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Owen Sanderson

Excess Spread is our newsletter covering the latest in structured credit and ABS. Find out more about 9fin for structured credit here.

First of all, a big thanks to all of the top liquidity providers at Afme/Invisso’s Global ABS conference this week: Clifford Chance, KBRA, Alantra, Lloyds, Barclays, BNP Paribas, CSC, NatWest Markets, Bank of America and big finisher Deutsche Bank. All excellent institutions that most definitely deserve your business.

The weather was perfect, the conference was free of rainstorms, heatwaves, taxi strikes, and the French air traffic controllers stayed at work. Even the petty crime for which Barcelona is notorious turned out to be an undercover sting operation, using one of the market’s best-known lawyers (and his watch) as bait and getting the thief bang to rights.

The tone was equally strong. A rallying market benefits trading desks and financing teams alike. Origination has adjusted to higher rates, while new issuers and new asset classes are lining up to join the party. Higher base rates ought to come out in the wash looking at the big picture, but with Sonia over 5% and Euribor at 4%, the average ABS fund has far more carry to reinvest every single quarter than in 2021. Whatever else happens, that strong technical is just sitting there behind the market helping primary get absorbed.

When everything seems good, that’s when you want to watch out for downside protection. The water is too quiet, there’s limited room for spread tightening, complacency could be creeping in.

But “spreads are too tight and we’re not sure there’s room to tighten much more” is basically a good problem to have. The other “good problem” is simply the velocity of dealflow.

Public market supply has been lean for so long that European securitisation markets are simply not staffed up for the levels we’ve seen in April and May. Investment teams don’t have a dedicated consumer ABS person, a mortgage person, an esoteric ABS person like in the US, so when actual volume does show up, it’s easy to get swamped. This is not necessarily through lack of cash to put to work, but because investors cannot do the work on every transaction.

There’s everything to play for when it comes to picking windows. Judging by the conference tone, a good solid six weeks or so remain to get deals done, and it’d be well worth hitting that window rather than waiting for a potentially jam-packed September. There are few signs of indigestion so far, but why hang about and find out?

The UK election is very much in the price, but the US is a major source of uncertainty. It’s not so much that any specific policy or position has a straight read across to European securitisation, but election-related chaos could generate market-moving headlines. You just don’t really want to be mid-bookbuild while Trump is saying things. You never know what you’ll get! November and December aren’t ideal execution windows at the best of times, but will the dust have settled by inauguration in January? Nobody knows.

I should probably rename this newsletter Synthetic Excess Spread, because that’s what everyone wants to talk about at the moment. Significant Risk Transfer is the flavour of the year, and we’re in a transitional moment, as the hype starts to translate into reality.

We could be looking at a two-tier market, where well-established large corporate shelves like CRAFT, Colonnade, Magdalena, Resonance and so forth move by increments towards a more industrialised / commoditised approach, with broader data room access, broader syndications with proper bookbuilds and better data availability for potential financing counterparties. Spreads will be tight, and books will be filled by quite new SRT investors and multi-asset credit funds.

The specialist, dedicated funds, however, will spend their time looking for off-the-run opportunities where the competition is less fierce, ticket size is smaller and margins juicier. New banks will be induced to issue; beyond Allica, other challengers are eyeing up the market. Difficult asset classes, complex credit underwrites, second tier originators; this is the happy hunting ground for the SRT veterans.

There’s a natural tension between the arrivistes and the veterans; the former are narrowing spreads for the latter, and (depends who you ask) eroding terms and protections.

As a new fund it’s hard to figure out what’s “market” in a private market like SRT. Even hiring a good law firm might not help, as SRT has historically been concentrated among just a handful of institutions.

But the new gen / tourist perspective is essentially that SRTs aren’t special. If you’re happy with structuring and happy with the asset classes involved, the learning curve to get up to speed on SRT docs and market practice isn’t so hard. The multi-asset credit funds can price corporate risk quite happily and like what they see.

The revealed preference of the funds, though, signals there’s a value in the specialist knowledge. As we wrote earlier this week, the Barclays issuer side SRT team in London is now cleaned right out, joining Cheyne Capital, Blackstone, Man Group, ArrowMark and PAG. Pretty good gigs all round! But these hires also send a signal that SRT experience (on the issuer side) is more valuable in staffing up an SRT investing team than generic securitisation investing experience (in non-SRT asset classes).

If there’s a gold rush in SRT, could there be a crash? What would this actually look like?

It probably doesn’t count as a crash if investors lose a bunch of money on a thing that is supposed to transfer risk. There’s more leverage around the space now, and the marks surely have something of the guesstimate involved, but does it really matter if some of this unwinds? Bad thing(s) happen in corporate credit, levered corporate credit gets smacked, hedge fund forced to unload at a discount. Disappointing for the LPs but not a problem.

How about this: big unwind of SRT leverage, everyone rushes for the exits, couple of big (tourist) LPs get very spooked and try to get their money out and the whole market shuts? Possible?

On the other hand, SRT markets survived Covid quite handily; there were some unwinds but these were absorbed and the market only “closed” for a time period shorter than a normal SRT execution process. It has a long track record of resilience and stability in the face of disruption; it stayed open through 2022, and spreads blew out far less than comparable products like CLO equity or index tranches.

Perhaps this very stability is a function of the clubbable relationship-driven approach of the longstanding SRT investors. Execution timelines are long, and even in a rapidly widening market like 2022, retrading a bank that you want to do the next 10 deals with might not be smart. We shall see whether that characteristic remains — multi-asset funds just doing SRTs for the next couple of trades may have no such qualms.

The old adage that in a gold rush you should sell picks and shovels is also worth considering. It’s not really possible to make a living trading SRT, given the tiny volumes, but more and more banks appear to be offering repo finance or other leverage structures which effectively retranche SRT positions. One of the big obstacles is data access — SRT issuers are not usually inclined to share comprehensive performance reporting with anyone but the investors in the deal. If a deal is bought with the intention of financing it on repo, then it’s generally possible to get the counterparty NDAd up and ready to go, but that process makes it hard to scale up an SRT financing operation quickly.

With more small institutions eyeing up the market, there’s more opportunity for arrangers to get involved.

We discussed the Vantage Data Centers UK 2024-1 deal two weeks back, but it’s worth coming back to. Based on my unscientific sampling, no other transaction sparked more conference discussion. Printing a new asset class two weeks before the conference, after a tortuous journey to market confers well-deserved bragging rights on arranger Barclays and legal advisors Clifford Chance.

It doesn’t take a Silicon Valley visionary to realize that there’s going to be quite a lot more data centre construction in the next few years, and so what’s at stake is how this gets funded.

Traditional divisions in investment banking and private equity don’t map well onto the data centre business; assets might be owned by corporate PE funds, infra funds or real estate funds, and financed in leveraged loans, high yield bonds, infrastructure/project bank facilities, commercial mortgages or, now, securitisation. Models of tenancy can be very different, and there’s no long-run data to look at.

Data centres in some form have existed for a long time, but hyperscalers serving the big cloud providers are newer and have been growing fast. Amazon Web Services did $3.8bn of revenue in 2013, and more than $90bn in 2023. Even in the five-year life of these bonds the market will look very different.

Vantage’s deal received strong execution, but according to one CRE lender’s finger-in-the-air estimate, the Gilts+225bps level isn’t materially through where a bank facility would have landed, despite the 18 months of brain damage for the deal teams.

But Vantage is playing the long game. It has an obvious interest in opening up the securitisation market in Europe. The more funding sources it can choose from, the better, both because this increases absolute volume of funding, and because a functioning capital markets exit helps banks price private facilities and construction lending more keenly.

Barclays, the other banks working on data centre ABS deals, and specifically the securitised products groups there are also playing the long game, and playing it against their colleagues in other business lines; if they can establish public securitisation rather than bank lending or infra debt as the dominant financing source for data centres in Europe, that should be a nice earner for the years ahead.

Any debut deserves kudos, but execution matters for what follows. Back in 2021, we wrote some, uh, excitable content about the dawning of the CRE CLO market in Europe, after the execution of Starz Mortgage Capital 2021-1. The deal got done, but the month-long public syndication and wonky dual-currency structure didn’t inspire others to follow. The deals which had been lining up in 2021 were shelved, and ran into the Russian invasion, rates, 2022 generally. They haven’t come back.

Encouraging aspects of Vantage include the broad book and decent domestic demand (63.5% UK). The deal had 144A docs, it was marketed in the US and US buyers were allocated 36%, but it’s clearly not a deal that was just existing US data center ABS investors taking some currency risk.

With 25 investors allocated, this looks like a proper book of sterling real money. UK fund managers have a reputation for banding together, so it probably helps to have the US bid for price tension, but there’s clearly domestic depth here. Sterling investors are quite used to deals which straddle the nexus of real estate / infrastructure / corporate lending and come with some structural complexity, so despite the new underling asset class, a lot of this will have felt familiar.

Now we have a first deal out, what other milestones can be achieved? Currency is an obvious next step. Euro-denominated fixed income doesn’t have the same tradition of secured corporate supply as sterling, but it is much, much larger and less clubby.

Bigger portfolios would be cool too! The Vantage deal is not quite a single asset deal but it’s a single campus. At £1.095bn total it’s a pretty chunky asset, and the £600m placed note is large for the sterling market, but as more and more data centres are built across Europe, issuers may want to aggregate multiple assets into single liquid financing structures.

The ideal arrangement for the issuer would probably be something flexible which procures funding in size and doesn’t require reworking regularly; a cookie-cutter securitisation shelf or a common-terms platform which assets can enter or leave.

Jurisdiction is another frontier to cross. Each European country has its own banks and therefore its own price for data center lending, plus its own legal regime. Each country represents a new “debut” to be executed, and a multi-jurisdictional data center conduit would be another milestone — if it can be done!

So congratulations to everyone involved, and if the conference is any guide, looking forward to the next steps in the nascent market!

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