31 West 52 Street, New York, NY 10019
13 March 2018
Leading figures in the Risk Transfer Sector
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Join SCI for the 2nd Annual Risk Transfer & Synthetics Seminar in New York on 13 March 2018
SCI’s Synthetic Securitisation Seminar provides an in-depth exploration of how synthetic securitisation is being utilised to transfer risk, achieve capital relief and create bespoke investment opportunities in the post-financial crisis environment. Panels cover capital relief trade structuring and regulatory considerations, issuance trends, index tranches and mortgage credit risk transfer.
The emphasis on ‘risk sharing’ between issuer and investor is increasing for capital relief trades. This panel examines risk transfer structuring considerations and issuer versus investor motivations, including a case study on a hypothetical transaction. Are structures becoming standardised enough to apply to other areas of the market?
- 12:50 - 1:30 Networking Break
Regulatory attitudes towards capital relief trades remain variable. This panel looks at the US versus the European landscape, drivers for US banks to begin using risk transfer more widely and the use of credit insurance where regulators don’t recognise synthetic securitisation for capital relief purposes.
- 2:20 - 3:00 Networking Break
The capital relief trades market continues to evolve and grow. This panel examines risk transfer issuance trends, emerging asset classes and jurisdictions, regulatory challenges and ESG considerations. What is the economic impact on deals likely to be if spreads widen or regulations loosen?
- 3:50 - 4:20 Networking Break
The search for yield, coupled with increasing CDS liquidity and the need to cover niche risks is driving interest in bespoke opportunities that require tailored solutions. This panel examines the rise of post-crisis index tranche investments and portfolio credit solutions, as well as developments in the secondary market for synthetic securitisations.
MORTGAGE RISK TRANSFER
Fannie Mae and Freddie Mac pioneered the market for transferring mortgage credit default risk with their CAS and STACR programmes, but other firms are now turning to synthetic securitisation to support the US mortgage finance system. This panel tracks the evolution of mortgage insurance-linked notes and GSE credit risk transfer, focusing on the role of rating agencies, as well as on ways of broadening investor participation and enhancing liquidity. How has the sector developed since the OCC cast doubt on JPMorgan’s risk transfer RMBS in 2016?
- 6:00 - 7:00 Cocktails & Networking
Delegate registration is $767 - however a limited discount @ 35% currently applies
Use the code stride18synth and pay just $498.55!
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Network with both new and established industry figures
Comments from delegates attending SCI's Synthetic Risk Transfer events in 2017:
"SCI was able to group together different actors of the market for the seminar, including investors, law firms, originators/buyers of protection, rating agencies, arrangers and structuring & advisory teams….it was a good opportunity to discuss capital relief trades and current trends, and do some networking."
Discover new issuers before they come to market
"Our primary goal was to expand our conversations to new Issuers. This year’s conference had many new potential Issuers, this made it very productive."
Gain new perspectives on topics and issues affecting your firm
"I intended to get a market update from the core participants and stake holders. As such it was very useful, particularly in having a strong balance between participant types."
Support the industry at a crucial moment in its development
"A must attend for European institutions active in CRT, particularly banks"
RECENT COVERAGE OF CAPITAL RELIEF, RISK TRANSFER AND INDEX TRANCHE TRADES IN SCI
Landmark shipping SRT completed
20 December 2017
Further details have emerged of Nord LB's landmark shipping significant risk transfer trade (SCI 8 December). Dubbed Northvest 2, the financial guarantee is believed to be the largest post-crisis synthetic securitisation of shipping assets.
Nord LB's latest transaction references a €10.1bn mixed portfolio of around 4300 high quality loans, including €1bn of shipping loans. Other assets in the portfolio include renewable energy, infrastructure, aviation and German medium-sized corporate loans.
According to the terms of the transaction, the first-loss piece remains on the bank's balance sheet, while the investor - Christofferson Robb - purchases a tranche of approximately €500m in a deal with no replenishment features. Other features include a pro-rata amortisation structure, with performance triggers, although Nord LB refrained from labelling the amortisation as such. In particular, the lender states that the amortisation structure could be described "at best" as pro rata, qualifying that there is no amortisation if the triggers fall below certain thresholds.
The investor was drawn by the mixed nature of the portfolio, which mitigates risk and helps with expected recoveries. The issuer, on the other hand, benefited from the due diligence capabilities and track record of the investor - albeit due diligence was restricted by the blind nature of the pool.
The bank's credit-based business model was another positive element. A Nord LB source observes: "Given the issues of low interest rates and other challenges currently facing the banking sector, our expertise in illiquid asset financing helps generate fees, interest and cashflows."
Nord LB launched the first Northvest transaction in March 2014, which referenced €11.4bn across four asset classes and increased it in September 2015 by a further €5.1bn. An additional tranche from the portfolio was placed with investors in May 2017 (see SCI's capital relief trades database).
Nord LB operates as lead arranger in Northvest transactions. Caplantic supports with structuring and placement, while also undertaking reporting and risk management responsibilities. Caplantic is based in Hanover and is a joint venture between Nord LB, Talanx and Bankhaus Lampe.
Nord LB is aiming to reduce its exposure to shipping to below €10bn in the medium term.
The latest Northvest deal allows the German lender to reduce its risk-weighted assets by around €3.7bn, thereby boosting its CET1 ratio by around 12%. CET1 and total capital ratios for 3Q18 stood at 11.5% and 16.9% respectively. The bank is targeting a year-end CET1 ratio of 12%.
Freddie innovation continues
11 December 2017
Freddie Mac continues to expand its credit risk transfer remit, pricing two innovative securitisations last week. The first deal references relief refinance loans, while the second is backed by affordable single-family rental (SFR) properties.
Dubbed FRESR 2017-SR01, Freddie Mac's inaugural US$161.12m SFR transaction is backed by 59 loans originated primarily by CoreVest American Finance (see SCI's primary issuance database). Of the 2,355 properties securing the deal, 94% are affordable to families earning less than 100% of area median income (AMI). In addition, 71% are affordable to low-income families earning less than 80% AMI and more than 12% affordable to families earning 50% of AMI or less.
The loans were not underwritten by Freddie Mac at the time of origination, but meet its current underwriting standards. "Single-family rentals provide an important alternative for the millions of families looking for options beyond rental apartments, who may not have the means to - or choose not to - purchase a home. We are using our multifamily financing capability to help meet this critical need and ensure that as families grow, their homes can grow with them," comments David Leopold, vp of targeted affordable sales and investments at Freddie Mac Multifamily.
The transaction comprises US$20.27m 3.06-year class A1 notes (which priced at swaps plus 23bp), US$93.57m 4.62-year class A2 notes (33bp), US$47.27m 9.36-year class A3s (64bp) and US$161.11m 5.81-year class XAs (which weren't offered). The certificates are backed by corresponding classes issued by CoreVest American Finance 2017-2 Trust and guaranteed by Freddie Mac (representing approximately 80% of the US$202m AFL 2017-2 deal).
Co-lead managers and joint bookrunners on the deal were Morgan Stanley and Wells Fargo, while Drexel Hamilton and Bank of America Merrill Lynch were co-managers. The certificates are expected to settle on 18 December.
Freddie Mac also priced its first STACR deal to reference loans that meet the Home Affordable Refinance Program (HARP) eligibility criteria, with LTV ratios of between 60% and 150% that were refinanced under the GSE's relief refinance programme. Additionally, the transaction introduces discount and interest-only notes to its credit risk transfer platform.
The STACR 2017-HRP1 deal - which has a 25-year legal final maturity - is aimed at investors that are seeking a longer maturity and seasoned collateral. The pool has an unpaid principal balance of approximately US$15.04bn, consisting of 82,552 fixed-rate single-family mortgages with an original term of 241 to 360 months, funded by Freddie Mac between 1 April 2009 and 31 December 2011. It has a weighted average credit score of 741 and roughly 95% of the loans have been current for the prior 36 months.
Fitch notes that the borrowers have weathered severe economic stress with minimal delinquencies, showing a strong willingness and ability to pay. The current mark-to-market CLTV of the borrowers has improved to 82% from 98% at the time of the relief refinance loan.
Rated by Fitch and Morningstar, the transaction comprises US$50m B/BB- rated class M2 notes (which printed at par, with a coupon of one-month Libor plus 245bp), US$50m B/BB- class M2Ds (printed at 96.29, with a 125bp coupon), US$75m unrated class B1s (par, with a 460bp coupon), US$75m unrated class B1Ds (87.26, with a 250bp coupon) and US$25m unrated class B2Ds (45.86, with a 300bp coupon). A B1I interest-only exchangeable note was also offered.
As loans liquidate or other credit events occur, the outstanding balance of the notes will be reduced by the actual loan's loss severity percentage related to those credit events.
Freddie Mac retained in their entirety the AH and M1H reference tranches, as well as a portion of the credit risk in the M2, B1 and B2 tranches. Credit Suisse and Bank of America Merrill Lynch are co-lead managers and joint bookrunners.
This latest iteration of the STACR series follows the introduction in October of the STACR SPI structure, which offers investors a cash format via participating interests (SCI 17 October).
Bespoke boost opportunity
15 August 2017
The search for yield is driving activity in bespoke CDS tranches, referred to as bespoke tranche opportunities (BTOs) post-financial crisis. The sector is expected to receive a further boost if single-name CDS liquidity continues to improve.
"The reasons why investors are attracted to bespoke investments are the capacity to attain leverage and the ability to create their own portfolio, by choosing names and the risk profile that they are comfortable with. It is possible to achieve a decent spread, with a two- to three-year maturity," confirms Frederic Couderc, co-cio at Chenavari Investment Managers.
The main differences between pre-crisis and post-crisis BTOs is that now dealers sell the entire capital structure and the trades are not driven by ratings arbitrage but are coherent with bank funding needs, according to Malek Meslemani, partner and senior portfolio manager at Chenavari. "Dealers are more disciplined than they were before the crisis and there is better equilibrium between the buyside and the sellside," he adds.
BTO portfolios are usually split into three sections - equity, mezzanine and 'seniors', including super senior - and sold to different types of investors and funds. Chenavari has historically been involved at the lower part of the capital structure, depending on the investment.
"A buyer of risk that masters the idiosyncratic risk (a hedge fund, for example) is preferable on the lower tranches of a BTO, as such an investment requires deep single names fundamentals expertise, whereas senior tranches express more a systemic risk. Some pension funds and insurers play in the senior tranche section, as there is less exposure to idiosyncratic risk at this level," Meslemani observes.
He points out that sectorial idiosyncratic risks are cyclical: for example, concerns over US retail names have overtaken concerns over US energy names - although not to the same amplitude. "With crude oil prices recovering to around US$50 a barrel recently, the risk of portfolio dispersion coming from energy names has decreased."
Chenavari's convexity strategy comprises mostly of four buckets: tranches on investment grade iTraxx and CDX indices; the Crossover index; and bespoke portfolios. Index tranches remain observable and the most liquid, while bespokes are less observable, as dealers initiate the primary trades and provide the bid/ask in secondary ones.
"We're a long/short and market-neutral player, mainly engaged in investment grade tranches combined with hedging trades," Meslemani continues. "We believe tranches offer value across these strategies, which is harder to achieve in other asset classes and instruments. We tend to favour investment grade credits, as they typically exhibit less dispersion."
Couderc adds: "Whether we invest in index or bespoke tranches depends on which is cheaper at any given time. If there's no liquidity premium on offer for a bespoke tranche, we'll invest in an indextranche."
One area that has seen a rise in activity in recent years is iTraxx Crossover tranches, as they exhibit relatively less realised defaults than CDX.HY tranches. "Additionally, the number of constituent names in Xover series has increased to 75, so there has been a pick-up here," Meslemani confirms.
Looking ahead, he suggests that if single-name CDS liquidity continues to improve, the BTO market will grow and attract more dealers (only a handful are involved at present). "There had been a deterioration of CDS liquidity, due to the withdrawal of a few banks since the financial crisis. However, the single-name CDS market is becoming little by little more efficient, thanks to clearing being introduced across different names and sectors. Consequently, we're starting to see brokers becoming involved to support clients - which may, in turn, encourage more clients to clear CDS."
Couderc concludes: "We're positive about the future of index tranches and the BTO sector, although a question remains regarding the pace of growth. The direction is clear, but it depends on clearinghouse and dealer participation."