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Trash to treasure

Insurance structuring is pretty hot right now. The last working week of 2024 brought Lifetime Mortgage Funding 1, which we discussed briefly before Christmas, and Jeronimo Funding (both Citi-arranged trades).

These are, respectively, a deal in which Waterfall Asset Management derisked a portfolio of Aviva's older-vintage equity release mortgages (Aviva subscribed the matching adjustment notes carved out from the portfolio) and a deal in which Elliott's captive insurer, Medvida Partners, funded a mixed pool of Spanish RPLs and subscribed the junior notes.

Flicking through the offering circular for the Waterfall deal throws up several delights.

Rather than being a simple dumb box for assets, the description of seller entity, Aira Force Capital Optimization Strategies LLC holds much promise.

“The business strategy of Aira includes the following:

1. Originating and managing flow securitisation of UK and European equity release mortgages, combining flow transactions with back-book portfolio transactions
2. Engaging mandates with insurers to invest their capital in matching adjustment tranches generated through the securitisation activity of Aira
3. Extending securitisation technology to other asset classes with a long maturity duration to create matching adjustment leverage and other capital optimisation strategies
4. Generating new origination through forward flow programmes
5. Potentially acquiring stakes in origination and servicing platforms that originate assets of the type described above.”

This is all very cool stuff, and it’s also rare in the securitisation hedge fund world. One problem is simply tenor — equity release mortgages are super-long duration, interest rolls up so there are no cashflows, and generally funds, even those with committed capital, aren’t the natural holders.

The other problem is that the insurance bid for equity release has been so strong there’s not much of an angle. UK life insurers own the vast majority of equity release mortgages in the UK, and generally prefer to internally securitise. The likes of Rothesay are sophisticated counterparties with a natural regulatory incentive to buy these assets.

Unless, that is, there’s a reason why insurers don’t want a certain asset pool. If this bid isn’t there, then the equity release trade isn’t so crowded, assets can be gotten cheaply, and, with a fair wind, securitised for more than they’re worth. What’s not to like?

Other details in the Lifetime offering circular include some pretty good significant investor disclosures. Besides Aviva taking the A1 and A2 notes, class A3 was split 50:50 between two accounts, another single investor took all of the B1 and B2, and another investor took 36% of the B0.

We don’t have further colour on who these might be, but the B0 note fits most conveniently into an ordinary ABS-orientated portfolio; the 0% coupon six-year WAL B1 and B2 notes (which went to a single account) are a bit more of an acquired taste.

Waterfall got its B3 and C notes at an issue price of 0% (notional of £80m and £10m respectively) as part of the consideration for the portfolio, but figuring out the overall economics of this deal is a job for someone with considerably more structuring chops than me.

Returning to the question of equity interest in equity release, one prominent fund in the space is 777 Partners, which garnered more headlines as a sports finance shop. But it also originated equity release loans through a vehicle known as Senior Capital.

We discussed some of the difficulties 777 Partners was facing last year (a lawsuit from Leadenhall Capital Partners, concerns about asset quality) but these kicked into higher gear late last year. The senior funding partner for 777’s equity release origination was Southern Atlantic Reinsurance, part of the A-Cap group of insurers.

In December, local insurance regulators, including in Utah and South Carolina ordered these to stop writing new policies. Per a regulatory submission from April, “it is the Department’s opinion that the financial condition, management, and operation of the Licensees are such as to render the continuation of their business hazardous to the public and their policyholders. The Department further believes that the Licensees have failed to comply with the insurance laws of this State”.

It’s doubtless a very live and complex situation, but it seems unlikely 777 is going to be on the front foot for new portfolio bids at the moment — the field seems wide open for Aira?

Up and to the right

We’re very proud to announce that, already in 2025, 9fin’s asset-based finance team has doubled in size! Celeste Tamers, formerly of Risk.Net, has joined us. She’s been doing great coverage especially on the SRT market, and we have some big plans. More (synthetic) excess spread for 2025!

Waive it through

Two and half months after the UK Court of Appeal dropped a hand grenade down the chimney of auto finance, the panic has receded and the constructive solutions have started coming through.

Perhaps Startline Motor Finance wouldn't get a blowout for a new Satus auto ABS, but the non-bank originator has successfully renewed and extended its funding line with JP Morgan, a relationship stretching back seven years.

The new funding is longer (five years), larger (£475m) and contemplates the addition of a mezz tranche to the senior. Beyond that the details are understandably private; if there are new reps we'd struggle to hear about them, but it’s good to see banks stepping up to keep originators funded.

There shouldn’t be any worries about new assets originated after the great re-documenting of November 2024, but presumably Startline has a fair bit of product originated between its last public deal in April 2024 and the Court of Appeal in October 2024, which may not have disclosed commissions.

Renault’s RCI Banque (now Mobilize Financial Services) passed waivers on its Cars Alliance UK Master plc vehicle, which finances hire purchase and personal contract plan loans for its UK customers (loan products, but with a residual value component). This private vehicle is likely funded by banks, making the negotiations more straightforward.

Anyway, the point of the amendments and waivers is to indemnify the issuer by allowing the seller to cover any remediation payments as an alternative to repurchasing the loans, and to waive any breaches in reps arising from the Court of Appeal judgement.

This is a sensible move to stop accidents from happening. If there's a problem, the seller can cover the costs. Much better to contribute cash that have a contingent buyback liability for the loans. Times are not great for the auto OEMs, but they're still massive companies which can cope with dripping in some cash, and again, this looks like the banks in the space being pragmatic in the face of the challenge.

Here’s hoping that the Supreme Court (now set to rule on an expedited basis in March 2025) will bring some sanity!

Comprehensive stabilisation

We covered the woes of Grover before Christmas, a cheery festive warning tale of 2021’s hubris coming home, but things have moved on a bit. 9fin’s Bianca Boorer writes that the company’s shareholders have rejected the proposals by former CEO Michael Cassau, and it is currently trying to raise funding from existing shareholders, a process which could involve the subordination of existing debt facilities.

“Negotiations with lenders on a comprehensive financial stabilisation are proceeding very constructively and are well advanced,” the company told 9fin. “The vast majority of shareholders are also in favour”.

Cool cool, good luck folks! The interaction with the asset-backed debt will be crucial.

To get you up to speed, Grover is a technology rental/subscription platform based in Germany. Most of its capital structure is made up of large asset-based funding facilities, with Fasanara Capital the largest lender (M&G did a smaller facility on less aggressive terms).

These fund the actual devices which Grover supplies, but from a credit perspective, look a little like subprime unsecured consumer lending (nobody is seriously in the business of repossessing old Xboxes to enhance recoveries).

At the corporate level, Grover has a venture debt facility with Kreos, though this is only about €15m, compared with the multiple hundreds of millions drawn across various asset-based lines.

Corporate and ABS are tied tightly together, more so than in more vanilla assets. Performance of the ABS facilities relies on keeping up the flow of new origination, and on Grover’s ability to service existing customers. The collateral does not lend itself to a traditional backup servicing arrangement. It’s not like a book of mortgages, where any servicer can step in (it’s generally easier to find an address, for one thing).

This is a known problem in lending to tech firms with new and unproven business models, and some lenders take warrants or other goodies (or have pre-emption rights to take over the servicing entirely). Grover’s 2022 accounts disclose “participation rights” for Fasanara, which it says were exercised during the firm’s Series C fundraising.

But the dependency runs the other way too. The firm’s ongoing health relies on the availability of the ABS lines. Keeping the lights on, paying salaries and renting office space is small potatoes compared to any potential shift in the terms of the funding facilities.

If Grover had roughly €800m drawn, and the advance rate drops 5% when the time comes to roll, it’s got to find €40m just to keep these running. If the terms are worse still (which, if the equity funding is hard to come by, seems plausible), the capital hole grows further.

For corporate level debt, there’s a well-established restructuring playbook, which might include equitisation of debt, a switch to PIK payments, liability management and more. Grover is apparently contemplating a German StarRUG process to implement its restructuring, a newish legal process giving a more reliable route to compromising creditors.

But these tools are much harder to achieve for a firm where the vast bulk of the capital structure is asset-backed.

The legal form of a delinked non-recourse asset-backed debt facility (even if, in practice, it’s tightly bound to the servicer) make it harder to drag an asset-based lender into a conventional debt restructuring (and make it harder for that lender to take the keys or extract attractive economics from said restructuring).

How much is an auto loan originator worth?

US capitalism just hits different. The tale of Carvana is an absolute romp. Built by a family dynasty into a $40bn company, pioneers of the CAR VENDING MACHINE, the business has already gone from golden child of tech disruption into a distressed debt exchange and all the way back again, clawing back its adored status in less than a year.

It’s not a meme stock as such; WallStreetBets degens love it, but so do the sellside desks. Analysts couldn’t find enough superlatives for the Q3 numbers, and there are lots of price targets well above current levels.

The bull case is that it promises nothing less than a revolution in the enormous US used car market, all the relevant numbers are heading up and to the right, and there’s still a lot of space to grow. This exceptional run has left it hated in equal measure by shorts, whose comparisons of profit to market cap are currently falling on deaf ears. The latest short to go visor down and take a tilt at Carvana is Hindenburg Research, which published a piece on 2 January. We cover the market reaction here and look at the firm in more depth here.

Lots of the accusations were fairly old, but Hindenburg is right that Carvana depends heavily on selling its loans into forward flows and securitisations, and that a considerable chunk of its earnings relies on booking gains on these sales.

If the business is basically making loans and selling them, with some car transactions underneath, that’s loan origination just as much it is car dealing (a business which trades on less extravagant multiples, and with more sensitivity to rates).

Consistently making outsize profits as a finance company is difficult. Both the origination and the loan sale are highly competitive. Does Carvana have an unusually price-insensitive customer base? Does it have unusually tolerant counterparties willing to pay a premium for its loans?

The first could be partly true. If you buy the Carvana hype about revolutionising the used car experience, then perhaps customers will overpay for a finance package as part of a slick and pleasant customer journey. Or, if the finance product is a loss-leader to allow Carvana to ship units and hit higher selling prices, maybe it will lend to anyone for low prices.

Still, if Carvana is worth $40bn or so, and the special sauce is in tech-enabled subprime auto loan origination, what’s a good multiple to slap on Oodle? or Startline or Blue Motor? Carvana sells roughly all of its loans, either into forward flows like its $4bn arrangement with Ally Financial or straight securitisations which it deconsolidates (it’s also a big user of on-balance sheet asset-backed arrangements to fund its retentions, and its floorplan / inventory).

That could be because it’s not really in the business of finance… or it could be just doing what any lender which wants to maximise operational and financial leverage does. At what point does the tail wag the dog?

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