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SBB (Samhällsbyggnadsbolaget i Norden AB) is a Swedish real estate company that owns public real estate across the Nordic region – including social housing, hospitals and schools.

The industry has faced difficulties as rates have risen.

Bonds trading well after tender offer in November

SBB’s bonds continue to perform relatively well – in part because of its use of tender offers.

SBB bought back EUR 417m of debt at around a 3% discount in November. It is now offering to buy back up to another EUR 250m of bonds.

Forcing investors to refresh their valuation

The tender offer helps support SBB’s bonds’ secondary prices. It adds a large buyer to the market – helping avoid a situation in which limited liquidity leads to bond price falls – which then results in panic and greater price level reductions.

It forces a large number of investors to do full analytics work on the securities – in order for them to decide whether to sell back their bonds in the tender offer.

This resulted in a much lower average discount (3%) for SBB’s buyback in November than expected.

Case study for other issuers

SBB’s voluntary offer program offers a case study for other issuers whose secondary prices are trading below where they believe they should be trading.

By adding themselves as a large additional buyer into the market, and forcing investors to do the fundamental analysis on their bonds, other issuers can use the same tools to support the secondary market trading of their securities.

Octane – Grown Into A Category Leader

Octane Lending Inc (“Octane”) has issued a $380m securitization to finance loans that it makes to individuals. Octane finances the purchase of powersports vehicles and recreational vehicles – including dirt bikes, snowmobiles, all-terrain vehicles and personal watercraft.

This is Octane’s ninth deal since it’s first securitization in December 2019. It has raised a total of over $3bn in asset backed securities (ABS) so far.

The transaction is issued by Octane Receivables Trust 2023-3 and is structured in five term tranches from AAA to BB/BB- (S&P/KBRA) as well as a 1-year money market A-1/K1+ rated note.

Octane’s CFO Steven Fernald said: “This successful transaction will help fuel our continued growth as we connect people with their passions and make buying better.”

Octane was founded in 2014 and now has over 550 employees.

The Power Of Specialty Fintech + Securitization

Octane has built a market-leading platform in this segment. It has done this by using securitization to be able to lend at scale, and at low financing costs to its end customers. Using this to build a first-mover advantage, it has been able to build customer acquisition, partnership, technological and operational advantages that now give it a competitive advantage and level of market defensibility.

This is an example of the power of combining specialty fintech and securitization – using technology to be able to efficiently serve niche segments, and securitization to be able to lend at rates that are competitive to those at which banks and other large institutions can lend.

Fintechs are also able to use securitization technology to build their businesses – using securitization-markets standard origination, servicing, risk management and operational standards that will be needed to securitize.

JPMorgan is reported to be stepping up its mortgage, auto loan and credit card securitization programs – ahead of the Federal Reserve increasing the amount of regulatory capital that banks need to hold.

Leveling the Playing Field

These regulatory capital increases work to level the playing field between banks and fintechs in lending – where the raw input cost (funding for those loans to customers) becomes more equal for banks and non-bank lenders.

The Bank Funding Advantage

When tapping the securitization markets for funding mortgages, consumer loans or other assets, fintechs and banks face relatively similar funding costs. In cases in which it is more economical for banks to hold these loans on their balance sheets funded by deposits or wholesale funds – fintechs might find it hard to match bank pricing. These cheap deposits and wholesale funds at banks largely come from implicit and explicit government guarantees, as well as banking being a licensed activity.

The Fed Steps In

Regulatory capital requirements are the other side of the equation for the government – helping to reduce the risk of the guarantees the government provides (for example avoiding SVB failure-type situations), and to create the best market structure for consumers and the wider economy (for example increasing competition and improving loan/savings pricing for consumers).

Under Federal Reserve proposals in July, bank regulatory capital charges would increase by 2% of risk-weighted assets (RWA). This would materially reduce the profitability of holding loans funded by deposits or wholesale markets on bank balance sheets – which is why we are reportedly seeing JPMorgan stepping up its securitization.

The Time For Fintech

Fintechs that can innovate to reduce operational costs of lending (such as using technology to improve the efficiency of underwriting and servicing without legacy costs), that have more efficient customer acquisition, or that create innovative lending products might now find themselves in a position in which they can compete for a much bigger share of the market and will find themselves growing rapidly.

WeWork has elected to not pay due interest on five notes. This comprises $37.3m in cash and $57.9m in PIK notes.

The notes on which interest has not been paid are:

1. 15.000% First Lien Senior Secured PIK Notes due 2027;
2. 11.000% Second Lien Senior Secured PIK Notes due 2027;
3. 11.000% Second Lien Exchangeable Senior Secured PIK Notes due 2027;
4. 12.000% Third Lien Senior Secured PIK Notes due 2027; and
5. 12.000% Third Lien Exchangeable Senior Secured PIK Notes due 2027.

WeWork has a 30 day grace period under the indentures for each security – until each non-payment becomes an event of default.

WeWork says that it has the liquidity to make the interest payments and may chose to do so at a later date.

The company stated: “Entering the grace period is intended to allow discussions with certain stakeholders in the Company’s capital structure to commence, while also enhancing liquidity as the Company continues to take action to implement its strategic plan. As part of this strategic plan, the Company is focused on rationalizing its real estate footprint and improving its capital structure.”

Debt Restructuring or Chapter 11

This may mean that WeWork bondholders can expect negotiations that could, among other things, aim to reduce the quantum of their due amounts, reduce the interest rate on their debt and/or extend the tenor of their debt .

This may be the best action possible by interim CEO David Tolley given the situation he has inherited to try and achieve the best outcome for the company’s stakeholders. Cash balances are low relative to expenses and cashflows used in operating activities per WeWork’s Q2 accounts.

A debt restructuring might make sense for all parties including bondholders – with it appearing clear that company will not be able to repay its outstanding debt.

As an indication WeWork’s $702m 7.875% May 2025 bonds are quoted at around 7 cents.

A debt restructuring might prove complex with the number and formats of obligations WeWork has outstanding and the total number of lenders across all those obligations. In addition to this, WeWork’s lease obligations might create additional legal complexity. A 30-day clock before an event of default might also be tight.

WeWork may enter a Chapter 11 process if a capital structure restructuring cannot be achieved through direct negotiation.

Broader Implications Beyond WeWork

WeWork has company specifics that have resulted in this situation. WeWork has some characteristics of a real estate company: most notably that its main input is office building space. But the company is relatively asset light (leasing its offices from landlords) – potentially making recovery post default values on debt very low relative to companies that own their own real estate.

That said, the company’s current situation is also in part due to a very bullish lending environment over the last few years – that has now turned. This has contributed to WeWork not being able to raise additional new funding – as debt or equity. At its peak, WeWork’s valuation was $47bn. It’s market capitalization is now around $150m.

In this context, we might reasonably expect a greater number of companies with large amounts of debt outstanding that have found themselves facing a radically different environment and set of options now relative to recent years , to begin to restructure and/or default.

US-based emerging-markets-focused hedge fund Gramercy has issued a $552.5m secured loan to London-headquartered law firm Pogust Goodhead.

This is the largest litigation funding loan to a UK law firm to date.

The loan proceeds help fund class action lawsuits against mining firms BHP and Vale for claims arising from the Mariana dam collapse in Brazil in 2015. Pogust Goodhead is representing over 720,000 claimants in a trial set to start in October 2024 in London. The claims are for damage to claimants’ property and livelihoods.

The loan proceeds also help fund litigation against 14 automobile companies (BMW, Fiat Chrysler, Ford, Honda, Hyundai, Jaguar/Land Rover, Mazda, Mercedes-Benz, Peugeot/Citroen, Renault Nissan, Toyota, Vauxhall, Volkswagen, and Volvo) over the dieselgate scandal on behalf of approximately one million UK customers.

Pogust Goodhead was founded in 2018 and has over 100 lawyers. London-based private credit fund manager Northwall Capital had previously lent £150m to Pogust Goodhead.

Tom Goodhead, CEO at Pogust Goodhead said: “This landmark deal shows that global investors have good faith in the outcome of our cases.”

Robert Koenigsberger, CIO at Gramercy said: “The firm has an exceptional track record and we have been impressed by the team and their approach to complex litigation. Allocating to this transaction is clearly consistent with Gramercy’s mission to positively impact the well-being of our clients, portfolio companies, and their communities. The investment materially aligns with our ESG and impact investing objectives.”

Litigation funding as an asset class is continuing to grow – estimated at $15.8bn in 2022 and projected to grow to $24.3bn by 2028 according to RationalStat.

Wells Fargo and Centerbridge Partners are launching a $5 billion private credit fund.

The strategy will target non-sponsor-backed North American middle market companies.

Investors in the fund will include Wells Fargo, Centerbridge, Abu Dhabi Investment Authority (ADIA) ($850bn AUM) and British Columbia Investment Management Corporation (BCI) ($230bn AUM).

The vehicle is set up as a business development company. The management company will be called Overland Advisors. Oakland Advisors will be controlled by Centerbridge and Wells Fargo will be a minority investor.

Wells Fargo will use its North American middle-market customer base to help originate investments.

“Overland represents a new paradigm in direct lending, bringing a relationship approach to direct lending and offering a much-needed capital solution in the large but underpenetrated non-sponsor U.S. middle market,” said Jeff Aronson, Co-Founder and Managing Principal of Centerbridge Partners. “We believe Overland draws on the unique and complementary capabilities of both Centerbridge’s leading private credit underwriting capabilities and Wells Fargo’s nationwide sourcing and origination network to offer an attractive new proposition for borrowers in the private lending and direct credit space at a particularly compelling time.”

“As a leader in U.S. middle market and asset-based lending, we are continually focused on finding ways to best serve our clients, and Overland can offer them options for alternative capital structures that can be used to pursue a broader set of growth and value creation initiatives across a variety of market conditions,” said Charlie Scharf, CEO of Wells Fargo. “Working with Centerbridge under our sourcing relationship will help us elevate our support of middle market clients.”

Hamad Shahwan AlDhaheri, Executive Director of the Private Equities Department at ADIA, commented, “Overland represents a highly differentiated and scalable approach to direct lending in the U.S. middle market. We are excited about our anchor investment in this unique platform.”

Daniel Garant, Executive Vice President & Global Head, Public Markets, BCI, said, “Direct Lending provides an important alternative financing source for middle market businesses. We believe Overland takes that to the next level by broadening and diversifying the types of businesses served, and we are pleased to be making this meaningful long-term investment.”

Brent crude oil prices topped $95 per barrel today – continuing their 30% rally since June.

Saudi Arabia and Russia decided to reduce their supply in early August. US shale production is down.

This may be a short term price spike – as we enter a recession and demand falls. Or it might be sustained for longer and we could see prices go higher than the $115 levels we saw last year.

In each case, these high oil prices affect credit markets.

Below are some possible risks/upsides to watch for.

Headline Inflation: higher oil prices in themselves give us higher headline inflation.

Inflation Expectations: higher prices in fuel and energy, as well as passed-through prices from higher costs for products such as air travel and manufactured goods, can create higher inflation expectations among consumers and businesses.

Higher Terminal Rates Than Expected: to tame inflation and inflation expectations, central banks may need to increase rates higher than currently expected by markets.

Stagflation: higher oil prices, higher inflation and higher rates increase the risk of greater output drops, lower demand through tighter household balance sheets and higher unemployment.

Corporate Credit Downgrades And Defaults: higher input costs reduce EBITDA for a range of companies – at an already stressed time. Some airlines, shipping companies, logistics companies and manufacturing companies, for example, may be more challenged if their oil price risk is not hedged. Credit rating downgrades, defaults and restructurings could follow in some cases.

Consumer Credit Deterioration: lower household net disposable income and higher unemployment could result in higher consumer credit arrears and default rates.

Currency Volatility And Dollar Strengthening: we could see greater currency volatility if oil prices maintain high levels, and could see dollar strengthening if worsening economic conditions reduce market risk appetite and increase capital flows into dollars as a safe haven play.

Emerging Market Sovereign Credit: some net importer emerging markets, particularly those with subsidized energy, may experience greater financial stress.

Greater Short-Term Support Of Fossil Fuels: government and public opinion may support greater short term use of fossil fuel production to reduce foreign reliance.

A Faster Long-Term Transition To Alternative Energy: there could be an increased push to adopt solar, wind, nuclear and other fuel sources. This may translate to greater government support or subsidies.

Sovereign Wealth Fund Credit Demand: some oil producer state sovereign wealth funds may have additional funds available for credit markets.

Oil Producer Primary Credit Issuance: many large oil producers are diversifying their economies away from oil production. Higher oil prices could provide some states with additional equity capital for infrastructure, industrial and other projects – which could then by supported by international credit markets.

Geopolitical And Election Effects: higher oil prices could create a number of geopolitical pressures – from a call for greater self-reliance, to more aggressive foreign policy, to increased demand for a quick end to the Ukraine war. This could affect election results – including the US 2024 presidential election – with knock-on effects for government policy and credit.

Asset Price Contagion: the risks above – including the risk of higher rates, recession resulting in lower equity prices, worsened credit performance increasing credit spreads increase the risks of financial market institution stresses as we saw with the banking crisis earlier this year. This risks further increasing credit spreads as investors are forced to sell holdings to cover other realized, marked-to-market or expected losses.

Subway, which agreed to be bought by private equity firm Roark Group last month, is reported to be planning to raise almost $5 billion through a whole business securitization.

In a whole business securitization, the company’s receivables and assets – including franchise fees, royalties and intellectual property – are sold into a special purpose vehicle, which then issues bonds.

Competitor fast-food franchise firms including as Domino’s, Dunkin Brands, Wendy’s Co and Arby’s Restaurant Group have issued bonds through whole business securitization structures.

Subway’s issuance would reportedly be used to refinance $4.9 billion in acquisition financing from Morgan Stanley, Barclays, JPMorgan, Mizuho, MUFG, Rabobank and Wells Fargo.

Citi and Viola Credit have provided French SME lending startup Defacto with a warehouse facility of up to €167m.

Citi is providing the senior piece and Viola Credit is providing the mezzanine facility.

The facility starts at €67m and will increase to €167m subject to Citi and Viola’s consent.

Defacto was founded in mid-2021 and provides European SMEs with invoice financing and other forms of funding. Financing tenors are up to 120 days – with an average outstanding period of 60 days. The company has so far financed €200m for 7,000 companies.

This type of warehouse facility allows young fintech companies to rapidly grow and effectively compete with incumbent bank lenders.

Hong Kong has issued a HK$ 800m (approximately US$ 100m) green tokenized bond.

Coupon payments, principal payment at maturity and secondary trade settlement use data in a private blockchain. The records on the blockchain are the “legally definitive and final records of ownership” per a statement from the Hong Kong Monetary Authority (HMKA).

The bond yields 4.05%, has a 365-day tenor and is rated A-1+ / F1+ (S&P / Fitch).

The HKMA and Hong Kong Special Administrative Region of the People’s Republic of China (HKSAR) government have said they will release a whitepaper with their learnings from the issuance – to provide a blueprint for other issuers to issue blockchain-ownership-recorded bonds in Hong Kong.

The use of proceeds will be for projects that fall into eligible categories under the HKSAR government’s green bond framework.

Governments, regulators and leading issuers in other jurisdictions may want to consider following suit.