A SaaS loan sat on the wall

Leveraged loan maturity wall looms for CLOs and a French consumer loan ABS debut

Transcript

SPEAKER_02 0:06

Hello and welcome to another fine match. For this episode, we have a sponsor. This is uh a sponsored episode by SP. And uh with that we shall shall get underway. I'm um George Smith, Global Capital Securitization Editor, and I'm coming to you from New York this morning, where I've been this week to attend our US awards, which were very successful last night, and uh also to go to the FT Live SRT, or CRT as they call it in these parts, credit risk transfer, the most significant event in risk transfer. That was also on Thursday. And I am joined by Tom Hall, our ABS reporter, and Thomas Hopkins, our CLA reporter, both I think from the London area.

SPEAKER_01 0:53

Hello to you both. Yes, at last we we we did not uh yeah, we did not get a company to accompany you to New York, George, so yet we're just in little old London.

SPEAKER_00 1:01

Yeah. It must have been nice going to the uh the CRT slash SRT conference. It seems like it's the one area that uh Europe's kind of made more sort of progress in America, perhaps. I mean, what was it good?

SPEAKER_02 1:14

You know, that while acknowledging that Europe is the European SRT market is bigger, there was a lot of like, you know, we don't want to have to do all that like STS and and resilient stuff, like the European market has grown because of these things. I think the big thing for the for the US market is now that Basel Endgame, Basel III Endgame, as it's uh as it's called, is getting closer now though the proposals earlier this year, and you know, depending on who you believe, there might be a final version by the midterms or a bit later. But now that the banks have a bit more kind of regulatory certainty about like what counts as SRT and how they can use it and what the capital benefits will be, that should unlock more US issuance. Um but we shall see, and then there was quite a lot of discussion about kind of reinsurance and and the kind of smaller banks using unfunded credit protection to sort of manage their risk, which I guess is it could be SRT or it could be a sort of smaller version. Um but yeah, it was an it was a good event and interesting. We should move on to the the European market and maybe we'll we'll start with ABS Tom. What's been going on in that sector?

SPEAKER_00 2:23

Yeah, it's been a pretty uh busy week. We we've had quite a few sort of deals. It feels like sterling's starting to pick up. We've had the the first UK prime RMBS since January. So it it feels like we've had a very uh long sort of drought in that kind of market. We we've also had you know plenty of full capital stack deals. We had Hilterman lease pricing a deal, and Stallantis also priced a uh deal. That was that was Hilterman, obviously the uh the Dutch auto leasing to SMEs, and then Stallantis was a uh Italian auto loan ABS. So yeah, there there's been plenty happening. And yeah, I guess that there's also been the the deal which I've written my weekly about, which is um Borzo Bank, it's a subsidiary of SOCGen, and uh it priced its uh debut French consumer ABS.

SPEAKER_02 3:16

Well French Consumer ABS is quite an unusual asset class, is it not?

SPEAKER_00 3:21

Yeah, exactly. So I was kind of I mean I think I've only sort of covered one in the you know the almost year and a half I've been here. So I was I was looking through the sort of data and there are you know kind of semi-regular issuers. I think BMP uh has a platform and it did a deal in 2025 and 2023, and also BPCE has a platform and it did one in 2024 and 2022. But there's no sort of you know regular annual issuers, it's it's one of those uh sort of areas of the market. I mean I think Northern Europe kind of more broadly uh seems to be an area where consumer ABS is kind of less popular, maybe with the exception of obviously Germany, because you have Aux Money and normally does two deals a year, and same with Santander. But in the you know, in the UK we only really have kind of Plata Finance, uh which does you know a couple deals a year. And the, as I said, in France we we don't really have any issuer who uh we can rely on to see a deal every year.

SPEAKER_01 4:20

Do you know why consumer ABS is is a little bit sort of less popular in France and Northern Europe relative to other places?

SPEAKER_00 4:27

Yeah, I mean it's an interesting question, and I I think it's one that I do I will have to do sort of more research on, but I think it's I mean it could be kind of cultural issues that could be similar to you know why why we see so much credit card ABS in the UK and don't really see that in mainland Europe just because of a different culture. I mean I know in Italy they have, you know, sort of more kind of unique or advanced uh deals where some of them are obviously um, you know, you can get consumer loans that are tied to your income so they can sort of add certainty from the side of you know whoever's providing the loans. Uh so I could see why that would make them kind of more popular sort of in southern Europe than maybe northern Europe. But yeah, I mean as I said, I think it is an area where I'll I'll probably have to do uh some more research to see why why we see so much more kind of coming out of uh Spain and Italy compared to Northern Europe.

SPEAKER_02 5:20

What's the motivation for um Bolsoya Bank then if they're a subsidiary of SockGen, presumably they have quite uh a generous sort of balance sheet to put to work from the parent?

SPEAKER_00 5:32

Yeah, I mean it it seems to be you know the the reason is because SockGen's trying to diversify its funding, and part of that is through um you know Borso Bank entering the ABS market and you know, obviously, I mean Bozo Bank is it's a bank in itself that it has access uh to deposits, but um, so you know, ABS will presumably be you know slightly more expensive funding in that sense, but it's obviously um you know if if you're a bank that's unrated, ABS can you know often be the the next sort of cheapest funding source in a a good way for uh diversifying your funding mix.

SPEAKER_02 6:09

Is there a mes in the deal or is it seniors only?

SPEAKER_00 6:12

No, it's just seniors, so it's uh I think 350 million uh euro off a tranche and then the seniors are split, so there's there's an A2 no, which is also um it's uh a green bond, actually. There's just 50 million uh that's being retained.

SPEAKER_02 6:28

Yes. And then I guess the final sort of thought on this is that it fits into a little run of debut issues, doesn't it? Because uh we had that German credit card IBS as well.

SPEAKER_00 6:38

Yeah, we've seen you know quite a lot of debuts since just the the kind of Easter uh weekend. We've had about you know kind of three I mention in the story. So yeah, there's the Advanced Bank one, uh Satan editor, Swedish Auto, and then there's uh this Borzo bank deal. You know, I I think it also adds to, you know, we we've been seeing a lot of debuts generally for consumer ABS kind of in the UK market. There's slightly different sort of deals though, because they are bank led, but they're they're generally happening because these banks have forward flow agreements with certain lenders. So Barclays uh has a forward flow arrangement with uh Admiral and it's been securitizing those loans in the the Morgless deal it did last October, and then City launched its uh Montgomery Square deal uh just in March, and that's backed by loans from Abound, which it you know also has a forward flow agreement with. Um so we are seeing you know a lot more momentum sort of in northern Europe for consumer ABS. So it's definitely yeah, it's quite an interesting sort of trend.

SPEAKER_02 7:39

Well, thank you, Tom. That story is called Borso Bank adds to consumer ABS Momentum with French debut. And we shall now move on to the CLO market. Thomas, has there been much sort of primary activity to keep you busy?

SPEAKER_01 7:54

Uh yes, there has actually been a bit this week. I mean, it's still I think we're still not at pre-war levels, but I think most of the signals that are coming out of the market seem to be that it's stabilizing, and you can certainly see this in terms of how uh spreads have tightened notably. Even the triple A's, which we always talk about on this podcast, are slowly, slowly coming in. We've seen a couple of uh 126 prints this week, which has been interesting. So, yeah, I mean one of them was uh Seabury Park CLO, which is uh Blackstone's ladies' one. I mean, you'd expect Blackstone to have one of the tighter prints just because it's such an established manager, but nonetheless, it is one of the tightest prints we've seen since the war. The other deal I think that's worth pointing out from this week actually is uh Silverpoint has done its second ever deal, so it's Silverpoint Euro CLO2. Uh they did a 132 on the AAA's, but you'd kind of expect that you know a slightly less established manager would have slightly wider print, but a 132 is actually still, I think, three basis points tighter than their debut deal, which came out in sort of October last year, so that's notable. Uh and I think today we've just seen obviously we're recording on Friday, and we've seen uh Bain come through with a refi for its you know 2024-2 CLO in Europe. And I think that Bain has basically re-fi'd, it would seem, uh, everything except the single B's, single B spreads have been a bit volatile at the moment. Uh so that may be why they didn't go for a sort of full reset. They've refined every single other tranche, though. So definitely activity and definitely more of a sense of positivity, I think, coming out of the market than would have been the case when we spoke sort of, you know, three or four weeks ago.

SPEAKER_02 9:36

Yes. Well, just in case anyone's feeling too positive, you've written this week's weekly about um an a looming problem for the market.

SPEAKER_01 9:45

I have indeed, yes. You're right, George. The 2028 uh maturity wall is definitely sort of hanging over the CLO market at the moment. And uh yeah, there's kind of there's a there's a sort of bumper crop of European leveraged loans that need to be refinanced over the next couple of years. Uh so I think Barclay's estimated there are about 57 billion euros of leverage loans set to mature in 2028, and of those, um, sort of CLOs own about 42 billion, obviously CLOs being overwhelmingly the largest owners of leveraged loans. Now, you know, the the the fact of loans happening to mature in 2028 and there being a significant crop of them isn't in and of itself in any way a problem. Um, however, there have been concerns raised in the market about the ability of some of the borrowers of these loans um to refinance their debt. And you know, why are we thinking about this now when we're talking about 2028 loans? Well, borrowers tend to start looking at a refinancing at least a year ahead of when the loan matures. So this is now something that is appearing on kind of uh CLO managers' horizons and on the horizons of other leverage loan investors, but as I say, CLOs are overwhelmingly the largest owners of of leverage loans.

SPEAKER_02 11:02

Yes. So how do you see things kind of playing out as this? Uh I feel like there's a lot of talk about maturity walls, like in say in CMBS a few years ago, but then Marik everyone managed to sort of figure it out. Is that how this is gonna go?

SPEAKER_01 11:17

I mean, it's quite difficult to say in a way, but because there's there's a number of different factors that you have to try and look at here. So I basically some of why this maturity wall exists has its origins in some sort of macroeconomic conditions in 2021. A lot of these loans were issued in 2021 when interest rates were negative. This was sort of at the tail end of the low rates era. I mean, if you go and look at like the you know, deposit facility rate that you know the ECB has, you go and uh you know, sort of trawl through the history of that as I did yesterday, having a very exciting life as a financial journalist. Um, but you know, it sort of was very, very low, or indeed negative, from 2008 basically to 2021. So it goes right back to the financial crisis. So there was this very established pattern of ultra cheap debt, and obviously interest rates were kept low as the world, you know, sort of tried to recover from the pandemic, and as the economy kind of emerged out of the pandemic in 2021 with these very, very low rates, there were a lot of borrowers that sort of loaded up on cheap debt. Um, MA activity surged, it was a very positive year in some ways for the loan market. However, the ultra-low rate era then promptly ended the following year when Russia invaded Ukraine and energy costs meant that central banks had to raise rates to combat inflation, and leverage loans are floating rate instruments, so immediately you had borrowers saddled with sort of higher costs. Now, this has obviously therefore been a problem that borrowers have had to deal with sort of since it originally happened. However, if you're early on in the life of a loan, you know, you have lots of time ahead of you to sort of sort out the company's profitability, its ability to service this debt. And it was sort of easier, I think, to sort of kick the can down a road the road a bit, whereas now what you're getting is borrowers and lenders really having to reckon with whether or not these companies are viable going forward in terms of whether or not they can service debt. So that's one and that this affects borrowers in pretty much every sector. But then there are some more you know specific things to look at which sort of apply to you know the software sector and to some of the sectors kind of you know affected by the Iran War, which I know is something we've talked about on the on the podcast before.

SPEAKER_02 13:45

Yes, indeed. So let's get into that slightly more than I guess as I understand it's quite a lot of these loans that make up the maturity wall are uh are software.

SPEAKER_01 13:56

They are, yes. It was quite a it was quite a big year for sort of software issuance sort of 2020, 2021, round that kind of era. And uh yeah, so software is actually one of the largest sectors um, you know, loans sort of maturing in 2028, and obviously the profitability of software businesses has kind of been under the microscope over the last couple of months because of the sort of problems caused by by AI. And you know, even if you're a little bit more of an AI skeptic like me, you know, uh you can sort of see how software businesses might have their sort of revenue models sort of threatened by AI just being able to do the job of some of these sort of software programs that have had a kind of subscription type revenue, uh particularly software as a service companies might be affected. So there's that. And then additionally, if you look at the impact of the war with the sort of higher energy costs, you know, the capital goods and materials sectors also make up a substantial portion of the loans due in 2028. So, you know, if we see energy costs kind of persisting, you know, because of a protracted conflict, refinancing's sort of could be um more challenging. But it's sort of difficult at this stage to sort of know exactly how much these are going to add to the existing pressure from higher rates because ultimately the software issue is still pretty new. It's only been around sort of a couple of months. Uh, we've got several earnings cycles, you know, that that sit in front of us before these loans absolutely have to be refinanced. So it may be the case that actually a lot of the firms that you know we're currently sort of worried about are able to kind of incorporate AI into their business models and will be all right. And similarly, if the Iran war has a resolution in the next couple of months, and you know, that's anyone's guess, frankly, as to whether it's going to be resolved soon or not, that could also alleviate a lot of the pressure on um sort of you know borrowers in sectors affected by the war. What it doesn't do is uh even if those two specific sectors sort of make some some progress and some headway in in a positive direction, what it doesn't do is alleviate the years-long pressure from higher rates. So borrowers that are in difficulty just because they loaded up on with far too much debt in 2021 and have struggled to service it ever since rates went up in 2022, those borrowers are going to be a problem regardless of what happens in software and uh and the war. Uh but there will be some borrowers who might be alright just because you know some of the issues that we're talking about with specific sectors aren't as serious as they might appear right now.

SPEAKER_02 16:28

I see, yes. How much of a consideration is kind of what happens on on sponsor level? I mean, both ways, really. Like, can we see equity injected? Is that what's necessary? Or likewise should we just have a few LMEs? Uh is that Yeah, well, exactly.

SPEAKER_01 16:44

There's sort of a number of different ways it can kind of play out if borrowers are struggling to refinance. You know, if it comes to the point where like a refinancing on terms that actually work for borrowers and and lenders is just not going to happen. I think there are a number of different different things that can happen. So you rightly point out, George, that uh an equity injection is something that can can happen. So, for example, CVC recently put about 200 million euros into Lipton, which has been struggling, apparently because partly because the British are drinking less tea, which I think is uh is really a troubling, troubling thing. Um, you know, so uh drink more tea, everyone. That's my message on the podcast today. Um, but um, you know, genuinely changing consumer habits have affected it. But uh so CVC put some more um equity in there, so we could see that. Although apparently, you know, market sources tell me that you know sponsors have been a little bit less willing actually to put equity in just in light of the higher rates and things at the moment. Uh it's a slightly less attractive prospect, but that's one option. And then you're right, George, LMEs are another sort of consideration in terms of what might happen here. I mean, people have been warning about you know LMEs sort of appearing on the horizon of European CLOs, you know, for for a little while now. Now, it's important to remember that an LME can just refer the term LME can refer to a perfectly kind of amicable sort of restructuring, uh, where the lenders and everyone all sit round the table with the borrower and agree a plan and it's all fine. Uh they can, however, also be aggressive LMEs, which involve what they you know call creditor and uncredited violence. So, you know, you have a certain group of lenders that agree a new level of kind of super senior desk, uh it's called up tiering, basically, and you know, the some of the existing lenders, which might be CLOs in this case, would be sort of subordinated when they thought that they were senior secured, which is obviously a problem, particularly if you've got you know debt that's heading in the distress in the direction of being sort of distressed. So that's also a possibility. I think what the market has sort of said is that one of the most likely things is that you'll get sort of loans being amended and extended, so what they call AE. And what this does is kind of prolong the life of the loan for another two or three years. I mean, lenders do typically demand a sort of higher spread to agree to amend and extend provisions, which doesn't exactly help borrowers that are already struggling to refinance in terms of having enough cash flow to make this sustainable, but it does basically buy them more some more time to sort of you know make the debt work. I mean, this can be a problem for CLOs that are coming to the end of reinvestment if they agree to amend and extend, because it affects their weighted average life tests, because obviously after reinvestment, there are sort of stricter conditions about you know the sort of weighted average life of loans that you have in your portfolio. So that can be a problem. And I think also just fundamentally, you know, CLOs and other lenders, you know, if they're agreeing to these AEs, there needs to be a consideration of whether or not borrowers are actually going to be able to turn things around, or if it's just buying a little bit more time and you're going to face the same problem in two or three years' time. You know, these loans can't just be indefinitely extended. Uh they do there will need to be a sort of solution at some point. So, you know, it's uh it's a kind of temporary measure, but I think some of the market opinion I've certainly got from you know managers and uh loan investors and things seems to be that amend and extend uh sort of scenarios are the most likely for you know for borrowers sort of struggling to refinance these 2028 loans that are sort of in danger of hitting a a maturity wall.

SPEAKER_02 20:14

Yeah, yes. Well, at some point I suppose people will have to make up their minds about whether this uh these worries about software are well founded or not. Um and if you want to read that story, it's called Leverage Load and Maturity Wall Loons over CLO Market. And otherwise, I think we shall leave it there. Thank you very much for listening and goodbye.

SPEAKER_01 20:33

Goodbye. Goodbye.