SPEAKER_02 0:07

Hello. Um welcome to another fine mess. I'm Tom Hall, Global Capital's Senior Securitization Reporter, and I'm joined this week by a guest.

SPEAKER_01 0:16

It's Mirko Yatgucci, Associate Managing Director for Um European Commercial Real Estate and Digital Infrastructure Ratings at uh Morningstar DBRS. How are you doing, Mirko?

SPEAKER_00 0:28

Hi, Tom. Good morning, and thanks for having me. Yeah, excellent.

SPEAKER_01 0:31

So uh I uh got you on the podcast to talk a little bit about the uh I guess one of the most kind of interesting and highest sort of growth areas in European structured finance, which is obviously around data center securitizations. So I guess you know it's been a pretty you know good year so far. We we've seen a few deals come out. I mean, one of the interesting things I always think when when looking at the market is there's obviously questions around, you know, it's it's uh growing so quickly in the US. And you know, there's questions of will Europe be able to kind of replicate that. And one of the kind of interesting, I think, questions within that is you know, looking at must trust structures. They're obviously you know quite popular in the US, but there's always questions around is it kind of difficult to replicate that in Europe because of you know legal issues in multi-jurisdictional areas? And then, you know, at the start of this year we we had this this Edge Connect deal, which you know, DBRS was rating. And you know, I I guess that's sort of you know used a mass trust structure. I I guess there's you know sort of interesting questions from you know a rating agency perspective of does you know a master trust structure create any you know additional uncertainty around, you know, are are there any sort of you know protections needed when looking at you know the quality of the assets which are going to be added to the trust over time?

SPEAKER_00 1:51

Yeah, more than uncertainty, I would say, Tom, what the master trust features had is uh is a complexity in the analysis, right? Because bringing in a new asset uh uh requires a new underwriting and a new analysis of the new asset. So I I would say from our side is the risk is manageable, but you need some tools, right? Some criteria that will make easier the potential addition of new assets to the structure. And uh just an example, uh you I would expect in a master trust to have some asset uh LG2P criteria, which for example might restrict or might require minimum occupancy threshold for the new asset that you bring in, uh, as well as some specific maybe technical standards for the new asset. So again, talking about data center, might uh an important requirement might be that the new asset that you bring in has the same or better PUE score than the asset that you have at the moment in the pool. There might be some restriction on location, and as well, clearly talking about you know, depth leverage test will be as well important. So loan-to-value limits, uh, minimum depth services coverage. You will also expect to have some depth test criteria that uh again uh will help to make you know the you know the addition of the asset more easy to uh analyze. And I would say finally, from our side, it's uh uh for this kind of structure, we we need to have the rate agency confirmation mechanics, which means that when you bring a new asset, you we need to have the opportunity to underwrite the asset and analyze the asset first, and basically uh decide, right? Uh see if the the new addition uh might have a rating impact on the transaction.

SPEAKER_01 3:43

And you know, I g I guess another kind of interesting question in in the market is you know, we're we're obviously seeing innovations, but I think we're we're also seeing, you know, kind of I mean if you you look at the the kind of Yonder deal uh this year, I I think that shared a lot of similarities with you know some of the the previous Vantage deals. And you know, I I guess that's you know kind of raises the question of is you know a more uniform kind of data center securitization structure, you know, a good thing for the market as you know, it should in theory sort of provide deeper liquidity. But you know, also on the other side, do you think there's still room for more sort of structural innovations uh within the sector?

SPEAKER_00 4:25

I think Tom, uh at the moment uh innovation uh it's almost uh inevitable for this asset class, asset type, it's just because it's still quite young, no uh infant product. If you, for example, you compare to you know credit cards ABS or auto loan ABS that has been running for for ages. So I think uh at the beginning, because we are still, let's say, like that, at the beginning of this process, a little bit of innovation is expected and also well accepted, I would say so. But I think in the longer term, right, what the securization market normally requires as a stand to go, it's uh you know standardization. For the reason that you said before, to improve liquidity and attract more investors, you will need that at a certain point, you know, structural features of uh data center securization have to converge and you need to see minimum features requirements that uh are gonna be common to hold the transaction up there. So innovation is fine, it's fine at the beginning as we try to refine in some way the best way to fund this extremely relevant asset type. But in the longer term, right, uh securization investors, what they like is predictability of the cash flow. What they like is that the opportunity to compare similar transactions and the fact, right, that they they might have a strong liquidity market out there. So all these elements they require that uh the transaction need to be pretty similar, uh they have to share similar features. You know, when a situation like, for example, as you have in the sector large operators, you might start to have that each single operator decide to do their own securization way. You know what I mean? Because that's clearly will be will make you know the comparison more difficult. It will force investors every time, right, to restudy, to reanalyze a new structure. And overall, I think what actually you're gonna have instead of the better pricing, you actually have you know wider you know margins, uh, just because uh the it becomes almost a bispook asset class and you and you don't want that.

SPEAKER_01 6:37

Yeah, kind of interesting question, you know, within the sectors around if data centers are are going to increasingly be treated as sort of strategic infrastructure, as you know, governments are sort of looking at different ways to approach sort of the rise of AI. And you know, do you think this is going to lead to you know a change in the credit quality of data center securitizations?

SPEAKER_00 6:57

I think this is a really interesting question because also uh there might be a little bit of a misunderstanding here between the fact that the government might consider right uh data center strategic uh infrastructure. And to be honest, that's the case. It's becoming more and more the case across you know across the world. But the the fact that a government might recognize a data center uh as a you know uh strategic infrastructure doesn't mean automatically that they're gonna support and back that data center, that infrastructure. You know what I mean? And I think yes, uh the implicit support or the fact that yes, there is a strong uh government, let's say like that, uh, backing for this asset indirectly might improve the quality of the credit quality of the asset. But because I think uh uh what really happens is that this asset type becoming more moving more from a real estate uh specialized real estate asset to more an infrastructure asset, automatically, for example, is gonna attract better, you know, larger customers, uh, especially right with the AI revolution, we're gonna spend more and more hyperscaler becoming dominant, and hyperscaler normally attract uh high investment grade tenant. High investment grade tenants they also tend to sign long lease contract without you know disruption, and again it's more predictability of the cash flow and a more and a less volatile cash flow. The fact that uh there is this uh in in some way implicit uh support from the governments for this asset type might improve the the asset quality because uh becoming a high, you know, the revolution that you know AI is bringing in automatically attract uh uh more hyperscaler, and more hyperscaler, for example, means normally better customer base. In general, you have uh high investment rate tenants there, which sign long contract normally without disruption, so providing uh visibility and predictability to the cash flow, all elements that uh in you know uh as a result they actually improve the asset quality. Uh but um I think that this support from the government, this implicit support to the government, or the fact that the data center is migrating from a specialized real estate asset to a strategic infrastructure asset, naturally will actually uh uh improve the say that the quality of the you know the credit quality of this uh of this asset.

SPEAKER_01 9:33

And then, you know, this related to uh uh some of the research I've seen that D Vers has published. But I mean how how important do you think you know the the concerns around sort of war or terror or cyber attacks are when it comes to you know rating data center deals and are there sort of enough you know protections like insurance cover uh in the data center deals to kind of you know prevent this from disrupting bond payments?

SPEAKER_00 9:58

Yeah, I think actually this question is really you know is uh closely related to the previous one because uh I think we all agree, right, that uh yes, data center are becoming a strategic and critical infrastructure for you know for basically all the countries out there, and this automatically makes them a really sensitive target uh in a war, you know, in a worse scenarios. And we have seen right the example we have the example of the recent attacks uh in the Gulf to data center infrastructure. So I think on on that side it's pretty much inevitable that uh you know data centers are gonna get more and more are gonna become a more and more sensitive asset on that side, and so as a result, uh potentially exposed to attack, not only physical attack, but also right, cyber attack, which might in some cases be instigated by hostile countries. So I think that's it's inevitable. From our perspective, from you know, from a rate agency point of view, again, what will be really focused is try to understand how these potential you know attacks might disrupt cash flow. And so understand is, for example, uh, you know, the uh this these attacks might result in a temporary disruption of cash flow or maybe in a permanent disruption of the cash flow. And we also, in the case, we're gonna try to understand what are the mitigants that might uh help to mitigate those risks. And so clearly uh when analyzing the asset, we will focus carefully on the redundancy capacity of the asset, the fact that you know the transaction benefits from an adequate insurance coverage, the potential diversification, so both geographically or also from an asset perspective. So you might have all hopefully more than one asset there, and so uh the potential attack on one of the assets doesn't completely stop the cash flow coming to the to the structure. And uh, the end of the story uh as well, the overall, for example, leverage, the fact that maybe the transaction benefits from a more conservative leverage are all, I think, mitigants that you know might help to uh mitigate the risk of um you know of this potential uh disruption coming from war and terror risk. But in general, our view is that um yes, the risk is there, is uh I think it's pretty clear, but it doesn't mean that you know we need to reassess in general the risk profile of the entire sector. I think is you know it's just that uh from our perspective the risk is really gonna be more and more focused on clearly location and uh potential diversification of the transaction.

SPEAKER_02 12:53

Yeah, excellent.

SPEAKER_01 12:54

Well, uh thanks so much for coming on the show, Marco. I really appreciate it. And uh yeah, I think that's been a very uh interesting uh sort of look at data center securitizations.

SPEAKER_00 13:04

Uh thanks um for having me, and always a pleasure speaking with you. Thank you.

SPEAKER_02 13:08

Yeah, excellent. All right, well, uh I'll be back shortly with uh Sarah to talk about all the main sort of news going on this week. Hello, and welcome back to another five minutes.

SPEAKER_01 13:23

I am now joined by Global Capital's securitization editor, Sarah Ainsworth, to talk a little bit about the uh the market more generally. Hi Sarah, how are you doing?

SPEAKER_03 13:32

Yeah, very well, thank you. How are you, Tom? Um another busy week for us this week.

SPEAKER_01 13:37

Yes, it has been absolutely packed. I mean, uh I've been counting it. It feels like, you know, whenever there's buy-elections on TV and that they have to read out all the candidates. I've I've got about uh 17 different deals that have been marketing throughout the week, which must be some kind of record. Now, obviously, I guess only half are pricing this week, and then the the other half are just on screens for next week. But yeah, it's been I mean, I think it has been a pretty positive week for the market, even though we haven't seen sort of you know any crazy spread tightening. I mean, spreads are sort of generally pretty tight right now anyway. So the the fact that they've managed to kind of maintain that level, and you know, with with this many deals on screens, we haven't seen, you know, sort of a huge amount of uh investor kind of attrition. I I think that's a a pretty positive sign for you know the market while it's still a sort of you know early reopening stage after the summer. So uh yeah, it's been been pretty solid week.

SPEAKER_03 14:36

Yeah, and we were at a conference this week on Thursday, which was good, and I'd say sentiment there was um pretty, pretty good. Lots of lots of people, lots of um lots of activity, lots of people chatting in corners and um people seemed quite upbeat. So um yeah.

SPEAKER_01 14:52

Yeah. I mean I guess the it was the the S ⁇ P conference, wasn't it? And that's like a classic uh conference to to know that you've reopened the market after the summer. But I think I think yeah, everyone was in a a pretty good mood, and it was, you know, th they were kind of mentioning that it's you know, it looks like it's gonna be the the third year in a row where we've hit the uh post-GFC issuance record. So that that's always you know good to see.

SPEAKER_03 15:18

So what like what particular deals did you focus on this week or anything in particular that you found especially interesting?

SPEAKER_01 15:25

Yeah, I've the main one that I've done my weekly on has been this uh Avens deal, uh, which is you know is a very interesting deal. It's the the first fully battery electric vehicle auto-leased back securitization, which is I mean it's kind of interesting that it's you know, we're only sort of seeing that in 2026, but that that also equally I think makes sense when you think about you know, it's quite hard to get a fully dev portfolio. So um, but yeah, that that's uh that's been a really interesting deal that I've been looking at.

SPEAKER_03 15:55

Okay. So yeah, go on, then tell us a bit a bit about the story. And and I mean, I don't know, are EVs more difficult to securitize than than other types of cars? How do people find that?

SPEAKER_01 16:06

I think they are. I mean it's kind of always interesting when you do an auto ABS story because it's I think it's sort of thought of as one of the the kind of you know blander markets of all deals are are kind of you know a bit samey. Uh but this I'd say is you know it's quite different. I mean I think the the main thing that really sort of differentiates it from other diesel or petrol powered, you know, back deals would be you know how you you kind of analyze the residual uh value risk out looking at these. Because it you know, residual value risk is uh typically more volatile when you look at EV back deals. So I mean, you know, just to explain what residual value risk is, it's is the risk that the asset is going to be worth less than you kind of expected it when uh a lease term ends and the vehicle goes back to the lender and then the lender sells it to recover its remaining value. And that obviously can create problems if you know it's significantly lower than you're expecting, because you know the the cash flows won't be strong enough or you went over a strong enough level unless there's you know a really good level of credit enhancement, you know, within the deal. Um so that's one of the the kind of interesting things uh when you look at these deals.

SPEAKER_03 17:15

What in terms of the deal itself, like in terms of the size and the levels, how how did that bear out?

SPEAKER_01 17:21

Yeah, so I mean you you've got you know the the senior notes which account for uh 77.5% of the deal size, and then uh you're getting most of the credit enhancement through a subordinated line, which uh accounts for 22.5%. So yeah, it's it's kind of I think it's quite an interesting structure. And you know, it's got three rating agencies on the deal, seniors are all rated AAA. So that's you know, obviously helps. And you know, it's also structured as a green bond, which is something that you don't really see in securitization, you know, outside of when you see it a bit in the the Dutch Prime RBS market, you've got like the Green Lion or Greenstorm programs, and also the the data center ones lend themselves a bit to it in terms of how they're able to do, you know, like water management and in terms of you know, if they're they're able to construct a deal where they can say it's it's you know not gonna be wasteful or in terms of those environmental factors. But um yeah, so I I think you know the and also it's Belgian. I mean we I think the the last sort of Belgian uh auto deal was five years ago also from Havens. That was the the debut of the deal. So uh you know there there's plenty that's more esoteric about this, but but equally, you know, Havens is a huge issuer. They they got like something like four or five uh different jurisdictions which they they issue out of. So it's an issue that investors are you know familiar with.

SPEAKER_03 18:46

Yeah. I guess it's interesting whether or not that green label would that help at all, do you think?

SPEAKER_01 18:51

Whether it pulls in more different investors or yeah, I mean I did ask, and because you you kind of be thinking, would you know green bond funds kind of be interested in it? But I think kind of sources close to the deal were were a little bit skeptical of that, but but they were saying it definitely, you know, it it helps with you know the accounts that you're already marketing to. Yeah. You can maybe get a few, you know, slightly larger tickets than usual, just because you know it does help with with some investors who are you know looking at uh you know their their kind of ESG sort of investment pools. Yeah.

SPEAKER_03 19:24

Okay. Sounds promising. And could there be any more EV back deals expected later this year?

SPEAKER_01 19:31

Yeah, I mean it's it's there there's sort of two aspects to it. I mean, I think uh a fully EV back deal is still going to be, you know, a kind of niche within the market. We might be looking at, you know, sort of just one or two a year. I mean, there's some candidates, you know, I I write in the story, I think octopus electric vehicles would would probably be one strong candidate because they've got this you know big warehouse with Lloyds and they've also been you know building out the capital markets team over there. So I think that's you know one possible candidate. I think it's interesting when you look at like EV adoption, you know, the regions where it's strongest. I think I mean one really interesting one is Norway is incredibly strong. But equally, uh, you know, I I don't think Norway really does. I I don't remember covering any Norwegian uh auto ABS deals. You know, Sweden, that's another one where it's popular, but I think uh Sand and Air did a deal this year, but uh it's it's not like a a huge market. So I I think it's m what's more likely is we're just gonna see more BEVs within, you know, possibly all basically uh auto ABS pools. Um so you'll you'll just see you know bigger sort of proportions. Maybe you know, I th I think in this week we've had you know VW is uh marketing uh a driver deal, and that's like 15% of that pool is uh backed by BEVs. So I mean maybe you know we'll we'll just start to see those sort of numbers increasing to more like you know, 20 or 25%, possibly.

SPEAKER_03 20:55

Okay. Well, it's interesting in a segment for us to to watch and follow in future. Yeah. Okay, great. And the story on our global capital website is Avens Energizers Auto ABS with first fully electric vehicle back deal.

SPEAKER_01 21:10

Yeah, excellent. So uh we're at week two of uh Thomas being away, but you've thrown your your hat into the ring.

SPEAKER_03 21:18

He's back next week, so my um the pressure will be down a bit then when Thomas is back. But yeah, so in the meantime, I uh did indeed jump into the deep end of the European CLO market and um yeah, wrote a story there.

SPEAKER_01 21:32

So yeah, you you've been writing about the the European CLO market. I mean, what what has this week's deals sort of been telling you about it?

SPEAKER_03 21:39

Yeah, so the angle that I took and just from um speaking to different people in the market is a sense of whether it's splitting in two slightly and what this week's deals tell us. And then the most recent deals that we have had on um Thursday afternoon seem to sum it up quite neatly. So there was five arrows, reset, Contago, CLO 10 through Morgan Stanley. They priced the AAA's at 121 basis points over Euribal, which is about as tight as we've seen since going back to February, I think it was when I looked at our asset backed monitor data. And then the same deal, single bees, were sold at 97 within 883, 883 basis point spread. So the discount margin on that one, I believe, was about 940 basis points. So there was that deal. And then about an hour or so later, we had um Aries. They launched a new deal, 708 million through Goldman's, I had nothing rated below triple B minus at all. So yeah, on one afternoon, um we had the top of the stack um at its tightest in several months, and then we had like the bottom that appeared um either discounted or missing. So that's been sort of an interesting theme and the market that we're looking at.

SPEAKER_01 23:04

Yeah. Well, let's get into that pricing. All right. So I guess starting at the the top of the stack, I mean, what why do you think triple A's are so strong right now?

SPEAKER_03 23:11

Um, yeah, so speaking um to some people in the market and also just going back and looking at what Thomas has written as well, it seems that every manager who's brought a reset since the summer um has managed to tighten its AAA. So Blackstone, they did one in August at 124, um Macquarie at 125, Partners Group, they did a Pentacelo 7, they got that down to 126 from 130 at its last uh refinancing. So I guess when asking um bankers and uh managers what's what's changed or what's keeping the momentum there in buying, people do say that some new counts have been showing up. Um, and some of that has been put down to some of the insurance companies who are coming through. There are some asset manager mandates ahead of the solvency two reforms. So that is expected to make CLOs cheaper for them to hold. And yeah, looking ahead, there's um a deep pipeline for the rest of September and October, and there could be some good competition for paper at the top. So um they're quite positive there.

SPEAKER_01 24:20

Yeah, excellent. Well, I'm sure Thomas will be happy to do that in the predicting a strong pipeline. So uh yeah. And then kind of looking at the the bottom of the stack, I mean, what exactly is happening with the single bees?

SPEAKER_03 24:32

Yeah. So I think people there, they suggested it's it's perhaps more a supply problem and not so much a credit ones. So this single bees will typically have a more narrow buyer base, and that issuance there is eating into that demand. The numbers that we've seen from again, I think from our asset back monitor, I think in January, just about less than 10% of European single bees were sold below par. And then by July and August, um, the figures that we ran, it was like 37 out of 38. And I think there's only been maybe one deal since August the first that has managed PAR. So, yes, it appears that a growing number of managers are dropping the tranche and fewer and fewer um are having them from the ones that we've seen since June. And yes, it seems that managers they have different their choices are that they can sort of pay north of 900 basis points. They can maybe sell it at around, say, 97 and a half, or they can just leave it out. So it'll be interesting to see how that how that develops and um yeah, whether most most so far this year's all are taking the discount on it.

SPEAKER_01 25:48

I mean, the thing that we really have to kind of talk about is, you know, we had the first CLO 2.0 for Europe in June. Um, I mean, is that something that you think investors are are kind of concerned about?

SPEAKER_03 25:59

Yeah, so that's a good question. And it came up um a couple of times at the conference um on Thursday that we were at. And um it it seemed to be that people think it matters um symbolically more than materially, I guess. Um so we had that Bain capital deal where a B tranch of um it was only around 11 million and it got um 11 million Euros and it got redeemed at around seven and a half million. And so Thomas, our dedicated CLO reporter, who's away, right next week, but he um yeah, he wrote several articles on the Bain deal. They include, like, if I just highlight them, Bain impairment shines light on CLO liability investor risk. He also wrote a comment piece as well that was very good. First Euros CLO impairment since GFC is a wake-up call for investors, and several other articles. But I think um the wider picture that we got from the rating agencies this week and the last few bit weeks has been quite reassuring. So, SP, when they looked at European CLO tranches this year, um, they upgraded 91, they've downgraded 16, and they pointed out that no post-2013 deal that its rate has ever had a tranche default. Um, Moody's elsewhere, they've had their own change in methodology, they've upgraded 262 tranches. But it seems that where the pressure sits is more, and again, people were talking about this at the conference, is in some of the older deals that are past their reinvestment period. And so that the double B, the single B bands. But then SP again in the conference, they were talking about stress scenarios. And I think even they were saying, like in an AI scenario, where sort of doomsday outlook where say 10 of the most widely held software names, if they should all default, well, that would only cut, say, a fifth of ratings. So it seems like it's more a bottom of the stack story than um a systemic one across the whole stack. But yeah, and I I think looking forward, people were positive. Something again that came up in the conference is that the big question is um about loan supply. People quite bullish on that. Um, people expecting it to pick up to around 30 billion or so for the rest of this year. Also, a lot of talk about um captive equity now, and that's becoming more the norm. So, yeah, managers will perhaps face this single B decision more often now. But I think overall, like we said, the the tone um from the conference and just the one-to-one that we were having with investors and bankers there was um was all quite positive. So, yes, I it's I should end on a positive note there.

SPEAKER_01 28:50

Excellent.

SPEAKER_03 28:51

Yeah, and I'm happy I'll be handing over the mantle back to um Thomas. And uh yeah, yeah, I'm sure he'll he'll pick it up and have lots of good stuff to write. Yeah.

SPEAKER_01 28:59

Yes, heavy heavy is the head that wears the CLO crown. Yeah. Um if anyone wants to read that story, it's also available uh on the website, and it's called Single Bees Left Behind in CLO Rally as Perceived Risk Mounts.

SPEAKER_02 29:14

That's all we've got for this week, then. But uh thank you so much for listening and uh goodbye.

SPEAKER_03 29:20

Yeah, thanks, Tom. Feature all next week. Bye bye.