Excess Spread is our weekly newsletter, covering trends, deals and more in structured credit and ABF.

Science project

We love a bit of clever structuring around here, and so we’re already excited for the potential takeout of the PayPal UK credit card portfolio. We wrote about the sale last week — Deutsche Bank beat an array of investment firms to it — but it promises to be a very interesting piece of capital markets business.

Big picture, PayPal has been selling off the assets in its financing businesses — KKR bought the European pay-in-three BNPL book in 2023, which we’ve written a lot about, Blue Owl bought the US pay-in-four book this year, and, most recently, the UK “PayPal Credit” portfolio has been for sale. These aren’t physical plastic cards; PayPal describes them on balance sheet as revolving credit, but for financing purposes, they’re pretty much the same.

Credit cards are much more complicated to sell off than BNPL loans, which have their own quirks, but at least are discreet pieces of term financing. Credit cards have wildly variable balances, some of which pay interest and some of which don’t, and someone needs to fund the variability.

This is classically the originator and servicer, and there’s no particular drama involved in doing a deal where this entity also owns the junior risk in a credit card securitisation.

It gets complicated quickly when the purpose of a deal is to deconsolidate the credit cards from the balance sheet of the seller, while allowing it to continue origination as normal. If the originator and seller continues to fund the variability, in what sense has it deconsolidated?

The most efficient way to fund credit cards is through a credit card master trust — can this be adapted to fit a deconsolidation format?

This is basically what NewDay managed to achieve with the sale of its book to KKR — but at least that had an existing structure to port over, and from what we hear, it wasn’t an easy process either.

Anyway, PayPal UK’s credit card sale had some unusual provisions in place to deal with this exact issue. Bidders were invited to submit their own deconsolidation analysis to explain how their bid would achieve PayPal’s goals — not a trivial matter, and something you might expect the seller to take care of themselves, potentially with the help of a friendly sellside advisor.

Winner Deutsche Bank might be in a better place than its investment firm rivals in this respect; it’s staffed up to provide exactly this kind of thinking to clients, and, being a bank, is in a much better placed to self-fund any variability that might need funding.

It’s also been staffing up for principal financing — Goldman Sachs’s Pankaj Soni went over last year, and Citi’s Cenan Djenan earlier this year — so perhaps this deal is a sign that the old Deutsche Bank, which used to be there or thereabouts on most of Europe’s portfolio sales, is back in the mix.

Maybe just a phone call?

It’s so easy to say “European regulators think…” or “European authorities do….” and fail to appreciate how different the various European bodies might be. Those in the know have long preferred to deal with the European Banking Authority over the European Securities and Markets Authority; the former seemed more commercial and pro-securitisation, the latter inflexible and opaque. Go up a level and the picture isn’t much clearer.

The European Commission’s proposals this summer were cautiously welcomed by the market, with a few concerns, but they’ve been lambasted by the head of the European Systemic Risk Board, and this week, it was the European Central Bank’s turn.

It’s a very formal document but it doesn’t pull punches. Some samples:

“The proposed recalibration of the existing requirements appears excessive and complex, and may therefore fall short of achieving the stated objectives of supporting the sustainable and healthy growth of the securitisation market and generating additional lending to households and businesses within the Union.”

“While synthetic securitisations are increasingly replacing true-sale structures for risk transfer, they lack the funding component and thus contribute far less to new lending and may introduce new financial stability risks. For this reason, the ECB considers that traditional securitisations better achieve the objectives of the proposed regulations.”

“The proposed amendments to the Securitisation Regulation would also amplify counterparty risk by deepening existing channels and creating new pathways for contagion between the banking and insurance sectors. During periods of financial stress, originator credit institutions could face a dual threat: credit losses on the securitised loan portfolio; and the potential default of (re)insurers providing credit protection.”

The big items are: as above, the ECB really doesn’t like unfunded SRTs from insurers, and certainly doesn’t think they should get STS treatment. It doesn’t like the proposed “risk sensitive” capital floors for senior tranches, fearing excessively low capital against some positions. It doesn’t like the Commission’s approach to the p-factor, offering its own alternative. It thinks SRTs for derivatives counterparty exposure should be banned.

The p-factor, capital weights and unfunded STS SRTs were some of the biggest goodies in the Commission package, so it’s quite a big deal if the ECB ends up derailing them.

In more positive news, the central bank aligns itself with the market on issues like responsibility for due diligence and sanctions for failures (to stay with the fund manager, not the LP), the new definitions for a senior tranche, and keeping private deals private, all key concerns in the Commission draft.

The ECB doesn’t have a formal role in drafting or approving the rules, which are currently with the Council, where the Danish presidency intends to fast-track them.

But it is the ECB, so it’s not a document to ignore; the Parliament is certainly likely to consider the ECB’s views on the package - especially since it explicitly asked for them - and it’d be quite the failure of coordination if a market-friendly capital regime passes against the explicit and fulsome opposition of the bloc’s main bank supervisor and central banking body.

This level of opposition was unexpected — we have unconfirmed reports of lobbyists lying down in darkened rooms after reading — and frankly, looks pretty sloppy.

How did the Commission, after extensive consultation and open discussion, come up with something the ECB was so vehemently opposed to? Don’t they talk to each other? Who is actually driving the bus here?

Anyone who’s seen European policymaking in action expected a long and turgid process to get from consultation to successful action, but this looks like a major derailment even from the bear case.

We were sharpening quills for an outlook piece tentatively titled “2026:The year of regulatory certainty” — check back in 2030 and we might be about to publish it.

Santander takes Excess Spread advice

We have wondered a couple of times why Santander does not arrange its own legacy asset deals. Being the largest issuer by far this year, with multiple front-book cash SRTs weekly, it’s not short on structuring capabilities (though its deal teams might be exhausted at the pace).

But for RPL or legacy books — the UK portfolios which became Hazel Residential and Frontier Mortgage Funding, or the Spanish book which became Ronda RMBS — it seemed content to sell the whole loans and let others collect the securitisation economics, an odd pattern we put down to internal politics.

Back in the day, this was standard stuff for portfolio sales — market practice looked a lot more like leveraged finance. An asset would be marketed for sale, sponsors would line up their own financing banks, potentially with a staple lurking in the background (but not necessarily used).

That’s still the case for sales from the likes of Metro Bank or Bank of Ireland, but when asset portfolios are coming out of big institutions with big SPG teams, they’re increasingly likely to securitise first and ask for bids later, as in the Lloyds processes, NatWest’s Antler, out this week, Barclays’ Pavillion shelf, the latest of which was out last week.

Providing risk retention, senior placement, structuring and prebaked leverage levels the playing field in theory, though it also happens to suit Pimco, the biggest buyer of loan pools, very nicely.

Now, though, we have Santander Residential 1, a portfolio of 13-year seasoned mortgage collateral self-arranged by Santander CIB.

Much as I’d like to think this was down to the newsletter, the deal has been in the works for a long time, but it still marks a meaningful departure.

The assets in question aren’t as hairy as in the other legacy books — some loans were, admittedly, underwritten at eyewateringly high LTVs, but it’s a fully performing 0% arrears portfolio. Nevertheless, it’s still clearly a legacy disposal transaction, announced with the residual notes preplaced in private; there’s a ton of demand out there for Spanish risk with a bit of yield.

The other big innovation in the new Santander deal — currently marketing with pricing slated for next week — is the use of a single Spanish FT structure, instead of an Irish DAC.

Most of the other Spanish legacy deals this year and last, from Balbec, CarVal, One William Street, Ellington and Pimco, have used the DAC construct, which is well understood and readily approved.

This makes the deals appreciably more complicated, because they need a Spanish FT (or multiple FTs) underneath, which hold the mortgage certificates and in turn issue unitranches to the Irish DAC to back the securitisation bonds. It’s a double layer, with twice the cost base, more complex tax, and more complicated legal arrangements.

The advantage comes from avoiding dealing with the CNMV, by reputation a fearsomely difficult securities regulator, which must preapprove Spanish securities offerings.

It’s a measure of quite how fearsome that reputation is that deal arrangers would rather create an entirely separate SPV in another jurisdiction to avoid going through the process — though perhaps the Santander deal will help blaze a path in future?

Other 9fin coverage you might have missed this week

Blackstone finds another use for European CMBS

Chetwood’s STS-multi-originator-forward-flow-deconsolidation deal, and another challenger staffing up for securitisation

The bank advising on landmark UAE SRTs

The cool thing about Castlelake’s upgraded Alma forward flow

A US hedge fund account sniffing round European securitisation

An unusual Italian real estate deal

A private UK SME financing

A debt collector’s ABS-driven restructuring plan

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