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Another Fine Mezz
A podcast about the global securitization markets from GlobalCapital
Another Fine Mezz
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CLO managers struggle with ramps, Stellantis returns to UK auto ABS with E-Carat shelf as ABS spreads tighten again
Hello and welcome to another fine man. I'm Tom Hall, Global Capital's Senior European Securitization Reporter, and we've got a full house. I'm joined by George Smith, our securitisation editor, and Thomas Hopkins, our European CLO reporter. How are you guys both doing?
SPEAKER_02Very well, thank you, Tom. Very busy this week. But yes, it seems like maybe on the deal front slightly quieter for both of you, perhaps. Yes, certainly.
SPEAKER_01Yes. Certainly on the CLO side. Well, to be honest, the CLO, CLO sort of pipeline has just remained pretty consistent since the Iran where we get sort of two or three deals a week and that's about it. So which, you know, does make life a little bit simpler being a CLO reporter. But um I I can yeah, I mean, this week we had a sort of we had a quite a rare sort of post-pricing upsize for an aqueduct deal. You don't often see a big sort of upsize post post-pricing. We uh we don't usually include the word upsize in our in our copy, I should point out, but uh but it is a market recognized term, it's just why I'm uh you know daring to speak it here. But then yeah, we had a another couple, we had a sort of Tikaho did a refi, and um we had Permira doing its latest uh Providus new issue CL.
SPEAKER_02Yes, well that upsize forced us into a little rethink of our um database as well, which you can you can check out on the website, but it now includes a little category for post-pricing upsizers.
SPEAKER_01Uh we had to update the FAQs and everything, didn't we, George?
SPEAKER_02We did indeed, yes. A bit of drafting went into that and and negotiating over whether we'd be allowed to refer to them as usizers. But I guess we should get into the into the weekly in the absence of um an overflowing primary pipeline to discuss. You've been looking into the the sort of options I guess you have when ramping up uh a CLO before coming to market.
SPEAKER_01Yes, I have been. And you know, obviously with you know ramping a CLO, it's sort of the process of managers initially buying up loans to sort of include in the CLO portfolio. Managers will complete kind of 40 to 50% of this before pricing through a warehouse, and then sort of most of the rest of it takes place between pricing and closing, which is a sort of four to eight week period. And uh this process can be sort of pretty unremarkable if it's just you know, if the if loan market conditions stay broadly stable, then managers simply go shopping essentially and uh you know buy up the loans that they want and then close the deal. What's different at the moment is just because loan prices are moving in such a volatile way, the ramp up has become more complex in a way that, you know, it it's got sort of new dimensions, and those can be positive and they can be negative for CLOs depending on how loan prices move during the ramp.
SPEAKER_02Yeah, I mean we've talked a bit about how loan prices are moving, but it's it's just been sort of all things going in all directions, has it? Is there a way we can sort of for for those who don't follow the loan market quite so closely, get our head around like what sort of conditions managers are trying to navigate here?
SPEAKER_01Right, so very quick potted history here then, George. So uh, you know, over the sort of late last year and kind of into January this year, you had about two-thirds of the loan market trading at or above par. And this the these conditions had obviously been quite stable for a little while, for several months. And then in February, as sort of concerns grew about the impact of AI on software borrowers' business models, uh, there was a bit of a sell-off of software loans. Loans traded down initially in February, and then in March, you've had the uh obviously the impact of the Iran War. So the closure of the Strait of Hormuz has raised energy prices, which has increased costs for borrowers in all sorts of sectors, and that sort of it has increased the risk of defaults causing a bit of a sell-off of loans as well. So loans, broadly speaking, have traded down sort of since January. But it's not quite the whole story because you know, in late March you had about 4% of the market trading at or above par, and you know, that's relative obviously to two-thirds in January, but now it's more like 29% because there's been a little bit of a rally. You know, some software credits have kind of gone up in price a little bit as managers have started to differentiate between different software names. And you know, with the Iran sort of ceasefire, that was a bit of a boost for the loan market, but again, that situation is changing. Well, as one manager described it to me this week, he said sort of fundamentals are you know moving on a tweet-by-tweet basis, and that is the reality we're dealing with. So the loan loan prices have broadly come down, but they are moving around in a way that's very difficult for managers to predict.
SPEAKER_02Okay, yeah. So what do you even do in this situation? Like pack it in and and switch to some other asset class for a bit.
SPEAKER_01Yes, well, it's certainly complicated, and managers like we've seen, as I was saying earlier, far slower deal flow. I mean, you know, on our asset bag monitor, I think we've seen as a third as many deals, you know, since the war as we did in January and February. And this is because while broadly speaking, there is an opportunity for managers to buy up loans slightly more cheaply uh than they would because more of the market is below par, they do take on ramp up risk essentially when during the ramp. So when you've priced a deal as a manager, you've locked in your liability spreads, and you've only bought up about sort of half of your portfolio. So if then, say conditions improve suddenly in the Middle East and loan prices rally, well then you know you've got to buy up more expensive loans and you don't benefit from sort of tighter liability spreads, and at that point your arbitrage gets squashed. So the amount of cash flowing down to your CLO equity gets squashed. You know, conversely, on the other side of the coin, of course, if the situation deteriorates a bit and loans sell off, well then you could actually end up in a situation where you can buy up cheaper loans, and you'll have locked in tighter spreads and you won't have to, you know, on your liability side and you you won't have to deal with sort of spread widening there and your arbitrage will improve. But the difficulty is, you know, a ramp, sort of post-pricing ramp, can sort of take four to eight weeks. I mean you can try and speed up that process, but that kind of partly depends on the availability of you know leverage loan paper, which is you know certainly a a bit of a sore point for a lot of uh CLO managers. And so bottom line is you simply don't know where the loan market is going to move. You you you cannot, it is not as dependable and as stable as it was just even a couple of months ago, and this makes your ramp complicated. I mean that doesn't necessarily mean negative, because it could turn out well for you if you're lucky, but it could also turn out, you know, rather more poorly if uh if you happen to enter the market at the wrong time.
SPEAKER_02Yeah, I mean I think I suggested to you in in midweek that an optimist might now be able to make a case for for CLO equity with so many loans now below par, but you were a bit underwhelmed by my by my suggestion.
SPEAKER_01Yes, I I was slightly underwhelmed and a bit skeptical. I mean, look, it is worth pointing out that CLO equity returns operate on a very long-term horizon. Um, and so even if the sort of day one arbitrage is not attractive, that can be improved over time. I suppose where I'm slightly more skeptical is that, you know, yes, loans have traded down, and you can pick up pick them up you know more cheaply as a consequence. That allows you to build par in your portfolio, you know, maybe picking up a cheaper credit and selling it later at a higher price, you know, handing your equity investors a bit of a wadge of cash, so that's all that's all good. But even though loans have traded down, 64% of the market is still at 98 or above. And that means that a lot of your high-quality assets are still trading pretty close to par. And so opportunities for par build are a little bit more limited than might initially be suggested by you know the fact of the whole loan market having traded down. If you if you are going for those high quality credits, you're just functionally going to have to buy a lot that's still reasonably close to par. And you know, you might have some conviction trades that are a bit lower, which you might have to negotiate with with your liability investors, but software credits in particular. So, you know, I think conditions have improved a bit, but I think you know, I'm a little bit skeptical as to how much the day one kind of arbitrage or you know, what equity returns look like on day one sort of has improved.
SPEAKER_02I guess the other sort of piece to the puzzle here is the um the liability side. CLO spreads sometimes seem to move sort of quite slowly compared to some other things. Um like what what's the story there on loans, how and how has it sort of been relinked to the loan spread moves that we've talked about?
SPEAKER_01Well, I mean, yes, you're you're right, they do move pretty slowly. Uh in fact, one investor described um you know CLO spreads to me as the sort of the slowest moving spreads in credit.
SPEAKER_02Um so you know, you there's there's always a bit of a hasn't encountered SRT.
SPEAKER_01Uh yes, I'll ask I'll ask said investor about that when I when I next uh have a chat. But yeah, it's certainly true that with the CLO market, particularly in the investment grade area of the capital stack, there's always a bit of lag time. You know, I mean it's even just you know, when you decide to sort of go to market with a CLO, it can take sort of up to two weeks to price it. So it over that time, quite a lot can happen. And yes, I mean we we've seen sort of broadly speaking, we've seen spreads widen since the Iran war happened. And you know, it's particularly notable on the AAAs, which have moved back to their sort of stubborn position of around the 130 basis point mark, which uh I know you've you've remarked on before, George. Um, we saw a brief window when they were sort of 10 basis points below that earlier this year, but they're around there again. And the sort of the trouble for managers at the moment is that there hasn't been that much loan primary. So a lot of what they're having to buy up is sort of loans in the secondary market that priced before the Iran War happened, and so don't have the correspondingly wide spreads to sort of make the arbitrage work as well. So I think that's sort of been difficult for managers. But one of the positives actually of the current loan market with you know loans kind of trading below par is that repricing risk is sort of considerably reduced because you know in January there was a wave of repricings, but that was when a lot of the market was above par. And the difficulty with the repricing, of course, is that you know, when an asset reprices, you're either repaid at par or you have to accept a lower spread. But there's sort of there's no real there's no real risk of that happening if the loans are trading. But if you've bought the loan below par, well then you know that there's much the there's sort of less risk of having to sort of have that kind of lower return on an asset for a CLO. So that's certainly one of the positives of of where the loan market is at present for CLO managers.
SPEAKER_02Well, thank you. That story is called leverage loan price volatility CLO ramp up tactics. And on the same subject, you've also written a free-to-read leader suggesting that managers shouldn't be in such a rush to sort of shovel deals out the door at the moment.
SPEAKER_01Exactly. I've said they should sort of avoid print and sprint tactics. Now, just you know, the sort of rather catchy name print and sprint does what it says on the tin, really. So managers print deals quickly and then sort of sprint to fill up their CLO portfolios during the ramp as quickly as possible. The reason they might do this is to take advantage of lower loan prices. So you get some volatility in the loan market, and managers kind of capitalize on that and you know get cheaper assets for their portfolios. Now, conditions might kind of seem ripe for a print and sprint environment right now, just because, as we've been saying, the loans have traded down and you don't know how long they're going to stay there for, and you know, for months uh earlier sort of in the year and and into last year, you'd seen so many loans kind of above par and you know it was difficult for managers to build par. So you might think that now would be the moment as a CLO manager to sort of move ahead quickly with deals and sort of ramp them. And there there are I think my my argument in the piece was certainly that you know there are opportunities. You can certainly, you know, there are returns to be made from buying up cheaper loans, but ultimately if that's the only reason you're printing a deal, or if it's the primary motivator for printing a deal, you do there is you know that there are ramp-up risks, as we were discussing. And ultimately, I've I've I think I've advocated strongly for more of a kind of wait and see approach where managers would just sort of carefully proceed with buying sort of you know the the high quality credits that they might otherwise buy, and there might be some you know opportunistic trades to be made, but I think because of how volatile the loan market is, the print and sprint approach does carry quite a lot of risk.
SPEAKER_02What's the quickest you could print and sprint? If you could do it quicker, surely you'd be minimizing your like time in and market um therefore your your risk.
SPEAKER_01Yeah, I mean look, that the so I think it's important to point out there is a bit of an incentive at the moment to sort of ramp your deal more quickly than that than you might otherwise, but that's the sprint part, whereas you know, I think the print part of the deal is you know of the tactic is sort of where my concerns lie in the sense of if you are printing the deal primarily so that you can sort of sprint to the finish and buy up cheaper loans, that that with it carries risk. But if you've decided that now is the right time to print a deal and you can build a strong portfolio, then when you have priced, you probably are incentivized to finish that ramp more quickly than you might otherwise, in the sense that usually when you price a deal, you would expect that the manager is happy with market conditions at that point, and uh you know, at that point in time you then probably want to try and preserve those market conditions and so finish your ramp. You know, time between pricing and closing is sort of four to eight weeks, it depends on each deal's structure, but of course you can sort of ramp your deal more quickly or more slowly, kind of within those sort of time constraints.
SPEAKER_02Yes, okay. So what are we saying? Don't sprint for the sake of printing, or don't print for the sake of sprinting. One of the two.
SPEAKER_01Yeah, don't print for the don't print for the sake of sprinting, I think is how I put it there, George. Okay.
SPEAKER_02Good. Well it's called uh CLO Managers Shouldn't Rush to Print and Sprint. So and it's free, so you can you can read it regardless of whether or not you subscribe. And with that we shall sweep onwards to ABS. Um Tom, you've sort of covered off everything in in one weekly story this week. Do you want to uh introduce the story and and the market's action in one go?
SPEAKER_00Yeah, sure. You know, I think the the market's been a little bit quieter for this week, and that was entirely expected. It was sort of more of a surprise uh last week that we had kind of seven deals in the pipeline, because everyone had sort of been saying uh it feels like there's only gonna be sort of two or three deals uh marketing towards the last couple weeks of April, and then it should sort of begin to pick up in May. And uh yeah, this week we've had uh just two deals pricing. So one is this multi-lease deal, which is quite an interesting deal. I think the only sort of regular Swiss uh issuer that do auto-leases, and they also use a currency swap, which is quite interesting. So it's their second time doing that. And they they issue in Euros uh when they previously issued in Swiss francs. And uh I should say the the deal has been it increased to 550 million euros from 400 million euros. Some people would say it upsized, but I'll I'll say increased. And then the the other deal uh was from Startline Motorfinance, so it's uh UK auto ABS. And we've actually we've seen I think somewhat surprisingly we we've seen quite a lot of activity in that area. I mean maybe it's not surprising because we've also had you know a lot more clarity around the the FCA laying out its final uh sort of redress scheme. But we had Oodle. Pent up supply perhaps. Yeah, possibly. I mean we we sort of saw a lot of that pent-up supply. Uh it seemed like it all came out kind of October or November last year. We had about sort of three or four deals. But yeah, again. I mean it's also interesting because Oodle, you know, got some of its funding done in November and now it's you know already back in April for, you know, another deal. So yeah, it could just be a case of you know, it's obviously all pent up from that year of while there was so much uncertainty around the uh car finance scandal where no issuers were you know felt that they could come to market. Uh now they're all they've got that clarity and they're all coming out. And that's the other interesting thing of you know, we got one of these deals that gone on screens, which will be expected to price next week, but it's uh Stillantis brought out a uh UK Auto ABS, the the first UK deal they've done since 2021. So that's uh you know, quite uh quite an interesting and positive thing for the UK auto ABS market.
SPEAKER_02Yeah, excellent. Wow, it's good to see that that market back up and running. Um you spotted an interesting sort of divergence between senior and and Mezanian spreads. Mez is seemingly sort of outperforming in terms of spread tight, I think. Is that right?
SPEAKER_00Yeah, that is right. And that's also I think kind of quite interesting because you normally think in times of uncertainty, uh senior spreads should be sort of performing better or pricing tighter because there should be sort of more money flowing into those kind of safer tranches. But yeah, it we have seen a lot of tightening on the senior. So I think one of the one of the things that really sort of demonstrates it of you know comparing two quite recent deals is Oodle's two deals. The seniors price flat for Dalson 2026, they priced flat at 90 basis points. That's the same as Dalson 2025 that came in November, where the seniors also priced at 90. But then if you look down the capital stack, all the notes from uh B to F and the Xbox notes, or just the B2F notes actually, I think, they all priced tighter for this new trade compared to the one from November. So yeah, I think that's quite interesting, and also uh Startline offered Mes with its deal this week. Yeah, also Startline offered Mez with its deal this week, and there was a lot more tightening from IPTs for that deal. So the the seniors, I think IPTs were sort of set in the about 90 basis points, and that's where they landed. Uh but if you look down the stack, there was you know kind of significant tightening with all those tranches.
SPEAKER_02So is this just like down to a basically a shortage of supply considering you know there's only two deals and and even those that that are out there kind of limiting the size like that? Um Mercedes deal we talked about last week, where they just set the size at 500 million and then gus got a super tight spread on the back of that.
SPEAKER_00Yeah, I mean I think that's part of it. I mean, if you sort of look at these tranches, I think you know, perhaps for the the Udall deal, they're the sort of well, the the Mes Tranche are kind of in the the 20 million area. There's the B tranche was about 34 million. They're a bit bigger with the start line, there's you know a 50 million tranche and a 40 million one. But um, you know, the these aren't like super uh huge tranches that you might see in like a C MBS where you've got you know 100 million plus and we haven't seen loads of deals uh sort of offering Mes. So it could be the case of you know the these MES investors are just thinking, you know, we we just haven't had enough supply, uh so we need to sort of buy up what we can, which obviously you know causes spreads to to grind tighter if you do see that happening. So yeah, I I think that's probably the the main reason so far.
SPEAKER_02Well, wonderful. You can read all about uh NTOM story which is called Multinease Leads the Way Tighter for ABS spreads.
SPEAKER_00Okay, well that's excellent. I think we've uh we've covered just about everything then. So all that's left to say is uh if you need to get in touch with us, uh the email format is firstname.lastname at globacapital.com. And uh I think that's all from us for this week then. Goodbye. Goodbye.
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