Sector developments and company hires

The rise in Euribor swap rates will lead to materially lower excess spread for euro-denominated consumer ABS that close in the near term, Fitch suggests. The rating agency warns that higher hedging costs at closing mean that more ‘hard’ credit enhancement is needed to achieve the same ratings, particularly for high investment-grade ratings.

“How long this situation persists will depend on the speed at which originators reprice assets and their willingness to sell portfolios at higher discount rates. Existing transactions are not affected, as the rate paid for the fixed leg of the swap is set at closing,” Fitch notes.

As inflation and expectations for ECB policy rates have risen, swap rates relevant for euro-denominated consumer ABS have increased from negative 0.5% in 3Q21 to positive 1.2% today, making interest rate hedges substantially more expensive. At the same time, while asset yields in portfolios currently being securitised have not yet increased, note spreads have - dramatically shrinking the excess spread available to cover defaults in new transactions. Without the benefit of a material amount of excess spread, ‘hard’ CE - such as overcollateralisation or a cash reserve - is likely to be needed to cover the same scenario-specific loss assumptions to reach a certain rating.

In other news…

North America

Angelo Gordon has closed its second credit solutions fund, increasing its total in raised equity commitments across several funds in the last three years to US$11bn. The AG Credit Solutions Fund II marks the latest fund in a string of vehicles since 2019, and follows its 2020 predecessor in seeking to use the firm’s capital base and structuring expertise to partner with companies and create bespoke financing solutions aimed at resolving idiosyncratic liquidity and capital structure situations. The fund exceeded its initial US$3bn target within seven months, and closed with US$3.1bn total of equity commitments - with significant support from existing Angelo Gordon clients, as well as new global institutional and retail investors.