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Hussain versus the market: how one man tried and failed to bring activism to securitization

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Activist investors in companies are among the best known — and richest — denizens of the financial world. The likes of Paul Singer, Dan Loeb, Bill Ackman and Carl Icahn are regulars on CNBC, and billionaires in their own right. But their investments have paid off; their attacks on boards, bosses and even whole countries have succeeded.

They are the polar opposite of Rizwan Hussain, a former securitization banker in London, who, acting with few allies and on a shoestring budget, tried to pull off his own form of activist investing — one based largely on legal challenges, rather than economic heft.

His quixotic campaign is unlikely to be imitated soon. Hussain was stymied at every turn. Every deal he tried to pull off failed and his attempts have left him personally bankrupt, and blacklisted by many in the industry he was once a part of. A High Court judge called him “profoundly dishonest” as recently as May.

But he has left a mark on the market. Securitization bond documentation now includes clauses to stop people trying to pull the same moves he attempted on other deals. The opportunities Hussain saw may one day be exploited by investors with deeper pockets, and more allies, than he ever managed to muster.

For Hussain’s part, he presents himself, as other activist investors in other areas do, as a champion of noteholders unable or unwilling to stand up for themselves, able to use his superior understanding of deal documents to redress the balance of power between bond buyers, issuers and investment banks.

That is at odds with how the noteholders in deals he has targeted behaved, however. They have generally resisted his offers, and in some cases, fought back, dipping into their own pockets to fund the legal firepower necessary to resist.

This is the story of how one man, acting virtually alone, weaved chaos across the securitization market.

Love me a tender

Participants in the European securitization market are used to a slow start in January. Primary dealflow starts a week or two later than other bond markets, and 2018 seemed even more sluggish than usual, as funds and banks grappled with the second Markets in Financial Instruments Directive (MiFID II), which had just come into force.

So a notice published to the Irish Stock Exchange’s regulatory news service on January 8 attracted a lot of attention.

The special purpose vehicles (SPVs) that host securitizations, just like regular companies, communicate with their investors through the news services of the exchanges where their bonds are listed. These are often just a stream of regular cashflow reports, along with redemption notices.

This one, however, was different. It was from an entity called Clifden IOM, controlled by Hussain, and it was an offer for noteholders to tender a variety of securitization bonds – 76 different bonds, from 17 different deals, all issued under the Residential Mortgage Acceptance Corp’s (RMAC) programme.

All of them had been issued before the financial crisis by GMAC Financial, an arm of General Motors which had moved into lending against UK property, and they were backed by non-conforming mortgages — something similar to what in the US were sub-prime or alt-A mortgages, albeit with some differences and, generally speaking, better performance records.

In itself, such a tender offer was not unusual. But it is typically the issuer of the bonds that makes the offer through a liability management exercise — buying back its own issuance for less than face value, often with the aim of resecuritizing the underlying assets into a new deal that is in some way more beneficial to it than the old.

But as this tender was from an unusual source, immediately, the market started to parse what it might mean.

The vehicle looking to buy the bonds was called Clifden IOM Holding. It had a website, in which it described the company as a “real estate investor” and named its board, which was largely composed of people who had been active in commercial real estate.

RMAC bonds may well have been investments linked to the fortunes of the property market but they inhabited a different world to the consumer mortgages that backed them. Corralling property developers and commercial landlords was a different skillset from analysing the pools of many thousands of loans that supported mortgage-backed securities.

Hussain was the only name on the website with notable experience in this field. He had been involved in setting up Topaz Mortgages, a specialist lender, and before that, worked in Royal Bank of Scotland’s (RBS) securitization group.

Crystal Palache

But there was one other name on the list that both scared and surprised the old hands in the European securitization market: Robert Palache .

He had been a partner at Clifford Chance in the 1990s as the European securitization market developed, earning a reputation as (one of several) godfathers of the market. Then he made the leap from lawyer to banker, on a compensation package that reverberated around London’s legal market, according to several senior securitization lawyers GlobalCapital spoke to for this story.

Palache joined Nomura’s legendary principal finance group to work for Guy Hands, the private equity baron who later founded Terra Firma, and used the leverage from securitizations to juice his investments in pub companies, care homes, and homes for soldiers.

After Nomura, Palache worked for Morgan Stanley, running the US bank’s commercial real estate group in Europe. A brief spell at Barclays Capital followed before the financial crisis and then Palache disappeared from view.

But his name on the Clifden website meant two things. First, it conferred credibility. He had worked for serious shops and serious securitization industry players. He drew a lot of water; Hussain, rather less so.

Secondly, Palache was a legend for a reason. He was a lawyer of uncommon skill and commercial expertise.

A source close to Clifden described Palache’s involvement in the company’s activities as “semi-retired”. GlobalCapital could not reach Palache for this article to confirm the level of his involvement in any of Hussain’s dealings.

The next question was where had Clifden sourced the cash to pay for a tender offer? The bonds it was attempting to buy had had a face value of around £2bn, albeit there were around £600m-worth left outstanding after amortisation after some of the mortgages in the underlying pool had been paid back.

The notice explained that Clifden had obtained funding from “a major international financial institution”.

Still, when it comes to a financing of this size, word gets around. Raising cash on this scale would usually mean borrowing from at least one of a few investment banks but nobody seemed to know where Clifden might have raised the money.

It grew weirder still. Clifden was (and is) an entity registered on the Isle of Man and had no securities licence of any kind in the UK or any other European jurisdiction. Legally, it isn’t even an investment fund but a corporation. It does not manage money from outside.

Still, it had seemed to have some heavyweight assistance, adding further credibility to that offered by Palache. It also had hired Lazard, a firm without much presence in securitization, but as blue-blooded as they come, as tender agent on the operation.

Mystery plan

Market players struggled to figure out what was Clifden’s ultimate aim.

Buying securities above market price makes sense when you can then use your ownership rights to make an extra return somewhere else — buying shares at a premium to take a company private, for example, or buying enough bonds to have a commanding position in a corporate restructuring to make sure your slice of the pie is extra-large.

The RMAC issues certainly provided a tempting target. Structured and sold more than 10 years earlier, the deals contained reserve funds — pools of cash trapped inside the securitizations, built up over the years to protect bondholders, and totalling more than £100m in these particular deals.

That became some securitization analysts’ and investors’ working theory.

Deutsche Bank’s research team wrote that “this is presumably to obtain control of the call rights in the structure, though the mechanics of getting to this end point is not entirely clear and could include restructuring or amending the documentation to give greater control to noteholders”.

Any such move, however, had to be made fast. Paratus, the UK specialist lender that originated the mortgages in RMAC, and still controlled the deals Clifden wanted to buy, had indicated the previous month that it was considering calling the bonds — mandatorily buying them from bondholders at par. It would then likely have taken back the mortgages from the SPV and securitized them again in a new structure.

It had not issued a formal call notice, but it was clear to bondholders that this could be coming, at the earliest, by March 12. If Hussain was to do anything at all with the RMAC bonds, it had to be before then.

Second bite

So far, so public. But adjacent to that market for securitization bonds, where exchange-listed and regulated securities are traded and pored over somewhat openly, is a far more private market for bundles of raw mortgages and other consumer debt. There is no disclosure here, no need for regulatory notices, and no real transparency.

But plenty of people in this private market had already tangled with Hussain.

If Deutsche Bank’s researchers, who sat on the public side — meaning they had no access to information covered by private side non-disclosure agreements  — had been able to talk to their private market colleagues in Deutsche’s structured credit group, they would have found out that Hussain’s tender for the RMAC bonds was his second bite of the cherry.

Hussain had already tried to sell the mortgages securitized in the RMAC deals he was now trying to buy in the public market — mortgages which belonged to Paratus at the time, not Hussain or any of his companies.

In October 2017, KPMG’s portfolio advisory group, led by Andrew Jenke, contacted buyers on Hussain’s behalf about a pool of UK non-conforming mortgages it had for sale, named Project Grosvenor.

Non-conforming mortgages are offered to borrowers with poor credit history, inadequate proof of income, difficulty showing the source of their funds, county court judgements against them, or similar. Unlike sub-prime or alt-A mortgages in the US, however, the UK’s market offers full recourse to the borrower.

Unlike in the US’s “jingle mail” states, which permit a homeowner to post the keys to the mortgage lender and walk away in the event of not being able to pay the debt, UK borrowers who default cannot simply hand the house back and flee the scene. The lenders can pursue them as long as they live in the country.

For the RMAC mortgages, however, most borrowers were still meeting their payments, meaning they had a history of good performance even at rates higher than those charged to higher quality borrowers.

Those sorts of mortgage pools attracted buyers such as private equity firms like Blackstone, TPG and Cerberus; hedge funds like Davidson Kempner; and global investment houses like M&G or Pimco. They would typically buy such assets in private with money borrowed from an investment bank to fund the purchase.

Then, they would repay the loan by securitizing the mortgages and selling them on to investors – locking in term funding for themselves, adding leverage, having put little of their own money into the deal, and boosting their returns.

The concept is not so different to the leveraged buyout of a company – by adding debt, you commit less of your own money relative to the returns you make, if everything goes to plan.

The news that a substantial pool of old mortgages was for sale attracted the select group of firms active in the market, and KPMG quickly received plenty of interest.

One of the funds most active in buying whole mortgage pools across Europe was and is Fortress Investment Group, a giant private equity firm now controlled by Japan’s SoftBank.

Fortress was so interested in buying UK mortgage assets that it had already snapped up one of the pre-crisis firms that controlled a lot of these assets — Paratus, the owner of the RMAC loans.

Paratus had originated a lot of mortgages over the years, and a lot of them had changed hands since the crisis. There was a chance that a few small pieces might show up from time to time to be traded by specialist brokers. But not this much at once. There were no £250m loan books lurking out there, except inside the RMAC deals.

Some of the potential bidders also grew nervous during their conversations with KPMG. They were given data on the assets — the basic parameters of the mortgages in question, size, approximate location, value of property, income of the borrowers, payment history and so on.

For the private market players, it was easy to figure out what was happening. The RMAC bonds were public, and so was the reporting on the underlying mortgages. It matched exactly with the data that KPMG provided.

Hitting the roof

Paratus, when it found out that someone was trying to sell a pool of mortgages it owned, hit the roof and began calling in favours across the market to shut the sale down.

The company had spent 20 years in the club-like European securitization market and had a lot of friends. Moreover, its owner, Fortress Investment Group, paid a lot of fees in conducting its business with the Street, and had the banking relationships to show for it.

Word quickly went around that anyone working with Hussain would be blacklisted by both Fortress and Paratus. Indeed, some bankers may even have feared for their relationship with SoftBank, the ultimate owner of both.

This was partially successful and some banks already had their own reasons to avoid Hussain. But even after Paratus started trying to shut down Hussain’s attempts, plenty of firms continued to deal with him.

Court disclosures published in 2018 show, for example, that Hussain was still dealing with several prestigious law firms, including Sidley Austin, CMS, and Dentons.

Paratus tried other channels, too. KPMG was its auditor, and its chairman lent on the accountancy firm to question what on earth it was up to. KPMG stonewalled the request, GlobalCaptial understands, and insisted that it had done nothing wrong.

KPMG’s due diligence, GlobalCapital understands, did not include verifying whether its client at the time actually owned the assets it had been hired to sell. The accountancy firm believed at the time, it is understood, that its portfolio advisory group were not obliged to do due diligence on where its client might have obtained its assets — its task was simply to market and sell them. KPMG declined to comment about this.

Since Project Grosvenor, it may have had second thoughts about being involved in selling UK mortgage portfolios at all.

In July 2018, it sold its UK portfolio advisory group, including all of the key staff, to corporate finance boutique Alantra, saying that “it was concluded that the UK portfolio solutions group was no longer core to our UK deal advisory practice due to its size and our ability to scale the business in the UK.”

Jenke, head of the group, contacted after his move to Alantra, said that KPMG’s conduct in relation to Project Grosvenor was “a matter for KPMG”.

KPMG told GlobalCapital that: “we cannot comment on work that we undertake for clients to preserve confidentiality.”

Some bidders on the RMAC assets managed to push through to a second round of bidding, a stage which usually requires the bidders to have obtained provisional financing terms from investment banks, subject to due diligence.

Davidson Kempner, GlobalCapital understands, was in pole position, with three other firms also in the second round. The US hedge fund has been among the most active purchasers of UK mortgage portfolios in recent years, buying pre-crisis loans written by issuers like GE Money, among others, and tangling more than once with Hussain (of which more later).

The fund itself declined to comment, which it said was its press policy. Meanwhile, Fortress itself bowed out of the process, understandably unwilling to buy its own loans back.

But the storm that had whipped up had been sufficient to make Davidson Kempner uncomfortable enough to withdraw its bid.

Full circle

That’s when the action moved back to the public markets. Paratus issued its call notice in December, flagging to the market at large that it would likely buy back its loans and refinance at the first opportunity.

With the portfolio sale falling apart, and Paratus ready to reassert control, Hussain moved to plan B, announcing the tender offer — timed so that he would have bought the bonds before Paratus could call the deal on March 12.

On the face of it, this was a bold, risky move — and looked for all the world like free money for anyone selling to Clifden.

Paratus had the contractual right to redeem the bonds at par and could exercise this right in just two months’ time. Hussain’s tender, however, offered to pay 105% of face value for some of the same securities.

If his strategy failed, and Paratus then called the bonds he had bought for 105 at par, he would be staring at a big loss.

As it transpired, though, he had no intention of ever paying for them.

Notifications to the market, issued on to the Irish Stock Exchange’s regulatory news service, came thick and fast from both sides. Paratus threatened legal action against bondholders who sold to Hussain; he responded by offering indemnities, and upping the tender price.

But as the crucial deadline approached, he revealed how his trade would work.

Instead of paying investors for the bonds, he would use the time they were in the clearing system, before he had to hand over the cash for them, to push his scheme through.

Tender offers are typically affected by who participates and in what size, so any settlement happens at the end of the process. But tender instructions are usually irrevocable, putting control in the hands of whoever ultimately buys the bonds, but has yet to pay for them.

What Hussain wanted was to effect a change in the terms of the bonds, to include make-whole provisions — standard terms in some asset classes, which trigger an extra payment from the issuer in the event it calls the bonds to compensate bondholders for the fact that they will no longer receive future coupon payments.

These clauses would pay either 2.25% or 4% of the face value of the bonds — a tasty return for the investors in question, when Hussain handed them their bonds back instead of paying for them, and a tasty return for any of the bonds which Clifden did control.

The make-whole payments were to be funded from the reserve funds built up inside the securitizations.

That money would otherwise be due to Paratus, and other investors, such as Cheyne Capital and Ellington, who bought the equity notes in the structures —the riskiest parts of a securitization that generally take the first losses and are paid into last, but which can end up making investors the most money of all the tranches.

Using a tender offer, instead of buying bonds outright, meant that Hussain could try this without putting up much cash of his own.

But he was stymied again. For one thing, it wasn’t clear that a bondholder, even if they controlled the whole deal, could vote through such a scheme — this would have constituted a modification of the basic terms of the deal, something investors cannot necessarily enforce.

More of a hindrance, though was human intervention.

Though securitizations are supposed to work in a mechanical fashion, with cash flowing in and out of the SPVs according to strict rules, there are nonetheless real institutions, staffed by real people, who make this happen.

In ordinary times, the directors of securitization SPVs, and the trustees for bondholders should have very little to do. But in this case, they had to assess the validity of the claims and counter-claims that Hussain and Paratus were making.

Eventually, Hussain could not prove that even if he had a clear-cut right to change the deal terms, he controlled enough bonds to vote the changes through. Meanwhile, investors were unimpressed with the legal “indemnities” he offered against subsequent lawsuits from Paratus.

The bonds were called, as planned, on March 12 and Paratus announced a new deal immediately afterwards, with Bank of America Merrill Lynch arranging.

Release me

Clifden, Hussain’s vehicle for going after the RMAC securitizations, had been involved in a similar affair some years earlier. Shareholders in the FTSE250 property company Grainger did not know Hussain’s name. But they were very well aware of Clifden.

As a listed company, Grainger has to keep the market updated with all of its relevant information, and announced with great fanfare in January 2014 that it had exchanged contracts on a sale of old equity release mortgages originated between 2004-2008.

These loans allow the elderly to access some of value in their homes using the property as collateral.

Grainger said it had booked a profit of £9.9m on the sale of the £88m portfolio. As the RMAC saga would later prove, Hussain was keen to pay prices that seemed too good to be true.

Grainger’s problem was that it only took 60% of the money in cash up front, some £52.6m. The rest, Grainger said, was payable unconditionally over the next 12 months.

The money it received up front likely came from an acquisition loan, with the accounts of the company that owned the mortgages in question, called Equity Release Increments Limited (ERIL), showing a £59m financing in place. GlobalCapital understands that Just Retirement Income, a vehicle of the Just Group insurer, provided the cash.

The rest of the money was supposed to come from the proceeds of Clifden’s either selling a securitization of the loans, or the whole portfolio. GlobalCapital understands Clifden contacted selected structured credit specialist funds about buying the assets, as well as hiring investment banks, and the law firm Clifford Chance to prepare for the deal.

But by February 2015, no such securitization had been executed and Hussain, according to ERIL’s accounts, had paid himself £172k from the company.

That’s not to say it would have been easy to sell the portfolio. Although equity release mortgages have been securitized several times in the UK, they are a rare asset class.

Typically they end up on the books of life insurance companies rather than sold into the market. Insurers like the correlation this type of mortgage shares with their own balance sheet demands when it comes to providing annuities.

Whatever discussions took place between Clifden and possible buyers, Grainger had waited long enough, and sought to collect its cash. It had two methods at its disposal. First, it had security over the shares of ERIL, the entity that owned the mortgages. Secondly, it had the right to apply “the monetary value of certain interest rate caps owned by Clifden” towards the payment.

Neither route proved fruitful. The interest rate caps proved worthless, and the value left in ERIL not much better. It bought the company back for £1, with net assets, after mark-to-market adjustments, of £19.3m.

Grainger booked a loss of £6.8m while Hussain put Clifden Holding, the purchasing vehicle used to buy the mortgages, into administration.

Unfair hold

Fast forward to 2018, and the RMAC fight was not the only pie Hussain had his fingers in. He was also trying to pull off a similarly ambitious, and similarly poorly funded, attack on a securitization originally set up for the property tycoon Vincent Tchenguiz called Fairhold.

The Fairhold deal, originally £443.5m in terms of principal split between ‘A’ and ‘B’ tranches, securitized a large portfolio of ground rents — payments made by property owners to the owner of the land their property stands on if they do not own it themselves.

The securitization was in deep distress when it caught Hussain’s attention, thanks to a long legal battle over the derivatives embedded in the deal.

The derivatives counterparties, Lloyds Bank and UBS, had fought tooth and nail to make sure they got paid — at the bondholders’ expense — and, although ground rents remained valuable, the two riskiest slices of the deal were essentially valueless, and the deal had run beyond its legal final maturity in late 2017, thanks to the value of the derivatives in the structure and the subsequent court cases over their cashflows.

Bondholders included Hayfin Capital Management and Avenue Capital Management, both specialist hedge funds active in the more complex nooks of the structured credit markets. Together, they held more than 25% of the class ‘A’ tranche of the securitization, as well as some of the class ‘B’, and wanted an exit.

The two funds engaged equally specialist brokerage Chalkhill to sell off a chunk of their position.

Enter Hussain, who offered to pay substantially more than other potential buyers.

High Court documents record an agreement to sell £141.7m of the class ‘A’ notes, the safest and most senior debt in the securitizaton, and £18.5m of the class ‘B’ notes to Clifden — though, as the class ‘B’ notes were all but worthless by this point, these figures likely represent the principal of the notes, rather than the trade price.

After signing documents to settle the trade, however, things began to fall apart — Hussain, once more, appeared unable to pay for the bonds.

“On the morning of the settlement date, and contrary to the terms of the trade documents, the counterparty declined in writing to settle the trades,” said Hayfin and Avenue in a statement.

According to the court, Hussain blamed “regulatory problems” for the mishap.

But this purchase was only part of Hussain’s attack on the deal. The second half was another tender offer for the Fairhold bonds, offering to pay 40% of face value for the class ‘A’ tranche and 5% for the class ‘B’ notes.

It was audacious, and unlikely, but not without reason.

If he could gain full control of the structure there was a valuable chunk of leasehold property lurking within the securitization. Indeed, the portfolio had once attracted a bid of £720m from ground rent specialist Long Harbour investments, before government reforms had rendered the assets less attractive, slicing a good £200m off the portfolio price.

This was still more than sufficient to pay for the tender offer, if the money could be somehow be kept out of the hands of the swap counterparties, who were still arguing in court that they ought to be paid in full before the bondholders saw any money.

That fundamental constraint, though, had not eluded the existing bondholders, who knew perfectly well that the deal’s problems could not be fixed easily.

One of those problems was once again that the price Hussain offered to pay was too good to be true.

If the class ‘A’ notes were worth 40p in the pound, debatable in itself, then they were already taking losses of 60p. Meanwhile, the class ‘B’ notes must be laughably far out of the money. Why pay 5p in the pound for something worth zero? The figure had to be a joke.

But it was not enough of a joke to avoid tripping up some very respectable buy-side firms.

GlobalCapital understands BlueCrest agreed to tender bonds to Hussain, while subsequent court testimony shows Royal London Mutual Insurance was also involved.

Funds fight back

The Fairhold bondholders, however, were battle hardened when it came to getting organised, thanks to their fight with Lloyds and UBS, which had been going on in court for years. They already had advisers in the shape of Rothschild and Freshfields, and an “Ad Hoc Committee” was already in place.

They updated the market on February 22, explaining that they “were not involved in any way” with the tender offer, did not wish to participate in it, and continued to hold their notes.

The issuer and trustee of the securitization announced the next day that they had no prior knowledge of the tender offer. The legal brinksmanship escalated.

Clifden sent a letter to the trustee, threatening to “reserve its rights” to bring subsequent lawsuits, and the tone of its tender notices became increasingly aggressive — it told investors were that they stood little chance of recovery from the Fairhold deal if they did not sell their bonds to the tender offer.

But Avenue and Hayfin had brought other noteholders round to their point of view. Angelo Gordon and CVC Credit Partners had also joined them, and the new grouping controlled 60% of the class ‘A’ notes, 75% of the class ‘Bs’.

All the investment groups involved, along with long-time advisers Rothschild and Freshfields, agreed in public not to participate in Hussain’s tender.

This pushed him to outline his strategy, which was simple enough, despite the complex web of SPVs that would be used to push the deal through.

In essence, he wanted to push Fairhold into administration, with the valuable ground rent assets then sold to one of his other vehicles. The noteholders would receive their fees due in the tender offer, and Lloyds and UBS, the swap counterparties, would be left facing a worthless, defaulted shell.

Though this seemed like a step toward boosting investor recoveries, existing bondholders were suspicious, fearing that they too could find themselves dealing with a defaulted shell.

For better protection, the bondholders jacked up the ownership thresholds required to direct the deal. Rather than being able to take control of the assets with 25% of a given tranche, the threshold would be raised to 50.1%, so that the existing noteholders would remain in control, confident that they would not sell to Hussain.

According to Judge Philip Kramer in the subsequent court case, Hussain said in court that Fairhold was run to the detriment of the noteholders with the assets declining and excessive professional fees being taken by those who ran it.

Summing up Hussain’s beliefs, the judge said that, according to Hussain: “He was just trying to redress the balance for the noteholders. And, as the protector of the rights of the various institutions who have invested over £400m in the company's notes, he says that he was there as a force for good.”

If that was the case, the bondholders did not seem to believe it — and neither did Judge Kramer.

“Why would he buy into a company and attempt to purchase loan notes in this company, which was so troubled and, on his view, ill managed?,” asked the judge. “Why would he go to all that expense and trouble? Then I look at what he has proposed, which is that he, or a company which was related to his company, would be able to get hold of the assets for £402m. That does rather point to the more likely explanation for his involvement in the company is that he saw a profit could be made by gaining control of this company's assets.”

Desperate measures

By June 2018, Hussain had not been able to tempt enough investors into the tender offer. But the bondholders groups were not out of danger yet. Lloyds and UBS were still trying to claim swap payments and suck cash out of the deal, and they were no closer to getting hold of the assets underlying the bonds, despite the default, now nearly nine months old.

It was at this point that Hussain tried something that was desperate in the extreme.

Less than a month later, Clifden tried to appoint administrators to enforce security over the underlying assets — but without the agreement of the administrators in question, who were waiting for cast-iron legal certainty over Hussain’s claim, and without the permission of Fairhold’s trustee.

These unfortunates were Michael Bowell and Dermot Coakley of MBI Coakley Ltd, and John Hedger, of Seneca IP, and their appointments were swiftly quashed, with yet another notice to the market.

However, even this did not stop Hussain. On July 19, the Irish Stock Exchange published a notice purporting to be from Fairhold itself, rather than from one of Hussain’s corporate entities.

The notice said that, in contrast to all of its previous statements, the Fairhold issuer, acting under direction of the three administrators, had agreed a rapid sale of the underlying ground rent rights to a Hussain-owned entity called Fairhold Investments for £402m.

The notice was described as given by “Fairhold Securitisation Limited, c/o Maples FS Limited, PO Box 1093, Queensgate House, Grand Cayman, KY1-1102, Cayman Islands”.

It certainly was not issued by the parties that thought they controlled Fairhold that morning — who were quite sure, too, that the issuer had not been put into administration.

Even if the notice had not been an actual falsehood, selling the assets that quickly would have been a big ask.

In court, the administrators’ representatives told the judge that such a sale would have needed due diligence to be carried out on Hussain’s companies, know-your-customer checks to be made on their directors, and watertight legal approval from third-party counsel for their appointment.

As might be expected, the false administrator gambit prompted a rush to court. This resulted in a total victory for the bondholders, the trustee, and the Fairhold issuer, who not only had the falsely appointed administrators removed, but secured injunctions against Hussain and his associates at Mann Made Corporate Services, the company he used to make his SPVs and administer them.

The victorious parties were also awarded court costs of £275k, to be paid by Hussain by September 7, 2018.

But even this wasn't enough for Hussain, who did not pay the money in time. The unfortunate Fairhold bondholders, racking up legal costs, were dragged back to court for a further application to “restrain” Hussain and his plethora of newly created SPVs.

The court obliged, and added a further £200k to Hussain’s mounting, unpaid legal bills, late in 2018.

Rizwan vs regulation

Hussain’s recent activities may have attracted disdain from the major investment banks, but it wasn’t always that way.

Bank of America Merrill Lynch found him useful in 2014. It was sitting on a very mixed bag of mortgages from before the crisis, the product, primarily, of “hung warehouses” — Merrill had lent money to non-banks in the UK so that they could go out and write mortgages, before packaging them up and selling securitizations to the market. When that market shut as the financial crisis hit, so did the non-banks, leaving Merrill stuck with unsellable mortgages that never made it into securitizations.

Come 2014, with the market back open and BAML deep into cleaning up its balance sheet, it wanted to exit some of these positions entirely.

But following the financial crisis, new rules had come in aimed at stopping banks doing precisely that. Instead of packaging up loans and selling them once and for all, banks were supposed to keep “skin in the game” by holding on to a small piece of the portfolio — this was known as risk retention and was designed to discourage banks from choosing their worst loans to package up and sell, while giving investors confidence in their counterparties and their investments.

This made a lot of sense for new loans but was, and continues to be, a royal pain for banks that were quite openly trying to shed assets they no longer wanted. The rules first started to apply in 2014, and even five years later, they are still making it harder for banks to sell off non-performing loans in the securitization market.

This meant BAML had a problem — one which Hussain could help solve. Since the US investment bank did not want the risk retention piece of the securitizations itself, it needed to find someone who did.

Hussain was working on a semi-freelance basis at structured credit brokerage StormHarbour. He set up a vehicle called Kilimanjaro Asset Management. This acted as the risk retention in BAML’s planned packaging of its old loans, soon to be dubbed Moorgate Funding 2014-1.

But while it may have fulfilled the letter of the law, the structure allowed BAML to avoid the economic substance of the issue.

The equity tranche of the deal — usually enough to satisfy risk retention requirements, since these tranches bear losses first and receive payment last — was split into two.

Both parts were issued to Kilimanjaro, but the valuable part was immediately bought back by BAML as the deal closed. The other part, the “Principal Residual Certificates”, would stay with Kilimanjaro.

If the deal ran smoothly to maturity, Kilimanjaro would receive around £25m — the 5% of the portfolio value required to meet regulatory risk retention obligations. But if it was called and redeemed before then, a decision which would be taken by whoever eventually bought the valuable part of the equity tranche, these notes would receive nothing.

For fulfilling this role, Kilimanjaro would receive a £10k fee. The company was judged by its auditor to be worth only this amount more than two years after the deal closed.

At the time, the deal’s approach to risk retention raised concerns and was enough to stop at least one investor from buying it. But it was early days for the new rules, which, in any case, were not designed for a deal like this.

The deal stood, and the non-equity tranches were successfully placed in the market.

BAML declined to comment for this article on the deal being structured to avoid risk retention rules.

The US investment bank bought back the valuable part of the equity but it wanted nothing to do with the mortgages, and to drop them from the balance sheet entirely, so it had sold on these notes.

Davidson Kempner, the US fund with the large appetite for UK mortgage risk, popped up again and in early 2019, announced that it had control of the call rights in Moorgate Funding 2014-1, and would be redeeming it, refinancing it with a new deal, Stratton Mortgage Funding.

This didn’t sit well with Hussain, who tried to put a stop to it, or at least flush out some extremely necessary cash. Kilimanjaro contacted the deal’s trustee to point out a “manifest error” in deal documents governing the call rights for the deal, and argue that it did indeed deserve the £25m.

Manifest error claims are supposed to be used for minor errors like typos. They allow counterparties to fix the problems that inevitably arise when hundreds of pages of deal documentation are combed over late at night by junior lawyers.

They are not intended to be a way to make retrospective attempts to change the economic substance of deals. Hussain tried to revoke the original deed of sale (part of the risk retention ploy had been to make Kilimanjaro, not any of BAML’s entities, the beneficial title seller) — and so it was back to court.

Things fall apart

By this time, however, his situation was looking critical.

The Fairhold judgement against him had resulted in £475k of court costs (admittedly a fraction of the £3m or so spent by the parties ranged against him), and counsel working for Paratus and Hayfin had pursued the case on to the Isle of Man, where Hussain registered most of the corporate entities he used.

By April, Clifden IOM Holding, the vehicle through which Hussain tried to pull off control of the RMAC bonds, was subject to a winding up petition, with debts it could not easily discharge. HMRC, too, had got involved, over unpaid tax bills from early 2018.

Lawyers paid for by Paratus and by Hayfin had decided to press the matter, and ensure Hussain would not be able to recover from crossing them.

It worked. Hussain’s registered home address, an apartment in London’s The Heron building, was sold for £3.8m on January 19. On January 30, he was declared insolvent.

Avoiding personal recourse was crucial in trying to pull off what Hussain was attempting in case it did not work. Placing a company, especially a SPV shell with no assets, into insolvency is one thing, but exposure to personal bankruptcy means he can no longer act as a company director.

He can found no more SPV vehicles, meaning he has no more chances.

Hussain and his long-time associates Mark Cundy and David Cathersides, who worked for Mann Made, also seemed to have fallen out, ending a partnership going back to at least as far as the Grainger days.

Anticipating the fallout of the personal insolvency — and the consequent inability to act as a corporate director — Hussain resigned in favour of an Alfred Olutayo Oyekoya on January 25. A month later, Oyekoya acted to kick Cundy and Cathersides out, citing supposed “serious breaches of duty”.

This would have left him, as well as yet another Hussain-controlled SPV, in charge of Kilimanjaro Asset Management, just as he mounted the attempt to shake cash free of Moorgate Funding 2014-1.

Naturally, this, too, ended up in court, in an ugly fight over who actually controlled the now worthless Kilimanjaro vehicle. Cundy and Cathersides were successful.

The judge described Hussain as “a deeply unsatisfactory witness, whose evidence, both in his witness statements and under cross examination, was profoundly dishonest”.

He further described some of the evidence Hussain provided as “a fabrication”, and said that Hussain had forged other documents in court, including a power of attorney.

In a summing up that could seem eerily familiar to many of Hussain’s adversaries so far, dragged through the courts, and liable for heavy legal burdens to simply defend what was already theirs, the judge said “it may be that the defendants’ success in these proceedings will prove to be a Pyrrhic victory if the company’s assets are worth a mere £10,000. However, I accept that the defendants had little choice but to make this application”.

Nothing ventured, nothing gained?

None of the projects are truly dead and buried. Hussain is trying to have the insolvency annulled, and is preparing to challenge the trustees on the RMAC bonds and on Fairhold in court again.

But Hussain’s schemes so far were never likely to succeed. For one thing, nearly all of them avoided putting any money down. The market for structured credit is populated by clever, technically astute and capable people, with the funds and the supporting infrastructure to exploit opportunities to make money.

Hussain had little in the way of funds, not much of an organisation to draw on, and tried to pull off trades that seemed frankly implausible to many in the market. Acting for himself, he had a greater tolerance for risk, time in court, and personal consequences than most others.

This would be his undoing. He faces personal bankruptcy and is all but certain never to work again in the securitization markets.

Aggression is tolerated and even welcomed in certain dimensions of structured credit markets. Nobody expects hedge funds playing in distressed debt to be a pushover, whether they are negotiating portfolio purchases, bidding on bonds or, indeed, showing up in court to press for their rights.

But Hussain’s tale illustrates the limits that should apply to that aggression, and the rules, explicit and implicit, that govern behaviour in a market. Even while competing tooth and nail, market players are supposed to keep their word — to settle trades they have agreed, to pay advisers they hire, and to act straightforwardly.

Structured credit and securitization markets have not enjoyed a great public image since the financial crisis — unfairly, according to virtually everyone active in their European iterations — and the last thing they needed was further scandal.

But Hussain’s failure shows that the market does actually have integrity. Once it was aware that Hussain and his various corporate vehicles were unreliable, it mostly closed ranks — banks, law firms, and service providers. Paratus, among others, worked hard to make sure that Hussain would be pursued through the courts, and would not find it easy to restart another scheme.

But there are lessons for the market to absorb too. The collaboration came rather too late in the day, resulting in too many firms paying hefty legal bills.

Law firms and advisers would have found it easier to steer clear (and maybe easier to make sure they got paid for their work) if those who had been burned early on had been public about their mistakes.

Client confidentiality, embarrassment, and a desire to avoid upsetting other clients kept the firms who worked on Hussain’s attempted trades quiet, when they should have been sounding the warning klaxons.

There is one more lesson, too, for regulated securities markets, and that is about the ease with which someone — anyone — can file an official-looking market notice. Investors rely on the regulated information services provided by the exchanges where their investments are listed for news of the utmost integrity on which they can act without having to question the veracity of what they find.

But the Fairhold affair showed just how easily the system can be manipulated, with notices filed on public securities with seemingly little scrutiny or verification.

The securitization market has survived Hussain’s attacks, but at the cost of mountainous legal fees. More transparency and trust can make sure that it does not happen again.