Lesser spotted German credit cards

More AI worries for CLOs, PremFina’s funding boost, Advanzia kick starts ABS market

In collaboration with TMF, our headline awards sponsor, GlobalCapital is running a survey on the trade finance market. It’s nine questions only and can be completed via this link.

Transcript

SPEAKER_02 0:06

Hello and welcome to another five stream. I'm George Smith, Liverpool Securitization Editor, and we have a full house this week, Tom Hall on ABS and Thomas Hopkins on CLOs. Although I say full house, we haven't had a full house of weekly stories this week, Thomas, because you had a a day off. But has it has that interrupted your ability to keep track of what's going on in the CLO market?

SPEAKER_01 0:30

Well, you know, I've done my best to stay checked in, at least to some extent, George, despite my my lovely day yesterday, you know, sort of having lunch instead of uh you know writing a weekly, which I uh very much enjoyed, I will have to say. But uh yeah, we still we've seen a you know we've seen a little bit of activity kind of over the course of this week. Not massive yet, I will say, but again, as as always, we tend to record these podcasts on Friday mornings and the you know the European CLO market, you know, we you often see a lot of deals pricing on Friday afternoons, so we may yet see some deals. I mean, I know certainly but before the Easter break on the Thursday when we were recording, uh we you know, we recorded and then we sort of had three deals come in directly before the Easter break, uh, which is not necessarily expected directly ahead of Easter, so I think we may well see a few deals later today. But I think the one deal to really sort of draw attention to this week, which sort of priced towards the end of the day yesterday, uh, was Penta CLO22. Uh it's obviously a partners group deal. And yeah, I mean that's uh sort of come in with spreads sort of on the triple A's of um around 130 basis points, which basically has become the new real well, we've returned to the old reality of AAA's consistently being around 130 basis points, which had existed for about you know almost 18 months, and then we have a wave of sort of spread tightening earlier in the year, but since the Iran war we've gone going back to that old reality. Um so yeah, we have seen that deal so far this week.

SPEAKER_02 1:58

Is it too early to say with the Iran war abating a little? It seems it's ha ceasefire temporarily at least, um, what impact that will have?

SPEAKER_01 2:07

Yeah, I think I think it is a little early to say. I mean, it's partly, I think, for CLOs, it really is dependent on like to what extent the Strait of Humuz stays open, basically. Because as I understand it, there's not there's still not a vast flow of traffic through the strait, and there are questions about whether, you know, sort of tankers are going to be charged by Iran for going through there. Uh, and I think obviously, you know, with certainly what's been happening with conflict kind of continuing to some extent in Lebanon this week, there are questions about, you know, whether or not this conflict is going to be resolved, whether or not the ceasefire is going to continue after the two weeks. Um, so I mean I think you know the market is probably quite positive about any progress being made towards resolving the war. But effectively, the main issue for CLOs is rising energy prices. And if the Strait of Homers doesn't really properly reopen and r return to levels that we would have seen pre-war, that's still kind of going to be an issue. And I, you know, what it would certainly seem from you know the the deal this week in terms of where the AAA's were and things, I think investors are, you know, probably still pricing in, you know, a little bit of risk that this conflict is just going to continue, really.

SPEAKER_02 3:21

Yeah, I mean, it was an interesting deal. We we don't think we've covered it yet or spoken to anyone on it because you you were off yesterday, but um it had this delayed issuance on the on the single bees, which has been a a charge that's been pretty tough to place, or at least has widened a lot, hasn't it?

SPEAKER_01 3:39

It has, yeah. I mean we've seen discount margins kind of go north of a thousand basis points in in some cases. And you know, when you're getting to that stage, it does really, even though, even though the single bees are quite a small portion of your capital stack, it does start to affect the kind of economics of the CLO, you know, in a way that your arbitrage really does become quite unfavorable. I mean, what we've seen managers do quite a lot since the war is just use their captive equity funds to be the single B note holders, so the captive equity fund effectively buys the CLO notes and then holds them. And uh that can actually be reasonably accretive if you know if you've got discount margin north of 900 basis points, which is, you know, granted, it's sort of splitting the difference here because you know, you in terms of you know where you actually sort of price the thing, because it still has to be priced in some ways in line with what the market would be doing. But you know, it it can be quite attractive for captive equity funds to to hold these notes.

SPEAKER_02 4:37

Does that get you a better return than the actual equity?

SPEAKER_01 4:40

It it might well do, George, given what the arbitrage has been doing. So I think in this in this environment it might be doubly attractive. Um it's not really what captive equity funds are designed to do. Well, it's another way of using a captive equity fund to continue to print deals despite market conditions not really being all that conducive to printing a new CLO.

SPEAKER_02 5:00

One day the captive equity funds will be buying the double A's and that'll just be have the captive equity fund buy the entire capital stack, you know, that'd be.

SPEAKER_01 5:11

But yes, um, so you know, some activity going on in the CLO market, but uh so far this week a little bit a little bit slower, but as I say, that is sort of to be confirmed because we might see a few deals kind of come in at the end of the day today.

SPEAKER_02 5:24

Yeah, well, I'll be interested to to keep an eye on that for next week and we can return to the topic. One other thing I thought I'd I'd note myself, um, although we also haven't yet written about this, I don't know if you saw on Wednesday Anthropic announced it had a an AI that was had discovered vulnerabilities in every major operating system and browser and was too dangerous for public release. So they've launched a project Glasswing, which is only making it available to sort of a select ten firms or so, so that they can like quickly patch all the vulnerabilities that the AI has identified, which is more than a thousand, which to me is like an absolutely massive step change in the pace of AI progress to the point where like AI is basically superhuman when it comes to coding and I mean imagine this will accelerate the software problems.

SPEAKER_01 6:19

I think yes. I mean, if if it's as good as they say it is, you know, just to inject some healthy AI skepticism from me, yeah. But if it is as good as they say it is, I mean that is yeah, I think probably going to sort of further entrench the issues in the software sector that we've been seeing for for CLOs. I mean, this is inequities as well, but you know, in in terms of CLOs. I think it's at the moment it's it's very difficult for uh managers uh managers to evaluate this risk comprehensively, but also for investors to price in the risk of AI because uh as you point out, George, it's changing so fast that uh trying to predict exactly which companies will and won't be affected and which types of software companies are likely to be more resilient or less resilient to AI is very difficult if every few weeks, almost it seems at the moment, a new and more advanced model can be released. And you know, ultimately in with CLOs, you are thinking, you're trying to think over a slightly longer term horizon. You know, you want to sort of take a position in a loan and then you know have at least some confidence that you know that that company is going to remain sort of stable, I s as I say, over a kind of multi-year horizon. You are trying to think in those terms in a way, and the AI is making that very complicated with software companies, which make up a large portion of the leveraged loan market. It's not easy just to say I'm not going to invest in software at all. You know, they they they're a significant sector.

SPEAKER_02 7:51

Yes, yes. Well, it is good to have a bit of skepticism with these things. Um, not that I often deliver it because I'm I mean, I think this is like almost the news of the century, and it's had like zero coverage from mainstream publications that I've seen. Like, you know, it's got an odd article filed away in the tech section, but like I opened the news and on the m Thursday morning, I was expecting like top story AI too dangerous for release has uh has been created. Um but it was nowhere to be seen. And I don't know, it doesn't seem like there's been like a lot of market stories on it either, or a lot of price movement. But anyway, we should we should move on to to the ABS market and uh and I should stop stop worrying everyone with my with my doom bungering.

SPEAKER_03 8:41

So one story that you wrote about this week, George, which I thought was interesting, was around the uh waterfall increasing its backing for uh Prem Fina. You know, the the kind of uh insurance premium business is is one that I've I've only written about with you know premium credit is the only you know really big issuer. But I I thought that was quite an interesting bit of news. Do you want to explain uh what's been going on there?

SPEAKER_02 9:05

Yeah, I just I wrote about this because it is quite an interesting market, as you say. So Prem Fina is the kind of challenger to the sort of two big uh lenders in this market. One is premium credit, which has its established ABS shelf, you know, it's sort of how many issuances now, probably like around 10 as as a longstanding and well-known shelf and well-liked. And it's sort of like you know, they they pay the annual premium up front and then allow you to pay it back in monthly installments, basically. So if you need to spread your insurance payments over time, that's how you can do it. Most insurance brokers will offer you uh lending from one of them. Anyway, uh Premier had a agreed a warehouse with HSBC and Waterfall last year, and now Waterfall's increased its commitment to the to the warehouse. They were pretty cagey with the actual details, they didn't really answer my questions on them. So we can't tell you exactly what what the capital structure looks like now, but I I think you know we do we do think HSBC is senior and waterfall is in the Maz with some kind of junior junior note from Prem Fina. I think what's interesting about this market though is also last year in summer, Close Brothers sort of shut down its personal lending business um to focus on commercial. Uh so there's this massive gap in the market now, which Prem Fina has been has been closing up and you know it doubles it's doubled its limbic in the last year and is growing at a pretty rapid rate as well. And then the other element to this is the kind of regulatory side. So, you know, there's some parallels between the motor finance um scandal that we've written extensively about and the in the premium financing market, um, in that they're sort of intermediated uh by brokers and brokers are paid or commission often. I think some people are sort of speculating that there could be some kind of sort of similar claims in the in the insurance premium market as there were in the motor finance market, but the FCA held a held an sort of report that they started working in 2024 and finished in February, basically saying like current rules are fine and there are significant differences between the two markets. In particular, there's not like a discretionary commission element, so the brokers don't have the the opportunity to like set the rates and therefore increase their commission, which was the real sort of thing that caused the problem in the motorfinance market. So it's a sort of like still an interesting regulatory time, and the FCA did say like we'll continue to kind of monitor this and and consumer duty is something we're we're hot on.

SPEAKER_01 11:46

Right. Well, I think sort of moving on to uh you know our other reporters' coverage of the ABS market this week. Tom, um, you know, you've been uh you've been very busy. You know, what have you been writing about this week?

SPEAKER_03 11:59

Yeah, so my my sort of weekly story's been rapidly evolving as as often happens when uh you're you're writing with a a shorter week from the bank holiday. So I think uh we didn't get any new deals on Tuesday, so I initially thought maybe I I wouldn't have loads to write about because obviously it it takes you know sort of the area of five working days to execute a deal. So you know, you you obviously you you don't know whether you're gonna see loads of deals go on screen towards the end of the week, uh but equally it it can make sense because you you get investors' attention and you're kind of reserving your spot at the front of the queue for the next week. Uh and that is what we ended up seeing. So um, you know, on on Wednesday we had this advance your bank deal, which uh has been very interesting actually because it's um it's what looks like the first uh public German credit card ABS, and it's also the the first German ABS uh to use a master trust structure. And then also on Thursday we we had more uh sort of traditional deals from regular issuers. We had Bank 11 with its um German auto abs uh and Bank 11's always um it's it's sort of a classic name for opening up the market. Uh it's it was you know the the first deal after the summer of both uh 2024 and 2025, so they're they're sort of a classic name uh you'd expect. And we also saw uh Oodle uh coming up with uh another uh UK auto abs. So we we've I've sort of switched the uh the narrative from the story of uh not not much happening to actually uh it has ended up being uh quite a busy week for ABS.

SPEAKER_01 13:41

That's rather an about turn for your story, than I think. Um just you know, thinking about you know where demand is moving and things, you know, does it feel like demand has kind of recovered from before the Easter weekend?

SPEAKER_03 13:54

Yeah, so it it was kind of an interesting time in the the kind of fortnight uh before the Easter weekend, because we only had two deals, um, one from MediaBanker and the other from Soccer and Bank. I think I I had a few sort of bankers kind of bringing up, you know, looking at Soccer and Bank. It it obviously didn't go badly, because I mean it it priced and it you know, and it was already marketing during quite a difficult week. Uh but equally it it felt like you know demand obviously wasn't overwhelming for that deal. And you know, it was also quite an interesting deal because I mean it it was you know there were three French banks on the deal, and I I heard from people outside the deal that it sounded like you know they they were generally targeting just mostly the uh the sort of French investor base because uh it sort of made a logical sense, uh just given that you know where kind of general uh investor demand was kind of at towards you know the the end of the the week before Easter. But yeah, so I I've had a few sort of people mention that and saying you know we we don't know exactly where demand is, and and the boring answer is is kind of we still don't know up to now. We we won't really know until next week once books open. Uh but equally I think the fact that you know Advancia feels comfortable bringing out such a sort of you know niche deal uh is definitely more on the the esoteric side. That's you know a really strong sign for the market that they've you know they've obviously been speaking to investors and feel that you know there there's going to be enough demand to to soak up this deal. And you know, equally also with Bank 11 and Oodle, you know, they're they have more sort of established investor bases. They're you know they're they're probably I think for both of them it it must be at least their their tenth securitisations. Uh so you know you you'd expect those deals to you know be be a bit easier to execute uh obviously than a a debut. But equally that you know nothing is nothing's promised in you know this kind of period of of geopolitical uncertainty. And you know, we we've spoken a little bit about the the sort of ceasefire agreement and opening of the the Strait of Hamoose. Uh but you know I I think that that's clearly positive for the market, but equally a lot of people are kind of saying, you know, they they don't know how sort of permanent that is or how how strong these agreements are, and you know it it I think it it's it's shaping up to be, you know, it doesn't look like that conflict is gonna be just sort of wrapped up in the next couple weeks and then we can move on and we can go back to uh super tight spreads. It feels like there is gonna be, you know, some uh sort of long-term lingering in in some form. But yeah, I I think it it does feel like the the market's definitely in a better place. Part of that is is from you know, general cyclical stuff of it's just investors generally are a bit more fatigued around the the kind of Easter weekend and then it starts uh picking back up afterwards, but you know, also it's it's the kind of easing of the the geopolitical news.

SPEAKER_01 16:58

Yes, of course. And do you think we're going to see more debut deals in the next few weeks?

SPEAKER_03 17:02

Yeah, so I mean it it's interesting. I mean it it's clearly a good thing, you know, that the the opening deal after Easter weekend is you know a debut. That alone doesn't imply that we're we're gonna have you know a flurry of deals. Uh you know, I th I think the the first quarter's been a really strong year for uh strong quarter uh for debuts. You know, we we've had Propel and then City also brought out uh its Montgomery Square debut, and we obviously also had you know the data center debuts from Yonder and Edge Connects. So there's been you know plenty of activity from new issuers. From speaking to bankers, it it does feel like there is going to be a mix, and there there are a few more uh kind of esoteric and debut deals uh in the pipeline. Um and it is looking like you know the the situation uh kind of geopolitically is stable enough that you could bring out a debut deal, and as always happens with you know these debut deals, it's about sort of selling the story to investors about who you know the the issuer is, and it's you know it always takes a lot longer uh with the the debut. But um, yeah, I I think we we could see uh a few more, but equally I I think uh traditional ABS is is going to be dominating, and as as uh I think I put in the story a banker sort of said to me, you know, obviously esoterics are are gonna be a lot rarer uh as the name implies.

SPEAKER_01 18:29

Of course. And uh yeah, for anyone who would like to read Tom's weekly, uh it is called Advancer Revives Confidence in ABS with German credit card first. And that is obviously on uh the global capital website for subscribers. Uh, but then to sort of pivot to something that is available, you know, regardless of whether or not you're a subscriber. Uh Tom, you've also written a Tuesday view for Global Capital this week. Do you want to sort of talk us through a little bit of what that was about?

SPEAKER_03 18:57

Uh yeah, so this was on uh you know it's a it's another uh market financial solution story. It's it's kind of the gift that keeps on giving uh for journalists. But I I thought this was quite a good time for a sort of story about how really what what are the lessons that should be learned uh from this. And the the reason I've done the story only sort of you know a bit over a month after the fall of MFS is uh because I I think there is still quite a lot that's not exactly known about the fall and why it happened. And obviously, I think you need to know sort of exactly why it happened when it comes to you know changing any sort of ABS funding line policies. You need to know why it fell so that you can change them to you know prevent similar situations in the future. Um and I think you know a lot of credit actually should be given to these banks because a lot of them haven't come out with any knee-jerk reactions. Because I think obviously you know you you'll have shareholders and members who you want to convince that if if you've been exposed to MFS that you're not gonna let this happen uh in the future. So it's it's clearly tempting uh to come out as quickly as possible and say, this is what we're gonna do, you know, this is how we're changing things. But actually, I think, you know, although I write in the article that there there's obviously you know been speculation from other sort of media that you know they're they're in early stages of changing how they do sort of warehouse lending. I mean they they are you know all these banks are saying we're still you know evaluating the situation and uh you know trying to figure out exactly how things uh sort of change going forward. Uh I I think that that is sort of the right response. Um I mean I I use uh towards the end of the story, I I use kind of this uh this Mark Twain quote about uh you know the cat that sits on the hot stove, uh it won't sit on a hot stove again, but also you know it won't sit on a cold stove either. And the the basically the the point of bringing that up was I was saying if you know we we do get a kind of knee-jerk reaction and you know banks sort of say, all right, I'm just gonna withdraw from uh lending to smaller sort of companies, and you know that that could lead to funding to try out for you know SME lenders who you know a lot of them really rely on these bank funding lines. You know, that that could you know ultimately be a really great shame if we find out more about the fall of NFS and it it turns out it was completely idiosyncratic and uh there there weren't exactly the these risks that bleed into uh other uh sort of specialist lenders.

SPEAKER_01 21:43

Well, thank you, Tom. And that story is called Banks Must Learn Right Lessons from Fall of Market Financial Solutions. And as I say, that is available um for you know subscribers and non-subscribers uh on our website. It's a GCV. Um I think that's all we're going to have time for this.

SPEAKER_02 22:00

We just have one one final thing to mention, which is that are running a survey at the moment on the trade receivables securitization market in collaboration with our awards sponsor, TMF. And I'll put the link for that in the blurb for the podcast so you can uh check it out there and and hopefully fill it in. Um otherwise, yes, that is all we have time for. So it is goodbye from us. Goodbye. Goodbye.