Tales of two currencies

Another middle market CLO and demand diverges in euro and sterling ABS

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SPEAKER_01 0:06

Hello and welcome to another final level capital securitization editor. Joined by Tom Hall, our ABS reporter and Thomas Hopkins, our CLA reporter, at least fittingly, um, because Thomas, you've been quite ill this week, but you've heroically, for our lesson has managed to make it here today to tell us about the the highlights in the CLO market this week.

SPEAKER_00 0:32

Yes, George, I as as listeners can probably hear from my um rather ridiculously croaky voice, I have been uh very much sort of near the point of expiry um to uh over the course of this week, but I'm uh still pleased to be here as usual. And uh yeah, um delighted to talk a little bit about the CLO market. I mean, just sort of more broadly in the CLO market, it's not been the world's busiest week actually. I mean we've seen a couple of reset deals, so just to mention the sort of Pro Providus CLO um 11 deal that was a reset from Pamira, and then of course you had um the Aries European CLO 8 reset as well. So we've seen a couple of those deals sort of price over the course of the week. But then of course we had some other deals, notably the latest private credit CLO, which priced sort of right, right, right at the end of last week, sort of after we would have recorded our last episode of Another Fine Mess. So hopefully we can talk about that a little bit because we get very excited every time there's a new private credit CLO on Another Fine Mess.

SPEAKER_01 1:34

Yes, indeed, yeah. Well let's let's get into that then. Um I mean we'll we'll try to make it swift for your benefit as much as as much as anything else. But um what was the what was the manager, what was the deal? Was there anything new or cool or fun about it?

SPEAKER_00 1:49

Uh yes, there are a couple of things. So yeah, so just firstly to note it's the Golub Capital deal. What was the deal from Golub Capital? And uh the full deal name is quite lengthy. It's the Golub Capital Partners Euro CLO 89 in brackets M transaction. Uh yes. We uh we we like to talk about how in CLO world we we get these long, unwieldy titles. I'm always very jealous of ABS. You get sort of you know quite fun, snappy names, whereas we we don't really get those in CLOs. But yeah, so it's important to note that this is the fifth ever um European private credit CLO from any manager, and it's Golub's first deal of this type, obviously European private credit CLO. Golub's very big in the US. And then additionally, it's the third um European private credit CLO to be issued in two currencies. So it'd be no surprise to anyone, I think, that those two currencies are Euros and sterling. But I think that format we've seen before, you know, Bearings and Aries have used that transaction structure in the past, you know, uh bearings with their second private credit CLO towards the end of last year and Aries with their private credit CLO sort of earlier this year.

SPEAKER_01 3:00

So those Aries and Behrings deals are arranged by the same bank. Has that changed? Is there a new arranger in the market?

SPEAKER_00 3:07

Nope, still dominated by the one bank, BNP Parabah, I think still has 100% market share because they uh they arranged this deal, so obviously they've really kind of carved out a niche for themselves, you know, in terms of structuring these private credit CLOs in Europe, particularly. But yeah, I mean I suppose something that you know they've now obviously also guided through all three of the of the well, I mean they've guided through every deal, but then notably you know, three multi-currency deals. And the multi-currency structure is incredibly popular, I think, for um European private credit CLOs. And there's a very clear reason for that. You know, when you look at the BSL market in Europe, most BSL borrowers can just issue in euros when they when they you know raise debt. And so there's not really any need for a deal currency CLO because the collateral is all in Euros. These would be leveraged loan issuers in Europe can just issue in Euros. Whereas if you look at what private credit CLOs are usually designed to do, they're usually securitizing basically at a portfolio of private credit loans that a given asset manager has. Now, the market for private credit loans is rather large in the UK, and so a lot of these asset managers have significant sleeves of sterling transactions, and they would essentially be kind of cutting themselves out of a you know a huge slice of their portfolio, securitizing a big slice of their portfolio if they didn't uh include these sort of sterling loans. And so it's become very popular. Well, I say very popular, there have only been three deals, but it does seem to be emerging as a kind of bit of a template to use. And as with the areas and bearings of transactions, in order to try and mitigate some currency risk, the sterling and euro assets are sort of in proportion with the sterling and euro liabilities. Um, of course, you know, there are there's still currency risk from sort of currency skewed defaults or prepayment patterns that, you know, uh differing prepayment patterns and amortization profiles. Um there is still some currency risk, but it is offset by the fact that those euro and stirring liabilities and assets are kind of kept in proportion, particularly during reinvestment.

SPEAKER_01 5:21

Was there anything actually different about these deals versus those previous deals from Aries and Barings?

SPEAKER_00 5:26

Yes, so there is one quite notable feature, and that is there is the option to defer interest payments on the AA rated notes. Now, usually in CLOs, double A rated notes are non-deferrable, but the Gollup deal has been structured differently because of the nature of its collateral. So the deal does have quite a lot of loans that have well does have the option to hold loans that give the borrower the option to defer a portion of the interest payments. Now, of course, if you've got collateral on which uh interest payments are being deferred, and uh you know you can't defer interest payments um on the CLO notes, that could be a problem, and you could get a technical event of default, even if the eventual cash flows through the CLO would be sufficient to service the CLO double AAs. So this is a kind of new feature. In some ways it's being framed a little bit as a sort of as a de-risking um element, and you can see why in that in that you do avoid a technical event of default, you know, but in some instances, but of course, the credit quality of those double-As does also depend on the if you know eventually, you know, full repayment being made. But you know, I don't think there's you know a huge risk to a double A-rated tranche, but it is just a a new feature, something you really don't often see in CLOs that's been sort of tailor-made for this private credit CLO and perhaps makes it differ from some of the other transactions we've seen.

SPEAKER_01 6:57

Well, we should move on to ABS. Um Tom, you've written like about 15 stories this week, maybe more. Like it's been ridiculously busy. How do you kind of sum up the deal action this week?

SPEAKER_02 7:11

Yeah, so as as you say, it has been very busy. We've had quite a diverse sort of mix. I mean, it seems like it it all basically came, we're recording this on the Friday. We I think we had about four or five new issues coming on the uh the Thursday, uh for yesterday. So that that's why I was so busy and I I managed to get uh five stories done yesterday. I think that's a new new record. But um I I think it's a it's quite a diverse mix. I mean, there's you know, quite a few interesting ones. I mean, we you know Lloyd's is spring out uh regular sort of you know UK Prime. We we've got you know some some more of the sort of traditional ABS, but we we also got uh Barclays has got its second steel from its uh its Morglas shelf, which is the um Admiral Consumer Loans, which uh they they have uh Ford Flow together, uh so it's securitising those for the second time. And then this week we also had an another uh UK by telehead that's sort of going into my uh my weekly story, but we we've been seeing lots of activity uh for that SA class over the last sort of month or so. We've also got a uh a CMBS uh bit which uh KKR is sponsoring, uh which is a uh a sponsor which we were discussing a little bit before the podcast, but uh I I can't recall uh the last time I I saw them sponsoring a European CMBS, and it's also a multifamily uh sort of asset, so that that's also a uh an asset class kind of you know outside of the uh the more defensive logistics that we we traditionally see for for CMBS. Uh so yeah, it's uh it's a pretty pretty diverse mix.

SPEAKER_01 8:54

Excellent. Well uh we should probably get into the weekly story because it it basically does cover the dynamics of kind of what's going on in the respective markets. But basically at a high level you seem to be saying sterling is is a bit sluggish and and Euros is is very healthy.

SPEAKER_02 9:10

Yeah, that's the gist of it. I mean I I think you know one of the things that I think is important to make clear and when I've spoken to sterling bankers is they're they're kind of saying, you know, the the sterling market's not in a bad place, but it's just not performing as well as the euro market is, where you know, lots of euro trades are either pricing uh tighter or you know only slightly wider uh than the already sort of you know kind of record tights that we we start seeing at the start of the year. Um and then when you look at you know the sterling market, I think you know, one of the trades this week which which really kind of sort of exemplifies you know the the issue that we're having in the market was this JP Morgan uh trade from its Pierpon shelf, where you know that that's um another a UK buy-to-let deal, which which also securitizes um from forward flows it has with some UK mortgage lenders. But I mean if they you know JP Morgan did a deal in January which priced at 77 basis point on the seniors, and then this week's deal uh priced at 87, and that's you know not as long thing that is out of the ordinary because we we've had plenty of uh UK buy to let and they they've all been pricing uh sort of in the the mid-80s, so we're you know, sort of ten basis points wider um in that asset class compared to where we started the year. So I mean that's you know, I I think that that's really you know j just a case of we we've had too much uh sort of homogeneous supply, and so investors or stellar investors suddenly you know need a bit of a break over the summer to really uh you know re regain their appetite for ABS.

SPEAKER_01 10:50

Yeah. So how do you I guess how do you sort of resolve then the sense that like the euro market at the same time is like absolutely firing in the most part, like obviously there have been a couple of deals that have been maybe slightly more sluggish, but the you know, the the proper like prime um German autos and and Dutch RBS seem to be doing very well.

SPEAKER_02 11:12

Yeah, I mean they're they're all doing sort of excellent. We we had the AFR um Dutch Prime trade price, I think a week or two ago, and and that was the the tightest uh Dutch Prime since February 2025, and then you know, the this was a little bit before kind of global ABS, but we we sort of started seeing trend emerge with uh Mercedes and Volkswagen, where where they priced their German autos uh the the tightest levels since sort of the first half of 2024. You know, that that's a very interesting uh sort of thing because those sort of ethic classes obviously have very uh devoted you know investor bases. So they they're they're able to tighten in ways that most uh ABS issuers aren't really able to. And this uh this actually I I also wrote a leader this week uh which was really kind of you know saying to prime issuers, you know, now is really the time to uh bring out prime deals uh sort of based on you know the the recent performance of of other prime issuers. Um it just seems like there's just so much demand and interest in these you know kind of super uh defensive assets. And you know, I I I was also having you know a call this week with someone and they were saying, oh well, what kind of isn't isn't that always the case, though, isn't it you you just it's always a good time to bring out a uh Mercedes deal or something because they they just have you know such a uh devoted uh investor base. But uh but actually I I don't think that's true. And you know, if you think of you know, if you'll remember uh towards the end or no, towards the beginning of last year, so sort of April time, uh I think Mercedes reopened uh the market with a uh with the silver arrow trade after Liberation Day, uh the terrace in the US caused the the market to shut. And then they priced trade, I think, 57, uh and the last Mercedes trade uh is at 42. So I don't think it's necessarily the case that it's you know just always uh a good time to bring out uh prime trade. But it it you know certainly is the case that uh right now is a good time uh to bring out you know super prime trade.

SPEAKER_01 13:21

So you think the big issuers need to to sort of lock in the spreads now, in a sense?

SPEAKER_02 13:27

Yeah, absolutely. And you know, as we record this, we've probably only got you know two, maybe two and a half or something weeks before the the market sort of closes for the summer. And I think the the lesson of the the first half of the year has really been the the market can completely change uh you know within a week or something based on you know just sort of the the geopolitical situation. Uh so then when you you know factoring in, you know, the the market's gonna be shutting for you know sort of five weeks. I mean basically anything could happen during that period. So if you know you're an issuer who's saying, well, I I think the market's just gonna be in a much better place uh in September, you know, I I'd sort of be saying, I mean that that could create a problem in itself of if too many issuers think this, then you're you're gonna have another uh glass supply in September from everyone wanting to target that window. But also you're you're taking on some you know additional risk from you know any sort of geopolitics uh that could go on now within that period and and kind of disrupt the market. But obviously having said that, I mean September's always generally is a is a good time to bring out a deal, so I can obviously see why we're sure as are you know wanting to target that window. You you've got the benefit of you know ABS investors are are really hungry after, you know, kind of five weeks of uh you know no activity.

SPEAKER_01 14:48

Yes, indeed. I I guess one thing that you haven't mentioned, but you know, it's not it's not total slam dunk for Euro Prime issuance, like because that uh Ross mortgage deal that when we last recorded like hadn't quite we hadn't seen an update from Henquite Price, but it it did end up widening slightly from its its IPTs despite being like prime French mortgages and and STS. How do you kind of resolve the performance of that deal against like the strength of the Dutch prime RBS market and the German prime auto ABS market?

SPEAKER_02 15:23

Yeah, I mean I think with that deal it's kind of hyper specific and there there's not going to be as much sort of read across from that over, you know, into sort of overall market conditions um compared to you know just a a typical uh regular issuance from from you know any kind of you know European ABS issuer. Because if if you look at you know that trade, I think I think I mean French prime RMBS is already kind of uh a little bit esoteric. You know, you you obviously have BPCE and Credit Agricole with you know annual programs. But you know, you you look at this uh the the Tampa deal, it was already, you know, uh quite quite a bit different to those just because uh you know the very low sort of weighted average payments makes it you know, it it doesn't make it necessarily super clear which kind of investors uh would be very interested in it because it you know in terms of the payments, it it seems like it won't necessarily operate in the the same way a you know, sort of traditional French prime operates. So I I think you know, when when you're dealing with a debut like that, it's difficult to to kind of say how this deal performs will uh you know, sort of there there's a lot of read across to the overall market. I I don't think that's uh necessarily the case.

SPEAKER_01 16:48

I see. Well, there's a lot to read, but if you want to read the weekly story on the kind of dynamic and the relative value between euro sterling, that's called Euro Sterling ABS spread diverge as pipeline fails. And Tom's argument that it's prime time for Euro ABS um is is free to read. Um we're expecting a cartoon for that, but it has not yet been published at the time of recording, so you definitely look at that. And also, we're anticipating a cartoon for Close Brothers, um, which like return to ABS issuance with a retained deal on on Monday, I believe.

SPEAKER_02 17:27

Yes, very interesting. I I was very pleased. We we were discussing a little bit. I've I've been having uh slow progress for cartoons so far with the year but now now it's ramping up very much like the the ABS pipeline. Uh now it's un uncontrollable with two two in one week.

SPEAKER_01 17:47

Yes. Well, uh that's all the all to be looked out for on the website. Otherwise, I think we shall say thank you very much for listening and goodbye.

SPEAKER_00 17:58

Goodbye. Thank you very much, George, and goodbye everyone.