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Global credit funds & CLO's
March 2024 | Issue 262
Published in London & New York.
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March 2024 | Issue 262

Arrangers optimistic on prospects for CLO-like recurring revenue deals

Tom Davidson
Managing editor
Recurring revenue (RR) securitisations, one of the more obscure corners of the ABS market, are seeing a surge of interest, according to market sources, with at least three deals in the pipeline.
These securitisations of loans to high-growth tech companies sit somewhere between CLOs and ABS. VCP RRL ABS III, the first new deal of the year, priced in February.
The structure remains associated with a handful of key players, including Golub, which developed the first deals in the space, and KBRA, which has rated all the RR ABS deals so far. A handful of arrangers specialise in the product, including MUFG and Deutsche Bank (which structured the last Vista deal). According to KBRA’s data there have been 17 transactions to date, including seven managed by Golub.
Jared Diamond, vice president, securitised products, at MUFG, says: “We’ve been doing a lot of work on the education front. For ABS investors the structure is familiar and the assets are new, while for CLO investors the assets are familiar and the structure is new. Appreciating the nuances have been key to the relative value story.”
“Recurring revenue loan borrowers are B2B enterprise software companies focused on growth”
Jared Diamond, Vice president, securitised products | MUFG
Some of those structural nuances include a pro-rata pay structure and the use of non-curable tests that trigger a rapid-amortisation cashflow waterfall. RR ABS are also generally short dated. In the case of VCP RRL ABS III, the reinvestment period is less than a year, but two years is more standard.
Recurring revenue ABS deals are mostly backed recurring revenue loans, as the name suggests, but portfolios are allowed to include mid-market and to a lesser extent broadly syndicated loans, albeit with limitations. A standard recurring revenue ABS will have a maximum limit of 75-80% of recurring revenue loans.
Much like the more familiar breeds of CLO, recurring revenue ABS are subject to some concentration limits, often with slight twists. One such test is a borrowing base test, whereby the amount of debt outstanding cannot exceed a predefined percentage of the collateral outstanding, in a similar vein to an over-collateralisation test within a CLO.
Recurring revenue ABS are also subject to rapid amortisation tests. For example, among other rapid amortisation triggers, if the borrowing base contravened on two successive payment dates, the transaction goes into rapid amortisation — permanently. In other words, there is no fail-safe to bring the deal out of this rapid amortisation. Rapid amortisation is a sequential paydown of the full structure. It can also be triggered if defaults or delinquencies exceed a specified level.
Although the underlying assets are private, KBRA tracks the performance of recurring revenue loans across the RR ABS universe in a monthly report. Its February 2024 update notes that on an aggregate basis, annual recurring revenue for the borrowers it tracks has increased 4.6% quarter-on-quarter and 24% year-on-year. There are no reported delinquencies or defaults.
“Recurring revenue loan borrowers are B2B enterprise software companies focused on growth,” says Diamond. “The flexibility and anti-dilutive nature of RR loans deliver a scalable and relevant solution to the late stage SaaS space, while providing a unique opportunity to direct lenders. Compared to other esoter ic ABS or CLOs, there’s a great relative value story to uncover.”
That story seems to be filtering through to middle market managers, especially those specialising in the tech sector. As well as Golub and Vista, both Monroe Capital and AB Private Credit Investors have done a number of RR ABS deals. That quartet of managers was joined late last year by Thoma Bravo in the form of its Thoma Bravo Credit Asset Funding ABS. Market sources suggest that a number of potential debut managers are exploring the space.

As Alan George, Managing Director and Head of Structured Products at Golub Capital, notes, "When we created the first RR ABS deal in 2019 there was some investor education required around what recurring revenue loans were. But that deal, and all the deals since, have performed exceptionally well. Relative to similar alternatives, these structures offer more par subordination, shorter tenors, higher pricing, and are backed by assets with zero historical losses, so it's no surprise to see interest growing in the product."
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