The Swedish debt purchasing firm struck a deal with Magnetar Capital Management, in which the structured credit fund has agreed to buy mezzanine and junior securitized notes from NPL portfolios which Hoist will buy over the next two years — giving Hoist €1bn of firepower to purchase NPLs, without taking the capital pain that might otherwise be associated.
Hoist will hold on to the senior notes in these structures, as well as buying and servicing the portfolios. Effectively, it is a “forward flow” deal for NPL purchasing, giving Hoist additional purchasing capacity without requiring it to raise equity in the market.
The specialist firm has already struck a similar deal for its back book, following a regulatory decision in 2018 which hiked risk weights for unsecured NPLs — crushing Hoist’s capital ratios overnight.
This was followed by a further European initiative to create an “NPL backstop”, essentially dishing out further capital punishment to encourage banks to sell off their non-performing assets quickly.
Again, this would have also hit Hoist, even though it intentionally purchases its portfolios, though it applies only to assets originated from April 2019, meaning its full effects have yet to flow through.
Hoist worked on an NPL securitization on its back book through 2019, implementing the deal in two stages, and ultimately selling the junior notes in a vehicle called Marathon SPV to CarVal, transferring the risk on a €337m portfolio of unsecured NPLs.
Both the old and new deals were arranged by Deutsche Bank, with White & Case as legal adviser to Hoist.
The challenge, in structuring a forward flow arrangement rather than a back book deal, lies in not knowing what the assets are. NPL buyers who look at whole loan pools often demand extensive due diligence and line-by-line loan tapes, which by definition can’t exist here.
Hoist also wanted to avoid a structure that constrained its ability to buy assets — while it was happy to set agreed limits, it didn’t want to have to ask Magnetar for approval to purchase portfolios.
That meant finding an investor in a very specific sweet spot — experienced with SRT transactions, interested in NPL exposure, and willing to take a relatively passive role in managing that NPL exposure, in line with the usual approach buyers of performing SRT trades take.
The deal is structured to give Magnetar a combined IRR of 14% over the 24 month investment period, based on its exposure to the bottom 15% of the portfolio (up to €150m).
Most debt purchasing firms are not banks, and instead lean on the high yield bond market for funding, rather than Hoist’s much cheaper deposits.
Stronger firms such as Cabot/Encore and Intrum did extensive work last year to prepare their capital structures for an anticipated leap in NPL sales this year, pushing out maturities and bringing in cash. Even struggling Lowell was able to access markets and refinance — though only thanks to a hefty equity injection from sponsor Permira.
Despite the cost of the securitization structures, Hoist remains one of the debt purchasers with lowest costs of capital, with the securitizations bringing it roughly back to where it started before the regulatory damage.