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Owen Sanderson

Excess Spread is our weekly newsletter, covering trends, deals and more in structured credit and ABS. Find out more about 9fin for structured credit.

Excess Spread is off next week, returning 31 October. 

Fund finance in its various forms is an increasingly active and innovative part of the capital markets. We spoke to Goldman Sachs’s mortgage and structured products boss a couple of weeks back, mainly about the extent to which this underpinned the bank’s broader FICC financing strategy.

Here’s the full piece, but the skinny is the bank has been laying out a lot of cash in the business of levering private credit funds, and this represents an increasingly important plank of its broader securitisation business. The revenue figures look impressive — FICC Financing traditionally considered (warehousing for asset-backed issuers, repo) has gone from being roughly a $400m per quarter business to $850m-$900m, with asset-based lending to funds the prime driver.

The most traditional way to lend to funds isn’t levering against the NAV, but the long-established subscription finance market, which interposes banks between funds and their LPs, giving funds ready access to cash to deploy, without having to deal with the admin of drawing down on LP commitments to fund the purchase.

Cynics argue these inflate the reported IRRs of private equity firms, and subscription finance can be manipulated to ensure fund GPs receive their incentive fees — see here for an excellent discussion from Oaktree’s Howard Marks on the subject. Either way, it’s here to stay, and the FT quotes $900bn of these facilities outstanding at the end of 2023.

The natural thing to do, if you have a lot of outstanding lending, is to securitise it for capital markets takeout. There’s a ton of sub line SRT transactions out there, but not much in the way of cash deals, still less funding transactions. One reason for this is the short term, revolving nature of the exposures; it’s easier to package funded term assets for securitisation and bond investor distribution.

Enter Capital Street Master Trust 2024-1, a $475m capital call securitisation rated by Morningstar DBRS. Astute readers will observe that the name indicates it is indeed a master trust, the standard mechanism by which short term revolving assets (like credit cards) are turned into term financing.

The advance rates and rating demonstrates the safe nature of the collateral — it’s triple-A up to 90%, and double-A for the next 5%. The deal is for four years, with an 18-month reinvestment period, and a suite of the usual eligibility specifics, concentration limits and so forth.

It is, as far as we’re aware, the first cash deal of this kind, and DBRS kind of hints as much; it’s rated by bodging together the “methodology for rating debt issued by investment funds” with the “rating structured finance CDO restructurings methodology”, and DBRS said it “materially deviated from its principal methodology”.

Intriguingly, given the egos in the fund management industry, DBRS has ranked each underlying fund manager as “top, medium or low”, which I’m looking forward to examining if I can get hold of a loan tape.

This is a US deal (and sub lines, like most things are bigger stateside) but there’s absolutely nothing stopping this kind of structure rolling out everywhere, and in large size. Much as we love a niche asset classes like last week’s implant bonds, this is more exciting — a large, mainstream, as-yet-unsecuritised opportunity.

I don’t usually look line-by-line through loan level data (who does?) but when I saw the announcement of White Rose Master Issuer, the new Yorkshire Building Society mortgage master trust, I rushed to the loan tape to see if my mortgage had been included. Sadly I was disappointed.

It’s possible that it’s been rotated into Brass No. 11, the 2023 deal which featured a five-year revolving period, but that’s far less exciting than being a (small) part of only the second new mortgage trust to be established since 2008. Most probable and most unfortunate, given the £3.3bn of funding Yorkshire has taken out of that market, is that my little loan is backing a covered bond.

White Rose is a simplified single-SPV structure akin to Coventry’s Economic Master Issuer (the only other new mortgage trust post-crisis). That should be simpler, cheaper, and more user-friendly than the pre-2008 structures. More SPVs means more administration and more cost, back-to-back loans, accountancy, audits, more complex hedging and way more legals.

I’m not the guy to take you through the legal benefits (have a word with Clifford Chance) but allow me to present some boxes and arrows — first White Rose:

Then Nationwide’s Silverstone, a trad pre-crisis trust.

The problems of master trust administration can be solved by applying money and time, but some of the builder treasury teams run pretty lean, and “add a vehicle which will take a huge amount of time and effort to deliver funding that’s not necessarily more efficient than covered bonds” is not an appealing proposition.

I’ve stolen the analogy of master trusts as nuclear power station from a treasurer at a big bank, but it’s a good one — they take a lot of starting up, you don’t really want to stop them once they’re going, and it’s not easy to clean them up or update the tech while they’re in operation.

The single SPV structure solves a lot of these problems, and it also, in theory, improves time to market, allowing issuers to take advantage of funding windows in a more flexible, covered-bond-like manner. In practice, this is debatable; issuers usually have a plan for their benchmark wholesale funding in all formats, so it’s not like a funding team wakes up, sees Cross tighter and points to whatever seems good on the funding menu.

By a happy coincidence, the other possible solution to the funding window dilemma in market at the same time.

Nationwide’s Silverstone Master Issuer (with boxes presented above) is now funding through the “stock and drop” process, and it is “dropping” class 3A. If you already have your nuclear power station generating clean efficient funding, keep it running!

“Stock and drop” is a catchy name for a simple idea — structure and retain a master trust issue, remarketing the bonds through syndication whenever you like. Per the investor book “the core concept behind the Stock & Drop initiative is to expedite Silverstone’s access to the makret, with transaction lead times reducing from 4-12 weeks to 2-3 days. This allows Nationwide to react quickly to demand and opportunities. Silverstone will be considered a readily-available funding tool for the Society, akin to Covered Bonds and MTNs”.

It’s reasonably common for UK prime issuers to retain some proportion of their senior bonds for Bank of England collateral purposes, so in theory these could also be “dropped” into market ad hoc, but the Nationwide approach is more intentional.

The weakness of the idea is the bonds won’t be market coupon, unless the Nationwide team are exceptionally good at predicting credit spreads a year or more in advance, but so far they do seem to have been fairly accurate (helped by the stability of prime RMBS all year).

Talk for the 50bp coupon 4.4-year tranche 3A was 52bps on Thursday morning, and the deal landed at 50bps, bang on the coupon level. Tranche 2A, dropped in March, was 48bps at reoffer versus the 50bps coupon. 1A, dropped in June just after Barcelona, was the furthest off (43bps at reoffer vs 47bps coupon).

Silverstone is usually one of the tightest issuers in the market, and big bank master trust paper should trade inside builders, so we’d think Nationwide would have wanted to at least match the 50bps spread for Skipton’s three-year standalone RMBS Darrowby No. 6 two weeks back.

White Rose offers an interesting pricing proposition. The controlled amortisation gives more certainty of cashflows than a standalone deal, so from first principles it should come tighter than a Brass transaction (or Darrowby) would — but despite Yorkshire’s growth, it’s still in the builder bucket not the clearer bucket, plus it’s a new programme not a veteran like Silverstone. So the theory says it should price somewhere between two deals, both of which came at 50bps. Maybe prime RMBS is just prime RMBS now without much structural distinction?

In non-mortgage master trust news, NewDay is out with its second STS issue, post the clean-up of its main NewDay Funding Master Issuer trust in September last year. This kind of underlines the problems of STS.

The platonic issuer ideal is to put in place an efficient funding structure that offers attractive priced funding through the cycle in different formats; basically, solve the funding thing in one fell swoop. NewDay’s trusts allows banks to lend to it and provides a basis for the three or so public ABS deals it will do in a year. But making it STS-eligible, thus improving capital treatment for its lending banks and hopefully tighter credit spreads on its bonds, required taking £100m or so in assets out of the trust because they could be considered credit-impaired.

As an exercise for the reader, how many potential investors in a NewDay transaction will have been reassured by this improvement?

Plenty on the bank side will be pleased to take the STS capital treatment, but the NewDay funding shelf is not really simpler, more transparent and only barely more standardised.

These are credit cards receivables paying north of 30%… some of them are going to have credit issues! That’s why you have a ton of excess spread flowing through the structures!

NewDay is extremely well-banked, and will have no issue finding other funding partners (it has a couple of separate vehicles outside the two master trusts already). But the excluded receivables therefore had to go into one of those, making NewDay’s overall funding less transparent, standardised, etc, and moving further from the ideal of “create an ultimate once-for-all funding vehicle and let it run”.

The other update to the NewDay shelf for this outing is the addition of a backup servicer.

Per the investor presentation: “NewDay considers this to be an appropriate point in its lifecycle and maturity to move to a more industry standard BUS [backup servicer] arrangement”. Lenvi (fka Equiniti Gateway) has the gig.

This is slightly curious, in that NewDay effectively is the market standard for UK non-prime cards, and issuers don’t get much more mature (22 deals so far!) but the rating agencies like it. NewDay is a very levered PE-owned high yield company, so agencies don’t assign much benefit to its corporate credit strength.

Per Fitch: “Given the unrated nature of the servicer, special attention was paid to potential disruptions following a servicer default. NewDay has an elaborate nexus of sub-servicing contracts in place which cover relevant contingencies and are specifically designed to provide continuity of service from a portfolio perspective until after the legal final maturity of the rated notes….However, this nexus of sub-servicing contracts is not referenced in the transaction documents and could therefore be renegotiated at any time without consent, or even notification, of any stakeholders in the securitisation. This makes it harder to assign a benefit to it, especially in high rating cases.”

The advance rate on the deal is exactly the same as the last transaction, but maybe that’s only been possible because of the backup servicer. DBRS reworked its operational rating criteria earlier this year. Life is too short to go through it, but quite possibly it tightened up the servicing provisions, and so keeping the efficiency of the cap stack meant adding in the backup. Well worth the £2.5k a month to Lenvi I suppose.

We’re always on the hunt for asset-backed exotica, and so a mystery we’ve been pondering is: who provided the $100m debt facility to Art Money, a BNPL provider lending against art purchases, and how’s the position looking?

Art Money had been running for 10 years, and seemed, earlier this year, to be on the point of breaking through, with an equity investment from auction house Christie’s, and associated tie-up. Like the implant bonds, one can see the rationale. Art purchases, especially at auction, may be priced from the heart rather than the head, and so 0% finance might materially improve the willingness to pay up.

From the FT article on the company in April, it looks more like expensive point-of-sale lending rather than true BNPL, in that the buyer pays, apparently a fee of 10% over 10 months, rather than the retailer paying to increase completions.

Anyway, by June the firm had run out of operating capital — a heartfelt note from the founder flagged its failure to bring in enough equity investment to bridge through to potential profitability.

The note references $100m in debt finance “for art purchases, as we pay sellers before we get paid” — this is a decent ticket for a fairly off-the-run area.

A further intriguing piece of the puzzle is a listing last month on the Vienna Stock Exchange, rapidly becoming the venue of choice for asset-backed business in Europe. This is for “Christies Art Finance LLC”, to the tune of $162m — so perhaps the auction house has decided to strike out on its own?

Sotheby’s, the other storied name of auctioneering, has gone further ahead in this respect, already issuing public ABS bonds, ArtFi Master Trust 2024-1. These bonds are backed by a (fairly concentrated) portfolio of art loans; the FT’s Alphaville fillets the offering here.

Excess Spread — Streets ahead, rosy outlook, artistic mystery

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