It has become increasingly common in the securitization market to see a couple of portfolios or more pushed together into one deal, even when the two have differing characteristics.
You don’t have to look far for examples. This week, Enpal is marketing a trade, the collateral for which is around three quarters solar loans, which have a 25 year life, and one quarter heat pump loans with a 15 year tenor.
A more dramatic example came last week, when Cerberus priced Fairbridge 2025-1, a Dutch buy-to-let RMBS, arrived with around 8% of the portfolio comprising short term bridging loans.
The motivation for these sorts of deals is often that blending different flavours of collateral into a single securitization is the cleanest and easiest way to get the deal up to size, given it takes around €250m of assets to justify the costs of doing a public issue.
That can also mean combining loans across a broader spectrum, instead of combining portfolios. The Dutch buy-to-let RMBS market is a good example, where some deals have contained commercial exposures that are often less granular residential portfolios.
Another factor is that for very small portfolios in the low 10s of millions, it can be tempting just to throw them into a bigger deal, because they are hard to finance on a standalone basis. The cost of the underwrite and legal fees to either leverage or sell such portfolios means that they can often get stuck unlevered, eating up capital.
Cracking the code
For an example of how to artfully deal with the problem, consider Quantum Mortgages’ public markets debut, Bletchley Park 2024-1, priced in June 2024.
It wasn’t just Quantum’s mortgages in the pool. Quantum’s owner, AB CarVal added £15m of long dated fixed rate mortgages to a portfolio that it obtained from backing another lender called Habito, which stopped lending in 2022.
Nevertheless, the senior notes of the deal landed exactly in line with Cerberus’s Edenbrook Mortgage Funding, a pure buy-to-let deal from a few weeks earlier, according to data from GlobalCapital’s Asset Backed Monitor.
Is it STS?
Enpal’s deal qualifies for the EU’s ‘simple, transparent and standardised’ (STS) designation. A more extreme example was El Corte Ingles’s Secucor Finance 2025-1. According to the Morningstar DBRS presale report, Secucor was backed by 13 types of loans “with vastly different repayment requirements and default performance”.
Yet, despite one of the requirements for the STS stamp being homogeneity, it still qualified.
As GlobalCapital reported at the time, the reason is that if a portfolio is entirely one of consumer loans, all underwritten on the basis of similar information, and all serviced to the same standard, it counts as a homogeneous pool.
Philosophically, it becomes a question of where to draw the line. No two loans are ever exactly identical. The current definition clearly eliminates the type of ‘kitchen sink’ deals it is arguably designed to cut out, where multiple different asset classes are bundled together, giving investors lots of extra work and creating a modelling challenge.
The current balance seems about right. Likely no one who can get their head around solar loans is going to be excessively taxed by doing the same work on finance for heat pumps and it would be a great shame for the EU’s ambitions of financing the green transition if the homogeneity requirement locked residential renewables providers out of the STS market.
In the non-STS market, things can a bit spicier. Banks get such heavy capital penalties for deteriorating loans that they are seemingly willing to give away more of the economics in portfolio sales, opening up smaller deals.
In two trades earlier this year, US firm Balbec securitized multiple portfolios of reperforming loans it had acquired from Spanish banks, benefiting from better pricing for the scale of loans it had assembled.
Recent events, however, have shown that investors are willing to push back if they don’t like a structure.
Cerberus’s deal is a good example. Despite GlobalCapital’s enthusiasm for the transaction, it took longer than usual to be priced, and it offered a big premium over more vanilla buy-to-let deals. Lots of work was seemingly required to get investors comfortable, but there was ultimately a happy ending, with some tranches tightening in from in initial price thoughts.
The Cerberus deal also shows another advantage of blending collateral pools into a single deal. It gives investors the chance to take a look at previously unsecuritized receivables in bite-sized chunks — bridging loans had not been part of an ABS before.
Flows run dry?
In any case, investors will likely have to get used to seeing more of these sorts of deals.
With the current enthusiasm for forward flow agreements, it seems likely that some origination pipelines might prove underwhelming. The question of what to do with these small, awkwardly sized portfolios came up on a recent conference panel with one suggestion being to finance them as part of a bigger securitization.
It mostly seems to work well if done in a sensible way with sufficiently investor-friendly structuring. CarVal, for instance, had two sets of swaps in its Bletchley Park structure to deal with the interest rate risk from long-dated fixed rates.
A reduction in homogeneity ultimately opens up financing for more loans and portfolios. That is no bad thing, so long as it is not accompanied by any obfuscation of risk. So far, so good.