Monday 21 January 2019 10:25 London/ 05.25 New York/ 18.25 Tokyo

A review of securitisation activity over the past seven days

Transaction of the week
The European securitisation pipeline remains all but empty as regulatory uncertainty continues to hamper new issuance activity. Upcoming optional redemption dates could provide a much-needed source of supply, however, with the potential restructuring of the Towd Point Mortgage Funding 2016-Granite1, 2 and 3 deals leading the way (SCI 18 January).

Cerberus is currently exploring 'strategic alternatives' with respect to the loans held in these securitisations (SCI passim). Reading between the lines, TwentyFour Asset Management partner and portfolio manager Rob Ford indicates that one such strategic alternative is to refinance the deals - either in the public or private securitisation markets - and potentially involve the same anchor investor.

In 2016 when the deals were originally issued, it was well known that some large Japanese banks (such as Norinchukin) were significant investors in UK RMBS, attracted by the spread levels available at that time - albeit as spreads subsequently tightened, they moved away from RMBS and turned their attention to the CLO market. They are believed to have bought a vast chunk of the £4.63bn senior tranche of Granite1, which was largely pre-placed, and may renew their appetite for the same assets now that spreads have widened back to approximately the same level as when the deal was issued. The pool factor for the senior notes currently stands at 51%, implying that their holding has reduced significantly, due to amortisation.

"A restructuring of the deal would provide access to seasoned loans and another three years of performance history," Ford observes. "For example, 90-plus days arrears have dropped over the last three years and the pool - which was originally sized at £6.2bn - has only seen £13.5m of losses, meaning that the refinancing may qualify for better credit enhancement."

He adds: "Originally, there was 24% credit enhancement at the triple-A level; now it stands at 38%. By taking the credit enhancement back to the mid-20s, the cost of the refinanced transaction will be cheaper for Cerberus, especially since the credit yield curve is flatter than in early 2016."

Another strategic alternative for the Towd Point deals could be to swap them into US dollar-denominated issuances, following the example of the Nationwide and Santander RMBS and Barclays credit card master trusts, which all issued short-dated dollar notes last year (SCI 24 July 2018). "US investors are much less concerned about the short-term Brexit noise and are not subject to the new EU regulation, and the opportunity to buy European triple-A notes that yield similar spreads to US triple-B credit risk transfer notes is attractive. Theoretically, it would be straightforward to put a new US SPV together, transfer all of the Granite assets and sell them plus the swaps - thereby bypassing the European securitisation regulation altogether," Ford suggests.

A third strategic alternative is for Cerberus to establish a structure similar to the Ripon Mortgages and Durham Mortgages transactions (SCI passim). These deals involved the assets being warehoused and the resulting paper retained by a consortium of 'stable funding banks', which proceeded to sell it down at a later date - albeit those banks were providing that funding to a UK government agency, so may be less inclined to do the same for a US private equity house.

Whatever the outcome of the Towd Point consultation, it is expected to have a three- to four-month gestation period.

Other deal-related news

  • The assignment by Fitch of a primary manufactured housing (MH) specialty servicing rating of RPS3- to Cascade Financial Services is being seen as a first step towards building a post-crisis MH RMBS market. The move also signals a shift in manufactured housing servicing dynamics (SCI 16 January).
  • AlphaCat Managers has securitised a non-standard passenger auto insurance portfolio, arranged by Ledger Capital Markets. This innovative transaction creates new ILS market opportunities in securitizing broader classes of insurance risk. We look forward to working with more MGAs and insurers. The bilateral transaction comprises a private placement of two tranches of notes: a US$6.67m senior note and a US$3.33m junior note, which will pay ILS fund investors retained earnings after payments made to support the senior tranche under a profit-and-loss share agreement (SCI 18 January).
  • Charter Mortgages has agreed to sell its residual economic interest in the Precise Mortgage Funding 2018-1B and 2018-2B securitisations to Merrill Lynch International (MLI) for a cash consideration of £6m, payable on completion. The transaction, which is expected to complete on 23 January, will involve the sale of the RC2 residual certificates to the securitisations (SCI 18 January).
  • Cerberus has acquired a €2.1bn portfolio of Italian unsecured non-performing loans via online auction platform Debitos. The move is believed to be the largest NPL transaction undertaken in the fintech sector (SCI 17 January).
  • The standstill in connection with the GB Mozart loan, securitised in the TMAN 7 CMBS, has been further extended to 31 March. The aim is to facilitate the liquidation of the portfolio. For more on CMBS restructurings, see SCI's CMBS loan events database.

Regulatory round-up

  • A Japanese Financial Services Agency proposal to introduce a risk retention rule may result in some Japanese investors being disincentivised from purchasing securitisation positions, where an appropriate entity has not committed to hold a 5% retention piece in the transaction. In a recent client memo, Anderson Mori & Tomotsune and Milbank notes that although the rule will apply to global securitisations, given that Japanese investors are estimated to account for 50%-75% of demand for triple-A rated CLO tranches, the proposal could have a dramatic effect on the sector (SCI 16 January).
  • The EU Securitisation Regulation came into force as of 1 January this year, despite several parts of the legislation not yet having been finalised and amid concerns that market participants may lack the necessary infrastructure to adequately comply. Despite this, it is thought that there will be more STS-compliant transactions issued at the start of 2019 than expected, with many issuers hoping to attain the STS label at a later date in the absence of official third-party verification agents (SCI 16 January).

Data

 

Pricings
US new issuance sprang back into life last week, with eight auto and consumer deals pricing. A pair of Australian RMBS - albeit one was a refinancing - also printed.

The auto ABS comprised US$1.5bn CarMax Auto Owner Trust 2019-1, US$254.4m CPS Auto Receivables Trust 2019-A, US$1.03bn Drive Auto Receivables Trust 2019-1 and US$1.25bn Ford Credit Auto Owner Trust 2019-REV1. The consumer ABS were US$476.19m Master Credit Card Trust II Series 2019-1, US$748m Navient Student Loan Trust 2019-1, US$600m OneMain Financial Issuance Trust 2019-1 and US$457.9m SoFi Professional Loan Program 2019-A Trust. Finally, the RMBS consisted of A$328m Puma 2014-1 Trust (refinancing) and A$400m Triton Trust No. 8 Bond Series 2019-1.

BWIC volume

 

Podcast
SCI's latest podcast is now live. This month the team round up asset class performance from 2018 and look ahead to the expectations for 2019. Access the podcast here, or on Apple Podcasts or Spotify.


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