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Welcome Richard

Excess Spread’s journey to global domination continues. Richard Metcalf, formerly of IFR’s structured finance team, is joining Celeste and myself at 9fin. If you don’t already know Richard from his IFR activities, he’s great, you should. He’ll be helping take 9fin’s coverage of European asset-backed/based markets to the next level.

In other programming notes, I have assembled an all-star cast to talk about funding UK mortgages next week. It’s a webinar session on Tuesday 16th at 2pm UKT, and the panel includes Simi Arora-Lalani from Clifford Chance, Stephen Hynes from OSB Group, Arun Sharma from Barclays, Hugo Davies from LendInvest, and Damian Thompson from Starling Bank.

Sign up here!

We’re getting appetites whetted for much more mortgage chat at DealCatalyst’s UK Mortgage Finance conference, which will be held at the Landmark on 29 September. All the details here, see you there!

It’s Santander’s world we’re just living in it

Santander is such a vast organisation with such a vigorous risk transfer programme that it’s been in market every couple of weeks from some subsidiary or other. Banco Santander has 735 subsidiaries, as of the last annual report, with a further 205 which are associates, JV or where the group has a significant equity stake.

Not all of them are securitising, but quite a few are. This week alone sees SC Germany Leasing 2025-1 selling a full cap stack backed by a €600m pool of German auto leases, announced last week.

Announcing on Monday was Secucor Finance 2025-1, a Spanish consumer ABS backed by the store cards / BNPL / personal loans originated by Sociedad Financiera El Corte Inglés, the financial services arm of Spain’s preeminent department store chain. But look quickly under the hood, and it’s 51% owned by Santander!

Should that provide insufficient volumes of Spanish consumer loan risk, Santander also announced Santander Consumo 9 on Monday, a €1.7bn full stack transaction

That’s not all though — two principal finance deals, Morgan Stanley’s Torres Residential and Bank of America’s Frontier Mortgage Funding 2025-1 are ALSO SANTANDER DEALS, securitising mortgages originated by Santander Consumer Finance and Santander UK respectively.

As we discussed before, it’s curious that these transactions were not also arranged and structured by Santander with minimal outside assistance.

Santander CIB is a JLM on the Torres class As and Santander Consumer Finance is backstopping the senior notes, but most of the economic benefit of the buy-securitise cycle is going to accrue to Morgan Stanley.

There are no details on structure out for Frontier yet (though it’s north of a billion), but again, it’s a BofA deal, rather than a prebaked securitisation disposal like the Lloyds processes, so one would assume BofA believes it can make some money taking it out in securitised format — money which Santander is effectively leaving on the table.

The Santander deal teams are probably running very fast just to keep up with their internal dealflow (and the synthetic SRTs executed in the background), but it’s surely not a capacity issue; investment bankers tend to be fairly hardworking individuals, and would usually prefer to be busy than otherwise. Perhaps the Morgan Stanley artistes have a certain structuring je ne sais quoi, perhaps MS and BofA have better relationships with the accounts which buy down the stack (unlikely given the massive volume of risk transfer deals from Santander entities) but even if that’s true, those are marginal gains at best.

It’s more likely driven by internal organisation at Santander — perhaps the decision-makers on portfolios disposals aren’t aligned with the decision-makers on cash or synthetic risk transfer, even though you’d think these were closely related activities. The Santander Consumer Finance disposal team were apparently the cruel masters who scheduled a final round deadline in the middle of Barcelona, so they clearly lack sympathy with the securitisation market.

Either way, it’s strange that such an active securitisation bank isn’t doing all of its own deals — but a boon for the principal finance desks which can benefit.

Restricting repo

Celeste reported this week on further developments in the SRT leverage controversy, with one big US bank inserting terms into its latest SRT prohibiting investors from using forms of leverage including repo and sub-line financing as well as NAV financing from any US bank. Some institutions had already prohibited repo, but these terms go further.

There shouldn’t be much intrinsic reason for a big bank to care whether an investor gets external financing or not, so it’s likely to be a nod to regulatory concerns — issuers want to be as clean as possible and give their supervisors maximum reassurance about the sustainability of the product.

The market for SRT financing is getting squeezed in both directions — regulators are asking investment banks for more info on their SRT repo books, some banks are getting out altogether, and issuers are tightening the terms. All other things being equal, this should weaken pricing, but there’s not much sign of that so far; the expansion of the investor universe and allocations to SRT are outweighing any leverage pullback.

If fewer investment banks remain in the SRT leverage game, it amplifies whatever concerns the regulators are attempting to solve for; if only a couple of banks are active at scale, it makes the market more fragile and more likely to see big price moves if one of them unwinds its book.

The long term answer probably involves disintermediating the banks altogether. Private credit money has been flowing into NAV lending for a long time, and private credit is also active in CRE back-leverage structures. SRT repo isn’t a volatile high-flow trading business which sits best in a broker-dealer; it can proceed at a pace that works for private credit, and there’s plenty of buyside money that might like two-year low-IG-ish positions in the 200s.

It doesn’t even really have to involve different institutions — funds which combine an SRT book looking for hedge fund returns alongside a lower-yielding mandate might find they can combine these in a way that works for thick tranche SRT deals and gets to roughly the same place as repo from a third party.

Meanwhile, the SRT market is still producing more eminently repo-friendly supply.

Celeste also wrote this week about one of the US majors selling a chunky $750m sub-line transaction, covering the thick 12.5% tranche required by US regulation, and paying in the low 3s. The three buyside firms involved may not necessarily have used leverage, but this kind of deal, where regulation forces a thick tranche on an asset class which has seen no credit-driven defaults, is clearly a good candidate for anything that can amplify returns.

Drive by

The FCA’s redress scheme for motor finance commissions is supposed to come out in consultation format in October, providing much needed certainty to lenders. The Supreme Court judgment in August eliminated the tail risks, but the FCA still expects payouts north of £9bn, and lenders need to know roughly how this will land.

That’s expected to clear the path for UK auto ABS, after nearly a year’s hiatus. A consultation isn’t a final version, but when lenders know the shape of things, they can at least start budgeting and managing impacts.

But Volkswagen didn’t want to wait, and pushed ahead with Driver 10 UK anyway, announcing last week and pricing this Thursday via arranger Lloyds.

We were excited to see what form of legal wizardry was incorporated in the deal to handle the uncertainties of the commission redress scheme, and slightly disappointed to find very little. VW bundled a note with the investor pack, pointing out that the bulk of the loans (>69%) were originated after VW updated loan docs in November 2024, and that none of them were originated under discretionary commission arrangements.

It also said: “[Volkswagen Financial Services’] financing contracts do not allow its customers to set-off their repayment obligations against other amounts which may be owed to them. Consequently, VWFS considers that until such time as a court delivers a final non-appealable judgment in favour of a customer with respect to the relevant financing contract, that customer does not have the right to set-off amounts owed to VWFS.”

Set-off is one of the big concerns for UK auto ABS against this backdrop (and for securitisations in general), so this is somewhat reassuring, though an eagle-eyed reader with a better legal brain than me pointed out that in the event of VWFS’s insolvency, the contractual set-off clauses might be overridden by the equitable right of set-off; customers would only be able to claim their redress by setting off against amounts owed.

You might think that a VWFS insolvency is a remote possibility, and the agencies would agree, rating it Baa1/BBB+/A-, but we’re talking about a triple-A bond here, so it really should be bulletproof.

Not that it seems to have harmed appetite much. The deal landed at 60bps and 100bps for class A and B respectively, with final coverage of 1.5x and 4.6x, after the upsize from £500m to £750m.

Home finance but better

There are lots of ideas out there to improve the UK mortgage market, and it’s hard to make them work.

At Perenna, for example, visionary founder Arjan Verbeek spent a good deal of time, effort and money establishing a bank, promoting the idea of fixed-for-term mortgages, railing against the foolishness of the structurally short-term UK mortgage market and pointing out the obvious benefits of the Danish model. Reasonable people can disagree, but nobody can doubt the sincerity with which he pushed the idea.

But too much money was spent for too little origination, and Perenna has now pivoted, aiming at the later life lending market instead. Habito, likewise, sought to convince the UK’s borrowers that a long-term fix was the right move, and with hindsight, fixing for 30 years in 2020 when they started offering the product would have been a hell of a trade. Nonetheless, volumes were paltry, and the £15m stub originated into a CarVal forward flow ended up being dumped into Bletchley Park 2024-1.

The natural companion of the long-term fix is doing something more interesting with home equity, and there the future looks a little brighter.

Last week saw the first HELOC-backed RMBS come to market in the UK, the Waterfall Asset Management-sponsored Odyssey Funding, backed by origination from Selina Finance.

Purists may quibble that only 34% of the deal is HELOCs and the rest is vanilla second charge, and pretty decent prime-ish second charge at that, but it’s still a huge milestone for both originator and sponsor. Getting to a first capital markets takeout shows that the model works; there’s appetite for a public deal, enough origination to back it, you can rinse and repeat, build a market, build a business.

That’s particularly crucial for Selina, which was battered by the market troubles of 2022 and 2023. It procured a warehouse from Goldman Sachs in November 2021, but Liz Truss disrupted any possible takeout, and Goldman cut its advance rate, prompting the transition into a capital-light forward-flow only model. Selina signed its first flow, with Vanquis Bank, in September 2023, and then a second with Waterfall shortly afterwards. Waterfall also bought the loans from the GS warehouse.

A forward-flow only business can’t afford to stand still, but has much more operating leverage, and it can be an effective way to prove out a business case. Customers want the loans, they can be funded at economic spreads, and then it’s just a question of TAM (total addressable market).

The prize for Selina isn’t disrupting second charge (a substantial market, doing >£200m a month according to the Financing and Leasing Association, where you can build a nice business) but disrupting unsecured credit, which has £400bn outstanding and churns fast.

There’s a logic to it, but it will still be a challenge.

HELOC stands for home equity line of credit, and it’s basically a revolving credit facility secured on a residential property, like a credit card but at rates reflecting its secured status.

For borrowers with a lot of home equity, it’s a rational product to use, but mortgage market innovation does not necessarily tend to the rational path; there’s a lot of entrenched interests quite comfortable with the current market structure.

HELOCs are a massive market in the US, where the 30-year fix rules supreme. Homeowners understandably have no desire to disturb their first lien borrowing struck on 2021 rates by refinancing and relevering, so they explore other routes to borrow against their equity instead. HELOCs are a $200bn market there, and one firm has even linked a physical credit card to enable easier drawdowns.

So, does everything ultimately converge to the US? Lots of financial market things do, especially in securitisation, but mortgage markets are quite nationally specific, tracked into place by history, culture, national character and economics.

The gatekeepers for UK mortgage innovation are the brokers, who have an obvious incentive to keep up the 2-5 year refi cycle, but also require extensive education and encouragement to get any genuinely new product off the ground.

Selina is set up to skip the brokers where possible, with its own advisory licencing and its own origination systems, but whether the journey involves educating brokers or convincing the public at large, there’s still a lot of convincing to do.

At least the capital markets exit is proven — and handily so. The deal was announced with protection of £100m in the triple A and 25% down the stack. Mezz books didn’t get to silly ratios but the senior tranche was tightened from IPTs of 90-95bps to land at 86bps, on the back of a book 3x covered (and 5.3x on the free float).

That’s the number that really matters to set the cost of capital for this product, and it reflects growing comfort with second charge exposure among the bank investor base. There are still some institutions which won’t touch it, but some treasury desks have come round to it in recent years, notably the mighty Barclays, appearing here as a JLM, alongside arranger BNP Paribas and HSBC.

Powering the world

I don’t know about you but I certainly start thinking about asset-based finance as soon as I get my slippers on in the morning, and so this video from Ares really resonated. The increased push of the big alternative asset managers to raise retail money for asset-based finance will no doubt produce more such delights. Perhaps Blackstone could do a song about it?

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