On another planet
Despite squeezed profits and tougher conditions in European securitisation, Morgan Stanley has emerged as a leader in a slice of the market that holds significant promise for the future, making the bank IFR’s EMEA Structured Finance House of the Year.
The European securitisation market has braved another tough year filled with multiple blows, including a broader credit sell-off early in the year, volatility ahead of the UK’s Brexit vote and the looming prospect of tougher rules for the sector.
These shocks have at times widened spreads to eye-watering levels and made it even more difficult to execute deals, mounting further pressure on banks to choose between scaling back their European business and finding a way to reinvent themselves.
Many have opted for the former, applying deep cuts to their ABS operations. But Morgan Stanley has instead doubled down in a part of the market that could potentially prove to be its panacea.
As central bank stimulus, coupled with punitive capital charges, continues to make the majority of vanilla “flow” ABS uneconomical for issuers, the market has gradually turned its focus to more lucrative deals driven by large portfolio disposals from banks looking to deleverage.
In particular, a key opportunity has emerged in providing financing solutions to private equity firms looking to buy and securitise these assets, many of which were originated in the lead-up to the financial crisis.
A number of banks are jostling for a share in this racier part of the securitisation market, which offers markedly higher returns. Yet in 2016 Morgan Stanley has emerged as a comprehensive service provider in this all-important segment of ABS.
“The market has evolved from more traditional securitisation to focusing on bank deleveraging efforts and what those look like,” said Paul Burke, managing director in Morgan Stanley’s European structured finance team.
“At the point when someone needs to deleverage, we are able to do the advising, the arranging, underwriting the risk, using our balance sheet. We have done that in a coordinated way.”
The bank was at the helm of the most prominent example of this emerging business model, helping Cerberus Capital Management buy £13bn in legacy UK home loans (from Northern Rock’s Granite programme) and securitise about half in the largest European mortgage-backed deal since the financial crisis.
Morgan Stanley structured and arranged the “Neptune” warehouse, which represented the largest-ever European rated facility. The bank also acted as sole arranger and joint lead manager on the subsequent securitisation, which sold £6.2bn in mortgage-backed bonds to investors.
The Granite bridge financing and the securitisation represented one of the largest earning opportunities for banks in the European market, with Morgan Stanley playing a lead role within the consortium that reaped the benefits.
The lender also led the Auburn 10 RMBS transaction, a securitisation of Capital Home Loans mortgages that Cerberus acquired from Permanent TSB. The trade was the largest securitisation of UK buy-to-let mortgages since 2007.
And it was not just in legacy UK assets where Morgan Stanley led the way. The bank was sole arranger on an €850m securitisation of seasoned French home loans originated by GE Money, and done just before Cerberus took over the bank’s French arm. It was a sizeable deal in the increasingly rare French RMBS space. Morgan Stanley then led a more than €700m follow-on deal in October.
There are distinct challenges to securitising legacy portfolios like these, but such deals represent a potential area for growth in the securitisation market.
With more European banks looking to shed capital-intensive assets as a way of deleveraging, there are likely to be many more of these deals coming to market in the next few years, brought by the private equity firms likely to buy up these portfolios.
“Whereas previously that financing was just bank balance sheet, private equity are having to go to the capital markets to extract the maximum value from these portfolios,” said Jon Walton, managing director in Morgan Stanley’s European structured finance team.
The central element to gaining a position in this part of the market is undoubtedly balance sheet and Morgan Stanley has not hesitated to make use of its strength. But the bank also aims to provides a comprehensive range of services, taking these transactions from start to finish.
“We haven’t been afraid to use our balance sheet,” Walton added. “But being a one-stop shop is what has allowed us to engage with this part of the market.”
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