Part of the reason the trade works for Cerberus is that, if it buys mezzanine bonds, it can take some extra leverage on these through the repo market. Otherwise, it would end up stuck with mostly investment grade bonds whose discount margins would be miles away from its return targets.
In Towd Point Mortgage Funding 2018-Auburn 12, for example, a deal issued by Cerberus last year, its Capital Home Loans unit (which originated the deal) bought some of the mezz bonds, which were financed through repos with Barclays, a joint lead on the Morgan Stanley-arranged deal.
In this year’s Auburn 13, another Cerberus deal securitizing mortgages from Capital Home Loans, sole arranger Bank of America announced the deal with the senior tranche placed, but the rest of the capital structure listed as “call desk”, with the exception of the class Z residual which Cerberus was holding.
But after market feedback, the deal was priced with all of classes A2-E retained, likely to be funded in the repo market.
Vantage, a £636m non-conforming refi for Cerberus also run by Bank of America, with Morgan Stanley joining as joint lead, was announced on Tuesday with only the triple-A tranches, the class ‘A’ and ‘B’ offered. The rest of the capital structure was listed as retained from the beginning.
"Despite election and Brexit risk, sterling ABS is holding up pretty well," said a securitization syndicate banker. "The preplaced deals and big refis have actually been quite supportive for the other deals out there, effectively handing cash back into sterling investors' hands. At some point we'll see a year end effect and lose some liquidity, but we're not seeing that yet at all."