Winner: Siena 2021 - RegCap-1

Banca Monte dei Paschi di Siena’s Siena 2021 - RegCap-1 has won the Transaction of the Year category in SCI’s Capital Relief Trades Awards. The synthetic securitisation is noteworthy for referencing a riskier asset class - a portfolio of mainly Italian Stage 2 loans - and for representing the bank’s efforts to address Covid-19 related impacts within its book.

Structured with the support of Intesa Sanpaolo - through the IMI Corporate & Investment Banking Division - in the role of arranger and placement agent, the transaction references a circa €800m portfolio of corporate and SME loans. The deal is structured in a tranched cover format, whereby the junior and senior tranches are retained by the originator, while the mezzanine tranche is guaranteed by the investor (Christofferson, Robb & Company).

In the Covid-19 context, European banks have experienced a widespread increase in Stage 2 loans within their books - with an average of 9% of the loan book, as of 31 March 2021. This increase follows also a conservative accounting classification of the economic sectors most affected by the pandemic. In this context, the deal completed by Banca Monte dei Paschi and CRC assumes relevance also for potential future issuers.

According to Aleardo Adotti, head of finance, treasury and capital management, through the execution of a CRT focused on Stage 2 assets, the bank sought to protect a meaningful part of its credit risk in the asset class, as well as to help navigate the bank through its de-risking effort. Notably, the deal is part of the bank’s ‘Plan on CRT transactions’, started in 2020, through which four transactions have so far been carried out.

Adotti says there were a few hurdles that needed to be overcome in order to close the deal. “The greatest effort was put into first selecting a perimeter envisaging satisfying features for both the investor and the originator, and second carefully determining the capital structure. In particular, the first loss retained by the originator needed to be calibrated correctly, in order to allow the bank to achieve adequate protection and a satisfactory capital release.”

The criteria used for classifying the underlying assets as ‘Stage 2’ follow the IFRS 9 accounting standard definition, in that the creditworthiness of the assets has deteriorated to a significant extent since initial recognition - although they remain performing. Should any of the assets in the portfolio move to Stage 3, the transaction covers for losses arising from the classification of a securitised exposure as ‘defaulted’.

“This is in line with prudential regulation in terms of the events being ‘past due’, ‘unlikely to pay’ and ‘bad loan’. When a loan is classified as a ‘Stage 3’ asset - once the retained junior tranche is fully exhausted - an initial loss equal to the IFRS 9 provisioning recorded on a loan is enforced from the cash collateral and adjusted from time to time until the final loss is determined,” explains Adotti.

Meanwhile, the investor is able to monitor the deal thanks to quarterly performance reports prepared by the bank. In addition, a loss verification agent may act in order to verify that losses are determined in compliance with the accounting policies.

The transaction’s WAL is about 4.7 years and it doesn’t envisage a replenishment or substitution period. However, Riccardo Gallina, head of loan management & advisory at Intesa Sanpaolo - IMI CIB Division, notes: “In order to maintain the deal’s efficiency in the case of high levels of prepayments, the transaction features a pro-rata amortisation of prepayments that exceed a pre-defined threshold.”

Honourable mention: Fontwell II Securities 2020

Fontwell II is a synthetic securitisation referencing a £1.83bn portfolio of UK agricultural mortgages secured on a first-charge basis over farmland and property originated by the Agricultural Mortgage Corporation plc (AMC), a subsidiary of Lloyds Bank plc. The non-replenishing transaction - structured by Lloyds Bank Corporate Markets as sole arranger and lead manager - provides credit protection for eight years and is motivated by regulatory capital relief at a beneficial cost of capital, as well as prudent risk management within the context of providing support to the UK agricultural industry in line with Lloyds Bank's Helping Britain Prosper ethos.

The portfolio comprises around 6,700 exposures to in excess of 4,000 borrowers operating across a range of farming sectors. The deal stands out due to the unique underlying asset class and the fact that it was executed amid challenging market circumstances for agriculture, given the uncertainty over Brexit, changes to the UK’s agricultural subsidy regime and the ongoing impact of Covid-19. As such and to maximise efficiency, the time between pricing and settlement was extended from the usual five days to 10, allowing for signing prior to the end of the Brexit transition period in 2020 and settlement in 2021.

Fontwell II achieved first and second loss and mezzanine protection on a 33% larger pool than the first Fontwell trade in December 2016, at a lower blended coupon rate, catering to investor risk/return preferences.

In aggregate, circa £157m of notes were placed with a small syndicate of international investors. The original note issuance of £129m priced in December, with an additional £28m of notes issued in March 2021 as a result of investor reverse enquiries. The note upsize enabled the retained tranche to be reduced from 22% to 5%.

Fontwell II was rated by Fitch and KBRA, which were required to consider how their standard methodologies should apply, given the unusually low loss history in the AMC book and specialist nature of the security for valuation purposes.