Moral fibre ABS

1 - > SPEAKER_01: Hello and welcome to another fine matter. 2 - > I'm George Smith, local capitalist securitisation 3 - > editor, and I'm joined by only one Tom this week, Thomas 4 - > Hopkins, our CL Reporter. 5 - > Hello. 6 - > SPEAKER_00: Hi there, George.

7 - > How are you doing? 8 - > SPEAKER_01: I'm very well, and it's good to have you back on 9 - > another fine mass. 10 - > SPEAKER_00: Yes, well, I was in Scotland last week. 11 - > You're currently in Scotland, and I'm wishing I was still in 12 - > Scotland because it is horrifically hot in London.

13 - > And uh yeah, I think basically most people in sort of the 14 - > southeast of England have just been in a terrible mood all week 15 - > because of the horrendous heat. 16 - > But yeah, so I'm very envious of you still you know of you being 17 - > in Scotland. 18 - > SPEAKER_01: Yes, I'm feeling very smart. 19 - > I mean I did actually do it tactically.

20 - > I got on the first tube on or the first train on Tuesday 21 - > morning when I saw the red alert. 22 - > And um as we record this on Friday, I'm getting the train 23 - > back this evening, so I've pretty much avoided the red 24 - > alert. 25 - > SPEAKER_00: Yes, it it it will be a shock to the system though, 26 - > I think even just one evening. 27 - > But yeah, you are fortunate in that the heat wave is uh set to 28 - > end this weekend, so you've missed most of it.

29 - > SPEAKER_01: Yes, indeed, indeed. 30 - > Um let's talk about the the market. 31 - > CLOs have sort of kept taking away, haven't they, since since 32 - > Global ABS, a few more deals printing this week, at least I 33 - > think I've seen. 34 - > SPEAKER_00: Yes, in fact, so it was quite a slow start to the 35 - > week.

36 - > Um, but sort of later on we've actually had quite a few. 37 - > Um so I mean at the start of the week we had a refinancing um of 38 - > sort of harvest CLO32, and then sort of moving on a bit, we 39 - > yeah, we we've had um a new issue from Bridge Point, you 40 - > know, we've also had a Capital Four reset, we've had sort of 41 - > OCP uh Euro CLO 2017 refinancing, and then sort of 42 - > yesterday evening there were sort of three um new issue deals 43 - > that came through Reading Ridge, Palmer Square, and sort of ICG.

44 - > So it's actually been it was as I say a slow start to the week, 45 - > but it's really kind of picked up. 46 - > Um and certainly from what I'm hearing from the market, you 47 - > know, while we haven't got spreads that are say at 2020 48 - > levels, they are still reasonably tight by the 49 - > standards of the last few years and are almost back to sort of 50 - > pre-w Iran war levels, not quite, but almost, and there's a 51 - > lot of positivity in the market, and so it seems to be moving at 52 - > quite a quite a pace, really.

53 - > SPEAKER_01: Well, that's all good news that there's 54 - > positivity in the market despite the topic of your weekly story, 55 - > which I understand. 56 - > Exactly, yes. 57 - > I'm not allowed to call it a default, but some tranche buying 58 - > investors have lost some of their principal for the first 59 - > time since the financial crisis. 60 - > Is that the legal way to phrase it?

61 - > SPEAKER_00: Yes, yeah, exactly. 62 - > We have to be we have to be careful, in fact, not to call 63 - > this a default because there was no technical default on the uh 64 - > on the tranche in question. 65 - > I want to make that quite clear. 66 - > Uh that's how we've described it.

67 - > But uh, but yes, what we have seen is the first impairment to 68 - > a CLO liability tranche in the CLO 2.0 era. 69 - > Uh, that obviously dates back to sort of 2013 when CLOs were 70 - > relaunched after the financial crisis. 71 - > So this is kind of the first impairment really since you know 72 - > um the GFC.

73 - > But there were impairments to, uh and this is only in Europe, I 74 - > have to make very clear as well, because we have seen impairments 75 - > to some US CLO liability tranches uh since the GFC. 76 - > There were also impairments in the CLO 1.0 era in um in Europe, 77 - > which was obviously sort of before and sort of including the 78 - > financial crisis, uh, but this is the first time it's happened. 79 - > So, in the sort of the 13 years of the of the new CLO product 80 - > that was kind of launched after the financial crisis in Europe, 81 - > um, it's happened.

82 - > And the deal in question was the Bain Capital Euro CLO 2018-1 83 - > deal, is obviously managed by Bain Capital Credit, and the 84 - > impairment happened on the class F notes. 85 - > You know, in CLO land, we often refer to things by uh their 86 - > rating because you know, when they're when the CLOs are 87 - > issued, you know, you'll you'll sort of reuse that rating to 88 - > refer to the particular tranch. 89 - > It's a little bit more complicated here because the 90 - > class F notes were originally the single B's, but by the time 91 - > the impairment happened, they'd been downgraded a couple of 92 - > times by Fitch.

93 - > And so, yeah, we're sort of calling them the class F's, but 94 - > you can think of them as kind of the single B tranch, so the 95 - > lowest tranche kind of at the bottom of the capital stack in 96 - > you know, in terms of CLO liabilities. 97 - > So, yes, George, essentially you're right. 98 - > So there was kind of essentially the note holders received a kind 99 - > of lower sort of principal kind of payout than they would have 100 - > done. 101 - > So they kind of consented.

102 - > Uh so when the deal was called, essentially, the the an 103 - > agreement was reached with the note holders, and they received 104 - > 7.4 million euros instead of the full par amount of 11.2, and 105 - > they did consent to sort of lowering this sort of par, but 106 - > it's a sort of outstanding principle balance, which made 107 - > calling the deal possible because generally in CLO 108 - > documentation, if you're going to call a deal, you know, you 109 - > have to be able to sort of re repay all the outstanding 110 - > balance and interest as part of that.

111 - > So kind of calling the deal was sort of made possible by this uh 112 - > agreement being reached with no holders, but because it was 113 - > reached, you know, and and the and the balance was lowered, 114 - > there was no technical event of default uh because they had 115 - > agreed to that and that's uh and that that's what they'd 116 - > received. 117 - > So so yes, but it is still an impairment in the sense that 118 - > investors did not receive the full original par balance of the 119 - > notes.

120 - > SPEAKER_01: So what's already gone gone wrong here then? 121 - > Because presumably nobody this isn't the outcome anyone would 122 - > have wanted. 123 - > SPEAKER_00: Exactly. 124 - > It really has a lot to do with the kind of deterioration of the 125 - > CLO's collateral pool sort of over kind of a number of years.

126 - > So uh a source close to the deal did tell me that one thing was 127 - > that the the CLO had sort of a meaningful exposure to mid-cap 128 - > issuers, uh, and the source kind of identified this as a key 129 - > issue of Bain's strategy at the time. 130 - > The source did note, though, that uh Bain has now changed 131 - > this strategy and has sort of shifted to kind of more diverse 132 - > and liquid portfolios. 133 - > Additionally, though, you know, it's sort of this is a deal that 134 - > obviously was first priced in 2018, and so it's gone through a 135 - > number of things like, you know, the the pandemic and the war in 136 - > Ukraine, the Iran war, which has been rather a shock to many 137 - > CLO's kind of collateral pools.

138 - > But then the most important thing I think to consider is 139 - > that this deal exited reinvestment in 2022 and has 140 - > kept running since then. 141 - > Now, the longer you keep a deal out of reinvestment, you know, 142 - > you don't call it or reset it, the more likely you are to end 143 - > up with kind of par losses in your portfolio and a kind of 144 - > just a deteriorating, weakening portfolio because inevitably 145 - > over time any CLO will pick up kind of lower quality credits.

146 - > And, you know, if you're going to keep a deal running after its 147 - > formal reinvestment period, you have to keep meeting the CCC and 148 - > OC tests, meaning that basically your your share of CCC rated 149 - > assets can't exceed 7.5% of your portfolio. 150 - > And so to keep the CCC threshold lower than that, if you're just 151 - > continuing to run the deal after reinvestment, you have to keep 152 - > selling triple C assets, and you often have to sell these at a 153 - > discount, and that doesn't raise enough to replace them with 154 - > higher quality assets, so you get a deteriorating portfolio.

155 - > You will also accumulate some defaults over time. 156 - > So there was some strategy-specific factors with 157 - > the with the CLO about um, you know, where where it had been 158 - > invested in sort of the mid-carechases, there was some 159 - > macro level shocks, and then there was just the fact that 160 - > this deal was kept running for so long after reinvestment. 161 - > Almost any deal will eventually start to get to a point where it 162 - > has accumulated, as I say, lower quality credits if you haven't 163 - > had like a fresh equity injection to clean up the 164 - > portfolio, as you would if you reset the deal.

165 - > And ultimately, then when looking to call the deal, I 166 - > think it became clear that if the assets in the portfolio were 167 - > sold, it was kind of unlikely that the sale of all the assets 168 - > would repay the notes in full, and that's sort of where the 169 - > impairment kind of you know comes about in the end. 170 - > SPEAKER_01: Is isn't it quite standard practice in the CLO 171 - > market to just reset deals once they get kind of towards the end 172 - > of reinvestment or just after like what happened here?

173 - > Why was there no reset? 174 - > SPEAKER_00: So yes, you're quite right. 175 - > Most managers will reset a deal within kind of nine to twelve 176 - > months of reinvestment ending. 177 - > The reasons for this is, well, A, it's quite complicated to 178 - > keep a deal running after reinvestment, as we've just sort 179 - > of noted.

180 - > Secondly, when the reinvestment period ends, you you know, if 181 - > you don't manage to meet certain conditions, like those tests we 182 - > were mentioning, amortization can start. 183 - > And if amortization starts, the AAA's are paid down first and 184 - > the cost of capital in the CLO goes up. 185 - > So most managers don't keep deals running for ages and ages 186 - > after reinvestment. 187 - > They will sort of reset them or call them within about nine to 188 - > twelve months.

189 - > But the reason that this deal was kept running, it seems to 190 - > have a lot to do with the fact that Bain did not hold the 191 - > majority of the equity in the deal. 192 - > This was held by sort of third-party investors. 193 - > Now it's very important to note that third-party investors, if 194 - > they hold the majority of the CLO's equity, they control 195 - > really when the deal is called or reset. 196 - > So Bain didn't really have any control over that.

197 - > Uh, in fact, I know from a source, you know, with sort of 198 - > familiar with the matter, that Bain tried to call the deal last 199 - > year and the majority equity decided against this. 200 - > But there are also reasons why it would have appeared quite 201 - > attractive for the third-party equity investors to keep this 202 - > deal running, because like a lot of deals in 2018, it priced with 203 - > incredibly tight spreads. 204 - > I mean, the triple A's had a spread of 78 basis points.

205 - > I mean, now you're talking sort of mid-120s for triple A's. 206 - > Uh, similarly, the transactions single B's, the tranch that 207 - > eventually was impaired, um, had a spread of just 629 basis 208 - > points. 209 - > Most marriages are not getting anything sort of far below 800 210 - > at the moment. 211 - > So these incredibly tight spreads would have, I think, 212 - > made for quite an attractive arbitrage.

213 - > And ultimately the arbitrage funds cash on cash distributions 214 - > to equity. 215 - > So at no point was there really much of an incentive to sort of 216 - > accept higher spreads and a lower arbitrage by resetting the 217 - > deal from the third-party equity investor perspective. 218 - > So it may have been attractive for them just to keep the deal 219 - > running and running and running and getting these quite healthy 220 - > cash distribution cash-on-cash distributions, even though 221 - > eventually when the deal's called, I mean, it you know, 222 - > it's it's sort of very it's quite unlikely that they will 223 - > receive anything from the event eventually calling the deal on 224 - > the basis that you know, if the single bee tranche is impaired, 225 - > it's very unlikely equity gets anything because equity is below 226 - > the single bees in the waterfall.

227 - > But it's it's an interesting illustration of how in some ways 228 - > the interests of the note holders and the interests of the 229 - > third-party equity investors were a little bit different. 230 - > And you know, the deal, I think, was called now rather than being 231 - > reset. 232 - > You know, that this may have been because ultimately, you 233 - > know, the third-party equity would have had to in the 234 - > third-party equity investor would have had to put in quite a 235 - > lot of capital, you know, in in sort of additional equity to 236 - > reset the deal.

237 - > And it may have just been more attractive to just call the deal 238 - > and invest somewhere else or in a in a in a new deal rather than 239 - > you know reset it. 240 - > So there were sort of specific circumstances I think that may 241 - > have led keeping the deal running to look a bit attractive 242 - > to third-party equity. 243 - > SPEAKER_01: Yeah, that is interesting. 244 - > People talk quite a bit, you know, NCLOs about having equity 245 - > and debt in the same vehicle kind of can create tension, but 246 - > it's it's very interesting to have this practical example of 247 - > kind of how that can play out.

248 - > SPEAKER_00: Well, exactly. 249 - > You know, I mean I think like to some extent, you know, equity 250 - > and debt can have an alignment of interests because neither of 251 - > them really want lots and lots of defaults in a portfolio, 252 - > generally speaking, because it does affect both of them 253 - > potentially. 254 - > But in this specific instance, when you had those really tight 255 - > spreads, you know, it may have been attractive to keep the deal 256 - > running for third-party equity, even though that that was sort 257 - > of ended up posing a risk to the note holders.

258 - > SPEAKER_01: Yes. 259 - > Um then I guess you know that this presumably has something 260 - > then to do with this vintage where the liability spreads were 261 - > so tight. 262 - > Um, and presumably there's at least kind of a few other deals 263 - > out there in a sort of vaguely similar position to this one. 264 - > Do you think this is something that investors should be 265 - > thinking about or worried about by the by what's played out 266 - > here?

267 - > SPEAKER_00: Yeah, I mean I certainly, and from some 268 - > conversations with investors that I've had, you know, there 269 - > does seem to be at least a little bit of a change in 270 - > sentiment about CLOs, but I would say it's a little change, 271 - > because you know, I think it will give them pause, but I 272 - > mean, one has to remember that this was one impairment to one 273 - > CLO liability tranche, you know, because obviously all none of 274 - > the other tranches in the Bain deal were impaired, it was just 275 - > those class Aps.

276 - > So this is one impairment to one CLO liability tranche in 13 277 - > years. 278 - > That's not the worst track record, really. 279 - > Uh, and it was sort of in some ways bound to happen eventually. 280 - > But yes, I think investors may be a little bit more wary now of 281 - > deals that have been left out of reinvestment for a long time, 282 - > particularly when those deals, you know, have the sort of very 283 - > tight spreads, like the 2018 deals.

284 - > I think if you look at so that there are about near there are 285 - > nearly 40 deals that are rated by Fitch that have been out of 286 - > reinvestment since 2024 or earlier. 287 - > Now, obviously, it's very important to say that many, or 288 - > indeed probably most of these deals, will just be reset or 289 - > called completely successfully and you know, with no issues. 290 - > But I think investors might just think a little bit more 291 - > carefully about deals that have been out of reinvestment for 292 - > quite a long time because it just means that you're just a 293 - > little bit more likely to have this sort of slowly 294 - > deteriorating collateral pull.

295 - > And if that is the case, you know, you know, unless the 296 - > manager or equity investor decides to reset the deal, there 297 - > could be an issue if if you call the deal. 298 - > And so that's probably something to be aware of. 299 - > I I think another thing maybe that they might think about is 300 - > also kind of whether or not the manager sort of has control of 301 - > the equity in the deal. 302 - > I mean, say what you like about sort of captive equity funds, 303 - > but um, you know, which we've discussed at some length on this 304 - > on this podcast, and you know, at least if the manager does 305 - > sort of have a controlling stake, they can intervene to 306 - > reset or call the deal.

307 - > I mean, they don't have to, but ultimately there's sometimes 308 - > that you know there can be a little bit more of a kind of 309 - > alignment of interest there in the sense that I think few 310 - > managers really want their deals to record impairments. 311 - > I mean, it doesn't mean it's impossible, obviously, but you 312 - > know, they do at least kind of have the ability to intervene. 313 - > Whereas, you know, in in if you have third-party equity 314 - > controlling the deal that doesn't want to reset or call, 315 - > you you can have your hands tied a little bit as a manager, and 316 - > uh this can obviously you know make an impairment a little bit 317 - > more likely.

318 - > So, yeah, I mean in short, I would say I think it's very 319 - > unlikely we're gonna see a wave of impairments to CLO liability 320 - > tranches, but also I think it would be you know wrong to say 321 - > that this Baying deal is you know is going to be completely 322 - > unique and there could not be any other examples that might 323 - > come along. 324 - > So it's certainly something that investors will think about, but 325 - > I don't think it's gonna provoke a radical change in their kind 326 - > of confidence in the sort of CLO 2.

0 product. 327 - > SPEAKER_01: Well, your story on the impairment is called Bane 328 - > Impairment Shines Light on CLO Liability Investor Risk, and 329 - > that is on the website for subscribers. 330 - > And there are more of your exact thoughts about what to make of 331 - > all this, which is and this one is is free for all, so do give 332 - > it a read. 333 - > First Euro CLO impairment since GFC is a wake-up call for 334 - > investors.

335 - > SPEAKER_00: Yes, indeed. 336 - > I've uh argued that essentially that uh the reason that the 337 - > investors are paid the sort of juicy spreads you might get paid 338 - > on a uh on a single B CLO note is precisely because there are 339 - > actually very real risks. 340 - > Um but yes, please do give that a read on our website if you're 341 - > if you're interested. 342 - > But George, uh, we should talk now about the ABS markets.

343 - > Do you want to give us a little sort of flavor of what's been 344 - > going on in the market this week? 345 - > SPEAKER_01: Yeah, so in the absence of Tom on uh Wednesday, 346 - > Thursday, and today Friday, I've I've had to uh try to keep track 347 - > of things. 348 - > There's a deal out from Ford Bank, which is a more sporadic 349 - > issue, but I think it does price quite tightly, at least when I 350 - > was looking through our asset-backed monitor at its um 351 - > at its past transactions.

352 - > Other than that, you've got kind of various deals now drawing 353 - > towards the finish line. 354 - > So Paratus had a bite let RMBS that I think was priced on 355 - > Thursday afternoon. 356 - > Um and United for with its French consumer loan deal also 357 - > priced Thursday afternoon and Hadock. 358 - > Um I wrote in the another fine mes column at the start of this 359 - > week that I thought one of the interesting things is both 360 - > Paratus and uh Hadock had STS stamps for the first time.

361 - > So clearly something that issuers are at least taking more 362 - > of an interest in and thinking about whether they can they can 363 - > get that on their deals. 364 - > The big transaction of the week was obviously that one Tom spoke 365 - > about last week, the Roth C securitization of HSBC 366 - > mortgages. 367 - > Uh we're recording fairly early on Friday and it's not yet 368 - > priced, so we'll have to keep an eye out for that. 369 - > It'll probably be done by the time this podcast goes on air.

370 - > SPEAKER_00: Yes, I did like Tom's initial story on that deal 371 - > precisely because he used uh a sort of a photograph of the 372 - > story that sort of had the cricket, basically, which is 373 - > sort of sponsored, I think, by Roth is the test cricket that's 374 - > going on right now. 375 - > So uh it's nice to see cricket making its way into global 376 - > capital. 377 - > But uh George, you have been sort of very industrious in 378 - > producing um a couple of uh very interesting uh articles over the 379 - > last couple of days, almost sort of two kind of weekly length 380 - > pieces.

381 - > But I think one of the things you've been writing about is uh 382 - > sort European fiber securitisation and you know 383 - > whether or not we're going to see most of that. 384 - > I mean you've uh you sort of said that it could arrive within 385 - > within about 18 months. 386 - > I mean, why do you think we haven't seen fibre 387 - > securitization really in in Europe yet? 388 - > SPEAKER_01: I mean, you used to be a uh project finance 389 - > reporter, so I guess you're probably partly to blame.

390 - > Uh I think Europe has just a very deep kind of bank lending 391 - > market, um, is one thing. 392 - > So there's there's just not like as much pressure to like find 393 - > kind of capital market solutions to financing fiber as as there 394 - > might be without that that bank finance market. 395 - > And then the other thing is just the kind of maturity of the 396 - > networks and like whether I mean securitization, you you need 397 - > like a sort of stabilized long-term cash flow that the 398 - > rating agency can get its head around and investors can get 399 - > comfortable with.

400 - > And so you can't really finance any capex, you can't really like 401 - > deal with networks where there's a lot of kind of customer churn 402 - > or anything like that. 403 - > So it's sort of a question of like A, there's a lot of bank 404 - > money, and B, there's not that many suitable assets yet, 405 - > although more and more are kind of reaching that point of 406 - > maturity. 407 - > SPEAKER_00: Yes, I mean I do remember from you know my my 408 - > project finance days of long ago that ultimately this fiber 409 - > rollout in Europe hasn't actually been going for all that 410 - > long.

411 - > I mean, we we started seeing fiber project financings, I 412 - > think sort of 2019, 2020, and you know, a lot of these deals, 413 - > I think, you know, that that was project financed initially, you 414 - > know, sort of had like five-year maturities, and then there was a 415 - > view that these would be kind of refinanced through the capital 416 - > markets, potentially, I think, through, you know, the sort of 417 - > ABS structures. 418 - > But ultimately, I think some of as you say, some of the some of 419 - > this might still be kind of working its way through the 420 - > system.

421 - > I mean, just in terms of like a stable cash flow and and raising 422 - > agents being able to get comfortable. 423 - > I mean, did you sense from talking to the market that you 424 - > know that that fiber just kind of isn't really there yet in 425 - > Europe, that there are sort of risks that raising agencies or 426 - > you know investors might be very seriously concerned about if 427 - > they try to do a fiber securitisation? 428 - > SPEAKER_01: I think it's a bit case by case.

429 - > So these are likely to have the like as we've seen in the 430 - > European data center securitization market to kind of 431 - > copy the US structure of having like a very long final maturity 432 - > and like a a post-ARD like cash sweep basically to amortize the 433 - > the principal balance, but be like soft bullet basically 434 - > maturity to say five years of the anticipated repayment date, 435 - > which is ARD. 436 - > That's a US thing. 437 - > I think we tend to call it the first optional repayment date in 438 - > the European market, but the even the use of the term ARD 439 - > suggests the kind of US influences on this market.

440 - > So for that you you need to sort of be able to say thirty years 441 - > into the future, like people will still want to pay for my 442 - > fiber. 443 - > Um and you generally won't have them like tied into a lease or 444 - > or tied into a deal for thirty years like you know, consumers, 445 - > I think you can only tie in for two years in in most of Europe. 446 - > And businesses, again, like you probably yeah, that is also the 447 - > credit quality of the of the business that you have tied in 448 - > for if even if you have tied them in for 30 years, which is 449 - > unlikely.

450 - > So you need to be kind of confident that your fibre is 451 - > going to be able to be re sort of leased or re another deal 452 - > will will be able to be done for you to supply fibre to the same 453 - > kind of premises. 454 - > SPEAKER_00: Yeah, we've also seen some issues with sort of an 455 - > abundance of competition between fibre developers. 456 - > You know the UK is particularly falling foul of that. 457 - > SPEAKER_01: I think you were saying in some of the 458 - > conversations you were having that people are rather skeptical 459 - > of the UK market particularly because you you have quite a lot 460 - > of risk of of churn between different companies and just of 461 - > uh of almost of this some of this infrastructure being kind 462 - > of overbuilt with different developers carving up almost 463 - > street by street in bits of London it feels like yeah 464 - > overbuilt came up a lot I think uh I think the UK and Germany 465 - > are the two jurisdictions particularly in the fibre to the 466 - > home like retail market basically where there's less 467 - > regulation and there and there's been a lot of kind of immediate 468 - > like speedy construction which which means as you say if 469 - > there's a lot of churn then that just makes it difficult for the 470 - > rating agencies to get comfortable and presumably 471 - > investors as well.

472 - > So yeah you need to find suitable assets and and it it 473 - > may be that they don't come from certain markets. 474 - > SPEAKER_00: How advanced is fiber securitization in the US? 475 - > Because often with securitization we see a trend 476 - > emerge in the US and then eventually it comes to Europe. 477 - > SPEAKER_01: I mean I think that's starting to happen with 478 - > data centers for example but is the US kind of way ahead of 479 - > Europe on this or yes uh it it's accelerating now I mean I think 480 - > last year there was quite like a sort of roughly three times 481 - > growth in the market.

482 - > It's kind of similar to the the data centers. 483 - > That's the one for 144A market uh which is like the public US 484 - > securitization market. 485 - > I think it's similar to what we saw with data centers where like 486 - > a couple of deals were done and then a few more deals were done 487 - > and then suddenly like wow everyone's doing this. 488 - > And this year I think we'll be big again.

489 - > From what I've heard and and the conversations I've had with Chad 490 - > who's our US ABS reporter like the data center deals are if 491 - > anything like performing slightly kind of sluggishly now 492 - > compared to the fiber deals where people are 493 - > enthusiastically still still kind of participating for the 494 - > diversification from data centers. 495 - > SPEAKER_00: And so it would it would seem that in the US 496 - > they've managed to sort of establish areas where you have 497 - > kind of a reasonable kind of amount of penetration of the 498 - > sort of fiber network to a sort of quite a large area that that 499 - > kind of provides a stable kind of cash flow essentially over a 500 - > over a long time.

501 - > Is this sort of been the case for some of the US deals which 502 - > has made them sort of able to move forward or do you think 503 - > there are other any other factors that mean that the US is 504 - > sort of ahead of Europe on this? 505 - > SPEAKER_01: I think that's right. 506 - > I mean at least a good part of it is like having suitable 507 - > assets. 508 - > And then the other component is just that US capital markets are 509 - > like a lot deeper and US investors are like more kind of 510 - > willing to to do kind of deals where there's a bit more of an 511 - > underwrite but the investor base is much bigger and then 512 - > therefore like that there's more people willing to look at it and 513 - > establish the market and then also to take down the kind of 514 - > scale of deal like it like US data center and fibre 515 - > securitization has come to be like an extremely substantial 516 - > part of the whole total US securitisation market now.

517 - > Whereas like it's hard to believe that European 518 - > securitisation in its current form would be able to support 519 - > like a dramatic increase in the total size of them of the 520 - > market. 521 - > Although obviously regulatory efforts are ongoing to to change 522 - > things. 523 - > SPEAKER_00: Of course um well that story I which I absolutely 524 - > commend to you know global capital readers it is available 525 - > to global capital subscribers it is called first european fiber 526 - > securitization could arrive within 18 months so do do give 527 - > that a read but Georgia as I said earlier you have been you 528 - > you seem to have worked very very hard yesterday and produced 529 - > um another story of considerable length and this is about 530 - > Baalbeck um sort of buying funding 365 do you want to tell 531 - > us a little bit about the you know that acquisition yeah I've 532 - > worked far too hard um this is I think this is the story of the 533 - > week if you're in the kind of specialist lending market.

534 - > SPEAKER_01: So funding 365 is a is a UK bridging lender. 535 - > Baalbeck is a big US um alternative asset manager I 536 - > guess with a focus on kind of real estate of of some 537 - > description. 538 - > They're a big big issuer of US R and BS they hit they you know 539 - > they have assets they securitize in the US and they've done a 540 - > couple of deals in Europe um there was the Spanish RPL deal 541 - > that we also I assume talked about on this podcast but I 542 - > wrote a story about that as well last year.

543 - > But this is I think at least one of the first times that I can 544 - > recall them buying a lender and I guess what's interesting about 545 - > this is it comes you know the UK bridging sector has not had the 546 - > most joyful time in the last few months since Market Financial 547 - > Solutions which was a competitor I suppose collapsed in in 548 - > February. 549 - > SPEAKER_00: Exactly and I mean I I know this might not sort of 550 - > apply directly to this specific acquisition but I think you've 551 - > sort of said somewhere in the story that you know there might 552 - > be a kind of window of opportunity if some of these 553 - > sort of smaller kind of specialist lenders don't have 554 - > access to the same funding lines that they might once have had 555 - > sort of following MFS.

556 - > Is that right? 557 - > SPEAKER_01: Yeah so this was sort of the talk of Barcelona 558 - > that banks are sort of retreating from lending to small 559 - > specialist lenders um in the wake of the of what's happened 560 - > with MFS. 561 - > I think yeah in theory if you're a big fund with uh like lots of 562 - > relationships with the banks it kind of makes sense that you 563 - > could buy one of these lenders and use that relationship to 564 - > kind of extend their funding right while others may be 565 - > struggling but but to be clear if it it's maybe just a happy 566 - > coincidence if anything for for Baalback here like they they've 567 - > been interested in in bridging in the UK for a long time and 568 - > and we're looking to get into this space already so it's you 569 - > know prior prior to the collapse of of MFS.

570 - > So it shouldn't be read as like an opportunistic trade from 571 - > Baalbeck it's it's clearly a her sector they have kind of 572 - > conviction about um it's just if anything a kind of if anything 573 - > kind of helpful that the situation with MFS has played 574 - > out. 575 - > SPEAKER_00: Why do you think we don't see more of these 576 - > acquisitions of some of these sort of specialist lenders you 577 - > know particularly given that you know that some of some of the 578 - > assets they hold are kind of very popular and are kind of 579 - > fought over.

580 - > I think you you might logically ask well why isn't there just 581 - > some buying up of the various lenders because that would give 582 - > you access to the the the the assets they hold. 583 - > SPEAKER_01: Yeah this is a this is a great question. 584 - > This is the question I think in the um in the asset financing 585 - > market at the moment like as you say the the the market for 586 - > assets the forward flow market is very competitive but then 587 - > like seemingly the sort of MA market for specialist lenders is 588 - > is much more subdued.

589 - > And people have been sort of saying there's there's this 590 - > trade where you literally just buy a lender and that gives you 591 - > kind of proprietary access for your funds to the assets and I 592 - > think that is definitely part of the motivation for Powerback 593 - > here to get those those assets kind of flowing into their 594 - > funds. 595 - > And we have seen a few other deals um for specialist lenders 596 - > KKR bought New Day and Cerberus bought Lend Co recently again we 597 - > we can't be sure of those of the motivations for those 598 - > transactions but one would have thought at least partly it's 599 - > it's together the asset flow.

600 - > SPEAKER_00: It's part of the challenge here that you know 601 - > some of these funds don't actually have mandates to buy up 602 - > you know lenders. 603 - > SPEAKER_01: Yeah I think that's exactly the challenge like the 604 - > the mandate flexibility question like you know a lot of the shops 605 - > that have done it successfully are like big private credit and 606 - > private equity shops where they can buy from one arm the the the 607 - > lender and from another arm like buy the assets and then that 608 - > kind of works in tandem but that's not the case for um for 609 - > Baoback like as I say I think this is the first game I can 610 - > recall of them buying a European lender.

611 - > I had luck on company's house and the the owner of funding 365 612 - > or at least owns the more than 75% of shares is is Baobek 613 - > Capital Limited which to me it doesn't look like a fund so it's 614 - > perhaps they've they've just bought it directly. 615 - > SPEAKER_00: Well thank you very much George and I do commend 616 - > that article to listeners it is called Baalbeck buys funding 365 617 - > as banks look to fund sponsor packed lenders and if you want 618 - > to find out a bit more about the possibility of public bridging 619 - > securitizations in the article you should definitely give it a 620 - > read.

621 - > It is available on the Global Capital site to global capital 622 - > subscribers. 623 - > SPEAKER_01: And with that we shall say thank you very much 624 - > for listening and goodbye.