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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.

One of the things I've enjoyed about the last 14 years writing about securitisation is how much weirder it can get than most other capital markets, and it doesn't get weirder, in public markets, than the UK government's student loan securitisations.

Which is why it's gratifying that this week brings a huge opportunity to Buy Weird Stuff, in the shape of the Morgan Stanley-managed sale process for £1.25bn notional of equity in the student loan securitisations, £750m in the first one and £486m in the second.

These genuinely are strange assets. The loans pay the lower of Bank Rate or RPI, so they're inflation AND rates linked (this can be hedged out, sort of). The actual payment profile, though, depends on wage growth in the UK, since the payments are deducted at source from pay cheques, just like a tax. Above a certain income threshold, a given percentage of money goes into student loan repayments. They don't count on a credit record and they're massively cheaper than any other borrowing source, so there's no real incentive to prepay.

What you basically have is a long-dated stream of cashflows correlated to nominal wage growth, back-ended (14-15 year WAL), which should give a pretty nice return overall, but is... weird.

Lots of funds like to talk about their desire for uncorrelated returns, but that usually means buying different somewhat normal asset classes, not necessarily buying something unlike anything ever issued before or since.

Well. I say uncorrelated, in the sense that these are not correlated to financial market returns. You are not gonna be able to hedge these against crossover. But they are correlated to UK wage growth, which is not necessarily what you'd choose, off the shelf, if you wanted to make a macro bet.

Elliott Management is the seller, which brings its own complications. Other structured credit hedge funds have the same basic constraints as Elliott — they may want leverage (Morgan Stanley is offering standard repo terms) and generally have a shorter time horizon than the 14-15 year WAL. More importantly, the structures themselves have deleveraged a lot since 2018 and 2017 when they were issued.

The other investors in the equity were hedge funds, but various family offices (including the Murdochs!) have got involved. But these may not be buyers in the size required to take the position off Eliott's hands, and given the deleveraging, the hedge fund trade might be played out; a better owner could be a life insurer or pension fund with a penchant for highly structured situations and a pocket for adventurous money.

Hiring Morgan Stanley may have indicated a desire to go beyond the existing investor base.

Barclays arranged and advised on the deals and has traded all of the class X bonds to have come out so far, while Credit Suisse, JP Morgan and Lloyds were joint leads. JP Morgan also “reviewed, challenged and commented on the sales structure, materials and investor list”, while Rothschild “provided third-party challenge to the sales adviser and reviewed their advice and recommendations”.

If the pockets of the original holders were deep enough, they’d have been the natural place to start, and Barclays would have been given the business, so the choice of the uninvolved Morgan Stanley suggests Elliott is hoping to unearth some hitherto hidden demand.

While some investors see Morgan Stanley, with its large principal finance desk, as more competitor than counterparty, there’s no doubt that it’s good at this stuff. Anecdotally, it tops a lot of lists for “banks that show us interesting stuff”, and there’s a reason it wins so many sellside mandates for portfolio processes.

The sale was supposed to be on Wednesday (18 September), but we’re hearing it’s been pushed back. Perhaps this is because the assets are strange enough to require particularly thorough investment committee processes, or perhaps the natural owners today are slower-moving than your average hedge fund. Or perhaps said natural owner has yet to emerge. If it could be you, do not delay! Call Morgan Stanley today!

We attended DealCatalyst's excellent UK Mortgage Finance conference for the third year running (now at new venue The Landmark), and it remains an excellent event to take the temperature from lenders and funders alike. Here's a few promotional items we ran ahead of the event, interviews with Doug Charleston from TwentyFour, Scott Robertson from Phoenix Group and Graham McClelland from Generation Home.

The vibes were mostly good — securitisation is working, lending volumes are back up, interest rates are coming down. One lender suggested that BTL borrowers had a 5% target in their head, and with five-year sterling swaps down to 3.4%, loans are flying off the shelf.

But there was a political cloud hanging over the event. Buy-to-let is by far the most popular lending product for specialist lenders and challenger banks alike, and, on plausible assumptions, buy-to-let lending could stay depressed. The market was running at around £40bn of gross lending per year from 2015-2020, and fell off a cliff in 2022 and 2023 (which saw a reduction in outstanding, for the first time in a quarter of a century).

So where does it settle down, and how bad will the Labour Party’s policies prove for the sector? The party of landlords has been replaced by the party of renters in government, and a new Renters’ Rights Bill is already on the table, abolishing no-fault evictions, blind bidding, and preventing landlords from taking action against tenants until they’re three months in arrears. Throw in tax changes from the previous government, and the individual landlord (the vast bulk of the market) could become an endangered species.

If BTL lending is down by half, which half? The withdrawal of the single property amateur doesn't destroy housing stock; it has to be sold to someone, whether that's an owner-occupier or a professional landlord.

Lending products used in this sector are precisely the categories of loan most likely to be affected by the Basel 3.1 changes we discussed last week, the asset types which sit at the margin of the challenger bank / specialist non-bank universe, and which are set to receive more punitive treatment under the new regulatory regime. It's not like raising regulatory capital requirements will knock out the banks entirely (this is good and profitable business to write) but it will tilt the competitive landscape.

Few of the panellists at the DealCatalyst event wanted to go deep on Basel — most lenders were far too busy figuring out who’s giving out the cheapest funding — but it hung over the conference regardless.

Second charge was also on the agenda. A keynote speech from the FCA's head of retail banking, market analysis and policy, Sarah McKenzie, highlighted that second charge was a sector with high rates AND high fees, which she felt for some reason was a bad thing, and which might prompt the regulator to examine competition in the sector. Given the number of lenders in the room it seemed unlikely to be that competition could be anything but cutthroat, but regulators gonna regulate.

If seconds have high fees and high rates, it's probably because they're risky and complex? There's a big difference in the credit profile of a borrower doing second charge because they got a 10-year fix in 2021 and want a kitchen extension, and a borrower consolidating 30 grand of crippling credit card debt, but that's exactly the point; second charge needs a more vigorous underwriting process. The FCA has already provided one tap on the shoulder here; a “Dear CEO” letter from 2018 reminded firms to lend responsibly, and to prove they are doing so.

Professional landlords can mean landlords with a portfolio you can count on your hands, but what the UK has historically lacked is much of an institutional landlord sector, outside the housing associations. This is gradually changing, with some of the biggest investors in the country getting stuck in.

Blackstone, one could argue, is a pioneer in the space, through its investment in for-profit housing association Sage Homes (securitising along the way in SAGE AR Funding 2021). This doesn’t seem to have been universally welcomed by tenants…. but that doesn’t mean it’s been a bad trade.

Over the summer, Blackstone sold 3,000 shared ownership properties to pension fund USS, to launch Sparrow Shared Ownership but there’s other activity too, especially in build-to-rent (which includes student accommodation). That’s cleaner than putting together portfolios of individual houses or flat, and more conducive to institutional money — Investors such as L&G and Aviva are getting involved, while the likes of Rothesay are doing the financing.

There’s always a fair bit of handwringing about the state of the UK property market, but this seems like a straightforwardly good trend — anything that can direct the massive firepower of long-term UK institutional investors into new shiny quality house stock has to be a good thing.

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