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SCI Start the Week - 17 May

Category: ABS Capital Relief Trades CLOs

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A review of securitisation activity over the past seven days

Last week's stories
Biden bonanza
Vast infrastructure package to energise project finance CLOs
CRE CLO surge
Record issuance expected
Demand drivers
Fundamentals and technicals support US CLOs for now
Geographical divergence
CSEE moratoria more likely to underperform
Lone Star rising
A soup to nuts profile of TCBI's inaugural CRT (Premium content)
Mortgage-backed SRT priced
Credit Suisse executes Elvetia refinancing
Virtuous circle?
Bullish sentiment underpins securitisation opportunity
Bad weather bonds
Utilities to make use of ABS to rebuild after extreme weather
This year has already seen two utility recovery charge (URC) ABS transactions in the US and, say analysts, more will be priced as extreme weather becomes more common - which some climate modellers predict.

"We've seen two so far this year and there is rumbling of more to come due to legislation already in place, as well as possible future legislation being put in place. The general market expectation is that there will be more. In recent years we've seen maybe one or two a year at most," says Inga Smolyar, senior credit officer at Moody's in New York.

Earlier this month, California utlity PG&E received permission from the Public Utilities Commission of California to issue a $7.5bn recovery bond to finance costs and expenditures related to the devastating 2017 wildfires. When priced, this will be the largest public utilitty securitisation ever seen.

At the end of April, Wisconsin Electric Power (WEPCO) raised $118m in environmental trust bonds to recover costs associated with the retiring of a coal-fired energy plant.

In all these deals, special dispensation was required from the state legislatures but the latter seem more willing to alllow utlities to seek restitution of costs through the ABS markets. In February, for example, the Texas authorities granted permission to utilities to seek recovery of costs incurred in system restoration after such events as hurricanes and violent storms.

The receivables in a URC ABS are derived from additional one-item fees levied on customers, based on their utility usage. The scheduled payments in the bond are based upon the projected additional fees, which are generally highly predictable.

Moody's affiliate Four Tweny Seven, a Callifornia-based cllimate risk data firm, says that in the next one to two decades the risk of water stress, hurricanes, excessive rainfall and extreme heat will worsen in certain regions of the US.

The damage that utilities incur and the loss of revenue as a result of such incidences of extreme weather can leave utilities dangerosuly exposed. Indeed, PG&E accepted culpability for its role in the 2017 wildfires which left it facing billions of dollars in legal claims. Utilities also need to rebuild infrastructure after violent weather conditions.

Not only do extreme weather events leave utilities needing to issue more debt to cope with increased costs and expenses, such events can also interrupt the payment flows into existing ABS deals. The weather need not be apocalyptic to interrupt payments; warmer than usual winters or cooler than normal summers can result in reduced elecric usage

Moreover, certain states have imposed moratoriums that prevent the disconnection of customers from the power grid in cases of severe weather, and this can lead to a significant proportion of fee-payers failing to make payments.

However, these developments do not pose a significant risk of delinquency to UCR bonds, says Moody's. Transactions incorporate legislatively mandated true-up mechanisms, which are periodically adjusted to ensure that the ABS deal makes scheduled payments even when revenue derived from fees falls short of expected levels.

In addition, deals have reserve accounts, generally equal to 0.05% of the initial note balance or equivalent to one semi-annual bond payment.

It would also be highly unusual for electric usage to completely shut down for a long period over the entire area to which the utility supplies power. The only incident in recent times when this did occur was Hurricane Sandy, which devastated large areas of New York in 2012, but even then no interest payments in affected utility ABS deals were missed.

"We are not aware of legislation authorising UCR bonds being revoked in the past, and at the end of the day we don't see a credit impact to the bonds from extreme weather either, given the true-up adjustment mechanisms," says Smolyar.

Simon Boughey

Other deal-related news

  • Hertz has determined that a revised proposal to provide equity capital to fund its exit from Chapter 11 - made by affiliates of Knighthead Capital Management, Certares Opportunities and Apollo Capital Management - constitutes a superior proposal than the one contemplated by its agreement with its existing plan sponsors, affiliates of Centerbridge Capital Partners, Warburg Pincus and Dundon Capital Partners (SCI 10 May).
  • Domivest is in the market with the first-ever STS buy-to-let RMBS (SCI 11 May).
  • In a letter to US Senate Majority Leader Chuck Schumer and Minority Leader Mitch McConnell, the Structured Finance Association has expressed its opposition to Senate Joint Resolution 15, which would invalidate the true lender rule issued by the OCC last year (SCI 11 May).
  • The EIB has disclosed that it invested €50m in UCI's latest RMBS, Prado VIII, aimed at promoting the renovation of existing residential buildings in Spain and Portugal, as well as the purchase of new near zero energy housing (SCI 12 May).
  • The Australian Prudential Regulation Authority has launched a consultation on proposed measures to enhance the capital adequacy of authorised deposit-taking institutions (SCI 12 May).
  • Fitch says it will no longer include a near-term stress sensitivity scenario that notches down half of ratings with negative rating outlooks with a floor of triple-C minus in its analysis of US CLO notes (SCI 12 May).
  • M&G has launched long-dated fixed rate mortgages in Ireland with its origination partner Finance Ireland (SCI 13 May).
  • The Principles for Responsible Investment has published a report that examines the challenges associated with incorporating ESG in securitised products (SCI 14 May).
  • Von der Heydt Asset Servicing and Immutable Insight Capital Management have partnered to securitise the blockchain fund, Blockchainfonds II (SCI 14 May).

Company and people moves

  • Mount Logan Capital subsidiary Great Lakes Senior MLC I has entered into a facility and security agreement with a large US-domiciled financial institution, as administrative agent (SCI 10 May).
  • Blazehill Capital has hired Jake Hyman as business development director, signalling its commitment to sourcing and executing complex credit opportunities in the UK mid-market (SCI 10 May).
  • SME Capital, SCIO Capital and Prytania Asset Management have formed a funding partnership to help support UK SMEs take the next step in their evolution, whether that is growth, acquisition or succession (SCI 10 May).
  • Brazilian alternative investment firm Vinci Partners Investments has established a joint venture with agribusiness investment firm Chrimata involving a new strategy, which will be co-managed by Vinci Partners' real estate and credit teams (SCI 11 May).
  • Family Legacy Capital Management has formed FLC Credit Partners, a private credit fund manager providing financing solutions to capital-constrained, lower middle market companies in North America (SCI 11 May).
  • Frost Brown Todd has promoted three CMBS attorneys in its Louisville office (SCI 11 May).
  • Bain Capital Ventures has named Noah Breslow operator in residence, based in New York (SCI 12 May).
  • Income Research + Management has strengthened its client service team with two new recruits (SCI 12 May).
  • DWS has launched the DWS Secured Income Fund, aimed at small to medium-sized defined benefit pension plans seeking stable, long-term returns (SCI 13 May).
  • Alok Kumar has rejoined Channel Capital Advisors as head of portfolio analysis in the trade finance team, responsible for leading the sourcing, analysing and negotiating of transactions (SCI 13 May).
  • Arthur J Gallagher & Co is set to acquire certain Willis Towers Watson reinsurance, specialty and retail brokerage operations as part of a proposed regulatory remedy for the pending Aon and Willis Towers Watson combination (SCI 13 May).
  • Adams Street Partners has recruited Leland Richards as a partner on the private credit team (SCI 13 May).
  • Leadenhall-backed Nectaris Re, a Bermuda-based Class 3A reinsurance company, has obtained a financial strength rating of A (Excellent) and a long-term issuer credit rating of 'a' from AM Best (SCI 14 May).
  • The US SEC has approved the registration of its first security-based swap data repository - DTCC Data Repository (US) (SCI 14 May).
  • Schroders has launched the Schroder GAIA Oaktree Credit fund, a global multi-strategy credit portfolio that offers investors access to high-conviction liquid credit opportunities (SCI 14 May).


Recent research to download
TCBI Deal Profile - May 2021
The Collins Amendment - March 2021
2021 Outlook - March 2021
CLO Case Study - Spring 2021

Upcoming events
SCI's 1st Annual CLO Special Opportunities Seminar
29 June 2021, Virtual Event
SCI's 3rd Annual NPL Securitisation Seminar
September 2021, Virtual Event
SCI's 7th Capital Relief Trades Seminar
13 October 2021, In Person Event