A mid-deal takeover

Cerberus buys Lendco, Advanzia's German credit cards, CLO resets on pause

Transcript

SPEAKER_02 0:07

Hello and welcome to another five minutes. I'm George Smith, Double Capital's Securitization Editor, and I'm joined by our CLO reporter, Thomas Hopkins, and our ABS reporter, Tom Ought to talk through an action-packed week in the markets.

SPEAKER_00 0:21

Where better than to start with ABS, Tom? What's been going on? It has been a really busy week, actually. It's been pretty packed. So I think uh I mean I think that that was sort of surprising because before the Easter weekend it it was feeling like it it might be a little bit uh sort of on the lighter side until sort of uh the start of May. But um yeah, we we've had seven deals marketing throughout the week, which is you know that's definitely on the the sort of heavier end. I think once you get past sort of four or five, you can consider that sort of quite heavy supply. But it hasn't slowed down any of the deals that have priced so far. So I mean, so far we're we're recording this early on a Friday. The one deal which I really want to mention that it's it's only just priced, but uh it's the Mercedes-Benz uh Silver Arrow deal. So it's only 500 million euros, so it's a bit smaller than their usual size, which is more in at like sort of 700 million, and it's you know smaller than the VCL and Bavarian Sky deals from the start of the year, which were closer to the sort of billion area. But uh still Mercedes managed to price it at 42 basis points and got 2.5 times coverage in the final terms, and that's like I mean, that just seems like a really, really strong result that you know those the VCLs and Bavarian skies were pricing at 42 and 43, so it seems like an early sign that you know there there is still room for for spread tightening with uh with some deals.

SPEAKER_02 1:49

Yeah, I guess there's always a bit of a spread size trade-off with these like mega prime German autos. But yeah, I mean we didn't really know where the where the levels were, right? Because we just hadn't had we just had a lot of kind of Italian and Spanish and and Finnish autos that you know always price a bit wider. So we just weren't quite sure where the where a primary print would come for a prime German auto.

SPEAKER_00 2:12

Yeah, but I mean I think there there's sort of been, you know, pe people kind of use we're using as a rule of thumb, it it felt like seniors were generally about sort of five basis points wider than before the Iran war. So I mean you you could sort of extrapolate that you'd think this would price somewhere in uh the the sort of like you know, 47 or 48, especially if they were gonna go for the usual sort of 700 million uh size. But um, yeah, I I think you know that that's obviously this has been one of the the sort of first tests of demand for quite a while. Uh and it it obviously suggests that you know investors are are very engaged and uh are kind of still sort of happy to to play in the current market. So uh that that seems like a really uh strong result.

SPEAKER_02 2:59

Yeah, well, we'll talk about the first ever German credit card ABS um in a minute, which we also touched upon last week. Um but before that there was quite an interesting deal from from Lenco. It was kind of standard issuance from their Atlas program, but midway through marketing, midway through marketing, the platform changed hands.

SPEAKER_00 3:21

Yeah, exactly. So they're they were marketing, you know, an Atlas deal, and then um sort of I think it was after the second book update, uh so sort of Wednesday afternoon, then suddenly it was announced that Cerberus had uh acquired Lenko. So that was obviously you know, it's it's obviously all really quite interesting it happening in the middle of a deal. I mean it's very interesting news in itself. And I mean it obviously had had no sort of impact on the deal, it didn't slow down uh the deal in any way, it still got a four-day execution, which is you know a really solid result in this market, and it priced the seniors at 82, which is uh you know a pretty good result given um you know the the post-sort of Iran general spread widening. But yeah, I think as you say, it's very interesting.

SPEAKER_02 4:06

The only real precedent I can think of in terms of news of a sale kind of interrupting a deal was one from Tesco Bank. A few years ago there was a Bloomberg story like midway through them marketing one of their Delamer credit card deals, and that ended up pricing quite a bit wider, so it's interesting. Yeah. I guess that was more of a rumour though at the time they did end up being sold to Barclays, but this this was actually the platform changing hands midway through marketing a deal.

SPEAKER_00 4:30

Yeah, I mean I'm sure with the the Cerberus acquiring Lenko announcement, I'm sure investors probably would have preferred to have heard that before books had opened. But um again, you know, it's you know, I it clearly wasn't uh you know something that made investors go like, oh, I'm so furious, I'm I'm gonna step away or something. It didn't, you know, have have that effect. But yeah, I mean it it's very interesting. We we were kind of talking about you know that this isn't completely sort of new territory for kind of Cerberus. They've owned UK mortgage lenders before. We we spoke a little bit about um I think they acquired capital home loans back in like 2015, then they sold the platform to Chetwood, but kept the uh the mortgage book. I think that was in 2024. And you know, I mentioned obviously we we've spoken a lot about Cerberus in uh the sort of Dutch Bitalette market where they own DCMF and they obviously uh securitize those loans with a few other Dutch Bitalette lenders. So they they do have a presence obviously in both both of those mortgage markets already.

SPEAKER_02 5:35

It will be interesting to see if they try to repeat the trick with the bridging loans in the Fairbridge deal.

SPEAKER_00 5:41

Well my my understanding is that they they are. I mean it it sounded like um we're gonna have at least as many bridging loans in in the next deal, which is due to come uh later this year.

SPEAKER_02 5:52

But do you think with the Lenco deal? I mean Lenco is a buy-to-letton bridging lender, so now they owe and we had Adrian from Lenco on our on our podcast a few weeks ago, and he was expressing some scepticism but um about how this would work in the particular in the in the UK context.

SPEAKER_00 6:10

I mean it would it would also be interesting if they were to yeah, if the next Atlas deal were to include something like 10% bridging lines and how how people would react to that. I mean, um yeah, I think it's uh it's kind of very uh early days uh in that uh sort of respect. But I mean um yeah, obviously the it's interesting that Cerberus uh does plan on yeah, it's it plans on being uh a regular issuer through the the Fairbridge shelf and continuing to securitize bridging loans in the Dutch market.

SPEAKER_02 6:41

It will also be interesting on Lenco to see kind of how they approach building the platform from here and whether this ends up in a similar like CHL loan book sale and platform sale separately. Yeah. I mean, you know, I think Lenco, including the deal price this week, has five outstanding RMBS transactions now from Atlas and three warehouses. So there's quite a bit of kind of securitized stuff to play with, and also an an MTN, um, which they use to kind of lever things up a bit further, I guess. Um so interesting times and an interesting um lender to buy. Yeah. And not the first sort of recent lender acquisition we've seen as well after New Day and KKR last year. Anyway, we should move on to talk about German credit cards. Give us the the introduction to the to this deal.

SPEAKER_00 7:36

Yeah, so I spoke a little bit about it uh last week, but you know, I I thought this this was quite interesting. So it's from um Advancia Bank, they're uh they're a Luxembourg-based bank, but this is uh a deal fully backed by German credit card receivables, and it's also through a must-trust structure, so that's quite interesting uh to see that for your debut deal. You know, it's interesting in the context of the the UK credit card market is sort of much bigger than Europe's. You know, I I just looked at sort of last year's deals, and it's uh sort of twice the size um in terms of issuance volumes for the UK. Uh, and we've got, you know, obviously New Day is a big name, and they normally bring out sort of two or three deals a year, and now we have Capital on Tap set up as Mass Trust, and you know, plans on being a regular issuer, and you know, Yaya uh finance is preparing in ABS Master Trust. So there's plenty of happening in the the sort of specialist lender space in the UK. Um then on Europe, you know, we we've got sort of a bit less going on last year. There were only really sort of you know two deals, so um it's it's definitely quieter, but with you know the the addition of Advancia who who said that they plan on being a regular issuer in the market, they're sort of you know stepping towards getting getting to the the level that the the UK is at. So it's it's definitely been a very interesting deal.

SPEAKER_02 9:06

What's the thinking for Advancia? Because they're a bankrupt, so they have deposits. Do they really need to uh securitize credit cards?

SPEAKER_00 9:12

Yeah, so it's interesting. So Advancia's been around since 2005, and they were obviously uh you know deposit funded initially. So that's gonna be your your cheapest sort of source of funding. Um and then they they only entered uh the securitisation market in 2021 with a 475 million euro warehouse, which increased in size to a billion by the end of 2023. So yeah, you you might think obviously you know deposit funding is is the cheapest funding source. But I think for you know Advancia, you know, they they've said securitisation it represents 20% of the player funding and it's something that they want to grow. And I think that that sort of makes sense given that you know they they obviously they they have a an issue a rating from Moody's, which is investment grade, and you know, part of them wanting to maintain that is you have to prove that you have a you know very strong and diverse funding mix. So obviously it makes sense starting when you're looking at other sort of funding sources other than deposits. Uh ABS can sort of be you know kind of an an obvious uh place to look. And you know, you also get quite a lot of flexibility uh when you look at ABS. You can you know obviously you can just go to the public market and sell uh notes that way, or you can repo with the central bank, or you know, a bank could deposit fund the trust uh via the seller share to sort of increase the the credit enhancement within the trust and strengthen it uh for investors. So, you know, you you do actually have quite a lot of flexibility uh if you do want to you know enter the ABS market.

SPEAKER_02 10:48

Sure. I mean one thing about um advance has jumped straight to this master trust structure. Obviously, we saw capsule on tap come through a few kind of standalone deals, and where's Inc. Bank in Portugal also has done standalone credit card deals. It sort of feels like master trust people see as the desirable structure for credit cards in the end. Do you think everyone sort of tends towards credit card master trust, or do you think the standalone route is as viable as a permanent issuance model?

SPEAKER_00 11:19

Yeah, I mean it's kind of interesting when looking at the master trusts. I mean, obviously, you know, the the two biggest asset classes to use the structure in the UK would be Prime R and BS and uh credit card ABS. And you know, I spoke to a few people about it and was kind of looking at the history. And I think you know, in the UK at least, uh credit cards have been the the first sort of asset class to use the master trust structure. This sort of in the the 90s, and then uh you know, prime R and BS, those structures were first sort of set up in the the kind of early to mid-2000s. So credit cards have sort of you know been been leading the way in this, and I think they really sort of it it lends itself to the structure as an asset class particularly well because you know the the receivables they're granular and super short dated. So you're you know often payments from one customer are being used to fund the spending of another customer, uh, so you have to keep you know revolving the structure and adding new receivables into the trust. I think the the way the freight that gets used a lot is that there's a lot of churn. So it makes sense to have you know a really big sort of revolving structure uh when you're dealing with these uh assets. And part of that is you know, you you need the size. So you know, bringing up the UK examples, you'll see you've got uh kind of New Day and Capital on Tap. They both obviously started with warehouses because especially lenders they don't have access to deposits. So you're gonna want to start with the warehouse for funding, and then you increase in size, and you want to do a standalone deal where you should, in theory, get you know cheaper funding from more competitive pricing amongst ABS investors. And then uh once you increase in your size, eventually the end goal is uh for the master trust. And then advanced years essentially fast track that because you know they they've had a banking license and access to deposits so they can increase in size uh and then sort of you know just enter the ABS market uh a bit further down the line. And you know, obviously the the trust has I think it's 2.87 billion euro balance, so it it's you know pretty big. So it makes sense that they they started with the must trust as opposed to just bringing out a sort of small sort of standalone or even like a you know a small revolving deal or a statid deal, which you'd have to, you know, it would take a lot more effort to be monitoring, monitoring a bunch of small deals than just uh one big sort of master trust. So I think um yeah, it's definitely it's almost always gonna be the end goal if you're uh a credit card issuer who wants to use uh securitization to fund you know your loan book, uh you're gonna eventually want to go down the master trust route in a way that's not necessarily always true with you know prime R and BS. I mean obviously it's it's more of a matter of matter of scale in those sort of senses. You know, if you're like a a Santander or a nationwide, you know, and you you know you you know that you're gonna be constantly tapping the market, it can make more sense to go through the must trust route.

SPEAKER_02 14:23

Alright, thank you, Tom. That story is called Advancia Bank Changes the Game for Euro Credit Card ABS, and it's on the website for subscribers. Now for the the CLO enthusiasts in the audience, they've uh they've waited patiently to this point, or maybe fast forwarded to this point. Um but uh Thomas, what's uh what's going on in in the CLO market at the moment?

SPEAKER_01 14:46

Well yes, m many many exciting things for CLO enthusiasts, or uh or actually perhaps perhaps not would be more accurate in the sense that uh deal flow has been very uh slow this week. Um we did have a rather interesting refinancing from uh signal at the start of the week, which uh basically what Signal did was they sort of refinanced just the investment grade tranches of their CLO. Um and it sort of still made sense because um you know they I think they did the deal in sort of um 2022 or a couple of years ago when spreads were a bit wider and also it was kind of their um only their second deal. And so um I think they'd had you know triple A spreads around the sort of 170 mark then. And so even though CLO liabilities have moved a little bit wider following the software sell-off and the Iran war, um uh a refinancing still made sense for those tranches, but you know, with junior mes spreads where they've been in the last few weeks, uh doing the sort of the double B's and the single B's would have made sort of uh little sense at all. And so, you know, uh signal essentially um sort of confirmed you know in a news story that I wrote this week that um you know they made the decision to um do the refinancing, a sort of surgical refinancing of the IG tranches rather than you know, uh a sort of full reset or a full refinancing of all of all the tranches instead. But um it was quite a creative way, I think, to sort of give themselves some tighter pricing, better arbitrage in a market that is, you know, notably, as I was mentioning in my feature this week, a bit difficult for resets, but you know, there can be opportunities, I think, for a uh for a surgical refi.

SPEAKER_02 16:24

So you've sort of honed in, as you said, on on the reset dynamics at the moment. The story, I mean, to front run, we normally read the headline out later, but it doesn't sound good for resets.

SPEAKER_01 16:37

No, it's it's not a brilliant environment for resets at the moment, and yeah, you're you're you're you're right, George. You know, uh we usually read the headline at that at the end, but I've led with sort of CLO managers pause resets and put a big pause button as the uh as the image uh in my uh in my story. And uh reason for that being that the market at the moment is not particularly sort of conducive to doing resets. And the reasons for that are really quite straightforward. Resets to a greater extent than new issues depend on kind of spread levels. They're very sensitive to spread levels because in simple terms, if you're a manager and you're gonna go and do a CLO reset, you will have priced your deal originally at particular spreads, and if you want to reset your deal, typically you want those spreads to be a bit lower than your your recently when you when you originally re-sort of you know priced the deal. I mean, granted, there are times when you will sort of just have to go and price a reset because you want, you know, your deal might be sort of out of reinvestment, maybe starting to amortize, you want to prolong the life of that deal, maybe you don't want to liquidate, and so you you do a reset, even you know, those spreads have moved wider from where your original deal priced. But nonetheless, even within that context, you still want the tightest spreads you can get, even if they are going to be above where your original deal spreads were. So if you get a sudden spike in spreads, as we've had following the Iran War, reset activity is likely to be pretty muted unless the market eventually takes a view that sort of higher spreads are going to endure and they've got no choice but to do a reset. And if you look at the two vintages of resets, you know, that are sort of potentially eligible, their 2021 and 2024 deals, and where AAA spreads are now around the sort of 130 basis point mark, deals from neither of those vintages really make sense strictly kind of in spread terms, you know. And so just to give you some figures, we've definitely seen the reset volumes drop off. So, you know, February was actually a pretty strong month for resets. You know, we'd seen 5.67 billion euros of resets in February, and that dropped to 1.48 billion euros in March. That's some Bank of America figures. So the difference, but just on a month on like month-on-month sort of basis from February to March, that difference is really quite stark in terms of reset volumes. And bear in mind 1.48 billion, I mean, that could be three CLOs, you know. We've not seen a lot of reset volumes recently.

SPEAKER_00 19:10

Yeah, and then I'm curious, I mean, is isn't it especially complicated for managers when it comes to you know resetting 2021 deals?

SPEAKER_01 19:18

Yes, so you're exactly right, Tom. I think 2021 deals are particularly complicated for managers to consider uh when it comes to sort of resets, because what you have to remember is that you know, 2021 deals are one of the two big cohorts or vintages of CLOs that are going to be you know around for resets because that a lot of 2021 deals have either exited reinvestment already, or you know, some of the late 2021 deals will probably be coming out of reinvestment, you know, over the course of uh of this year, uh, because reinvestment periods usually last sort of four and a half to five years. So at this point, you know, when you're out of reinvestment, there are stricter conditions imposed as to whether or not you can kind of keep reinvesting and you know, rather than have the deals amortize. Amortization is not very popular for CLO equity investors and therefore CLO managers. Sometimes they're the same thing, but because basically when amortization starts, you pay down the triple A's first, and the triple A's have the tightest spreads. So your cost of capital just kind of starts to go up in your CLO. So managers very seldom let deals amortize fully, they usually call the deals or they reset the deals. So you've got this big group of 2021 deals that you know are going to be exiting reinvestment, they're approaching amortization. Managers are going to have to try to make a decision as to whether or not they want to liquidate or reset deals. Unfortunately, neither liquidations nor resets look particularly popular at the moment because if you look at where CLO AAAs were in 2021, they were between 80 and about 110 basis points. They're now at 130. So if you reset your deal, that's going to sort of widen your AAA spread by anywhere between sort of you know like 20 and you know, even maybe as much as 50 basis points, which has a big impact on spread levels in your CLO. Of course, if you have you know wider CLO liabilities, that compresses your CLO arbitrage, which worsens returns for your equity investors. So not a particular popular choice. But similarly, with liquidations at the moment, loan prices have traded down in recent months, uh, following the software sell-off, following Iran. And so the net asset value of quite a few CLO portfolios has sort of deteriorated since the start of the year. So you know, you might be in a situation where you know a reset doesn't look particularly attractive for equity because of what it does to the arbitrage, but actually the overall return that you would crystallize if you liquid. liquidated your CLO wouldn't be that attractive either because loan prices have traded down. So managers with 2021 deals face a complicated sort of choice at the moment. I think what's likely just in terms of you know looking forward here is that I think managers will try to sort of stave off doing resets for a little while at least, you know, perhaps in the hope that the war will sort of you know be resolved, spreads will tighten again, you know, loan prices will go up and there'll be a more favorable environment for either resets or liquidations. And granted there's no set date when amortization has to start if you can continue to meet the conditions that allow you to keep reinvesting, you know, you can keep reinvesting. So I think managers will sort of particularly with 2021 deals will sort of you know work to do that. They've still got a bit of time in that their deals are only just exiting reinvestment. Managers of 2024 deals have a slightly easier situation in that you know they've still got years left in reinvestment so they can let their deals run for a while and kind of bide their time. But you know 2021 deals there probably will come a point where a critical decision is needed by managers. And I think yeah the hope is of course that conditions improve. This strategy of delaying though does have just it does run the risk that perhaps conditions did deteriorate further and actually if you'd reset or liquidate it now it might not have been great in terms of your returns but it would be better than if you'd done it in a few months. So managers do run that risk by delaying but delaying certainly seems to be the current strategy but who knows the Iran war could end tomorrow with how unpredictable things are I don't think that's very likely but the situation is very fluid. And so you know this certainly describes current conditions for managers with resets in particular as 2021 deals but that could all change very very quickly given how yeah fluid this situation is yeah yeah very interesting all right well we we've already said the name of the the article but I'll say it one more time.

SPEAKER_00 24:03

So CLO managers pause resets as wider spreads injure and that's available on the website. So yeah I I think that's uh that's all from us for this week. Uh if you need to get in touch with any of us it's uh firstname dot last name at globalcapital dot com. And uh I guess all that's left to say is goodbye. Goodbye.