer, giving Chenavari further comfort in the lending.

The fund is to be managed on market terms, without L’Oreal having input into investment decisions. This should allow the offering to be extended to other corporates keen to fund decarbonisation in their own supply chain; they’d be unwilling to join a L’Oreal-directed initiative.

But the incentive fees on the fund do incorporate decarbonisation targets, verified by a third party, ensuring that the lending in question is directed to ethical ends.

This is arguably a much more powerful environmental solution than say, a green bond (or a sustainability-linked bond). The KPIs in sustainability deals were often woolly or easily achieved, and the cash is fungible, making proving the impact for a borrower with green and brown issuance a challenge. The “greenium” has been declining, and most of the borrowers offering these structures already had ample access to finance.

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