The almighty dollar
The old exorbitant privilege might be looking a bit creaky, with the 10-year nudging over 5% and absolutely no political prospect of prudence, but still, there’s only one capital market to go to if you absolutely must borrow gigantic sums of money.
UK specialist lender Pepper Money doesn’t need gigantic sums of money, in the grand scheme of things, but it still needs a bit more than can reliably be got in its home market of sterling-denominated RMBS — it’s now the market’s biggest issuer.
Thus we have the first specialist lender RMBS with a potential dollar tranche in… basically forever. 9fin’s new database is nice-looking but doesn’t yet go back far enough to be sure. The old grey matter archives are a little unreliable, but I don’t think I recall one in the 16 years I’ve been covering this market.
There have been sporadic dollar tranches from bank or builder RMBS issuers — the last placed transaction being Silverstone in 2022, followed up by the unfortunately timed Brass No. 11, which ran into the “mini-budget” and had to be shelved and recut. NewDay has also had dollar tranches, the last being issued in 2023.
Master trust issues, like Silverstone or NewDay, have the advantage of certain cashflows — scheduled amortisation or bullet maturities — which makes adding a cross-currency swap much cheaper. Back in the day, master trusts were also the main foreign-currency issuers.
This is digging deep, but I believe there were a couple of yen tranches stuck on master trust deals in the 2010-12 period, meeting particular demand from a specific account, and dollars were reasonably common. An Arkle (defunct Lloyds master trust) deal in 2010 had a full house of sterling, euros, dollar and yen — and Santander went one better, adding Aussie dollars for Fosse 2012-1.
There’s probably a cultural dimension to this — issuers and structurers in the immediate post-crisis period were used to doing multi-currency deals, which were common in the pre-crisis period across specialist lenders and bank issuers alike. But there was also different regulation (post-crisis rules on capitalising cross-currency derivatives hadn’t come in) and a fragile market that needed all the international help it could get.
More recently, there’s been increasing interest in tempting US investors to look at European (and particularly UK) product. The number of UK issuers trekking to SFIG Vegas in February has been on the up, and, while their meeting schedules aren’t as packed as in Barcelona, they’ve certainly been getting a hearing.
Pepper, Together, and Paratus AMC all regularly use 144A documentation for their new issues, and though the pricing impact is hard to discern, treasury teams point to strong and increasing engagement from US accounts. US docs and distribution are mandatory for CMBS deals, data centres (or centers) and hairier asset classes such as re-performing loans, though that doesn’t mean shifting currency.
Indeed, it’s important to pause a while and consider the benefits. US investors that might want to buy 144A product from European issuers are going to be somewhat sophisticated — dedicated portfolios, structured product specialists — and frankly, you don’t have to be that sophisticated to put on a few currency forwards to hedge foreign currency cashflows.
So it’s really a question of whether the investor does any currency hedging itself (and implicitly charges for it) or whether the currency hedging happens at a deal level.
There’s no question that it’s simpler to do it at the investor level — currency forwards are much, much cheaper and easier than embedding an amortising or balance-guaranteed cross-currency swap in a securitisation — so how large is the additional audience that comes from doing a true dollar deal?
But thinking about the last basis point is only one part of the treasury team’s job — and is sometimes in tension with the much more important goal of not screwing up.
That means ensuring a business is always comfortably funded, with headroom and exits and redundancies and failsafes, such that the running of the business is not beholden to benign capital markets conditions or the whims of a few anchor accounts.
That’s the real prize that’s available through going to dollars. Sterling RMBS, especially in non-STS format (a necessity for non-conforming originators like Pepper) is a deep but fairly narrow market, which is vulnerable to a buyers’ strike, or even a reallocation from a few big investors. It’s not likely, but what’s the spread impact if Pimco packed up tomorrow?
Business is going well for Pepper, to such an extent that it’s doing up to six deals a year, more than Kensington used to do. That’s a cadence which means they’re essentially always prepping the next issue, and cannot count on any scarcity premium. An investor that doesn’t play will get another chance in a couple of months. A sterling wobble, and the execution pipeline backs up very quickly indeed — or forces expedients such as loan notes or small club preplacement, all of which costs money.
Establish a real dollar presence — and “we’ll be back six times a year” will help get dollar buyers’ attention — and you’re no longer stuck in the cosy but sometimes stifling embrace of fewer than 20 sterling RMBS buyers. You can’t exactly thumb your nose at the sterling mafia but it massively adds to the resilience of a shelf, and by extension the whole business, if you can reliably place bonds into the far, far broader dollar buyer base.
To be clear, we think this is very cool, and a brave, pathbreaking move with strategic significance for Pepper and the whole market.
But for completeness, the case against might go something like this:
Even doing six deals a year and placing let’s say $100m a time into dollar RMBS isn’t actually as diversifying as it looks. While the dollar market is in theory vast beyond comprehension, lots of actual syndicated US securitization still has concentrated buyer bases, and the actual number of investors who want to do the work on UK mortgage product might not be large (and might already be active in 144A sterling).
The marginal buyers that this might attract will probably want to be rewarded for their hard work, both in spread and allocation terms, and that means selling them cheap deals (cheaper than sterling, especially after the basis) and in size. Giving a worthwhile ticket to a big US fund has got to mean at least $30m, probably $50m so... the $100m dollar tranche has, maybe, best case, got a couple of extra buyers on board?
That’s not nothing (extra accounts doing $50m+ are a fine thing) but it’s not transformative — it’s useful incremental demand, at a fairly steep price.
So which is it to be with Pepper? Being first into a market often comes at a price, and lots of issuers would rather skip the plaudits, do the second deal, and de-risk the process.
But still, the risks have been managed. This has been well planned and prepared, with lots of investor work and multiple non-deal roadshows. Arranger Bank of America (it says it right on the tin) has a superb US distribution network, and the rest of the syndicate aren’t too shabby.
At the point of announcement, Pepper likely had good ideas about where the bonds will go and at what price — let’s hope the deal flies and a new market opens!
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9fin’s US ABF webinar — Hype or Opportunity? — replay and writeup
Why isn’t there a logistics master trust?
Market-wide, CMBS is now financing more homogeneous assets than ever before. Roll back a decade or so, and CMBS was often backed by single, trophy-type assets (what the Americans would call SASB) — it provided greater scale than the bank or private credit market (at the time).
There were deals like the Squaire (Germany’s largest office building); the Intu secured debt/CMBS hybrids, backed by the UK’s largest pan-regional shopping centres; a clutch of prestige London office buildings (Citypoint, the Aldgate Tower); prestige offices in Brussels and Paris.
But these days, the credit case for shopping centres and landmark offices remains shaky, and the market is more focused on digital infrastructure and logistics.
These assets are much, much more similar to one another than are offices and retail. Data centre capacity is not infinitely fungible, and every location has specificities, but they’re fundamentally selling compute capacity in various flavours, which can be used, in theory, from anywhere.
Location absolutely matters for logistics, especially the “last mile” part of the business. But it doesn’t matter if a logistics facility is on the unfashionable side of town, with an unpleasant aspect. This may even be a strength, if it lowers the rent! What matters for the success of the business is transit links and proximity to population.
In office, by contrast, location is key, and often hyper-local. If you want to rent 200k square feet of office space to a reinsurer, it better be in the cricket pitch-sized circle around Lloyd’s of London.
In data centre financings, flexibility is key — there’s a lot of construction happening, even in Europe, and sponsors ideally want to be able to add stabilised centres into financing platforms without fuss. There’s a variety of solutions to this (such as the extendable CMBS structure for EdgeConneX European Data Centers 2026-1), but in the US, much the more mature market, the solution is often a master trust.
This borrows technology from credit cards and mortgages (also adapted to subscription lines) to allow multiple securitisations to be issued off the same large collateral pool, giving flexibility to add collateral, standardised and liquid bond supply, and stabilised maturities and terms.
Vantage has a master trust, as do Compass, Switch, Sabey, CyrusOne and Stack Infrastructure. Insofar as an asset class this new and developing this fast has a standard, this is market standard.
Logistics, if anything, is more suitable still. Blackstone’s latest deal, UK Logistics 2026-4 for its Mileway platform, includes the ability to upsize the loan from £613.7m to £1.034bn.
This underscores the relative homogeneity of the collateral — if investors prove happy to underwrite the deal on the basis of “adding some more similar assets”, rather than line-by-line examination of each property, then presumably it would be possible to set up some kind of common issuance platform going forward.
But maybe “master trust” is the wrong concept. Mileway Europe set up a common terms platform in 2024, and, we hear, explored similar structures for the UK business — a deal which might have looked more like Land Securities, or single estate secured corporates like Broadgate or Canary Wharf, rather than a true mortgage master trust.
After considerable deleveraging, Mileway Europe recently graduated to unsecured corporate bond issuance, the ultimate flexible structure, but this does have a downside (the deleveraging!)
One other consideration for Blackstone (realistically, the most plausible sponsor for something like a logistics master trust) is that a permanent issuance structure locks in deal terms at the time of structuring. If you want to shake loose a covenant term in a master trust, or even an MTN shelf, that means consents from all the outstanding deals.
If you issue standalone CMBS, on the other hand, just push the package each time and ratchet towards maximum flexibility. One could argue that Blackstone doesn’t really need every last iota of covenant freedom, having already won the argument on covenant-lite and portability, but big sponsors are gonna do what big sponsors do.
Me IRL
I’ll be moderating a session at DealCatalyst’s UK Mortgage Finance Conference on 28 September at the Landmark.
I guess I’m the (anti)fraud guy now, so my session is “Rebuilding Trust: Best Practices in Governance, Underwriting and Disclosure” with Nigel Batley of European DataWarehouse, Olya Chappell of Foundation Homeloans, Eli Korman of PledgeClear, Graham McClelland of Gen H, and Hal Sarjant of ROSA.
If that’s not enough an incentive, there’ll be loads of people from the UK mortgage and securitisation industry there from investor, issuer and arranger sides — hope to catch you there too!
