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Moody’s has released a rating methodology for data-center backed securitizations (Data Center ABS).

This is for multi-tenant data centers. Single tenant data centers are still rated using Moody’s commercial mortgage backed securities (CMBS) rating methodology.

Data centers have simple business models. They are similar to shopping centers and offices. The operator provides the building, connectivity (wiring, networking equipment, connection to the internet), power, cooling, and security. They then rent space to tenants – who provide their own computing equipment.

The tenant has a short or long term lease on the space that they rent from the data center operator.

In data center securitizations the assets are generally: 1) the physical data centers, and 2) the leases of the companies that rent space in the data center.

Data center securitization deals are mostly structured as master trusts – where additional funds can be raised by adding more assets over time.

Key risks:

• Re-leasing risk. Same as many commercial real estate deals – the tenant leases are shorter than the deal. So there is risk on the pricing of new leases and the credit quality of new tenants.
• Tenant defaults.

Moody’s looks at tenant concentrations, data center locations, regulatory risk, proximity to subsea cables, data center age, and operator experience.

Moody’s then models the potential effects of these risks on cashflows.

In modeling liquidation proceeds in case of default – Moody’s models the sale of the land, but gives no value to the buildings.

This is part of a trend of consolidation in private credit – with scale being seen as key to winning assets in an increasingly competitive market. Other acquisitions include BlackRock buying HPS, TPG buying Angelo Gordon, Stonepeak buying Boundary Street Capital, and Blue Owl buying Atalaya.

M&G Investments is buying 70% of P Capital Partners (PCP). Management retains the rest.

PCP is a Stockholm-headquartered private credit fund manager.

PCP invests €10m to €125m tickets in non-sponsor backed companies in Northern Europe. Their AUM is €4bn.

For M&G, this is a small addition to its total £350bn AUM – but adds to M&G’s deal origination and investment expertise in the fast-growing and profitable private credit market. M&G’s prior private and structured credit AUM is £19bn.

Joseph Pinto, CEO of M&G investments – M&G wants to become the “European champion” in private markets.

At a market level, private credit has $1.5tn in AUM and this is growing by over 10% per year (S&P).

This acquisition is expected to close in mid-2025.

P Capital Partners

PCP was established in 2002 as a investment strategy in a family office. It was spun out of the family office through a management buyout in 2009.

The firm has 42 employees.

PCP has invested in more than 170 companies since inception.

PCP runs three private credit strategies – “Corporate Credit”, “Transition Partner” and “Growth”.

The Corporate Credit Strategy provides senior secured loans to private companies.

The Transition Partner Strategy lends to companies working towards environmental transition and sustainability trends.

The Growth Strategy lends to entrepreneur-led statups that are scaling.

Finding good quality private credit assets to invest in is currently the biggest bottleneck for private credit investors.

Private credit funds have been popular with end investors and have raised large amounts. There is now a lot of competition to deploy those funds.

This deal between Liberty Mutual and Affirm is an example of a type of deal where large managers, with the ability to do large-sized deals and with in-house expertise, can have a competitive advantage in deploying funds.

The deal

Liberty Mutual has upsized its asset-backed funding facility to Affirm.

Affirm is a San Francisco-based buy new pay later (BNPL) lender. It is the largest BNPL lender in the US.

Liberty Mutual Investments is the asset management arm of the insurance group Liberty Mutual Group.

Under this deal, Liberty Mutual Investments provides an asset-backed funding facility to Affirm for BNPL loans.

The facility is for up to $750m of funding at any point. As loans are paid off by Affirm’s consumer borrowers, the facility can be drawn on again to fund new loans.

The facility runs to June 2027. The total amount invested by Liberty Mutual through this facility by June 2027 is expected to be up to $5bn.

Liberty Mutual Investments

Liberty Mutual appears to be working to do more deals like this.

John Kim, Head of Alternative Credit at Liberty Mutual Investments: “Liberty Mutual Investments’ ability to invest across the capital structure with a single-client focus allows us to flexibly provide solutions and scale to our long-term partners, like Affirm”.

Affirm

This private credit funding facility is part of Affirm’s funding mix.

Affirm funds its BNPL loans through warehouse facilities, term asset-backed funding facilities, and public securitization deals. Their investor base across these channels is over 130 institutions.

Affirm says it is working to add borrowing capacity across these funding channels. They have grown their borrowing capacity (funded and committed funds) by 50% over the last two years to close to $17bn (September 2024).

Having warehouse facility, term asset-backed funding facility, and public securitization programs in place lets Affirm shop for the best pricing and terms across markets. It also gives Affirm some protection in case one of these markets is out of capacity or temporarily closed.

Investor demand is increasing in the private credit asset-backed market – as private credit funds need to deploy the large capital pools they have raised from their own investors.

SoFi announced a $525m securitization agreement with PGIM.

The assets being funded are personal loans originated by SoFi.

SoFi is a US digital bank founded in 2011.

PGIM is the asset-management arm of US life insurance company Prudential. PGIM manages over $1.4tn. Its securitization (public an private combined) assets under management is $120bn.

This looks like the start of a series of transactions for PGIM and SoFi. They did a similar $350m private securitization of personal loans together in May 2024.

The relationship provides PGIM with a regular place that it can deploy investor funds. It gives SoFi confidence to be able to originate more loans at competitive pricing – with the knowledge that it is likely to be able to fund the new loans at a profitable funding rate through these private securitization transactions.

Edwin Wilches, Co-Head of Securitized Products at PGIM Fixed Income: “we continue to expand our platform as an asset-based finance lender and source investments that provide compelling risk-adjusted returns for our clients”.

Anthtony Noto, CEO of SoFi: “the investor demand we see for SoFi’s personal loans underscores the quality and strength of our lending business, which continues to contribute meaningfully to our durable growth”.

This category of private loan funding transactions is likely to continue to grow quickly – most rapidly in the US but also in Europe and Asia.

Goldman Sachs is setting up a new business unit to compete with private credit funds.

Announcing the move, Goldman CEO David Solomon called private credit “one of the most important structural trends taking place in finance”.

Private credit funds have been taking more high-margin deals from investment banks over the last few years – including debt financing for leveraged buyouts.

Goldman’s new unit will compete with private credit funds. They have named this business the Capital Solutions Group.

It will be staffed with private credit, private equity and structuring bankers.

The idea seems to be to originate private credit deals – and sell some or all of the risk out to Goldman’s institutional investors through its sales and trading teams.

Solomon spoke about demand from Goldman’s investing clients for private-form investment grade, leveraged lending, hybrid capital, asset-backed finance and equity.

This move could leave Goldman’s private credit clients seeing the firm as more of a direct competitor. But it potentially also opens up new value for these clients – where Goldman could come in as a co-investor or secondary-market counterparty.

It allows Goldman to offer private equity and corporate clients with more private credit solutions – and potentially better pricing and faster deals. It also increases the scope of products that institutional investors can get from Goldman – adding to the value of the investment bank’s institutional sales platform.

Goldman is well positioned for this new private credit investment banking business. It has a strong origination platform with over 10,000 corporate clients, a global sales and trading platform with access to most large institutional investors to sell down risk, and private credit asset investment capacity in its asset management business.

This new Capital Solutions Group will be co-headed by Peter Lyon and Mahesh Saireddy.

Peter is currently the Global Head of Goldman’s Financial Institutions Group. Mahesh is Global Head of Mortgages and Structured Products.

In a sign of the importance of private credit to Goldman’s future – both Peter and Mahesh will join the firm’s Management Committee.

The Capital Solutions Group will contain an origination team – that will source investment grade credit, leveraged loans, real estate, infrastructure, other asset-backed finance and private equity deals.

In addition to adding this Capital Solutions Group to expand their private credit business in their Global Banking and Markets division, Goldman has also made changes to try to grow their private credit business in their Asset and Wealth Management division.

Vivek Bantwal – Global Head of the Financing Group in Global Banking and Markets – is moving to Asset and Wealth Management. He will co-head the Global Private Credit team with James Reynolds. This team’s private credit portfolio currently has $145 billion in assets. The aim with this move is to work more closely with Global Banking and Markets to source deals. Sourcing enough high quality deals has become a key constraint across the industry – as the money raised by private credit funds that needs to now be deployed has grown rapidly over the last year.

Reportedly:

• Things have gone off plan for BlackRock’s investment in Alacrity.
• We may see more restructurings like this across the private credit market over the next two years.
• BlackRock has agreed to transfer its ownership to the company’s private credit lenders.
• BlackRock paid $560m for Alacrity in early 2023. It was bought through its long-term private capital strategy. This will be lost.
• BlackRock bought the company from Kohlberg & Co. in 2023.
• Alacrity’s debt in early 2023 – $1bn unitranche debt and $500m junior debt.
• The unitranche debt was from lenders including KKR & Co., Antares Capital and Blue Own Capital.
• The junior debt was from Goldman Sachs Asset Management.
• Changes – the unitranche private debt lenders (including KKR, Antares, Blue Owl) have agreed to convert 50% of their debt into equity. And they will provide $175m in new debt. This new debt will be in the form of a revolving credit facility and a term loan.
• The unitranche private debt investors will end up owning around 90% of the company. Goldman Sachs Asset Management will end up with the remaining 10%.
• Alacrity helps insurance companies with claims management work. They have suffered from worse demand and higher interest rates than hoped.
• Involved parties: Evercore (BlackRock’s advisor), Centerview Partners and AlixPartners (Alacrity advisors), Latham & Watkins and FTI Consulting (private credit firms advisors).

Influence Media is a firm that buys music rights.

Their portfolio includes music rights from artists Future, Enrique Iglesias and Blake Shelton.

Influence has raised $360m by privately securitizing music royalties from part of its catalog.

Investors included Alfac, Nuveen, Pacific Life, PPM America, and accounts managed by HPS Investment Partners.

Placement agents – BlackRock, Goldman Sachs, Truist.

Deal counsel – Latham & Watkins.

Influence was founded in 2019. This is their first securitization. They have bought over 30 sets of music rights so far.

Influence’s investment strategy is to find “modern evergreens” – new songs that they think will continue to sell well in the future.

The music rights asset class is continuing to grow.

Other recent music-royalty backed securitization deals include – a $1.5bn public deal in November from Blackstone’s Hipgnosis (Shakira, Red Hot Chili Peppers, 50 Cent, Bon Jovi, Fleetwood Mac, the Chainsmokers, Journey, Eurythmics), a $850m public deal in November from Concord (the Beatles, The Rolling Stones, Otis Redding, Phil Collins, Kiss, Carrie Underwood), a $80m private deal in October by Duetti, a $267m public deal and $450m private facility in March by Kobalt (The Foot Fighters, Paul McCartney, Busta Rhymes), and a $500m private deal in March by HarbourView (Nelly, Wiz Khalifa, Luis Fonsi, Incubus, Fleetwood Mac).

UK insurer Aviva and US investor Waterfall Asset Management have securitized equity release mortgages. They issued a total of £1bn in notes.

This is the largest ever non-US home equity release loan securitization deal. All the mortgages in this deal are in the UK.

Aviva is the loan originator. Aviva also bought the top tranches of the deal.

Waterfall Asset Management is the transaction sponsor – they hold the first loss risk through the junior notes in the deal. Waterfall is a specialist ABS investor with $13bn AUM.

Equity release mortgages are for older people. The mortgage provider gives the homeowner cash today in return for repayment in the future – usually when the homeowner dies or goes into long-term care.

There are two types of home equity release mortgage – lifetime mortgages and home reversion plans.

In a lifetime mortgage, the homeowner gets a lump sum today, and then interest accrues on that lump sum until the homeowner dies or goes into long-term care. At this point, the principal and accrued interest is repaid – usually from the sale of the home.

In a home reversion plan, the homeowner sells a percentage of their home to the mortgage provider, at a discount to the market price of the property. The provider then gets their share of the proceeds from the sale of home. The discount is how the provider covers their interest cost and profit over the life of the mortgage.

This deal is solely lifetime mortgages. The homeowners in the portfolio are between 55 and 103 years old.

The deal is rated by Moody’s and ARC. The top tranche is Aa2 (Moody’s) / AA+ (ARC).

The arranger and lead manager was Citi. The issuing SPV is Lifetime Mortgage Funding 1 PLC.

Private credit managers are in a race to get scale.

We are seeing this from larger fund raises and from M&A. Expect more consolidation as niche players find it harder to originate deals.

Why the rush to get scale?

The big reason is originating assets – as the private credit markets have grown so fast over the last decade, a lot of new entrants have joined the market. Capital has been relatively abundant for managers – and the difficulty now is finding good deals to invest in.

Big players can outcompete small players in this – they can create (or buy) their own origination platforms – which smaller players cannot afford, they can go for deals that are too big for smaller players, and they will often get prioritized by investment banks and brokers when they are intermediating deals because they are more important clients.

This is different to liquid markets like global macro hedge funds – where sourcing is a relatively level playing field. It is also a scaling market – unlike smaller markets for asset types like distressed debt.

Trouble then compounds for smaller players when raising funds – as LPs then pick to invest in big funds who can originate more than smaller funds who might have trouble deploying their capital.

Essentially there are economies of scale in this business.

Opportunities for smaller funds

There are opportunities for smaller funds if they can find areas in which they can innovate and offer products that larger funds are unable to offer. This is difficult to maintain though – as information flows fairly freely in this business. Nonetheless – if they can stay one step ahead by being smarter and more nimble, that could be a strategy.

Also if a smaller fund is able to create its own proprietary origination platform – for example by entering an exclusive partnership or right of first refusal relationship with credit originators – that could be a strategy that works.

Another strategy could be finding a specialist market in which there are barriers to entry. Emerging markets which have controls on investment by foreign managers could be one. Or emerging markets in which a manager is better placed to be able to service and enforce on loans than large global managers.

In any of these cases, if the manager is successful, they are likely to quickly have larger managers knocking on their door to buy them.

Longer term – skill > scale

As the market evolves, we will see some areas in which manager credit investment acumen becomes more important than scale – and there will be space for smaller specialist players.

A relatively near term one is if we start to see existing private credit deal defaults increase. Specialist managers who have special expertise in working through distressed situations might win there. Skill could be more important than scale. This may be relatively difficult to scale as different managers will be skilled at different underlying asset classes and geographies of distressed loans.

Another area will be private credit secondaries. As this market grows, if smaller managers can develop better pricing models – this could be an area in which smaller managers could succeed as scale is less important.

A third is as the market develops to intermediate borrowers and private credit managers. The process is still currently inefficient and relationship driven. Over time, infrastructure solutions are likely to be developed that reduce the need for private credit managers to have their own origination teams – at least for some asset classes. For example, for lending against consumer loan asset pools or for direct lending to mid-market corporates, we may see fintech or traditional finance solutions emerge.

Janus Henderson and Victory Park Capital

Janus Henderson has AUM of $360bn. It is London headquartered and invests in equities, fixed income and alternatives. The firm was created in 2017 from the merger of Janus Capital Group and Henderson Group.

Victory Park Capital was founded in 2007 and is headquartered in Chicago. Since 2010, it has specialized in asset-backed lending – including SME and consumer finance, financial and hard assets, and real estate credit. It has invested over $10bn across over 220 investments. Its AUM is $6bn.

Janus last month bought National Bank of Kuwait’s emerging markets private investments team – NBK Capital Partners. It is renamed to Janus Henderson Emerging Markets Private Investments.

San-Francisco headquartered Cherry Technologies has issued a $250m securitization backed by loans used for elective medical procedures.

Cherry offers treat now pay later (essentially buy now pay later) loans for dental and orthodontics, medical aesthetics, plastic surgery, dermatology and other treatments.

Cherry was established in 2017 and provides treat-now-pay-later loans through 24,000 merchants across the US. The company has lent $1.0bn across 570,000 transactions so far.

The deal was rated by KBRA – the top tranche has a single-A rating. The issuer is Cherry Securitization Trust 2024-1. This is Cherry’s first public securitization.

Securitization is creating a new model for the Buy Now Pay Later sector

Buy now pay later (BNPL) loans providers thrived when rates were at zero – but then faced a hard time as rates increased.

They were able to get very low cost funding during the low rates era – allowing them in many cases to offer their customers interest free financing. The BNPL companies would make their revenue from merchant fees.

BNPL providers are now using securitization to access relatively cheap funding to finance their loans. Companies like Affirm and Zip have been issuing public securitization deals, and others like PayPal, Zilch and Klarna are doing this through asset-backed private credit deals.

Credit risk is still a concern – especially for BNPL loans to non-prime borrowers.