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Rocket fuel?

The deepening tie-up between alternative asset management and insurance is probably the biggest trend in asset-backed and private credit markets right now (you can hear me discussing it with DealCatalyst’s Todd Anderson here).

It’s happening everywhere that has financial markets, but there are big moves afoot in the UK. First up is Athora’s purchase of Pension Insurance Corporation, announced last Thursday. Athora is Apollo’s European captive, active in the Netherlands, Italy, Belgium and Germany.

But Athora’s £5.7bn purchase of PIC will bring in its £50.9bn portfolio of assets, almost double its balance sheet at a stroke, with far more growth to potentially follow — PIC, in the fairly recent past, has been one of the most prominent participants in the bulk purchase annuity (BPA) market, in which life insurers buy-in corporate defined benefit pension schemes.

That typically involves rotating the assets into something a little spicier than the previous trustees had signed off, something Apollo is eminently capable of achieving, and benefiting from the scale and origination capabilities of a larger institution.

We did a bit of digging into the balance sheets of both institutions earlier this week, and found some things you’d expect — PIC has more government bonds and corporate bonds, by about 10 percentage points, than Athora.

Less expected was the two institutions had about the same allocation to private credit — 18.4% for PIC and 17.66% for Athora, despite Athora describing private credit as “the main return-seeking asset class, providing stable income and better risk-adjusted returns than comparable traded assets”.

It’s hard to get further under the hood, but the kinds of things that can be described as “private credit” are quite varied. For PIC, this seems to mean infrastructure and social housing private placements, mostly rated in the low-A area, while the biggest subdivision for Athora is “large cap and mid-market lending”, at 8.74% of the balance sheet.

Athora breaks down its private credit book not by implied or internal rating but by LTV, showing that €5.8bn of its €9.5bn in private credit has an LTV below 50%. That sounds safe, but it’s fairly normal for an LBO package structured to single-B to have an LTV below 50%.

Athora also has a lot more mortgage exposure, at 14%, split between €4.6bn ordinary mortgages and €3.3bn savings mortgages, a high duration legacy product which repays at maturity rather than amortising. PIC, like lots of other UK insurers, has some equity release mortgages, but only £1bn, 2% of the balance sheet, far below the 11% at Rothesay.

Presumably the PIC balance sheet will start to resemble Athora’s allocations a little more, once the deal closes — meaning sizeable chunks of investment in UK private credit and mortgages.

The other big news came the Thursday following (10 July), with L&G and Blackstone announcing a “strategic partnership to accelerate growth ambitions”.

Partnership can cover a multitude of structures. Citi and Carlyle announced an asset-backed finance collaboration last month, which “formalized a framework to exchange market intelligence and explore co-investment and financing opportunities” — so an investment bank giving market colour and maybe lend money to one of its biggest clients? Sounds like a good plan!

The L&G-Blackstone deal might have a bit more substance. L&G will invest “up to 10% of anticipated annuities new business flows”, which isn’t quite defined.

It did £2.1bn of retail annuity sales in 2024, but the bigger prize is surely bulk annuities, where L&G says it has written more than £70bn of business in the UK, with a market share of over 25% in the last decade. If we assume £50bn a year in total UK BPA deals (it was £47.8bn in 2024), with L&G taking £12.5bn of that (a 25% market share, though this is optimistic given L&G did £8.4bn last year), plus £2bn of retail… then 10% of that is maybe £1.4-£1.5bn a year?

A Blackstone spokesperson told Bloomberg the partnership could grow up to $20bn over five years, substantially above the £7.5bn you might get on the back of the envelope numbers above (unless one is really pessimistic about USD-GBP) — so presumably the hope is the Blackstone investment partnership will enable L&G to take a substantially larger share of the total BPA supply, by providing a source of higher-returning investments.

That’s not going to be easy — Athora-PIC will most certainly be looking for these deals, and the market is already getting more competitive. Brookfield launched earlier this year, while M&G, Royal London and Utmost also launched inside the past two years.

The release says the partnership will “leverage Blackstone’s private credit origination platform to access a pipeline of diversified investment-grade assets, predominantly from the US”.

L&G has a big and diverse private markets allocation this side of the pond, with £57bn in “private markets assets” (it owns a big stake Pemberton). It owned a UK housebuilder (sold last year), and it owns £5.3bn in lifetime mortgages, £13.9bn in private credit, and £9.8bn in investment property. as well as sizeable infrastructure and affordable housing exposures.

But it makes sense it would want to build up a US presence, going beyond its existing exposures (north of £2bn-equivalent) to the US private placement market. Providing investment grade private credit in insurance friendly format is a big theme for Blackstone (as it is for Blackstone’s peers) — is it going to put a bit of extra pep in L&G’s step?

No more heroes

They say bad news sells paper, but I'd modify that for the financial world by saying "cool trades sell papers".

We like hearing about funds that will get a massive payday if only they can thread multiple needles of legal financial and market complexity. It might be a lot more work that clipping coupons of performing loans, but there's a certain glamour to it all.

So how come nobody seems to be putting on smart aggressive CMBS restructuring trades? This is an asset class that used to be an absolute playground for special sits funds, with tight, complex, and sometimes poorly drafted docs, valuable collateral, multiple legal angles, and different routes to "heads I win tails you lose" game theory setups. I was just a newbie reporter at the time, but there was a ton going on in the years 2010-2014.

Now it's got dull, despite the slow motion crunch of 2018-2021 vintage deals into their maturity walls.

CRE financing in this era is, in theory, better than the pre-crisis vintage. Typical LTVs going into CMBS deals are lower. Single asset single borrower transactions have largely replaced conduit deals, allowing more focus on specific asset due diligence, and some of the most egregious structural features (massive mismatched off-market swaps) have gone.

But while the structures might be better, the traditionally largest sub-asset classes (offices and shopping centres) have had real structural challenges in the past five-seven years, and the higher rates environment has dragged up required cap rates, pushing down valuations.

Challenges like this create opportunities — loan extensions or upcoming maturity dates can be a source of bargaining power for investors — but CMBS 2.0 deals are scarce, and kind of a weird hobby for most investors, rather than a valid asset class to build a career around.

Docs have also made things more dull. The base of sponsors is more concentrated, sponsors have become more powerful right across the financial markets ecosystem, and have learned to extract as much optionality as possible from their financing partners, who will be grateful for the mandate whatever the terms.

The career-improving response for a bank CRE desk faced with a request for financing from Blackstone or Brookfield is "yes we're in how much would you like", not carping about termsheets, covenants and voting requests. Lend and be thankful for it!

Still, the troubled deals are stacking up. Moody’s downgraded Taurus 2021-3 DEU this week, the CMBS financing Frankfurt’s The Squaire office building. Everything but the senior class is now sub-IG, with Moody’s estimating property value at €389.7m, compared with the €756.9m valuation conducted in March 2024.

When the underlying loan extension was agreed last year, pushing out loan maturity to December this year, there was an intriguing mention of an obligor recapitalisation plan — something which has become very live from April this year, when anchor tenant KPMG gave notice it would be leaving when its lease is up in 2028.

KPMG has a massive 46k sqm in The Squaire, and is downsizing and moving into town. The office market is buoyant — JLL says Q1 2025 saw an all-time office leasing record — but it also notes around 1.25m sqm remained vacant at the end of the quarter, and The Squaire only suits particular tenants. It’s right by the airport and above a station; convenient if you need to leave Frankfurt, but well out of the CBD cluster.

Six months of loan maturity and the biggest tenant leaving does not spell easy refinancing to me, and presumably an adjustment has to come somehow — the €485m of debt against the building may need to be right-sized for a more realistic valuation.

This adjustment won’t come easily, though, and perhaps there’s cash to made along the way, if only we had some CMBS adventurers still.

Watching the watchers

It’s hard to underwrite for first party fraud, or at least that’s something I’ve heard a lot since the collapse of Stenn International, the trade receivables platform, at the back end of last year.

Several banks and funds had exposure to Stenn, including BNP Paribas, Citi, HSBC and Natixis, which arranged the facility. Other institutions were refinanced out as spreads tightened, which may have stung at the time but is much better than being carried out as the losses on the main Stenn facility became clear in early 2025.

The losses are large. Several sources have said they expected recoveries in the 20% area, on a facility that was north of $900m when Stenn entered administration. HSBC’s skeleton argument in the administration application said that hundreds of millions of receivables were faked, and even the real ones are difficult to claim.

Underwriting for first party fraud is genuinely difficult, but most lenders don’t try, because finance is based on a chain of trust. Audited accounts are supposed to be trustworthy, because auditors are supposed to have the power to look under the hood in a way mere lenders do not; they can ask for account details and independently verify the existence of assets down to a granular level.

The UK’s Financial Reporting Council, the regulatory body for auditors, is now investigating the audits of Stenn International and Stenn Assets Funding UK by Azets Audit Services and Deloitte LLP. The Irish SPVs which housed the Stenn receivables are outside of the scope of the UK audit regulator, but it would seem odd to do one without the other.

Whatever this may find, not all audits are created equal. The mechanics and scope of a debt facility audit can be negotiated and specified. Who gets to do the audit, who sets the audit's terms, when can auditors be replaced, which information can be accessed. All of it matters but, in practice, how many lenders want to argue over audit mechanics? There are deals to be done!

Stenn’s administrators, Interpath, also published a progress report this week. It's investigating what went on at the firm and have hired Forensic Risk Alliance, a specialist investigations and forensic accounting firm, to help. Ashurst is advising company side, and Interpath is also looking at other means of redress, saying where applicable it would “engage with stakeholders to exploe the merits and funding of pursuing potential claims available to the Company”.

EU accidentally bans deals which never existed

There are no STS CRE deals. That's because it's fiendishly hard to knock CRE loans portfolios into the kind of shape which allows STS to work, and the benefits are slim. There's certainly an STS spread premium in RMBS and ABS, though it's often hard to disentangle from other questions about collateral quality.

Does an STS deal price tighter purely because of the regulatory designation, or because it's a good quality front book portfolio with a stable sponsor? The benefits are clearer for SRT deals, since the STS tranche isn’t distributed; it’s just a straightforward boost to deal efficiency.

The binding constraints for most CRE trades with respect to STS is the concentration limit (no more than 2% of the portfolio to a single obligor) but even if you can get past this it’s also, based on the current state of regulation, impossible to achieve anyway, as of this year.

Basel 3.1, introduced in the European Union in January this year, raises the risk weight of the sub-55% LTV portion of CRE lending to 60%, regardless of the other qualities associated. But the STS rules require CRE STS deals (of which none exist) to have an average risk weight for the underlyings below 50%. It's literally impossible to do these deals now (Celeste wrote about this in more scholarly format here)

The concentration limit remains the higher bar, and most true sale CRE deals are large loan transactions, often what in the US would be called SASB CMBS (single asset single borrower). There are a couple of small balance CRE shelves out there, but these are not STS for other good reasons.

In the last Pembroke Property Finance deal for Finance Ireland, the top 10 risk groups represented 51% of volume, with all of these top 10 representing a concentration greater than the 2% limit. Together's CRE deals are way more granular, with the largest loan in the last deal (£5.25m) just nudging over 1% of the £522m portfolio, but they’re also very diverse in terms of loan types, mixing residential, semi-residential and commercial across multiple categories of lending property and loan structure.

Certain kinds of CRE portfolio might be possible to structure into the STS homogeneity requirements; a large portfolio like Santander's Spanish branches (Silverback Finance) or Telecom Italia's phone exchanges could qualify, with a bit of structuring to make each property a single obligor (Erna, the CMBS deal backed by the latter, is actually a large loan transaction with four facilities underneath). For a synthetic deal this might be easier to achieve, since it would strip out a few layers of possible SPVs.

Anyway, a fix is on the way — the new EC proposals!

These adjust the 50% constraint to 60%, such that, if one could find a homogenous and granular portfolio of sub-55% LTV CRE lending, one could, in theory, get STS treatment on it, assuming the proposals pass in their current form after the long road of regulatory negotiations ahead. The impossible deals could exist!

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