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Much specialist lender M&A and financing activity consists of splitting or recombining origination and holding loans.

The capital that likes to fund essentially a stream of product fees might be different from the capital that likes to hold large volumes of mortgages, and the skill sets aren’t necessarily the same.

Putting on a good trade in buying mortgage portfolios consists in being correct about future states of the world, with enough leverage to make it interesting if you are, and enough downside protection so it won’t hurt much if you aren’t. Writing a lot of mortgages, though, has to do with broker relationships, advertising, underwriting teams, technology, and operational processes.

The sides need to work together, because writing a lot of loans is not necessarily the same as writing a lot of good loans, but the arrangements between them can vary.

So you can break apart the two sides to the business, with forward flows, portfolio sales, residual sales, knitting together the incentives through contracts or market pricing, or you can recombine them under one roof; Shawbrook’s forward flow with Bluestone turned into an acquisition.

Anyway, we touched very briefly on the sale process for the portfolios of Dutch specialist lender RNHB last month, Project Galibier (the highest pass on the Tour de France for those who aren’t into the lycra) by way of acknowledging that it’s a shame (for investment bankers) that all of the big exciting portfolio disposals seem to be coming with financing already attached.

As with Kensington, there’s a split between the entity, which is supposed to be sticking with existing sponsors AB CarVal and Arrow Global, and the actual assets, though the line is drawn slightly differently; when Barclays bought Kensington, it also acquired £2.2bn of newly originated mortgages, written between October 2021 and closing in March 2023.

RNHB, however, is also selling assets in its warehouses, we understand; live warehouses include Yellow AssetCo, Aldrin Asset-Co Cobalt AssetCo, Armstrong AssetCo, and Indigo AssetCo, while the securitised back book includes eight transactions, of which one is a small balance CRE portfolio, with the rest residential buy-to-let. Warehouse providers include Barclays, HSBC, Natixis and BNP Paribas.

The sale process, being run by Morgan Stanley, is entering its final stages, with the leading bidders Apollo, and Pimco, according to sources, though Rothesay has also been around the process.

At the end of 2022 RNHB’s annual report said it had a €4.1bn book, which sounds about right; the investor book for the company’s DPF 2023-1 disclosed a core lending book (Dutch BTL mortgages) of €3.7bn. These look like pretty good loans, with 60% LTV and 3m arrears at 0.07%, though the 3.72% weighted average interest rate is now off market.

Like most specialist lenders, RNHB has also taken its leverage point higher still by repo finance against its risk retention, in a facility disclosed as €100m at the end of 2022. One presumes the sale process will be structured in such a way as to preserve the regulatory sanctity of the risk retentions.

Even if these assets weren’t already levered, the list of final round bidders makes for dismal reading for banks with money to lend. Pimco generally doesn’t take leverage (though sold notes in Jupiter!), while Apollo does, but if I were a betting man, I’d think the bid would be run through Apollo’s Dutch insurer Athora, rather than Apollo’s debt-hungry PE or credit funds.

Rothesay has won fewer of the flagship performing mortgage processes than say, Pimco, though it’s got a ton of equity release assets and other illiquid whole loan portfolios, and recently hired Nim Sivakumaran, who ran Morgan Stanley’s principal financing/mortgage trading operating in Europe, as co-CIO.

Given the timelines at work here (we first picked up some chatter on the RNHB process the week before Nim resigned), the bid can’t be his deal (the FCA register shows him registered as significant management at Rothesay from January) but the insurer is still a very notable name for this kind of asset.

Rothesay announced another massive bulk purchase annuity deal this week, acquiring the £6bn Scottish Widows BPA business; these are the capital flows that will shape whole loan trading and securitisation for years to come. Royal London has also entered the BPA market, with two internal deals reported this week (Sky News reports that it also looked at the Scottish Widows buyout)…. and what do you know, it’s staffing up in asset-backed private investing as well, with Will Nicholl, formerly of M&G, heading over there last year.

Shopping centres are back! Or at least, they’re an exciting distressed opportunity. Offices are the real CRE problem child now (underwritten at 3%, need to yield 6%), while shopping centre yields were always higher, they’ve have been through the wringer and… they’re still high. The extend-and-pretend cycle is also further advanced; if you want to deploy opportunistic new money, the time is now!

In financial advisor language: “Retail values were not impacted as negatively by the rise in interest rates over the past two years, reflecting the recalibration the sector has already been through during the global pandemic. Similarly, prime dominant shopping centres that have been supported by capex investment such as the SGS centres are now viewed as viable investments, providing strong cash-on-cash returns, in the face of structural changes and weakened market dynamics impacting other real estate sectors.”

Anyway, there’s a deal afoot for some of the UK’s biggest retail assets — the monster Lakeside development, plus Glasgow’s Braehead, Nottingham’s Victoria Centre and Atria Waterford (4.6m sqft of space).

These centres were a former part of the Intu portfolio, one of the UK’s big Covid casualties — a rescue rights issue to turn the group around was called off in March 2020, just before many shops shut their doors, and by the time retail reopened, the group was toast, with its various different secured funding groups split off on their own. CPPIB took over the flagship Trafford Centre in Manchester, Newcastle’s Metrocentre bondholders forged their own path (at 137% LTV currently!), while these assets were all in the SGS financing group.

SGS went through a debt restructuring in 2021, procuring £87m in super senior new money, which would refinance the existing liquidity facility and give some flexibility to put in place a recovery business plan. Interest on the existing notes and term loans was to be on a ‘pay if you can’ basis, with a cash sweep, but there was no notional writedown on the debt.

It seemed that SGS mostly couldn’t pay the ‘pay if you can’ coupon, so the notionals have kept rolling up, with a total of £382m of capitalised interest across the term loan and three bonds (original notional of £1.29bn).

This deal was done off a December 2020 collateral valuation of £753m for a 171% LTV, but the release said it would “establish a stable capital structure”, so who are we to object?

Most importantly, maturities were extended, to give some breathing space for the post-Covid turnaround… to March 2024.

So, it now being March 2024, and the “stable capital structure” now being up to 205% LTV (on the £858m December 2023 valuation), SGS is going through another restructuring. 9fin’s distressed debt team were in court last week for the hearing to convene creditors, ahead of an English law Scheme of Arrangement. Subscribers can read the skeleton argument on 9fin or delve into the history of SGS’s post-Intu life here.

The latest proposal is much punchier than the can-kicking effort from 2021. Existing creditors will get £428m of repayments, including amendment fees. Mostly what they will get is €1.3bn of PIK HoldCo notes and shares in the business.

The centrepiece is a fat slug of new money — £395m of senior loans with a £50m capex facility, a much more reasonable capital structure for assets worth £858m. Terms have apparently been agreed with a “leading commercial real estate lender” for a 2028 loan at an all-in cost of around 8.5%. Juice this with a loan-on-loan and that’s a pretty nice bit of financing; time to go shopping again?

There’s more encouraging chatter from the eurozone establishment, in the shape of a statement from the ECB governing council, which says policymakers should be “ensuring that the EU securitisation market can play a role in transferring risks away from banks to enable them to provide more financing to the real economy, while creating opportunities for capital markets investors. This requires understanding the supply and demand factors relevant for the development of the securitisation market, including (a) reviewing the prudential treatment of securitisation for banks and insurance companies and the reporting and due diligence requirements, while taking into account international standards and (b) exploring whether public guarantees and further standardisation through pan-EU issuances could support targeted segments of securitisation, such as green securitisations to support the climate transition.”

This all sounds like good stuff, particularly reviewing the prudential treatment, reporting and due diligence requirements. PCS wrote: “Also welcome is the fact that the ECB does not just stay within generalities in calling for an improved market but explicitly focuses on the items that need fixing.”

We’ve also got the historically covered bond-loving Germans on board, apparently, which should be helpful, and there are some very intriguing possibilities in place. Harmonising securitisation for “pan-EU issuances” is a massive project, because it wouldn’t just require compatible national securitisation laws — it would need to fully rework consumer credit rules across multiple asset classes, as well as the basic legal infrastructure of lending and asset transfers. There’s a high risk of accidentally breaking things along the way as well — Lux law securitisation companies are used for all sorts of asset financing which isn’t full-blown securitisation, so handle with care.

Let’s be real though, this is not going to happen. Just as CRR didn’t result in a seamless pan-European banking system and the Insolvency Directive didn’t fully integrate insolvency processes, there’s no way there’s the political capital and technical desire to create a true single securitisation market. Maybe there’s some way of bodging it together; could you have a pan-European securitisation with national-law compartments?

Anyway, it’s worth remembering that the Securitisation Regulation (SR) was also designed to fix securitisation. The original Capital Markets Union project was launched 10 years ago, and the SR came in five years ago. The twists and turns of the regulatory journey are too long and painful to recount here, but essentially… it didn’t work.

There is a vibrant market, but it’s healthiest in the spots least touched by the regulators; private transactions and CLOs. STS for synthetics has helped develop the market, perhaps because it’s more sensitive than other asset classes to the details of capital treatment.

Banks, which still write most of the loans in Europe, are still not using public cash securitisation in a large-scale systematic way, and if they did scale up their net issuance to, say, €100bn a year across RMBS and ABS (so maybe €300bn-€400bn once you add in refinancings?) that would swamp the market as currently constituted.

The big regulatory changes since the crisis are: loan-level data investors don’t use, in formats which neither side appreciates. Risk retention, which is irrelevant to the bank-originated funding deals, and avoided insofar as possible for everything else, and STS, appreciated only for its capital and liquidity benefits. In return for this, the market has had more than a decade of regulatory uncertainty, and now maybe it’s all up for review again.

So the mood music is once again positive… but put it this way, if the European regulatory establishment was fixing my plumbing (rather than the financial plumbing!) I’d be pretty nervous about getting them round again.

There’s nothing hotter than the current private credit-in-SRTs combination (our private credit colleagues tell us it’s flavour of the month among LPs too), so this year’s IMN SRT Symposium, at Clifford Chance’s offices on 21 March, should be a good one.

SRT has historically been a fairly clubby market (in a nice way! People like it if show an interest in how the market works, and don’t talk about SYNTHETIC CDO DERIVATIVE CAPITAL ARBITRAGE SLICING DICING) but the reopening of the US market and the burgeoning interest in the asset class means the club might have to let in a few new members, so expecting record attendance.

Anyway, if that wasn’t incentive enough, you also get a panel moderated by me. I have the end of the day when-will-they-bring-out-the-beers slot, but a great set of panellists, with some of the biggest issuers in the market and the biggest investor. We’ll try to keep it spicy and end with a bang. Thanks to IMN for the opportunity!

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