Hit the reset button

The first reset of a European private credit CLO, the rise of CFOs, and the plight of US ABS issuer Extenet 

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SPEAKER_03 0:07

Hello and welcome to another five minutes of George Smith, Global Capital's Securitization Editor. I'm back after two weeks off and I'm joined by a full compliment of Tom Hall and Thomas Hopkins. But Tom, I don't think we have much ABS news to bring to the for the lesson of this week. The public market's been shut, hasn't it?

SPEAKER_00 0:28

Yeah, it's been uh silent on the uh the public market, but uh that's that's obviously always expected uh when you're in the early days of August. Uh and we we certainly got luckier, you know, I think compared to last year in terms of how long the uh the market was able to uh to keep going before it shut. Although it's funny, I I look at some of the issuance numbers and it it seemed like uh 2025 sort of July numbers were actually uh quite strong, which sort of goes against against my memory. But yeah, it's interesting. But now we're in the uh the definitely the the slowdown as we uh kind of you know slowly await the market reopen, hopefully towards the the end of the month.

SPEAKER_03 1:08

Yes, we had a couple of interesting private things to write about. There was a large portfolio sale of home purchase plans by Gatehouse Bank, um, and you written some stuff about Equinex, which priced two weeks ago, I guess, as you listen to. There's a a data center CMS as a as a kind of corporate bond. And then also an equity raise from NPA and Gable Group stuff setting up a funding line for high LTV mortgages. So a couple of bits and pieces um if you want to if you subscribe and you want to go through the website. But in contrast, Thomas, the the CLO market has has continued strongly.

SPEAKER_02 1:49

Yes, it has George. And uh yes, despite my pleas in my uh my TV this week in which I I I I I argued that uh you know CLO managers should definitely take an extended holiday. We've seen a number of deals still going ahead this week. So we've had sort of the Henley CLO2 reset, uh there's been a Carlisle did a reset for its 2025-1 deal, there was the sort of Victory Street CLO1 reset, and then we're actually still getting new issues um as well because Blackstone has done a you know Lakeland's Park CLO new issue, which is remarkable because you know so in August it does tend to tilt sort of towards resets a little bit more than it does new issues because uh you know the leverage sort of supply of kind of leveraged loans in the primary market um sort of slows down a bit in August, and you need more kind of primary loan supply to ramp a new issue CLO. You know, obviously, resets you can buy up things in the secondary market, you don't rely on the primary market quite as much, but we are actually still seeing new issue deals despite the fact that that tends to slow um into August. And yeah, the expectation from most people I'm speaking to in the market does seem to be that while obviously you will get a slightly slower pipeline in August than in other times of the year, that it doesn't look like the market is actually going to shut, or that we'll you know, we'll just have a sort of rather modest slowdown. That remains the expectation. Obviously, that can always change, but that seems to be the view from market participants at the moment.

SPEAKER_03 3:17

So no summer holiday for CLO tranch investors.

SPEAKER_02 3:21

Apparently not, no. I mean, it's actually working from the beach. Well, one wonders. I mean, you know, yes, the joys of modern technology. But um, yeah, I mean, it's interesting because you know, Acunia actually recently put out, this is a CUNIA credit management that recently put out, you know, their in the tranches piece. And they've what they've actually said, they've directly said in this that uh investor holiday patterns have shifted over recent years. They sort of put that quite directly in the analysis. And yeah, I think you know the market does sort of remain open, you know, you you will be able to print a deal and not as insane spreads if you choose to bring a deal to the market at the moment. Obviously, from an equity perspective, it's a little bit more challenging. You know, the you know, the arbitrage is sort of notably weak. Cash on cash distributions haven't been good. So there might be reasons from an equity perspective why you might not want to bring a deal. But if you did, if you do sort of bring a deal to market at the moment, yeah, you will definitely be able to print um in terms of liability investors being around.

SPEAKER_03 4:22

So let's home in on your weekly story, which as we record, was a week ago, so a little bit more than a week ago, I guess, the steel price. Is that right? This is the bearings reset of the first private credit CLO in Europe.

SPEAKER_02 4:35

Yes, it is, and so it's it's it's a reset of the first private uh private credit CLO in Europe, and it is also the first reset of uh private credit CLO. So quite a few firsts there, but yeah, it's sort of re it's sort of priced um in the kind of latter bit of you know last week. Yeah, and it's it's quite it's really quite interesting what they've they've done with the transaction because you know obviously at when this obviously this was the first ever you know private credit CLO, and so they launched it and priced it in 2024 as a static deal and only in Euros. Now, all the deals that we've seen since then have been reinvesting CLOs. Obviously, the difference being that if you've got a static transaction, you sort of select the collateral pool at the beginning of the CLO's life, and then you know you you just sort of stick with that portfolio of loans, and if they prepay, you know, the uh effectively the CLO just starts to amortize more quickly, so they have much shorter duration than a reinvesting deal in which new deals get new loans can be continually added. But yeah, this Behrings deal was done as a static transaction only in euros, and all of the rest of the sort of CLOs that have the private credit CLOs that have priced since then have been reinvesting. All but one of them have been dual currency. Now, what Behrings did with this deal is they converted it in the reset from a static deal into a reinvesting structure, and they also converted it into a dual currency CLO. So they basically added um a triple A rated sterling tranche. So that the deal has both euro and sterling triple A rated tranches. The rest of the deal is all in Euros, but obviously to match that sterling tranche, uh they have, you know, in the portfolio of loans, they have a pool of sterling assets and a pool of Euro assets. You know, obviously the the pool of Euro assets is significantly larger than the sterling one because there's only the one sterling liability tranche. But yeah, so they've sort of changed the shape of the deal quite a lot as part of this reset.

SPEAKER_03 6:33

Pretty cool, pretty unusual. Are they then, I guess they're sort of now homing in on what looks like it's gonna be the way that private credit CLOs are dynamic Europe?

SPEAKER_02 6:44

Yes, I think that is what's happening. And you know, Bearings has obviously helped to pioneer that that structure because they in 2025, you know, they did their 2025-1 private credit CLO, and that deal was the first dual currency deal in Europe, the you know, obviously in the private credit sort of asset class. And I think what they've certainly seen is that you know they they were I think when they came to market with the you know the 2024 deal, this deal that was reset, I think they were a little bit more conservative. You know, it wasn't clear exactly how the market would, you know, receive the first ever deal. So they thought, well, you know, let's just let's be careful about this, let's do a static transaction, which tends to be more popular with liability investors because of the shorter duration, and let's just keep it simple and put it all in one currency. Now, a a source, you know, uh close to that deal um when discussing the reset with me said that you know ultimately it you know it it would actually have been possible to do it as a reinvesting deal. You know, hindsight is obviously 2020 vision, but the investor response to these private credit CLOs has been good. And so, you know, the reinvesting deal makes sense. Additionally, the the response has also been very good to the dual currency structure, you know, which makes a lot of sense for you know private credit CLO managers. And so basically what Behrings has done in the reset is gone, well, you know, we priced this first deal in one format, but we've sort of later tried out another format, which is then, you know, and and other managers have sort of followed suit and gone with that format. Now let's sort of take this original deal and just basically transform it into the sort of template that seems to be working.

SPEAKER_03 8:29

So obviously, with this change from static to reinvesting, I guess some of the assets must have run off of that, or there must have been some need to make some changes to the portfolio. What how have they approached that one?

SPEAKER_02 8:41

Yes, exactly. So they would what they wouldn't certainly have needed to do. I mean, look, in a in a reset, you would make changes to the collateral pool any anyway, but I suppose the the one difference really in this case is that they will have had to sort of top up, you know, because obviously if you've got assets that prepay in a static deal, you won't have replaced them during the life of the deal. So they'll they'll have done some portfolio cleaning and they'll have topped it up to the sort of par amount that they wanted. Obviously, the other change that they would have had to make to the collateral pool is that they would need to sort of bring in their sterling assets because they won't have had sterling assets in the portfolio before, and in that this has been changed to a dual currency reinvesting deal, that have had to make those changes to the collateral pool.

SPEAKER_03 9:20

Um and in your story, you've mentioned um BSL or collateral as well, which we've spoken about hybrid deals in the past. Like a you probably still wouldn't call this a hybrid deal, but how does that fit in?

SPEAKER_02 9:31

So it's not, I suppose, a pure and true hybrid deal, which we really haven't seen yet in the European market, although, as you say, I've I've written about the possibility of them coming about. But almost the reason that people are talking about the possibility of a hybrid deal coming about is the fact that private credit CLOs are increasingly, as part of this kind of template structure that we're seeing emerge, making use of some BSL collateral. So, you know, basically how it works on this deal and a couple of other deals that we've seen, basically the CLO, the private credit CLO, gets a bucket and they can hold up to a certain portion, you know, of the collateral in the CLO in sort of BSL assets, and that's that bucket that it sits in. So that the size of that bucket is 15% in this deal. I've seen 20% on other deals, but I happen to know that you know um Bearings has actually already been making use of that allowance um because they've basically used it to speed up the ramp. Because obviously, usually with a reset you don't have like as much of a sort of ramp up period, but I suppose in this case they were making quite substantial changes to the portfolio in the process of converting it from you know um static to sort of dual current uh to reinvesting and you know from one currency to dual currency, but they've used it in that way, and uh it is quite convenient really for private credit CLOs to be able to do this because sourcing new private credit loans can be quite a time-consuming process. You don't have a secondary market from which you can just buy new loans. You're sort of filling that usually with the asset manager's own portfolio of private credit loans, and so the ramp can be slower. This isn't so good for liability investors because obviously, if you're a liability investor, you know, you commit your capital at pricing and you've got this then long price-to-close window potentially where your capital is committed, but the liabilities haven't actually been drawn, and so you're not really receiving interest proceeds yet. Shortening that is quite popular. It's also, however, the use of PSL collateral, which we're seeing as part of this template structure, is also quite helpful for equity investors sometimes, because obviously, if a private credit asset prepays, replacing it can take some time because again, there's no secondary market and you can get cash drag. You just have cash sitting in this CLO that's not sort of doing anything, um, whereas it could be productively invested. And again, being able to buy BSL collateral quite quickly and easily to sort of plug that gap is you know good, certainly from an equity perspective uh equity investor perspective, because you always want uh interest payments from the underlying loans flowing through the CLO, boosting your your distributions. So we are definitely seeing that becoming a sort of standard part. And in in some ways, then it is almost you know an early, early form of a hybrid transaction, but it is more a private credit CLO that is sort of supported by some BSL collateral rather than a deal that actively intends to use both types of collateral, both private credit loans and BSL credits throughout the life of the deal. That would be a true hybrid deal. This is maybe an early form of one, but not a true hybrid deal. It is very much a private credit CLO that can use some BSL. And that's how, you know, again, this is the sort of common structure that we're seeing emerge that I think this this reset really sort of emphasizes.

SPEAKER_03 12:44

I guess then the bottom line, did they tighten the pricing versus the original deal?

SPEAKER_02 12:50

They did actually, which, you know, if you look at the if you look at the triple A's, you know, I think they you know they came down um a couple of basis points. So, you know, and that is actually quite notable given that you know they were sort of making such substantial changes to the structure of the deal. But I I think really what it emphasizes, I suppose, is just the extent to which uh you know liability investors have become comfortable with this structure for this asset class, because you wouldn't be able to make such substantial changes and you know really use this structure if investors weren't comfortable, you know.

SPEAKER_03 13:25

Well, thank you, Thomas. The story is called Bearings Reset Reveals Overlap in European private credit CLO structures. If you would like to redefine a detail my play for subscribers. Tom, we've kept you uh back to the the CLO section this week because your story is actually probably more related, if anything, to the CLO market and the ABS market this week. You've written about collateralized fund obligations. Perhaps you'd better give us CFOs 101 before we before we get into what's going on with the CFOs.

SPEAKER_00 13:59

Yeah, so I mean CFOs are they're a product that's kind of tangential, sort of on on the edge of uh securitization. But I mean um, you know, to the the sort of securitization of fund investment. So, you know, in a in a fund you have the general partner that's going to be managing the fund and they take fees for running it, and then you have limited partners who are uh investing in the funds, and then uh a CFO is essentially a way of securitizing uh those limited partner stakes. Yeah, so you you'll pull together those stakes, sell them to an SPV, and then you'll structure them and issue bonds uh through the SPV. Uh so it it sort of is a securitisation, you know, in in some form, it's just a very different sort of collateral than you'd see in the kind of you know mainstream securitizations.

SPEAKER_03 14:50

This isn't altogether new, is it?

SPEAKER_00 14:53

No, I mean they they've existed in some form since the early 2000s, so probably more than 20 years. I mean, I think uh they they've sort of been having a revival. I mean, if you look at kind of global issuance, I mean they've been having a revival in the US and Europe, I think it is sort of a broad trend in in both regions. But I think global issuance was about four billion in 2022, and then 2025 it climbed to about between $20 billion and $25 billion. And now there's predictions of it reaching uh $30 billion uh this year. So it it has been you know massively growing.

SPEAKER_03 15:28

Yeah, so what's the appeal then? I mean, I guess we should take it in turn from the CFO manager side. Why would they want to issue?

SPEAKER_00 15:34

So from the CFO manager's perspective, it it's gonna be a you know a capital raising tool because the CFO invests in the manager's funds, and then they they normally are going to be retaining uh the CFO equity on its own balance sheet. And then on the from the investor perspective, I think I've kind of seen them broadly marketed as you sort of get greater diversification and a higher yield uh and sort of more mainstream CLOs, uh, but you also get the sort of benefits of you know, by investing in a securitization, you're you're gonna be getting you know more more sort of credit enhancement created from the tranching. And they they're obviously also if you're investing in a rated product, you'll get sort of you know more benefits through that than just investing uh in a fund kind of by itself.

SPEAKER_03 16:24

So do we have any kind of concrete examples that we can point to to sort of illustrate the right CFOs?

SPEAKER_00 16:32

I guess the the recent sort of product that's kind of been on the market has been uh launch from Apollo. It's called the uh Apollo multi-asset Prime Securities program or AMAPS. And that's not uh kind of explicitly stated to be a CFO, um, but it it's kind of it's backed by a pool of Apollo LP fund investments. So it it sort of you know seems to kind of meet some of the uh criteria. And I think also if you look at how uh you know the the agencies rate them, I I think they use what's called uh a blind pool methodology, which is where there's a lot more reliance kind of all of a sudden you you look at a lot kind of deeper detail in uh the manager behind the CFO um compared to just looking at the pool. Obviously the pool's incredibly important, but if you look at you know, I think for this Amax 5 deal, uh which I write about, as kind of a 10-month ramp-up period where you can make sort of purchase beyond the initial portfolio, and then it goes into a five-year reinvestment period. But you need to kind of have quite a long track rec record of how uh you know the CFO manager uh operates when you you kind of rate those. Um so that I think that sort of separates them a little bit from uh kind of CLOs.

SPEAKER_03 17:48

I see, yeah. Um and what was Apollo, have they said anything about their own motivation for launching their product?

SPEAKER_00 17:55

Yeah, so I think it it's quite interesting. I mean, they in the statement they put out about why they're launching the fund, they obviously mention uh CLOs quite a lot and how this can be sort of an alternative. And then you know, they they mention again, you know, related to you you get more diversified collateral, less leverage, and you should be able to get a higher yield as opposed to you know moving down the the capital sack in a CLO. So it's uh certainly, I mean, from from the investor standpoint, where where they're marketing it is is kind of being marketed as a a rival to CLOs.

SPEAKER_03 18:30

Well, thank you, Tom. That story is on the website. Includes a lot of a lot more details, including some comparisons and kind of how the modern CFO differs from some of the products that are around before the GFC, and it is called Collateral Fund Obligations Resurgeon Does Investors Seek Yield. And I think Tom and Thomas will now be leaving me, and I will be joined by our US ABS reporter, Chad, to talk about an interesting case he's been covering across the Atlantic. And welcome back. Um I'm now joined by Chad Van Astrop, who's our senior US ABS reporter. Hi Chad, and welcome back to another five minutes.

SPEAKER_01 19:13

Hello, George, good to be back.

SPEAKER_03 19:15

So you've been doing some interesting reporting about a company called Extinat. For those of us who who've followed less closely, what exactly is Extinat and what's going on with the fab?

SPEAKER_01 19:27

Yeah, it's been an interesting story sort of developing over the last uh couple of months, I I'd say. In June, Extinct uh told his told its investors that it was facing an immediate liquidity issue. They got a reprieve at the end of June for their ABS deals with a service or advance, but that hasn't actually followed in July. And ExtherNet has now defaulted on $500 million off its ABS bonds. There was about $2.5 million of interest owed in July. Uh, we've been told that about 30 investors are exposed here. Um, and it's safe to say, you know, many of them are pretty perplexed. And I'll sort of explain why. So taking a step back, Extinet is a business that, up until last month, they operated both indoor and outdoor mobile signal nodes. Essentially, they build and operate the systems that allow us to have strong phone signal when we're in crowded public places. You know, think Wembley Stadium in London or MetLife Stadium in New Jersey. So Extinet's outdoor business is what backs its ABS bonds. Um, and as I mentioned, Extinet have issued two ABS deals, one in 2024 and one in 2025, both uh out of the same master trust. When the 2025 deal closed in the middle of last year, there were about 245 contracts that were backing um this deal. And the interesting element here is that about 99% of the cash flow is from contracts with major telcos like ATT, Verizon, and T-Mobile. So XNet also has an indoor business which was sold last month, and cash uh from that deal is currently being held in escrow, but we can discuss that a little bit later.

SPEAKER_03 21:25

So you said investors are are feeling a bit perplexed. What what have they actually been been saying to you about this?

SPEAKER_01 21:32

Yeah, so uh the the ABS uh investors who haven't received their payments for July, they tell me they should have a claim on the sale of um extinct's indoor business, which uh um happened last month. But you know, they say that some of the cash from the sale of the indoor business should be used to get the ABS deals above uh order again and uh not entirely go to exthernet. Owners. And another interesting element here is that Exthernet is owned by companies that are not strangers to the securitization world, namely, you know, private equity firm Digital Bridge, infrastructure investor Stone Peak, and insurance company John Hancock. Of course, you know, the listeners may remember Digital Bridge being behind the first data center securitizations, both in the UK and the US. And Digital Bridge has uh five portfolio companies which are active in the US securitization market. So, you know, there might be wider implications for the industry as a result of this. Extinet has actually privately asked investors for a three-month holiday on paying interest on its ABS bonds. They were still asking the investors for that holiday after they had defaulted last week. They're seeking that pause in interest payments so that they can get a sale of the outdoor business, which backs these ABS bonds. They want to get that sale done. They've actually run a process to try and sell that business, I think, since since April. So this has been kind of going on in the background, you know, as I guess these ABS deals have unraveled. But you know, the investors that I speak to, they don't seem too keen to want to um offer that pause.

SPEAKER_03 23:21

So that all Extinet's done and in the way of response to this, or have they have they been doing other things?

SPEAKER_01 23:26

Yeah, uh look, publicly they they haven't said uh anything despite multiple uh attempts to contact them. You know, Extinete are yet to um explain how they actually ended up in this situation, um, you know, why they've defaulted on these ABS bonds. But um, you know, in speaking to people involved in this situation, I've been able to find out that Extinet has set up an independent committee of lawyers and forensic accountants to lead an investigation into why they've faced this liquidity issue. Uh, that process is actually on hold now because the ABS bondholders and the company seem to be in discussions about how the funds from the sale of the indoor business might be used. You know, meanwhile, Xnet has told investors privately that at least one company is interested in buying the outdoor business. And it seems they've had a few offers for that business that are above the value of the principal of the ABS bonds. And some of the interested buyers um may be willing to pay the ABS interest between agreeing to purchasing the outdoor business and the that transaction actually closing, which you know may be six in the vicinity of six months. It it's sort of unclear yet. But you know, there are some prospective, or there's there are some questions about um you know if the prospective buyer can actually get the bridge financing needed to get this sale done.

SPEAKER_03 25:00

Yeah, well, uh it seems like a pretty extraordinary uh situation, and I'm sure you'll be keeping us a breath of it as it develops, but kind of what are we watching out for? What comes next?

SPEAKER_01 25:09

And and uh Yeah, look, you know, investors are obvious obviously looking for a swift resolution, but there are lawyers involved on both sides, so there's potential for uh you know a lot of back and forth. You know, more broadly, KBRA and the service are involved here um have both said in communications that payments relating to the ABS deals were actually not going into accounts governed by the securitization entity. So, you know, for the market, it serves as a reminder for you know investors, services, issuers about the need to check that cash meant for securitization is actually being ring fenced. Of course, you know, securitization ring fences assets, but you know, the associated cash also needs to be ring fenced too. But you know, that might be easier said than done when um a business has multiple um units, some of its cash flow, you know, securitized and some not, things get a little bit complicated, particularly when a contract with a certain company may straddle uh business units that are securitized and some that aren't. So, you know, I guess people may be turning their attention to deal docs and um you know tightening up the conditions that are in those as a result of what's happened here. But you know, whatever happens, global capital will be working hard to find out what's next and what the situation means for the market.

SPEAKER_03 26:39

Great. Well, thank you very much for coming on the show, Chad. And you can find all of Chad's stories on the website for our subscribers on on this topic and on many of the other important topics in the US CBS market. Otherwise, thank you very much for listening and goodbye.

SPEAKER_00 26:56

Goodbye. Goodbye.