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Structured Credit 

Find information others can't see in one of the fastest growing corners of finance

Private Credit 

Owen Sanderson

We decided recently that if you can’t beat them, join them — asset-backed private credit is the new thing (even if it’s kind of the same old thing) and so we’ve been writing an intro guide to the space.

One challenge in putting together an asset-backed private credit fund on the scale that say, KKR operates is finding enough assets to fill it. Assets under management in KKR’s private credit fund are apparently $82bn globally, and KKR reckons there’s a $7trn opportunity… but these deals only work because of fairly abundant leverage, so the actual deployed capital is going to be a fraction of the total assets.

KKR itself has been hunting elephants but the regular flow of deals tends to be on the small side — a £300m mortgage warehouse is plenty big enough for most specialist lenders, but the mezz ticket might only be £30m or thereabouts, so it’s hard to get a €1bn+ fund deployed at that pace.

There’s probably a cost advantage in structures that can allow much larger deployments of capital at once. Take the ticket above £100m, and the big funds become much more interested.

Small tickets in public market mezz support pretty punchy price tension — consider the Elstree Funding No. 4 transaction, where the class B notes went from 155bps-165bps and 3.1x, to 1x done at 145bps — but in private, there’s an advantage in size. Processes are slower and more involved, and funds don’t want to do the work to deploy pocket change.

Capital on Tap, which made its public market securitisation debut last year with London Cards No. 1, is raising a rather interesting piece of financing — a mezzanine piece of around £200m.

Credit cards and unsecured loans generally require larger mezz tickets than mortgages anyway, as the riskiness of the collateral means a lower senior advance rate. One of the Capital on Tap warehouses with Citi and BNP Paribas, a £450m facility, had a £90m mezz piece from Atalaya Capital Management.

The new deal, though, consolidates mezzanine financing across Capital on Tap’s different facilities, and takes a form akin to a corporate NAV facility — the different financed portfolios each have a value, and financing can be raised against these values, getting the leverage point up across the portfolio as a whole. This does mean an extra layer of complexity — potential mezz investors have to look through the vehicle to multiple portfolios with different risk characteristics, triggers and waterfalls — but asset-backed private credit funds aren’t usually scared of a bit of structuring.

The most efficient way to finance credit card portfolios is a master trust, given the revolving nature of the collateral — the UK cards market doesn’t have a whole lot of securitisation issuers, but NewDay, the largest, has two master trusts, NewDay Funding and NewDay Partnership Funding, and takes the leverage point down to double-B level. Even the funding-only bank issuers, Tesco Bank (perhaps not long for this world) and Lloyds use master trust structures to manufacture stable term funding out of fluctuating credit card balances.

Setting up a master trust is a heavy lift for a treasury team, but NewDay also underlines the next stage in levering up a specialist lender — get big enough to do corporate bonds.

The ideal transaction for an investment bank is providing capital with certainty and in size — rather than having clients reliant on the vagaries of capital markets, a bank gets paid for taking the market risk. That’s the basic trade for LBOs, rights issues, CRE lending, whatever else.

It used to be the basic trade in securitisation, too — the big legacy asset disposal processes of the 2010s involved billions in committed financing for the likes of Cerberus, DK, Lone Star, Apollo, Blackstone and M&G.

This was excellent business for securitised products groups at investment banks, which got paid for large capital commitments and large securitisation takeouts. Several institutions (Goldman Sachs, Deutsche Bank, JP Morgan, Morgan Stanley) bought portfolios as principals, but even those that didn’t could still earn nicely from underwriting acquisition debt.

Today the pickings are much slimmer. The Lloyds transactions (Bridgegate Funding, Performer Funding, and the current process) all see Lloyds itself keep the triple-A. Barclays intends to keep the triple-A in its Italian performing mortgage sale (which GoldenTree appears to be winning) and kept the triple-A in its Gemgarto saleto M&G last year. That’s already north of £7bn in financing not being provided by third parties and distributed to the market, and the structuring work is mostly kept in-house too. Citi and MS were mandated on the two Lloyds processes so far, to be fair, but I doubt the economics compare very favourably to a full underwriting and takeout.

Other deals are also light on financing. The Kensington back book sale in 2022 was a massive trade, by size of mortgages, but everything was already securitised. Morgan Stanley, at least at the start of the somewhat tortuous process, offered staple financing against the residual notes, a spicy facility but tiny compared to the size of the book. RNHB’s process mostly involves already-securitised assets, plus a few warehouses; buyers will be owning the residuals, not buying the whole assets out of the vehicle.

And of course, there’s Pimco, which we’ve written a ton about already — having the best bid for portfolios generally coming from an institution that doesn’t require leverage and doesn’t distribute securitisations (except Jupiter!) is not good for the broad economics of the securitisation business.

The question, with bonus season upon us, is whether this is just a bunch of weird coincidences or a structural and permanent change in the industry?

We think the ‘asset-backed private credit’ stuff is a lucrative source of deals, and the example par excellence, KKR’s PayPal deal Project Danube, offered one of the few chances last year for asset-backed teams in Europe to deploy big tickets in service of a portfolio acquisition. There’s no takeout, though, so it’s more like the LBO market of the 90s than today; there’s a ton of ABPC activity to get on with, but it won’t necessarily involve recycling risk out to the market, and even as the non-bank lending sector expands, it’s unlikely that many of the deals are going to approach the scale of say, the UKAR disposals.

Portfolio sales in future could look more like the Barclays and Lloyds transactions than the historic bad bank/non-core asset disposals. Bridgegate was practically the definition of a non-core portfolio, but it was being sold by a well-capitalised bank in a position to provide its own senior financing.

The government-sponsored bad banks institutions have mostly sold off their assets, higher base rates means better economics for banks that own senior tranches, and future asset disposals are likely to come from banks that aren’t quite so desperate to sell as in the mid 2010s.

That means they’ll be focused on execution and willing to offer vendor finance through keeping senior notes (giving less opportunities for investment banks to underwrite big acquisition facilities).

We’ll probably see more specialist lenders selling entire platforms in the years ahead — whatever happens to CHL will be interesting, NewDay’s owner Cinven considered an IPO in 2021 and must be thinking about an exit, every year or so Sky’s Mark Kleinman writes a “Together considering sale” story. But any of these will probably keep financing in place.

We’d come down on the side of structural change — long term there’ll be lots to do, but the blockbuster deals are going to be thin on the ground.

9fin’s distressed debt team have been doing a ton of work on Atos, the giant French consultancy. We have some meaty analysis here and here for subscribers. Bondholders are lawyering up and forming groups, the shares slid again (and a planned rights issue was scrapped), and it’s not looking good for the unsecured debt, with the bonds trading below 30.

A situation this big matters in its own right, but it also touches the securitised products world in a number of ways.

The most obvious one is the River Green Finance 2020 CMBS, in which the loan went into default and transferred to special servicing in the middle of last month. Atos is 83.8% of total rent, paying €22.3m, with a lease out to 2030.

Per the notice in January, “The Borrower and the Servicer have been in discussions about the upcoming maturity of the Loan over the past several months and are jointly of the view that a consensual long-term restructuring of the Loan is currently in the best interests of all parties concerned and is achievable.”

While Atos was and is paying its rent, it’s probably a poor time to either refinance or sell the asset, given the uncertainty — so a restructuring that is heavy on the can-kicking is probably the best option.

The development housing the Atos HQ has a few vacancies, but the actual River Ouest asset seems pretty good by office standards.

As the SPV name implies, it’s an ‘energy efficient’ building with a green bond opinion attached (it’s the first and only green CMBS deal in Europe). It appears to have an ‘E’ EPC rating, lower than my draughty Victorian terrace, but gets a B grade for greenhouse gases, very good BREEAM rating and Excellent ratings on two French standards. Confusing stuff clearly.

In terms of actual money, it’s also good — 61.2% LTV, 12.8% debt yield, 1.6% vacancy, hedging out to 2025. An updated valuation from the last round in January 2023 probably breaches the cash trap threshold at 62.15%, and Sophos (1.8% rent) is leaving.

All that said, the French press is reporting that Atos’s London landlord locked out some of its IT professionals over unpaid rent. Still, whatever happens to the company, it’s likely that some Atos-shaped entity will continue to exist, and continue to require a headquarters, whatever happens to the company’s debt stack.

Just by looking out of the window I can see office buildings in far worse financial shape, specifically the Aldgate Tower, securing Viridis (ELoC 38).

The loan matures in July, the deal is already trapping cash on a 7.1% debt yield, plus it has a 73.8% LTV, 14.5% vacancy rate, and the very out-of-the-money 1% Sonia cap expires at loan maturity in July. One tenant is collapsed law firm Ince Gordon Dadds, which imploded twice in the course of last year. Bank of America’s research desk published a good piece on prospects for the asset this week, so I’d encourage you to read that — TLDR they think bondholders get par from a property disposal, but “conceivably, the downside could be worse”. Quite.

Back to Atos. Somewhat less obvious is the likely presence of Atos across the SRT market. Risk transfer deals, even those focused on leveraged finance exposure, don’t tend to include the real problem child credits. They’d just be weeded out in negotiations anyway.

So the likely candidates for actually triggering credit events are the substantial IG companies that go down fast — Carillion would be one example. We haven’t seen the SRT portfolios, being private and extensively NDA’d. But given that the largest lenders to Atos are the big French banks, all extensive SRT issuers with established large corporate shelves, we’d be amazed if none of the risk had found its way to SRT investors.

We’re probably a long way from actually triggering anything. Atos has started mandat ad hoc proceedings, a facilitated discussion with creditors; there’s no failure to pay or standstill of the kind that would trigger standard CDS, so there’s unlikely to be an impact so far (except on trading levels, if you can get a quote).

Indeed, this is exactly the kind of thing that will hopefully show the SRT market at its best. Bearing losses for banks is kind of the whole job — let’s hope it passes the test when it comes.

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