Sector developments and company hires

Liquidity event shows ABS ‘did its job’

The volume of European ABS and CLO bonds listed on BWICs between the UK government’s ‘mini-budget’ announcement on 23 September and the resignation of former chancellor Kwasi Kwarteng on 14 October totalled €6.9bn, roughly equivalent to the quarterly volume seen in Q1 and Q2 of this year, according to TwentyFour Asset Management figures. However, even more bonds are believed to have changed hands via bilateral trades, including portfolio sales.

The forced selling during this period – triggered by asset managers’ need to meet short-term liquidity requirements – was mostly concentrated in triple- and double-A rated UK RMBS and European CLO paper. Indeed, in a recent blog post, TwentyFour AM suggests that the fact the paper was investment grade highlights that the motivation for the selling was due to liquidity rather than credit concerns. 

“The post-mini-budget period was one of the largest liquidity events we have seen since the global financial crisis and it was certainly the largest volume of pension fund selling we have witnessed since 2008,” the blog notes. “While the cost of liquidity certainly rose, bid-offer spreads on triple-A and triple-B rated RMBS and CLO bonds remained relatively stable at 0.5%-1% and 2%-3% respectively through the period. Bonds did trade and the asset class did exactly what it was supposed to do.”

The proportion of CLO bonds listed on BWICs in September and October that were ultimately traded was between 85% and 93%, compared to a low of 49% during the Covid-19 triggered sell-off in March 2020, according to TwentyFour AM. Dealers appeared more willing to put balance sheet to work, given the level of investor appetite to buy high quality bonds at wider levels.

Bank treasuries have reportedly stepped into the secondary markets over the past few weeks and absorbed a large volume of UK prime RMBS at a yield of around 5%, as well as UK buy-to-let and non-conforming RMBS triple-As at yields of more than 6%. With the cash price of double-A rated CLOs dropping by 5-7 points into the mid-to high-80s, the convexity and yield of 6.5% in euros attracted hedge funds and private equity buyers. Further, demand from US buyers has been particularly strong, as lower levels rendered European ABS cheaper than domestic bonds.

“The recent liquidity crisis has put ABS in the spotlight, but for a good reason. First, the ABS market has done its job in providing liquidity to UK pension funds and has comfortably absorbed an unprecedented level of supply in a short period of time, probably even better than we expected. Second, it has highlighted the attractiveness of the asset class from a yield and credit perspective, with multiple buyers stepping in,” TwentyFour AM concludes.

In other news…

Blockchain POC prints

Liquid Mortgage says it has successfully replicated an MBS structure and bondholder payments on a blockchain, under a first-of-its-kind proof of concept. The underlying collateral is loan-backed digital assets, with full payment history, data and documentation attached. The aim is to provide investors with transparency from borrower payment through to noteholder payment.

EMEA

Cadwalader has promoted James Hoggett to special counsel, effective from 1 January 2023. Based in the firm’s London office, he focuses on fund finance, advising both lenders and GPs on a wide range of products, including asset-backed facilities and co-invest structures across all asset classes.

North America

Citi has appointed Brian Hochhauser as a director, CLO trading, based in New York. He was previously a director at Credit Suisse, which he joined in March 2011, and worked at Bank of America before that.

Medalist Partners has formed a strategic partnership with Semper Capital, in a bid to capitalise on structured credit opportunities. The partnership will see the two firms leveraging their complimentary expertise to co-invest across multiple structured credit products. Medalist will offer investment support and institutional resources under the new partnership to support Semper’s existing capabilities and will also work to launch new products together going forward as interest in alternatives from retail investors continues to rise worldwide. Medalist will make a minority investment in the Semper platform.