The lease you can do

Leasing ABS thrives, private credit worries and CLOs widen

Transcript

SPEAKER_01 0:07

Hello and welcome to another five minutes. I'm George Smith, Global Capital Securitization Editor. And this week I have the pleasure of the company of Tom Hall, our European ABS reporter. And and only Tom Hall. Hello.

SPEAKER_00 0:21

Hello, George. Yes, it's a tragedy when the the trio's not together, but alas we we must keep going.

SPEAKER_01 0:27

Hopefully Thomas is is enjoying his holidays and we will endeavour to at least give CLOs a little word at the end if we can. But let's start seeing as we're as we're both here with the ABS market. Has I mean, you know, we talked last week about how things were a little bit disrupted after the US Israeli strikes on Iran. But the market did seem to kind of come through last week and and this week has that continued?

SPEAKER_00 0:53

Yeah. So there was, you know, a slowdown on Monday, but then, you know, as as you'll remember on on Monday night, we had these, you know, sort of trumpet out this statement, sort of saying that it feels like you know, the the Iran strikes are sort of get it getting close to the end, and then on Tuesday, you know, that that was clear the the best day of the week, and everyone was just coming out. I think we had you know three three new issues that day. We had Porsche with an Austrian auto. We had Pepper coming out with its second charge deal, and we also had New Day with its uh partnership uh deal. So I mean it's it's been a super busy week. I think we had about 10 deals uh at one point in the pipeline. So yeah, very interesting stuff.

SPEAKER_01 1:39

Yeah, I guess there's a there's a lot to be done between now and and Easter, and so there's there's no time to lose a minute if the market's open.

SPEAKER_00 1:48

Yeah, absolutely. And and that's the main thing I keep hearing is that you know we we've got this really heavy pipeline. And so I think it it's very sort of you know, you have to be very careful with your timing. And you know, I I think there's you know, certain issues obviously played it really well. Of you know, we had Socgen and Santander, they they put deals on screens, you know, to towards the end of last week, and they obviously took on the extra weekend risk of you know marketing a deal over the weekend during uncertain times, but it obviously worked out very well for them and they ended up pricey on Thursday. I think everyone was pricey on the Thursday, basically. We we also had you know Enra and Orcs Money, though those trades that were you know slightly delayed from the you know Iran conflict, uh you know they they all got in on Thursday and they they've all gotten done now. So uh yeah.

SPEAKER_01 2:38

Yes, but despite the uh action packed primary market, you've actually read in your weekly about a deal, the priced last week.

SPEAKER_00 2:46

Yeah, so I mean the this was sort of it's a very interesting deal, and it's also a very interesting sector. So it's from uh you know a UK specialist leasing firm called Propel, and it's a uh equipment leasing debut. And you know, it's interesting for a few reasons. I mean, one of them is that you know it's it's a mix of uh soft and hard assets, which uh is quite interesting. It's something that we we haven't really seen yet in uh public leasing. I'm sure we'll we'll kind of get into uh exactly why that's interesting. But yeah, it's it's been a very interesting uh deal.

SPEAKER_01 3:21

Yeah, so at a kind of high level, leasing is an asset club that a lot of people are very excited about. You hear a lot of enthusiasm, a lot of people are like, we really like leasing, we're putting cash into leasing, leasing's gonna be big. What are the reasons for that?

SPEAKER_00 3:35

Yeah, so I think the the main reason has been sort of this bank retrenchment from uh leasing. It it seems to be that you know banks used to sort of be dominating, you know, providing leasing equipment, uh SMEs, but they're you know, obviously high risk-weighted assets, and you know, they they've sort of been you know withdrawing a little bit from that sector, and that's where you know a lot of specialist lenders have you know jumped in to fill that gap. And now, you know, we're we're sort of seeing them building up large enough portfolios and the uh you know market is kind of developing uh a lot more where you know we're we're starting to see them bring out ABS trades. And you know, with the the propel, I think that's quite an interesting one because you know that that company is seeing really massive growth since 2020. I think its book has grown by about 400% since 2020, according to its website. So I mean they they've you know said they they've had a large enough book to uh securitize it for a little while, but they were you know really just waiting until they had you know a long period of historical data and you know obviously the the market is maturing a lot more. So that was I think their main incentive for waiting until now to bring out a deal. Um but yeah, as as as we're seeing the you know the market uh maturing, it makes it easier, I think, for players to enter.

SPEAKER_01 5:03

Yeah, I guess the interesting thing is this is kind of from a bank perspective, as you say, this used to be a bank dominated market. I also as you say, it's kind of hard at high RWA lending, but banks can do high RWA lending if it comes with some kind of ancillary business or or something. But right now, you know, if you lend to an SME, that's kind of it, like there's not there's not much more that comes of that. So it does seem that there's this trend to kind of retreat up the capital structure, maybe provide senior funding, have a sort of buffer of private capital or a specialist lender's capital between you and and the first loss, I guess. And yeah, this is this is clearly resulting in a flourishing market. So as well as Propel, we had a B Quip um with their debut in the Netherlands at the end of last year, and we've had a few others over recent years, I think Hadock and Helterman and and LeaseCom last year kind of spring to mind. But that there are certain aspects to this Propel deal, which was called Velocity 2026-1, um, that you picked out as kind of innovative or or new, right?

SPEAKER_00 6:08

Yeah, I mean I think the the thing as you mentioned with the the leasing sector is it's not really super homogenous. All these different lenders they have their own niches, whether it's you know, Hilterman obviously focuses on autos lending to or auto leases uh to SMEs. And then you have like Hadoc, which specializes in you know heavy equipment, uh BQI also in heavy equipment like cranes and you know and then you have LeaseCom that's like you know focuses on soft assets like tech assets, and I think you know Propel does a little bit of both. It it you know in the image I I used uh some agricultural equipment that that would be more in the the kind of heavy assets they provide leases for, but they also you know have more kind of tech focus like laptops and you know leases in in that sort of form. And you know, it's quite a different form of you know you when you're looking at the risk depending on what sort of type of assets you end, because you know, heavy assets, I think what one of the the things that was explained to me is that if it's got wheels, sometimes it it can be easier to move around when it comes to recovering, you know, in the case that you have to have recoveries. So that that's quite an interesting thing when you're sort of looking at the the credit profiles of these deals.

SPEAKER_01 7:29

Yeah, I mean is that good or bad having wheels is that it's kind of gone off to gone off to Scotland or or further afield and you're in London trying to trying to get it back, or is it that you know you turn up, you get it back, and then you can take it home with you?

SPEAKER_00 7:43

I think it's generally seen as a a better thing if if it's got wheels, you know. I suppose it depends on you know exactly what the the leases are for, and you know, it it depends on how you know how heavy the tech is or w and how far away it is. But yeah, I think uh it's it's definitely, you know, they're kind of quite idiosyncratic and you you they require a lot of investor education each time you see a new leasing trade go on screen.

SPEAKER_01 8:12

Yeah, I suppose you have a a kind of difference in in the in the ten of which these things are useful for, right? Like people need a new phone seemingly every two years, but I don't know how often you need a new you need a new tractor. And then do these lenders want to see this space develop then and and this to kind of become a more how how do they want this space to evolve? Is it gonna become more standardized? Are more issuers likely to kind of emerge onto the scene? Um, or is this something that you know every deal is going to remain this kind of niche play that you really need to do the work on to understand?

SPEAKER_00 8:49

Yeah, I mean it's not super clear right now whether I mean obviously we yeah, we've got about five sort of lenders in the space right now who you know want to set up sort of regular program. They're all you know offer quite different niches. And I think the reaction every time a new one comes in of you know of Propel uh joining this week from all the other lenders is you know they they seem pretty happy, you know, even though it it is you know they're they're securitizing sort of different leases to the other lenders. It's still good for the market, uh having you know more lenders in, and you should hopefully have deeper liquidity as more investors uh sort of you know look into the sector. I mean fundamentally it's providing leases for SMEs, so it's it can be quite a good diversifier because you get you know exposure that's quite different from most sort of ABS products like you know, autos or residential mortgages are very more dependent on sort of you know consumer profiles. But yeah, so I I think it's it's definitely you know always good for the market, you know, especially when it's in its early stages where you know three out of five of the issuers have only just done uh their debut. It's definitely good to see more uh coming in, whether they're offering you know uh a product that we've kind of seen before in quite you know similar ways, or whether they're offering something that's you know kind of completely different and requires you know a bit more work to sort of you know for the rating agencies and investors to kind of get their head around it.

SPEAKER_01 10:25

Excellent. Well, this story, if you want to read it, is called Propel Adds Diversity to Maturing Equipment, releasing ABS Smart. And it's on the Global Capital website for subscribers. Tom, we're we're also in the midst of quite a busy season for conferences. I know we're off to the FT Live SRT event next week. And then you're also going to Amsterdam.

SPEAKER_00 10:50

Yes, I am. I'm going to the uh Alphi securitisation conference, and yeah, I'm look I'm very much looking forward to that. I've been writing quite quite a few stories uh this year on the Dutch market, and there's plenty of uh interesting stuff looking at that region going this year. So uh yeah, I'm I'm very much looking forward to attending.

SPEAKER_01 11:11

Yeah, well that'll be good. I was in Vienna, of course, in uh in January, and I was also at the Super Return event by Informer on Monday this week. As we record, we're recording on Friday, so I suppose that FT event I referenced will really be this week by the time you come to listen to it, and this will be last week. But if you're still with me, um I was at the ABF summit on on Monday, which was you know, I mean, I suppose it's what you'd expect was kind of dominating the conversation, um, quite a lot of sort of like how do you mitigate worries about fraud and and that sort of thing. I mean people I think were still sort of somewhat dazed by what had happened to the to the market in in the last couple of weeks, um, as we've discussed on both of our previo previous two episodes as well.

SPEAKER_00 12:01

Yeah. Well, I guess that that sort of leads on quite well to what you've been writing about in your weekly. I mean, do you want to give me a little you know rundown of what you've been writing about?

SPEAKER_01 12:11

Yeah, so I was just looking at you know what feels like quite a difficult moment for private credit as a whole. Um, you know, we we obviously talked to Thomas in previous weeks about the software sell-off and how that's affecting CLOs, and similarly, it's affecting private credit. And you know, there's been various negative headlines about retail investors pulling cash from the sector. Um, but on top of all of that, there is this growing worry about fraud, which I was just talking about. So, market financial solutions, which was a UK bridging lender, entered administration last month. At this stage, you know, it's it's pretty unclear exactly what's happened, but we can say that the CEO, Parash Raja, denies fraud. His lawyers um have given us a statement of RSW Experson saying mistakes have been made, but there's been no intention to fraud whatsoever, and Mr. Raja has not been the beneficiary of any shortfall, if any, there may be. But it doesn't stop kind of people from being worried about how do you prevent double pledging, how do you prevent fraud in general, how do you basically guard the investments that you're making in ABF and securitization structures from risks that kind of come from outside the credit risk. So, you know, investors are very kind of paid and very comfortable taking credit risk, but they also need this kind of extra guardrail of of fraud risk, and and that's something that's really kind of come into focus, I think, and sort of adding to this sense around private credit that you know there are there are things to be worried about, and there may have been some unduly lax underwriting in the space.

SPEAKER_00 13:56

Yeah. I mean, I we've definitely sort of seen, you know, some some kind of different responses in terms of how you know banks or you know, asset managers with exposures to NFS are reacting. I mean, you know, I I wrote a little bit at the start of the week around uh this this lesser from Jeffrey's where they said it's you know within their risk exposure uh that they're you know willing to accept that they're you know there can be some risks.

SPEAKER_01 14:26

Yeah, I think they said it was disappointing, but within their risk tolerance. Yeah, that those things.

SPEAKER_00 14:31

Yeah, I mean what what are your kind of thoughts on that, on kind of you know reactions and things that can sort of change for the market, you know, going forward?

SPEAKER_01 14:39

That is an an interesting thing to highlight. I think what's clear is like if any cases of fraud kind of are proven or or suspected, then people want those to be taken very seriously. Like it it's clearly part of the underwrite to prevent fraud. Like you can't hold your hands up and say, well, it was fraud, like nothing I could have done. Um there are things you can do, there are checks you can make, there are more things that you can do to to due diligence and investment. So I think that anyone who's thinking they can get away with that as a line, or that's gonna be a defence, an acceptable defense for the sector as a whole, is mistaken. So the question basically becomes like what can you actually do? And I mean we were talking a little bit about this on the podcast last week, but it you know, obviously you have to do more due diligence on the lender themselves. Better data clearly helps. Can you reconcile the cash flows you're actually receiving with the cash flows you thought you would receive down to the penny? I think those those are the sorts of things people are starting to look at now, and that's where the where the focus is going. What that means, I suppose, is that some asset classes might become harder to fund. So anything that pays in kind up to maturity and then gives you one lump sum payment, like UK bridging, becomes more difficult to fund because that due diligence step just becomes harder on an ongoing basis. Anything that is very short dated or turns over quickly where you can't do like line by line due diligence um becomes harder to fund. So, you know, receivables, trade receivables, that sort of thing, definitely. I wonder if that also extends similar by now pay later. I mean it remains it remains to be seen. But can you go, you know, on a on a sort of book that's turning over every month or or quicker? Like how much due diligence can you can you do on every line? I mean, maybe it's something AI can help with. I think I've written a bit about that in the past, but but those are the sorts of questions and and that's the sort of fallout from this, I think, that people are are starting to look at.

SPEAKER_00 16:45

Yeah. I mean I guess it it definitely depends on how long and I think for if you have a pick payment on, you know, a bridging loan that lasts a year or something, I suppose you you think that that you know could create more issues than maybe uh a buy now pay later one that's you know much more kind of short dated. But then again, you know, I I guess it the this is an area where you know it it's obviously much more much more difficult to uh do your due diligence than the traditional you know kind of lending sectors.

SPEAKER_01 17:18

Yeah, I mean in a way we talked about this as well, like it might just see a f like to quality like buy to let something that you really can verify, you know, you get cash flows from that, you have a loan secured on a house that you could check with the land registry and and those sorts of things just become kind of more of a an attractive asset class, I suppose. So what we might see perhaps is a little bit of cooling in this kind of quest for yield that has really driven absolutely everything tighter over the past few years, I suppose, really, since since the mini budget securitization generally has been on a pretty strong recovery trend. But we shall see.

SPEAKER_00 18:00

Absolutely. Well, that story is called Fizz of Lax ABF underwriting pile pressure on private credit. Uh and you can read that on the website. But I guess no episode of the podcast would be complete without a word about CLOs and uh as as we said, unfortunately, Thomas has been off this week. But I think George, you you've been uh trying to follow in his footsteps.

SPEAKER_01 18:26

Yeah, I've kept an eye on the CLO market. I won't pretend to do a a full Thomas impression. Um I think what can we say this week? Spreads have widened. I mean that was sort of clear at the end of last week, but I think it's very clear now that you know AAA's are back a bit and and Mes is back a bit more and single B's are are back even further, and and also manager tiering at the lower end of the structure is is coming out um more clearly. I mean Thomas wrote his weekly about this last week and also discussed it on the podcast. So I think we don't need to like labour it too much, but I do think it's becoming clear that how you play this software sell-off is gonna be a pretty like you know, it's gonna be something investors remember about managers and and a way to like choose between managers. And there's some good research from S ⁇ P that kind of shows you how much each manager has uh exposure to software, and it it goes from like almost none to about 15%. So there's quite a serious divergence. There's quite a a good opportunity to kind of choose which managers you like and position yourself as such. So it'll be interesting to see kind of how that how this tiering plays out going forward and and which managers it favours and and doesn't. With regards to kind of primary market, I think there was a deal on on Wednesday, I want to say, from Bain um via BNP. Um so primary is still open. I think it favors new issues at the moment. If you you've got a kind of spread widening, it could be temporary. If you're thinking about a reset or a refinancing, I think you'd probably sit on your hands. Um if you've got some reinvestment period to play with, like you you'd you probably hope. I mean, for one thing it depends where your spreads are, but I think it in right now you probably hope spreads would recover once they did this, you know, the the situation in Iran settles down, or by the time you know people have got their head around the software thing a bit more. You might hope to see spreads recover. I think if I was thinking about a reset I'd hold I'd hold off. Um also if you've got a few years of reinvestment period, like a lot can happen between now and then. And we've just seen spreads uh, I guess, quite high levels, and maybe more people were thinking about resets for that moment. Uh we'll see whether that's on hold now. It seems fairly kind of feasible to print new issues. I think most people are s uh of the sense that new issues can still be printed. We had four last week and one more this week so far, as we record on Friday. So yeah, that's where we are with CLOs and and Thomas will be back next week to do the the market and the and the CLO audience greater justice, I suppose.

SPEAKER_00 21:09

Well, I think you've done a pretty good job, George. But uh I'm I'm I'm sure everyone everyone will be pleased uh to have Thomas back next week.

SPEAKER_01 21:18

But uh I will be pleased, I'll be the most pleased of everyone. And and with that, we should we should stop there. Um so thank you very much for listening. That's all we've got time for, and it's goodbye from us. Goodbye, goodbye.