Cerberus is marketing its Dutch buy-to-let RMBS trade this week, Fairbridge 2025-1, which is groundbreaking in that it is the first public European RMBS to include bridging loans.
Bridging loans are used by borrowers who need to raise capital before they sell a property they own or refinance it with a longer mortgage. Often they are done to finance renovations ahead of a sale.
While there is plenty of growth in this market, many have been sceptical that the public RMBS market will ever become a more efficient financing option than bank funding lines, due to bridging loans' short maturities and the lack of homogeneity in the market as to the classification of the loans and what they are used to finance.
The collateral pool for the Fairbridge deal is 8.3% bridging loans. That is a long way from an RMBS that is backed 100% by bridging loans but Cerberus has answered some of the fundamental questions for bringing the asset class to the public market, as well as paying the upfront costs for the debut transaction, opening the door for other lenders to follow.
With bridging being one of the fastest growing asset classes in the UK, with 53% growth since 2024, these lenders should be thankful that Cerberus has done the heavy lifting for the first deal, creating a viable path for financing these loans through the public securitization market.
One small step for bridging
Some in the market have argued that this deal is not a major milestone. This is because the portion of the portfolio that is bridging loans is small and these loans are mostly homogenous, vanilla bridges which are being used for light refurbishment, which are less complex to securitize compared to loans made for heavy refurbishment.
This deal is also static and does not provide answers as to how a revolving structure, which would almost certainly be necessary for a 100% bridging loan RMBS, would work, and how loans could be added to a deal without changing its characteristics.
all of that is true but it ignores the fact that Fairbridge provides answers around how deals backed by buy-to-let mortgages, which include bridging loans, could be structured.
This is important as lenders will likely want investors to grow more comfortable with bridging loans by including a small number of bridges in BTL deals before bringing out a 100% bridging RMBS.
Cerberus has set the structure so that the notes pay pro rata for the first year of the transaction, which is roughly the maturity of the bridging loans, then switching to a sequential payment structure.
One lender said this was a “rational decision,” as it allows Cerberus to avoid paying down the senior notes too quickly, losing leverage, and being left with more expensive junior debt.
Regardless of whether investors are comfortable or not with this structure, which will become clearer after the deal is priced this week, the answer will be immensely useful for the next lender to include bridging loans in a BTL RMBS.
One giant leap for RMBS
GlobalCapital is aware of at lease one issuer who seriously considered including a small number of bridging loans in a BTL RMBS before but ultimately decided not to include these loans in the portfolio as there was no big benefit to doing so in its cost of funding when compared to warehousing.
One of the key reasons that this issuer decided not to include bridging loans in its deal was because of the high costs that would accompany the first bridging RMBS, in terms of legal documentation and reporting templates, GlobalCapital understands.
One bridging lender also said that these initial costs, as well as the price discovery involved in the first transaction, could put off any lenders from being the first to enter the market.
This bridging lender said that most bridging lenders see no benefit to being the first to enter the market, but may consider it once the first deal has delivered clarity and a template.
Cerberus should be given major kudos for paying the higher costs associated with bringing out the first bridging RMBS, which successive lenders likely will not have to endure when entering the market.
Through taking this bold plunge Cerberus has planted the seed for what could become a mainstream asset class in years to come.