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quick thread about Hoist Finance, combining some of favourite things (securitisation, NPLs, regulatory cock ups, hedge funds doing weird stuff)
Hoist is a debt purchasing firm based in Sweden, basically doing the same stuff as Arrow, Cabot, Intrum, Lowell, B2 etc. Buy bad loans from banks, work them out, collect more than you spent buying them, is the plan
Unlike all of those firms, though, Hoist is itself a bank, which takes deposits, is regulated, supervised etc.
This was mostly good for Hoist, because while all its peers have to fund in the HY market, expensively and shakily in the case of Lowell, Hoist has a bunch of cheap, sticky deposits. Lower cost of capital = easier to make money buying NPLs https://www.globalcapital.com/article/b1nxlpnk0vpfbh/permira-splashes-cash-on-lowell-rescue-ahead-of-2021-npl-splurge
Until, however, the regulators got involved. Around 2018, European authorities were really pretty keen on getting banks to hurry up and sell their bad loans, and encouraged this using their favourite stick, capital requirements. Capital reqs on unsecured NPLs jumped 50% overnight
what if, like Hoist, you bought them deliberately, way below book, as part of your core business? Doesn't matter here - for the regulator, NPLs are NPLs. Capital ratio dropped like 5 percentage points, Hoist was in trouble, cancelled its divi
Next step was to try to fix the (entirely artificial) problem. Hoist went out to try to sell its NPLs in securitized format, so it wouldn't have to suck up the capital pain. https://www.globalcapital.com/article/b1g9vt6ds1sjfc/debt-purchaser-preps-securitization-to-fight-rwa-hike
It took most of the year, but eventually managed to do a deal with CarVal https://www.globalcapital.com/article/b1jddhrpz3c1px/hoist-completes-first-ig-italian-srt-backed-by-unsecured-npls
But their business model was still kind of broken - it was still basically uneconomic for them to go around buying NPL portfolios given the new capital requirements. Even worse, in the meantime, regulators had turned up the punishment level more, adding a new NPL backstop
so the next step was to find someone who could derisk their new purchases - a deal which could let them carry on buying NPLs, dump the capital requirements, and neutralise the new regulations
That took most of 2020, thanks to the pandemic. Lots of uncertainty about NPL supply, corporate distress, collections etc didn't help. Plus a lot of the more adventurous money out there suddenly had other things to focus on
This year, however, they closed a deal with Magnetar, which does the business https://www.globalcapital.com/article/b1qj6gj70t0lpj/hoist-solves-npl-conundrum-with-magnetar-tie-up
It's basically a forward-flow NPL signficant risk transfer securitization
if those words don't mean much to you — Magnetar takes the first 15% of risk on each portfolio Hoist buys, but doesn't know in advance what those portfolios look like, beyond the broad parameters
Instead of taking the pain of the extra NPL capital reqs, Hoist is left holding an investment-grade-ish senior tranche of a securitization (which keeping the collection fees and any overall upside from the portfolio)
Magnetar gets 14% IRR for this, without doing the hard yards of having go buy the portfolios itself. https://www.prnewswire.co.uk/news-releases/hoist-finance-and-magnetar-sign-securitisation-partnership-agreement-for-new-portfolio-investments-853049403.html
Everybody wins! Except, Hoist is still paying a hedge fund 14% to go do exactly the same business it has always done, thanks to a dumb blanket regulation which threatened to cripple its business. Magnetar may or may not have thanked the EBA for helping it put on this trade
