So the answer, as much publicised by Apollo, is investment grade financing, which has the virtue of being much much larger. Once you’re tapped out on the alternatives bucket, go after the way larger IG allocation and continue growing quickly.

Apollo has done some giant IG special sits-type deals, be it $11bn for Intel for a new chip fab plant in Ireland, €3bn for German real estate company Vonovia, or $5.1bn for SoftBank’s Vision Fund. But these are relatively rare situations; IG companies usually have access to regular IG funding in size.

The best way to manufacture IG risk in size at a spread to IG corporate bonds, is to carve it out of asset pools — and that’s how the “asset-based private credit” theme ties in.

There’s a slightly echo of the pre-2008 world here — a specific pool of capital with an insatiable appetite for senior risk that pays just a little bit more than more traditionally “safe” assets. As the old adage goes, it’s not the risky stuff that gets you, it’s the safe stuff that turns out to be risky.

Pre-crisis, there was a strong incentive from bank capital rules and from vehicles like SIVs and securities arbitrage conduits to generate large quantities of triple-A paper paying more than government or corporate debt.

But aside from being an untapped source of senior risk, it’s a very different trade.

Triple-A investors blew up in 2007 and 2008 because of maturity mismatch and mark-to-market — funding three-year RMBS, which traded down to full extension, with 30-day money. The arb was primarily regulatory, with bank credit risk rules baking in faith in the rating agencies, allowing enormous leverage to build up.

This trade is the conceptual opposite. Insurance money from lifers and reinsurers is behind the Blackstone/Apollo et al push into investment grade risk. Sometimes these are captive, as in the case of Apollo’s Athene; sometimes arms-length clients as with Blackstone. If anything, it’s unwinding a maturity mismatch by taking assets off banks, where they’re deposit funded, and funding them with longer-term insurance capital.

Furthermore, this longer-term money creates another manufacturing problem; even carving out IG-risk-with-a-spread from asset portfolios is excessively short term to match lifer liabilities, especially in Europe, where 25-year mortgages are refinancing every five years or so.

Beyond insurance, the next frontier has to be bringing in retail cash. In a sense, this is the Pimco trade: buy portfolios of whole loans, turn them into securities which can be owned by the Income Funds.

But Apollo has launched its “ABC” (Apollo Asset-Backed Credit Company) offering this year, with a $2.5k minimum ticket. KKR already has its Asset-Backed Income Fund (though it’s a tiny slice of the overall KKR ABF offering), while Blackstone’s Private Multi-Asset Credit Fund, registered with the SEC in August, also offers a broad route for Blackstone’s retail investors to access some of its asset-based investments. The man on the street is poised for a plunge into securitisation.

Securitisation: the quiz

The European Commission wants you to answer more than 100 questions about securitisation, and quickly!

The much-anticipated “Targeted Consultation on the Functioning of the EU Securitisation Framework” is here and the questionnaire to fill in is here. A cynic might point out that the Commission ran a similar exercise while working on the Securitisation Regulation, and apparently disregarded the vast majority of responses, but this time is different.

Ian Bell at PCS offers the following initial response: “A (very) quick scan of the document reveals a number of things. First, it seems to be quite exhaustive, covering all the main topics identified as relevant. These include LCR eligibility, Solvency II and the possible addition of unfunded synthetics to the STS category, as well as those that were very much expected such as due diligence, disclosure and the now infamous p factor (ie CRR capital calibrations). In addition to being exhaustive it can also be said to be somewhat exhausting as there are a very many questions indeed.”

We count 178 but there are some multiple choice / rankings to fill in — either way it’s a monster, though as the preamble says: “not all questions are relevant for all stakeholders, respondents should not feel obliged to reply to every question”.

Bell points out that the deadline of 4 December gives little time for the kind of detailed data-supported responses the Commission requests, but as he notes: “the short period is also an indication of the seriousness of the Commission's intent to move very swiftly with this project. The Commission has publicly indicated that it very much hopes to have a legislative project to present to Parliament and Council by next summer.”

To Bell’s list of main topics, we’d flag another couple of points — the Commission is clearly interested on whether CLOs should be treated as “public securitisation”, noting “A separate significant part of the market, in particular many collateralised loan obligations (CLOs), is public in nature but is not classified as such under the SECR and therefore it does not report to the securitisation repositories (“SRs”). This curtails supervisors’ ability to adequately analyse and supervise cross-border markets and might limit overall market transparency.”

The quid pro quo for widening the definition of “public” securitisation to include CLOs would be a lower reporting burden for truly private deals — this seems obviously sensible to me, CLO tranches are very obviously public syndicated debt, but then again I’m not a CLO manager.

There are also questions (section 9) on the “securitisation platform”, which was discussed in the Noyer report (and discussed here a couple of weeks back). Lots of possibilities appear to be on the table; should this “platform” cover SMEs, green loans, mortgage, corporate loans or something else? Should it involve guarantees? From whom?

These are some heavy duty questions — one could imagine a consultancy spending several months just on 8.9 above and submitting a 100 page response to that alone.

Also notable, we think, is the lack of any material on risk retention. There’s a question about reworking the AIFMD framework to allow AIFs (hedge funds basically) to act as sponsors in securitisations, but there’s no recognition that risk retention is an intellectual nonsense for several of the most active securitisation markets, and has become a box-ticking structural mess of epic proportions.

Implant bonds

A bracing week in the land of the free does underline how different certain cultural aspects of US finance can be.

One of the panellists discussing SRT deals at DealCatalyst’s US SRT conference last week joked that suing the CFPB, the US consumer finance regulator, was now “socially acceptable” (but suing the FDIC isn’t quite). I can’t think of any European financial institution with the stones to sue its regulator in the post-2008 environment, but I guess that’s the dead hand of socialism for you.

US ABS is also notable for accepting much more in the way of esoteric and exotic collateral. Most off-the-run products can find some kind of private financing home in Europe, be that a credit fund or an ambitious bank, but these things rarely come out in public. Not so in America!

Thus we come to Cherry Securitization Trust 2024-1, a financing for a portfolio of “point-of-sale unsecured consumer loans and retail installment sale contracts to finance elective medical services to primarily prime borrowers”.

I don’t know the business in question but this calls to mind some amazing images. Who exactly is going to the plastic surgeon’s office and taking spur of the moment financing for procedures which might cost thousands?

BNPL here actually makes a lot of sense; there’s a lot of potentially high value upselling opportunities in cosmetic dentistry and surgery. Why not get your bum done at the same time as your belly fat, especially if it’s funded through 0% buy-now-pay-later lending?

The credit quality might well be better than the kind of borrowers using Klarna to fund their Sunday night takeaway; presumably borrowers walked into the plastic surgery consultation with a few grand to spare on perfecting their beach bod, so they’re probably higher-earning with more disposable income than small ticket BNPL borrowers. The extensive reach of the US credit bureaus is also a source of comfort.

KBRA rates the deal, so head over there for more details. It’s slightly unfair of me to call these implant bonds, given that there’s a 20% concentration limit for cosmetic surgery; dental and medical spa treatments constitute more than 85% so really these are shiny tooth bonds if anything.

At this point my editor is having to stand over me to stop a stream of plastic surgery puns spattering this piece, so I’ll wrap up soon but actually this is quite cool?

It’s finding an innovative niche for financing, in a way that incumbent financial institutions would be unlikely to do, and finding investors willing to take down esoteric risks they’ve not seen before (at a price). The deal features a healthy 11.72% excess spread, so there’s clearly a decent business here.

Let’s hope the single-A market doesn’t rapidly move to double-D…

SRT even when you don’t need it

The booming significant risk transfer market has reached a point where even institutions that literally can’t claim significant risk transfer are doing SRT deals. That, at least, is one conclusion you could draw from Brignole CQ 2024, the Italian salary sacrifice CQS loan ABS priced last month, though it would probably be the wrong one.

The shelf is well-established. Creditis, the originator, was originally owned by Banca Carige (which historically funded it), but has been self-funding via Brignole deals and warehouses since 2019, when credit fund Chenavari took a majority stake, buying out the minorities in 2023.

Being owned by a securitisation hedge fund which absolutely loves leverage, deals are generally full stack offerings, with Creditis holding the retention in vertical format, giving optionality over whether to sell the entire portfolio if the price is right, so it’s already economically geared up to be able to act as a cash risk transfer deal. From a bond investor’s perspective, it doesn’t look so different from a bank-originated full stack offering which does have full SRT treatment.

But these are murky waters. Economic transfer, accounting deconsolidation and derisking are closely related but not identical, and demonstrating significant risk transfer to a standard that satisfies banking regulators is different again. Deal features which tangle an originator up in the ongoing life of a delinked securitisation come under particular scrutiny, be that set-off risk, reps and buyback, call optionality, the terms of any revolving period.

In Brignole, for example, the call is structured so that the purchase price for the portfolio does not make good losses or unpaid obligations in the portfolio — the investor in the junior tranche needs to bear the losses, such that risk is genuinely transferred for the lifetime of the deal, rather than deferred to the call date.

So baking this into a deal has real consequences. The obvious reason to do it is because Creditis will soon come within the purview of banking regulators, one way or another. It was formerly owned by a bank, so perhaps it’s now up for sale? Alternatively, perhaps it’s working out getting a licence itself. Italy has a lot of small regional banks, but it also has some interesting banking business models; Guber Banca and IFIS, major buyers of NPLs for example.

We’ve already seen challenger banks explore SRT deals as a step on the way to a public listing, managing capital needs such that an IPO can be less dilutive and more capital-efficient; now we’ve got a preemptive SRT deal which bakes in better-optimised capital ahead of actually being supervised as a bank and having risk-based capital requirements.

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