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

For those of you sharpening your pencils for a robust response to the European Commission consultation on functioning of the securitisation market, this week offers little support to the idea that the market is hobbling along. If anything, it’s in rude health, with active dealflow across multiple asset classes.

The hedge funds are out in force, with One William Street and Waterfall Asset Management executing public deals for legacy Spanish RPLs and front book UK second liens respectively. Hampshire Trust Bank is doing its debut BTL RMBS, a deconsolidation trade; BNP Paribas’s Arval Leasing UK is doing a debut; Santander is doing yet another deconsolidation, this time from Spain; LendInvest is doing its first mixed collateral RMBS; and of course the first solar ABS in public format (of which more below).

We’ve even had investment bank principal deals, from JP Morgan (offering more LendInvest collateral to market in Pierpont 2024-1) and Goldman Sachs (EDML Blue 2024-1, bundling in some Venn Partners collateral from the Cartesian programme). More deconsolidation last week from Shawbrook and Barclays, some legacy refinancings; it’s all kicking off.

So not only do we have abundant deals, but these nicely illustrate the different reasons to securitise. Arval is raising standalone subsidiary funding, Hampshire Trust is shedding assets, Waterfall is taking out a forward flow with a non-bank, OWS is levering a much-loved and repeatedly securitised legacy porfolio, LendInvest is diversifying its product mix, JPM and Goldman are doing old-school principal trading, Santander is achieving capital relief.

There’s clearly some caution around senior placement, with several deals announced with protection or preplacement at the ready — €375m of the €520m senior notes in Lugo Funding, One William Street’s financing of the Miravet/Castillo/CataluynaCaixa portfolio were already spoken for, Enpal’s Golden Ray 1 had €100m of protection, Santander’s Consumo 7 had the €1.038bn senior tranche entirely preplaced (UniCredit has a JLM mandate for class A only, so look there first I guess?), and Waterfall Asset Management’s Citadel 2024-1 had £70m of “lead-affiliated protected interest” in place.

Derisking the senior placement doesn’t necessarily imply a lack of overall senior demand.

Large ticket senior investors can take longer to come into a book, senior bonds are so much larger than the rest of the stack, and it’s mission-critical in a way that mezz placement is not. Mezz demand has generally been very robust, but even if it isn’t, an issuer can widen out a mezz tranche representing 5% of a deal without blowing up the economics of the transaction. If the senior book fails to build, the deal is pulled.

The diversity of deal purposes, structures and sponsors though seems to be sending pricing in all directions. Looking at the generic spreads from BofA’s research team, you’d see UK BTL and non-conforming seniors 2bps tighter over the last month, from 80bps to 78bps in BTL and 85bps to 83bps in non-conform — nothing to see here.

But if you actually look at the deals on screen, it’s a more mixed picture. Hampshire Trust’s seniors, in Winchester Funding No. 1 were talked in the low 90s, and set to price at 89bps.

This is outside Enra’s Elstree Funding No. 5 (85bps), which priced on October 9 with a mixed pool including second lien (which should, in theory, push spreads wider), and it is also outside LendInvest’s Mortimer-MIX, whose inclusion of high loan-to-income owner-occupied mortgages should also (in theory) push it slightly wider than the previous Mortimer BTL-only deals. JP Morgan’s Pierpont 2024-1, which mixed LendInvest BTL mortgages with MT Finance BTL mortgages, managed 84bps.

The widest of the UK transactions is Citadel 2024-1, the Waterfall-sponsored second lien-only pool originated by Optimum Credit, which is set to come at 102bps-103bps from 110bps area IPTs and 105bps guidance — a decent way back of the other specialist lenders.

There hasn’t been a second-lien only transaction since Together in January, so there are no easy primary comps — Pepper, which usually funds its seconds through the Castell shelf, was last seen in October 2023 and has been selling them to Waterfall instead.

Though, on reflection — the Citadel collateral is much spicier than the Castell deals. The last Castell had original LTV of 63.76%, including first lien, while Citadel is 82.99%. The Citadel loans yield 11.07%, rather than 8.58%. All this in a more aggressive, though less levered, deal structure (1.5x step-ups, rather than 2x as is usual in a seconds deal)….so with that in mind, being less than 20bps back of prime specialist BTL looks rather good.

The prudent issuer, one assumes, wishes to get out ahead of the US election next week, though the even more prudent issuer probably wouldn’t have left it until the last week, but there we go. Deal timings are an imperfect art. The direct read-across for European securitisation is limited, whichever way it goes, but there’s headline risk in spades. A contested result with lawsuits, recounts and, uh, “tensions” is going to generate a lot of noise and potential volatility, and really, if you don’t need to be in market over the period, why would you?

The grey skies of northern Europe formed the forbidding backdrop to one of the most hotly anticipated securitisations of the last few years, The First Public Solar Securitisation in Europe.

The deal is Enpal’s Golden Ray 1, a €245m STS Green German Solar Loan ABS. Enpal is a fast-growing tech unicorn offering integrated solar and renewable energy installations and leasing, and it’s been widely tipped as the most likely issuer to break open the public market, having already raised more than €5bn in private solar asset-backed financing from banks and funds.

Solar and renewable securitisation has been an area of market excitement for several years. 9fin discussed the potential for the market to reach €150bn back in 2022, and the general interest in the market earlier that year. Besides Enpal, other private solar ABS transactions in Europe include deals for Perfecta Energia in Spain, and a commercial solar deal for Powen Group.

Even ignoring the solar element, though, this is a complex and challenging deal. Let’s start with the collateral. Enpal has been originating leases for several years, but loans only since last year — and these are 25 year agreements. There’s no historic track record to assess how these will perform, either in respect of credit or prepayment.

It’s nigh-on impossible for a lender to repossess a rooftop solar installation or rip out a home battery unit on non-payment, so there is no real security in the sense of a home mortgage or an auto loan. Strip away the solar part, and you have a 25 year unsecured loan, prepayable at will, a product that essentially doesn’t exist in the wild.

From that unusual starting point, several equally unusual deal features flow. To fund long term loans, the structure needs to look a lot like an RMBS. If you’ll permit a small lap of honour, we wrote in late 2022:

“Solar ABS fits in a sort of mid-ground between RMBS and ABS, from both a structural and a credit perspective.

Clearly the equipment is fitted to a home, so prepayment rates are connected somewhat to housing market activity (you can’t take it with you when you move), while credit performance is also more mortgage-like (partly because it tends to be prime-type borrowers who are homeowners).

Solar loans should be long-dated (to match the payback from the equipment), so deal structures will have to be more RMBS-like, with call options built in so the European securitisation market’s preferred 1-5 year tenors can accommodate the product. The products are likely to have longer fixed rate periods than most European mortgages, opening the way to structuring long tenor insurance-friendly tranches alongside classic short-dated floating ABS. Unlike a classic ABS, there’s not necessarily a ton of excess spread in the deals, so techniques like “Yield Supplement Overcollateralisation” (essentially harvesting a bit of principal to juice interest) might be required in term deals.”

We don’t have the long-dated tranche or the YSO, but there’s very little excess spread at closing (KBRA models just 0.8%), so there’s not much room for meaningful step-ups to incentivise the necessary calls. Instead of a meaty step, there’s an interest diversion mechanism to switch off payments to the retained notes and pay down principal faster.

Given the long-dated fixed rates and uncertain prepayment behaviour, the hedging is also considerably more complex than a standard asset-backed deal, combining a banded balance-guaranteed swap, looking to the lower of two amortisation curves and floored at the note balance, as well as a 10 year interest rate floor on €49m notional.

All debut deals are the special children of the deal team, but this is quite the leap.

Some debuts are like the “first second-lien only front book Irish RMBS since 2008”, but that kind of thing is really just another RMBS, not the opening of a market for totally untried collateral.

To underline the uncertainty around the collateral here, Enpal offers two comps to consider prepayment speed — Santander’s unsecured consumer deals, at 14-18%, AND ING’s German Lion RMBS, at around 5%, while noting also that its loans have so far seen extremely rapid prepayments right at the beginning of the term of the loan (customers buy the solar installation with the financing, then prepay as soon as they’re happy with the equipment), flattening out to more normal levels after five months or so.

It’s also commissioned two separate proxy studies from German credit agency SCHUFA, proxying existing SCHUFA performance data against Enpal’s loan book to assess creditworthiness.

It’s also pretty unusual to see a front book securitisation in a jurisdiction where triple-A is possible structuring senior notes rated below triple-A level (Aa3/AA with Moody’s and KBRA). There is a preplaced triple-A, but this rating comes thanks to a European Investment Fund guarantee, not the deal credit enhancement. Perhaps the supranational support (EIB has earmarked €100m to support Enpal, though it isn’t clear if it’s through this deal) removed the need for the YSO, pushing the liability stack below asset spreads.

The complexities notwithstanding, the market apparently loves it at the price. The unguaranteed A2 notes were talked at 100bps area as of Wednesday, then tightened to 90bps on a 2.6x book by Thursday afternoon — so clearly a bit of price discovery is occurring. Down the stack the coverage is 8.2x and 4.8x for the B and C notes, so expect big moves from the mezz talk as well.

It’s a genuinely landmark trade, and if anything, the complexity of the collateral should make the victory lap from the issuer, arranger Citi, and bookrunners Barclays, Bank of America, and Credit Agricole, all the more satisfying.

Back in the heady days of 2018, I had the pleasure of a reporting trip to Bali (pretty rough, right?), where I was covering the annual IMF meetings for my old mag.

One bright and early morning, the talk was all about the African Development Bank's Room2Run securitization, the first risk transfer deal with a multilateral development bank. Mariner Investment Management provided capital relief against a portfolio of African infrastructure lending, thereby reloading capital capacity at the lender. Here’s an excellent rundown on the transaction from Risk Control.

In Bali, all the deal counterparties were assembled for a presentation on the deal and prospects for MDB risk transfer. More significantly, or so it seemed, the venue was standing room only, and treasurers and funding teams from other development institutions were assiduously taking notes. Mariner itself (the SRT investing team later spun out as Newmarket Capital) were excited to build out a new source of risk transfer product, aligned with their own expertise and approach; arranger Mizuho enthusiastically pitched other MDBs deals.

But subsequent dealflow was non-existent, until last week! The latest round of IMF meetings saw IDB Invest announce Scaling4Impact, with Newmarket once again as counterparty (joined this time by Axis and Axa in a senior mezzanine position).

To be fair, the hiatus in supply had something to do with the pandemic. Public credit institutions swung into high gear to cope with the effects of Covid, refocusing concessional lending and directing vast new support programmes to cushion the impact of the pandemic on individuals and corporates.

The obstacles to executing SRT deals are typically organizational, not a function of market pricing or capital availability. They require joining up C-suite to legal to credit to risk to treasury to origination to structuring and getting everyone to work together. This is hard enough in a private sector bank, but might be harder still in an MDB, especially when such an institution is in firefighting mode.

The role of public institutions in SRT markets is more typically as investors, rather than issuers. Even in Room2Run, the European Commission took down the senior mezz. The EIB Group's European Investment Fund unit retains a dominant position in hedging SME portfolios for Europe's smaller banks, and doing an EIF deal can be a useful stepping stone to a more regular private sector presence as SRT issuer. The British Business Bank does structured guarantees, the International Finance Corporation (the World Bank Group's private sector-focused unit) does deals (especially in emerging markets like Mexico, Poland and Brazil), while EBRD is also active, doing deals in Greece, Croatia, and Poland.

A non-trivial proportion of these trades are with local subsidiaries of Santander (the arranger on Scaling4Impact), but that is partly because Santander has an absolute ton of local EM subsidiaries and a keen awareness of the benefits of securitization for risk transfer.

MDBs have different motivations from private sector banks. While capital resources might be more plentiful, capital treatment is very different, and the kind of capital is also different. MDB credit ratings rest in part on callable capital — a commitment from member countries to pay in to support lending — but the institutions generally don’t want to call it. If they want to expand lending on the existing capital base, then, risk transfer is helpful.

The largest risk transfer issuers worldwide by a long way aren’t banks and aren’t subject to bank regulation. There are Basel-like elements in the Federal Housing Finance Agency’s capital rules for the Fannie Mae and Freddie Mac, but it’s a bespoke regime for these two institutions. That hasn’t stopped them issuing more than $50bn referencing $2trn of mortgages though!

The main motivation for an MDB to issue comes from a desire to maintain ratings, and in this respect, the gap in issuance between 2018 and today has been helpful. The rating agencies now have a more developed approach to incorporating securitisation benefits, prompted in part by a push from the AfDB’s deal.

Doing a deal with an MDB comes with a lot more hype than the closing of a private bank SRT trade; Santander's veteran SRT structuring team were advisors on the Scaling4Impact transaction, but it was Ana Botín, chief executive and executive chair of the bank, that took the lap of honour in Washington DC unveiling the deal.

The event was (of course) timed to coincide with the development bank jamboree that is the IMF Annual Meetings, and it's supposed to be the first stage in IDB Invest's new "originate to share" business model.

The IMF/World Bank meetings are basically all about ways to use public money to unlock private capital flows; using a publicly-owned lender like IDB Invest (an arm of the Inter-American Development Bank focused on lending to the private sector) to crowd in what's effectively equity capital from private investors seems like a good fit.

MDB lending is also not necessarily at market rates (what would be the point if it was?) or on market terms. That's a problem when it comes to distributing risk by conventional means, but the SRT structure sidesteps the problem, severing loan spread from the cost of protection.

On the other hand, development bank lending is often large ticket, lumpy infra projects, perhaps at stages where private money has yet to come in, so underwriting these deals isn't easy. SRT investors that lean heavily on the law of large numbers and prefer granular SME and mortgage pool won't find these deals a comfortable proposition. The Newmarket team, though, have a strong background in infrastructure underwriting, and expertise to go line-by-line through a deal like this.

Perhaps this time others will follow more quickly. My old shop published an interview with European Bank for Reconstruction and Development president who said EBRD was studying the structure.

The same IMF meetings, though, produced a warning shot in the Fund's influential financial stability report, pointing out the risks that the SRT market could return risk to the banking system via leverage provided to SRT tranches.

Repo leverage on SRT deals comes with a hefty haircut (and banks generally can't lever their own deals) but the Fund is right that it partly reconnects banks to the equity risk in other bank portfolios. On the other hand, have you looked at bank stocks lately? How much leverage can a hedge fund get from its prime brokers on a portfolio of bank equity? Wait til they find out that bank ECM desks backstop rights issues for other, struggling banks!

The Fund’s worries have apparently been enough to persuade the editorial board at Bloomberg that Something Must Be Done, in a piece which has attracted widespread opprobrium in the SRT industry. See below for a sample.

The first howler comes in word #5….Significant Risk Transfer is what the acronym stands for, and “synthetic risk transfer” is a sure-fire indicator what follows is going to be gibberish. Are regulators all but oblivious? I mean, they pre-approve the deals, they get deal submissions of hundreds of pages explaining each and every transaction, so unless they’re filing these straight in the bin I’d assume they’re quite aware of the market.

I could go on but it’s like shooting fish in a barrel. If you want further righteous indignation, the Bank Policy Institute has written a good response!

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