Contents

ABS

Judgement day

Appeals court to rule on SEC's private funds proposals

The Court of Appeals for the Fifth Circuit is set to soon issue a ruling on the SEC’s Private Funds Adviser Rule, which will have a significant bearing on all corners of the US investment market if implementation goes ahead as planned.

The five-part regulation was adopted in September 2023, with the SEC claiming it “updates” and “enhances” existing rules, but compliance does not start until September 2023. An estimated US$3trn market, comprising venture capital, private equity and hedge funds, is to be affected.

Compliance costs will cost this industry in the region of US$5bn, estimate sources - which in one way or another will be charged back to the investor - while a whole range of investment opportunities will be either prohibited or are thought likely to be prohibited.

Investors affected by the ruling are often prominent buyers in the structured finance industry, and it is also likely to restrain the flow of liquidity from private credit which has been such a notable feature of the business in recent times.

“The final rules are expected to have a substantial impact on industry-wide business practices and greatly increase regulatory burden,” noted law firm White and Case in its note to clients on the subject in September last year.

There has been considerable push back from the industry since last August, and the original proposal has been watered down but opponents claim it is still too far reaching and is not justified by the 2010 Dodd-Frank Act or regulatory precedent.

Power is now vested in the three-member panel of the fifth circuit appeal court, and there is hope that it will determine that the SEC has overstepped its boundaries of authority.

The justices are Cory Wilson, Kurt Engelhardt and Leslie Southwick, the first two of which were appointed by President Trump and the last by President George W Bush. The court has the reputation of being one of the most conservative in the country.

Hitherto private funds have been subject to a much lighter regulatory regime as participants are deemed sophisticated and meet minimum investment thresholds. “Private funds are only available to sophisticated investors — we’re not talking about retirees investing their life’s savings here. The attempt by the SEC to bring private funds into a more aggressive regulatory regime than what already exists for mutual funds struck a lot of people as surprising, unfounded and unnecessary,” says Marc Elovitz, a co-managing partner at Schulte Roth & Zabel in New York.

The Private Funds Adviser Rule not only seeks to impose a more onerous and costly reporting regime, it attempts to curtail certain activities unless disclosure and consent criteria have been met. Yet there is considerable ambiguity and lack of clarity around the implementation and nature of these prohibitions. It is feared that these uncertainties will drive potential new entrants away from the market.

The so-called Preferential Treatment Rule also seeks to establish a level playing field between investors irrespective of how much money they bring to the table. As Elovitz explains, “It doesn’t matter if you have a US$200m pension or a US$2m pension it says you should be treated the same and this is not well-founded in our financial system.”

A judgement from the court of appeals is expected no later than May, but it might well come sooner given the imminence of the September compliance date and the considerable effort that needs to be expended to meet these requirements.

If the judgement does not meet the approval of the SEC or the industry, or it suits neither, then additional verdicts may be sought from the full 17-member fifth circuit court of appeals, or, ultimately, the Supreme Court of the United States but this gambit is unlikely to be fruitful, say experts. Neither court has the bandwidth to spend a great deal of time in further adjudications of this sort, so the verdict from the judges Wilson, Engelhardt and Southwick is likely to be the last word.

The stakes are high: “this ruling would impact private funds significantly and carries a real threat of reducing the capital available for markets,” says Elovitz.

Simon Boughey

CLO Managers

Survival of the biggest

CLO platforms retain allure as M&As in alternative credit continue apace

The volume of mergers and acquisitions in the alternative credit manager space grew last year, as large institutions and established managers responded to investor appetite. But, while deals for standalone CLO platforms remain popular, direct lending and multi-strategy continue to be the key drivers behind the trend.

There were a record number of M&A deals in the alternative credit manager space in 2023, according to data from alternative credit consultancy Gapstow. The firm’s Alternative Credit Acquisition Database recorded 32 transactions accounting for a combined US$284bn in AuM, a 36% increase on the previous record witnessed in 2022, and a 78% uplift on the five-year average. A key driver behind this, says Gapstow ceo Chris Acito, is that investor demand for alternative credit products continues to grow, which is not the case for other asset classes.

“That’s where the money is,” says Acito. “CEOs of asset management firms are not that excited to acquire a large-cap public equity team that manages money in long-only format hugging the benchmark. You can say the same about hedge funds, fixed income, frankly even private equity. If you’re an asset manager and you’re looking for the next set of opportunities – specifically those that are growing – all roads point back to the alternative credit spaces.”

Increasingly, the type of buyer in recent years has shifted from private equity managers to larger institutions, according to Gapstow. There has been a notable change since around 2020, which has been exemplified over the past two years by deals including Franklin Templeton’s acquisition of Alcentra; Nuveen’s acquisition of Arcmont Asset Management; Mubadala’s acquisition of Fortress Investment Group; and Generali’s acquisition of Octagon Credit Investors and Global Evolution via its deal for Conning Holdings. 

In large part, this push from larger asset managers is because their LPs are looking to focus on fewer relationships with larger more diversified managers. As Acito explains: “My thesis is that there is going to be an imperative going forward for the big to become bigger and the broad to become broader.”

He continues: “There is always room for smaller boutique managers who do something interesting, but people want to do more with individual managers. LPs want to invest lots into alternative credit but they still need to have time to manage other areas of their portfolio, so increasingly it makes sense to work with the same people in multiple areas.”

The most popular strategies in this gold rush have been multi-strategy credit and direct lending, accounting for 52.2% and 22.1% respectively of AuM acquired in 2023, according to Gapstow’s figures. However, at 18.8%, CLOs made a larger contribution last year than has historically been the case. This was skewed somewhat by Generali’s acquisition of Octagon, which by itself accounted for the majority of CLO AuM changing hands. In terms of volume, the six acquisitions of CLO platforms was only marginally above the five-year average of 5.4.

CLO platforms, says Acito, have historically been attractive acquisition propositions, but there is a natural limit to the number of deals that can happen in the space. There are a small and dwindling number of free-standing CLO managers of scale, he explains, that have not already been acquired by larger asset managers.

“There are always a surprising number of deals for CLO platforms happening every year,” Acito says. “They will always be desirable because people view them as a scalable way to continue to raise AuM. But also, when an acquisition is made, the buyer doesn’t necessarily need to bring over any analysts if they already have a big CLO franchise. When you can take something over and can theoretically largely strip out all of the expenses, that’s a pretty accretive acquisition. You can’t often do that in other businesses, but it happens in CLOs all the time.”

This goes some way to explaining why five of the six buyouts of CLO managers recorded by Gapstow in 2023 were classified as consolidation or AuM plays. The value proposition for buyers that already have established CLO capabilities – and can consequently find efficiencies and synergies – is far greater than it is for those that do not.

“If I’m buying an existing book of business and taking out a lot of the costs,” says Acito, “eventually those CLOs are going to wind their way off, but in the meantime I get supercharged margin on them. The buyer who is keeping the CLO management team may not have as great a margin for a couple of years as it tries to build the platform.”

In stark contrast, acquisitions of direct lending managers have typically been capability-related – motivated by diversification into the asset class or into a new geography. In 2022, such deals included the acquisitions of Arcmont by Nuveen and Alcentra by Franklin Templeton. Last year, BlackRock acquired European manager Kreos Capital while Prudential Financial’s PGIM acquired lower mid-market direct lender Deerpath Capital Management.

When worlds collide
It is worth noting that all four multi-strategy acquisitions recorded by Gapstow were for firms that had CLO platforms: Fortress, Sculptor Capital Management, CQS and Angelo Gordon. Three were made by buyers that were already active in the CLO space, namely Mubadala, Rithm and TPG, calling into question what conflicts might be likely to emerge during the merger process.

Acito explains there can always be challenging situations, particularly when larger multi-strategy firms have a distressed team and a CLO team. A hypothetical scenario that sees a previously performing loan in an existing CLO platform become a potential target for the distressed strategy could essentially play “one side of the house against the other”.

“The industry has proven that, although it is not an inconsequential problem, that is a manageable problem,” Acito says. “In a merger situation, people would typically go into that with eyes wide open. With good help from compliance lawyers and the like, the appropriate protocols would be put into place.”

He adds: “Some people actually view that dynamic as complementary. In CLOs one of the highest added-value things you can do is to avoid bankruptcies. You limit that threat with a very diversified portfolio. But when loans do go bad, workout capabilities are a very different skill set, and sometimes it can be a real advantage to have an in-house group you can turn to for help.”

Kenny Wastell

ABS

On the cards?

BBUK acquisition could spell end of DELAM issuance

Barclays Bank UK (BBUK) last week entered into an agreement to purchase Tesco’s retail banking business for an estimated total consideration of £600m. Tesco Bank’s Delamare Cards MTN Issuer master trust (DELAM) is expected to transfer to BBUK upon completion of the acquisition, but the move could halt further new issuance from the programme, as the diversity of funding channels available to Barclays renders it less reliant on securitisation.

Under the transaction - which is anticipated to complete in 2H24 - BBUK is set to acquire £4.2bn of gross credit card receivables, £4.1bn of gross unsecured personal loans and £6.7bn in customer deposits from Tesco Bank. With the purchase, BBUK will also enter into a long-term, exclusive strategic partnership with Tesco Stores to market and distribute credit cards, unsecured personal loans and deposits using the Tesco brand. This strategic partnership will operate for an initial period of 10 years, with BBUK utilising both Tesco’s existing distribution channels and the open market.

Tesco Bank was a programmatic securitisation issuer between 2014 and 2018, during which time it distributed four UK credit card ABS (CCABS) via its DELAM master trust. More recently, Tesco Bank placed DELAM 2023-1 and DELAM 2023-2 last April and October respectively (SCI ABS Markets - 16 October 2023). JPMorgan international securitisation research analysts note that these deals represented the first source of distributed CCABS issuance from a UK bank in the post-Covid/post-TFSME era, with non-bank issuer NewDay dominating the market in the intervening years.

As at December 2023, the DELAM master trust had an outstanding collateral balance of circa £3.3bn, with £2.24bn of funding notes in issue (of which £550m is distributed and around £1.7bn is retained), according to JPMorgan figures. BBUK also has an outstanding CCABS master trust, Gracechurch Card Programme Funding (BCARD), which contains circa £10bn of outstanding collateral - making it the largest UK CCABS master trust.

However, Barclays is not an active CCABS issuer, given that it hasn’t priced a deal (distributed or retained) since July 2018. The JPMorgan analysts note that at present, the £5.3bn of BCARD funding notes outstanding are retained bonds that were issued in 2013-2015 and for which the scheduled redemption dates were extended for a second time in May 2022, to between June 2027 and November 2028.

Regarding the future of DELAM once it is assumed by Barclays, they point out that one obvious - and likely influential - fact is the significant size discrepancy between the target and the acquirer. Tesco Bank’s total assets of £10.3bn (as at 31 August 2023) represent a small fraction of BBUK’s £303.5bn asset base (as at 30 June 2023).

“With this in mind, while both institutions are primarily deposit-funded, the inherent diversity of funding channels available to Barclays makes it less reliant on securitisation. And its sparing use of securitisation in recent years is a case in point, in our view, particularly as several of its deposit-taking peers have started to return to the market,” the analysts observe.

They add: “Thus, while Tesco Bank noted in its 2023 Interim Report that its recent DELAM issuance was part of the group’s liquidity and funding strategy, we don’t expect the programme will continue to be utilised in the same way by BBUK – even with the long-term strategic marketing partnership to continue distributing Tesco-branded credit cards. Accordingly, while theoretically not out of the realm of possibility, we do not expect to see any further new issuance from the DELAM programme.”

Nevertheless, the analysts’ base case is that existing DELAM bondholders will experience no disruption as a result of the acquisition and transfer, as BBUK is expected to take over servicing and other responsibilities of the master trust from Tesco Personal Finance (TPF) and continue to manage the redemption profile of the outstanding bonds. The scheduled redemption dates for the two outstanding distributed DELAM bonds fall in 2Q26 and 4Q26, with a barbell of redemptions of retained bonds scheduled in 3Q25 and then 2028.

They add that the DELAM seller share currently stands at circa 33.3% versus a minimum requirement of 9.1%. Although there is perhaps downside risk that any failure to add new receivables to DELAM could trigger early amortisation of the bonds, the analysts highlight relatively seamless master trust management in the US following mergers - including Chase/Bank One and Bank of America/MBNA - as providing some evidence that it will be ‘business as usual’ for DELAM bondholders post-acquisition.

Corinne Smith

Structured Finance

SCI Start the Week - 12 February 2024

A review of SCI's latest content

Last week's news and analysis
Break in the clouds
2024 investment opportunities eyed across Europe
Capital velocity
SRT market update
Economic risk underestimated?
RWA density study shows downward convergence
FCA review spells uncertainty for UK auto ABS
Updates on commission structure investigation & Dexia outsourcing
Job swaps weekly: Interpath poaches four from EY
People moves and key promotions in securitisation
Latest SRTx fixings released
Index values indicate tightening in spreads in line with overall risk markets
Navient unveils 'strategic actions'
Corporate simplification planned
Non-traditional use
CMBS temporary housing challenges highlighted
Romanian SME boost
EIB Group and Deutsche Leasing Romania close synthetic securitisation
Structured finance in private capital's pivot to hybrid fundraising
Growth in CFOs and RNFs driven by ongoing demand from regulated investors
Transition boost
Climate-focused guarantor eyes emerging markets
Plus
Deal-focused updates from our ABS Markets and CLO Markets services

SCI In Conversation podcast
In the latest episode of the SCI In Conversation podcast, SCI's deputy editor Kenny Wastell speaks to S&P Global Ratings’ md and head of EMEA structured finance research Andrew South and Alastair Bigley, md and sector lead for European RMBS, about the year ahead.
The episode can be accessed here, as well as wherever you usually get your podcasts, including Apple Podcasts and Spotify (just search for ‘SCI In Conversation’).

SCI Markets
SCI Markets provides deal-focused information on the global CLO and Australian/European/UK ABS/MBS primary and secondary markets. It offers intra-day updates and searchable deal databases alongside CLO BWIC pricing and commentary. Please email Tauseef Asri at SCI for more information or to set up a free trial here.

SRTx benchmark
SCI has launched SRTx (Significant Risk Transfer Index), a new benchmark that measures the estimated prevailing new-issue price spread for generic private market risk transfer transactions. Calculated and rebalanced on a monthly basis by Mark Fontanilla & Co, the index provides market participants with a benchmark reference point for pricing in the private risk transfer market by aggregating issuer and investor views on pricing. For more information on SRTx or to register your interest as a contributor, click here.

Upcoming SCI events
SCI’s 3rd Annual ESG Securitisation Seminar
16 April 2024, London

Emerging Europe SRT Seminar
18 June 2024, Warsaw

2nd Annual Esoteric ABS Seminar
25 June, New York

CRT Training for New Market Entrants
14-15 October, London

Women In Risk Sharing
15th October, London

10th Annual Capital Relief Trades Seminar
16 & 17 October 2024, London

2nd Annual European CRE Finance Seminar
November 2024, London

Capital Relief Trades

Corporate flow

SRT Market Update

As the halfway mark in Q1 approaches, a backlog of European corporate mandates appears to be building in the SRT market.

“From the main banks active in the SRT market, I’m mostly seeing a corporate flow right now,” confirms one SRT investor.

He continues: “It seems that a lot of the European banks that were not in the market in Q4 last year, because of the US push we experienced, have decided to come out in Q1-Q2 this year.”

Asked if, as reported last week, he expects established issuers to double their number of trades this year, the investor points to capital management along with regulatory uncertainty and macro pressures. He says: “It’s tough to put a number to it. But I would say, yes, they're certainly looking to increase their issuance meaningfully.”

He continues: “Basel 4 starts next year, the environment remains pressured from a macro perspective and we expect to see more downgrades in portfolios. And in that environment, capital is impacted. Therefore, trying to manage capital ahead is generally a good idea.”

Regarding spreads, the investor does not anticipate or perceive any pronounced tightening. He says: “Spreads have already tightened in Q4 of last year; however, there is not enough data this year to say whether they’ll tighten or widen. But I get the sense that there is a different approach to the very easy transactions versus the more difficult transactions. The very easy transactions are seeing appetite from certain investors who will bid tighter; more difficult transactions - which include the more private names and more European-focused deals - are not expected to tighten in pricing.”

He continues: “Generally, I think spreads peaked in Q3 last year, before starting to tighten in Q4. I feel that trend was typically driven by the big US trades that were done. And I think that in the same spirit, the same sort of US trades (with 100% investment grade borrowers and so on) will price a bit tighter. However and overall, I do not sense that the market is necessarily tighter.”

Regarding the current pipeline, additional details have emerged regarding Santander’s global large corporate trade. Entitled Ducati, the trade is said to be very similar to Santander’s previous Bultaco deal, which equally alluded to a motorcycle manufacturing company. Bultaco was a €291.6m synthetic securitisation that referenced a €5bn portfolio of US, UK and European undrawn corporate revolvers.

Regarding Ducati, the investor notes: “It’s a similar profile to Bultaco, with a high-quality portfolio - all RCFs, high-quality borrowers and very investment grade heavy.”

Meanwhile, Credit Agricole is rumoured to be prepping its latest CEDAR transaction, with sources noting that “it’s in its very early stages.”

Finally, in terms of execution and timing, the investor expects BNP Paribas’ Broadway and Deutsche Bank’s CRAFT trades to price towards the end of March. As for Caixabank’s SME transaction, the investor says: “It hasn't launched properly yet. They’ve done NDAs, but there's no portfolio or term sheet yet.”

Vincent Nadeau

Structured Finance

Job swaps weekly: Hogan Lovells adds dozens from Orrick

People moves and key promotions in securitisation

This week’s roundup of securitisation job swaps sees Hogan Lovells snapping up a hoard of Italy-based finance and M&A lawyers from Orrick, including a number of securitisation partners. Elsewhere, First Eagle Alternative Credit (FEAC) has revealed its leadership transition plan, as its president prepares to leave the firm early next year, while Newmark has appointed a UK- and Europe-focused head of debt and structured finance.

Hogan Lovells has poached a group of over 30 staff from Orrick in Italy, comprising 23 finance and M&A lawyers, as well as trainees and business services professionals. The group includes a team of five securitisation partners – Alessandro Accrocca, Annalisa Dentoni-Litta, Madeleine Horrocks, Patrizio Messina and Sabrina Setini (who joins as a new partner, having been of counsel at Orrick) – and provides assistance in both English and Italian law. 

Messina will succeed Luca Picone as Hogan Lovells’ managing partner for Italy, working alongside newly appointed deputy managing partner Vittorio Moresco. Picone has led the firm’s Italy practice for seven years and will continue to work closely with both Messina and Moresco.

Meanwhile, FEAC president Chris Flynn is to leave the firm in early 2025. Effective immediately, Flynn will share the title of FEAC co-president with Jim Fellows, cio of FEAC. Fellows will become president upon Flynn’s departure, while continuing to serve as cio, and this period of co-leadership is intended to promote a smooth transition of responsibilities. The pair now report to First Eagle president and ceo Mehdi Mahmud.

Fellows has been with FEAC and its predecessor companies for 20 of his more than 30 years in the alternative investment industry, most recently serving as FEAC’s cio and head of tradable credit. He is a member of FEAC’s global investment committee and the investment committees of both its tradable credit and direct lending platforms.

FEAC’s leadership transition plan also includes a number of other senior-level promotions, which are effective immediately. Deputy cio of direct lending Michelle Handy has been promoted to cio of direct lending, while deputy cio of tradable credit Bob Hickey has been promoted to cio of tradable credit. Brian Murphy, head of capital markets, and Garrett Stephen, co-head of origination and structuring for direct lending, have been promoted to co-heads of origination for FEAC. Murphy also retains his current title of head of capital markets.

In conjunction with these promotions, Handy, Murphy and Stephen have joined FEAC’s global investment committee alongside Flynn, Fellows, Hickey and head of business development Mike Herzig.

Newmark has recruited a new head of debt and structured finance for the UK and Europe, further bolstering its capital markets services in the region. Matthew Featherstone will join Newmark’s London office from CBRE Capital Advisors where he served as an executive director on its debt and structured finance team. Featherstone brings almost twenty years of experience to the role, and will work alongside Newmark’s senior team in the UK and newly recruited lead for its real estate investment banking group, Charlie Foster.

Scotiabank ceo and head of global banking and markets, Jake Lawrence, is to leave the group after 22 years to take up a new position as cfo at Power Corporation of Canada. Following his departure, Scotiabank’s present md and head of global fixed income, commodities and currencies, Paul Scurfield, will take over as global head of capital markets, global banking and markets. In addition, Michael Kruse will serve as Scotiabank’s interim global head of corporate and investment banking, global banking and markets.

Clifford Chance has poached structured finance specialist Blake Jones from Paul Hastings as a private capital-focused partner in its London office. Jones specialises in both public and private market securitisation transactions, and also brings a keen interest in ESG to his new role. Prior to his five-year tenure as a partner at Paul Hastings, Jones held positions at Citi, Linklaters and BlackRock.

Insurance services group Marco Capital has merged its Guernsey reinsurance subsidiaries Humboldt Re and Kelvin Re under a new brand called Marco Re. Now the largest carrier in the Marco Capital group, Marco Re has substantial financial strength and benefits from economies of scale derived from its merger, as its two component carriers had similar books of business. These two companies were originally formed and managed under Credit Suisse ILS.

Mark Elliott leads Marco Re as ceo and is supported by a senior team in Guernsey, as well as Marco’s specialist insurance services company Polo Commercial Insurance Services (PCIS). Elliott was previously ceo of Humboldt Re and Kelvin Re, having worked at Aon and Artex before that.

Dechert has added a new partner to its corporate and securities practice in New York. Eliot Relles has joined the firm from Weil, Gotshal & Manges, where he has served as a partner in its banking and finance division since 2020. He previously spent 23-years at Schulte Roth & Zabel. Relles’ practice focuses on a range of complex corporate finance transactions – including structured finance.

Frost Brown Todd has appointed Stoll Keenon Ogden‘s Alexander Staffieri as partner, based in its Louisville office. Staffieri works alongside banks and investors on transactions including commercial real estate lending, structured finance and asset-based lending. He leaves his role as member and co-chair of the business services group at Stoll Keenon Ogden after 12 years with the firm. 

Cushman & Wakefield's Lauren Greenberg has joined Berkadia as director for investment sales and structured finance, based in its New York office. Greenberg leaves her role as director for global hospitality capital markets at Cushman & Wakefield after four and a half years with the firm. She previously worked in real estate and structured credit roles at EY, Morningstar and The Weitzman Group.

UBS has promoted Paolo Bertoldo to director for leveraged and structured finance, based in its London office. Bertoldo joined the bank in 2019 and is promoted from associate director. He previously spent three years as a credit analyst in HSBC’s Milan office.

In further promotion news, Hall Structured Finance has elevated Bryce Yamauchi to vice president of originations. Based in Dallas, Yamauchi joined Hall in early 2021, having previously spent seven and a half years at Bay Mount Capital.

Inkia Energy's Ana Gabriela Farfán Estabridis has joined Santander as structured finance vice president, based in its Madrid office. Estabridis leaves her role as deputy business development manager at Inkia after five years with the business, having previously spent three and a half years at IC Power.

Andrew Readinger has joined NPL Markets as senior advisor, based in London. He has over 35 years of experience, most recently as md, head of Europe and North America financial institution group at Commerzbank, which he joined in February 2011. Before that, he worked at Depfa Bank, Morgan Stanley and JPMorgan.

And finally, decarbonisation-focused asset management firm Aligned Climate Capital has appointed Katia Garrigoux Vargas as associate in its solar panels team, with a focus on solar project acquisitions and structured finance. Vargas will be based in New York and joins the firm after a brief contract as a consultant at Net Impact. She previously spent three and a half years at Numberly.

Corinne Smith, Claudia Lewis, Kenny Wastell