According to the last available accounts for this entity, it had $561m of senior variable funding notes outstanding, and $100m in mezzanine notes.

The senior tranche was paying SOFR+185bps, the $75m class B S+400bps, $12.5m class C 600bps, and $12.5m class D 950bps.

The deal was award-winning at the time — legal trade mag IFLR cites complexities including: “analysis of receivables contracts and on-sale agreements in 16 jurisdictions, doubly complicated in refinancing due to intermediary involvement before the receivables are sold to Stenn. The deal included pre-funding mechanics to boost Stenn’s liquidity and accommodated daily sales and weekly and monthly waterfalls. It holds together multiple funding instruments (from senior notes to four classes of mezzanine term notes) through complex intercreditor and borrowing base mechanics. Certain cashflows within the SPV are reserved for particular investors”.

Certainly everything all seemed to be heading in the right direction. As of 2022, an unpromising backdrop for fintech funding generally, it had raised money at a $900m valuation from Centerbridge — per this article from TechCrunch. At that point, it had financed $6bn in loans from 74 countries with $1bn of origination in 2022.

In December 2023, it refinanced its core securitisation facilities, increasing capacity to $950m and adding a “new institutional investor”, according to the company’s latest accounts.

“Given strong internal capital generation during the year and a healthy liquidity position, the group fully repaid a residual PIK obligation associated with a legacy $75m Crayhill senior debt facility,” according to the accounts.

It disclosed that it had extend and upsized its revolving credit facility with HSBC Innovation Bank (for $50m with a December 2026 maturity). This, one would think, is good news and a bright future awaits.

The music continued well into 2024. Stenn opened offices in Atlanta, Barcelona and Shanghai — the US headquarters in October — and has been advertising for new hires as recently as two weeks ago.

While we’ve talked about some of the potential problems in receivables financing before, the graveyard of the likes of Greensill and Gedesco, the reputation of Stenn seems sound in this area. Our informal soundings suggest lenders that weren’t in the facilities were driven out by price, rather than performance concerns. And then there’s the credit insurance, which should make lenders whole.

So what on earth is happening here? Like most non-banks, Stenn is a small-to-medium servicing and operating entity attached to several large SPVs housing most of the assets. It’s the corporate entity being put into administration by the provider of its corporate RCF; there’s nothing to suggest impairment at the Irish entities housing the actual assets.

AssetCco issues do, of course, feed into corporate performance. If there’s not enough cash coming out of the securitisation, it will be hard to fund opex, especially to the tune of three new offices in a year.

We’re now in the realms of conjecture, but the suddenness of the Stenn administration makes that seem unlikely. If performance was trending down for this year and excess spread was squeezed, that would be obvious a few months out, and the generally well-respected management team wouldn’t embark on a big costly footprint expansion. If a major obligor suddenly had, uh, issues, you’d expect gritted teeth and a claim on the credit insurance.

The suddenness of the failure looks, to us, more like an issue with equity or parental funding commitments. In a rapid expansion, you’d expect the corporate revolver to get a hefty workout.

Perhaps the expectation was for some capital to come in and pay this down, giving more runway to make use of the expansion. If something happened to disrupt an expected capital injection, that could explain the rapid filing.

More details will doubtless emerge soon — we wish the Stenn team well through what must be a difficult time.

Court, what court?

There's something charmingly robust about the US capital markets. Want to borrow the GDP of a small European country to yolo into Bitcoin? Right this way! To an extent this also extends to the New York-law high yield markets this side of the pond. Got a problem? Get it lawyered, put it in the risk factors, start 50bps wider and go.

So it is that the first real test of the Court of Appeal ruling on motor commission comes not in ABS, the market that in public or private form actually finances much of the country's auto lending, but in high yield and leveraged loans, in the shape of a refinancing for Domestic & General.

This CVC-owned company is probably familiar to you if you've bought a washing machine, fridge or dishwasher in the past few years; when you get phoned up to take out an extended care package / warranty / protection scheme on your new appliance, it's D&G behind it. These are definitely commission sales without disclosure!

So it is that D&G mentions the ruling in its risk factors at some length. I’m assuming anyone reading this has some idea what I’m talking about, but you can read previous coverage here and here if not; the gist is that the Court of Appeal handed down a ruling which calls into question any financial product sold on the basis of a commission which was not disclosed to the customer, potentially opening the way to misselling claims from customers or other routes to redress.

From D&G’s risk factors: “This case, which examined credit broker commissions in motor finance consumer transactions, established broad principles that might influence other sectors using commission-based models, including the insurance industry.“

It also said: “there are good arguments to distinguish the Motor Finance case from the insurance sector and DGI’s business model”, though whatever these arguments are, they weren’t included in the bond offering docs. It certainly doesn’t seem like the ambulance-chasers have come for washing machine warranties yet, though D&G doesn’t mention where it has amped up disclosure standards from its brokers yet.

Despite mutterings from a few investors we talked to, the market test has been encouraging. The loan leg landed at a perfectly respectable 400bps and 99.75, the sterling bond at 8.125% from low-mid 8s IPTs, with some docs changes along the way. 9fin’s legal team said the prelim featured “many sponsor friendly terms with…. all the capacity and flexibility in these terms available from day one”, so it’s no surprise there was a little pushback.

This might just be sheer LevFin bullheadedness (D&G bonds didn’t move when the ruling first dropped) or sensible robustness to the likely path forward for principles around commission. Either way, it’s a strong result and a little encouraging to any nervous auto lenders or premium finance businesses out there.

Apex predator

European NPL investing has been transformed over the past year, as the aftershocks of the rates cycle have reverbated through the corporate debt purchasers. This time last year, AnaCap Financial Europe (AFE), Intrum, Lowell, and iQera were all independent (AFE, admittedly, was deep in its restructuring process).

As of Thursday (5 December) morning, Arrow Global is now on a path to own iQera, and bought AFE last year. Intrum is going through a Texas Chapter 11, while Lowell's restructuring is just kicking off (its 2025 bonds are now current, and trading in the 60s, suggesting a straight refi is off the table).

The issues are structurally the same. The corporate debt purchasers enjoyed a long honeymoon in high yield markets, which looked at their abundant free cashflow and low EBITDA leverage multiples, ignoring less savoury metrics like debt to net asset value.

Buy NPL portfolio, fund with bonds, collect the easiest loans to demonstrate strong cash generation, rinse and repeat. When interest rates rose, the refinancing cost for the bonds went up, but the yields on the back book portfolios did not (front book IRR crept up, but slowly).

The remedies also looked similar. Pivot to servicing, a fee business, rather than deploy now-costly capital into buying loans outright. For Intrum and for Lowell, the pivot has come too late, and the debt stacks are too large.

In the case of Arrow, which looks like the real sector winner, if and when it completes the takeover of iQera, the pivot is more complex. There’s more servicing, but there’s also been the build-out of a meaningful fund management and private debt investing operation, raising third-party capital and acquiring interest in CRE lending and bridging. It’s got tentacles in different credit products besides NPLs.

It’s the funds which have allowed it to snap up AFE and now iQera. In a traditional restructuring, creditors take control and shop around the company to sponsors and strategic buyers. Arrow has compressed the process by ensuring it is the largest creditor to AFE, and clearly a significant creditor to iQera as well, such that it can define the terms of these processes.

There’s little hard detail available on the iQera takeover so far. Here’s 9fin’s story, but the gist is that Arrow Credit Opportunities II is set to become the controlling shareholder, with the restructuring effected by accelerated safeguard in France, and restructuring effective in the first half next year.

In the AFE deal, Arrow pretty much left it well alone. There was never really any equity in the AFE portfolio, there continues to be no equity in it, and the restructuring didn’t put much in. New money was provided via super senior debt, but it’s hard to backsolve how well the deal works for Arrow (it never disclosed its cost basis in the AFE bonds).

Don’t expect it to hurry to disclose that for iQera either, but it’s a slightly different animal. AFE really was a fund in very poor corporate disguise, whereas iQera is a real and substantial operating business, call it debt purchaser classic. Arrow actually owned a small stake before BC Partners bought it!

The trade for AFE has more to do with “let’s buy these assets with minimal commitment and see if they go up”, while iQera has much more tangible synergy with Arrow’s core activities. If Arrow really does have secret sauce to do with data or NPL management, it can share this with iQera once the deal is done.

Much harder to parse is the future for Intrum and Lowell, the big beasts. The debt stacks are too large for a ticket of say, €100m to drive either process, even if Arrow were minded to stick its oar in. For Arrow, it might be better to see Intrum and Lowell distracted, starved of capital and unlikely to be best bid on any portfolio than actually try to own either firm.

Intrum’s deal, currently being fought in Texas court, doesn’t do much to delever the company, but nor does it create much urgency to sell. Bondholders get a small slice of equity but won’t be in charge; largest shareholder Nordic Capital has shown that it’s more than willing to hang on and hope something turns up.

Lowell is more complicated. It likely needs a much bigger haircut to debt (see our analysis here) than Intrum’s modest 10% trim, and current sponsor Permira already put in €600m in 2020. The fund with Lowell in also has remote software rockstar TeamViewer in so it’s probably doing ok, but the whole point of PE is to run the winners and cut the losers. A basket of options is worth more than options on a basket etc etc. So maybe there is an exit in Lowell’s future, or at least a motivated band of creditors who want to monetise.

Fintech raises money

My own shop has been in the market lately, and we’re very happy and proud to announce a $50m Series B this week (see this story from the FT as well).

We’ve got big plans to come, especially in asset-based finance, SRTs, securitisation and all this sort of thing, so stay tuned! May all of our lines go up and to the right in 2025!

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