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SCI Start the Week - 22 March

Category: Capital Relief Trades CDO CLOs

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A review of securitisation activity over the past seven days

Last week's stories
Bifurcated bother
Stress for CMBS secured by ground fees, leaseholds
Diversification play
MPL platforms broadening product offerings
Greek synthetic debuts
Piraeus Bank finalises capital relief trade
Legislative hoops
Multiple layers of regulatory assent hinders US CRT development
Performance indicators
Footfall data, CMBS spread correlation highlighted
Record breakers?
Chart-topping CRT issuance volumes anticipated (Premium Content)
Target recalibration
UK SME synthetics to regain traction
Bank boost
US CLO triple-As see strong bank demand, but for how long?
Significant support from US banks has contributed to the 2021 rally at the top of the stack. Inevitably, though, that level of support will be finite.

Notwithstanding the slight wobble seen in the last few sessions, the primary-secondary basis in US triple-A spreads has compressed significantly in recent months and looks likely to continue at similar levels for a while yet. That, in part, is thanks to the broad-based participation of US banks and the all but unprecedented position in which they find themselves.

"We haven't seen an environment like this for the banks for all but five decades," says Charlie Wu, strategist at Morgan Stanley. "Deposit growth in 2020 clocked in at 23% (on an end of period basis), the highest annual growth rate experienced since 1974. And it isn't slowing down."

A recent report from the US CLOs and Large Cap Banks teams at Morgan Stanley Research expects that in 2021 deposit growth will increase 30% faster than in 2020 due to QE and the roll-off of the Treasury General Account, which it estimates will increase bank reserves by US$2trn, 30% above 2020's US$1.5trn. At the same time, consumers, corporates and investors are not spending all of their QE or government-funded stimulus. As a result, savings are high and operating deposits are growing.

According to Morgan Stanley this is critical, as it means banks can take duration and credit risk with operating deposits. Last year, when the pandemic hit, banks weren't sure how quickly these new savings would be spent, so they kept the reinvestment of these deposits short and liquid. But now, as the period of high savings has stretched on, banks could boost their assumptions for how much of this savings is operational and start to take more duration and credit risk.

Consequently, the report adds: "Banks are more flush with deposits than they have been in 50 years, with the loan-to-deposit ratio at 63% for all commercial banks in the US, and even lower at 56% for the largest 25 banks. They are obviously keen to find reinvestments that deliver more than the 10bp generated from overnight reserves at the Fed."

However, the banks' resultant demand for triple-A CLO paper will not be sustained at current levels forever. Morgan Stanley believes that lower CLO demand will be a function of two factors. Either loan growth re-emerges faster than deposit growth, or QE ends, whichever comes first. They expect loan growth to pick up in 2H21, slowing bank demand for securities in the back half of the year. But demand for securities will likely remain higher than normal until QE ends, which economists pencil in for mid-to-late 2022.

The report continues: "The wild card is if loan demand surges above forecast, so watch that space. Typically, we would also highlight rising credit risk as an offset to reinvesting bank liquidity in CLOs, but we are in unprecedented times with US$1.9trn stimulus a credit positive event, reducing risk in many asset classes including CLOs."

In any event, banks reducing demand is unlikely to have as major an impact as their increased uptake has had so far this year. As Wu concludes: "Banks are obviously an important investor in the CLO triple-A space, but they're by no means the only investor. We're not saying they are the only driver of recent spread tightening; they are just part of the puzzle."

Mark Pelham

Other deal-related news

  • Defence Bank is prepping its inaugural public Australian prime RMBS, the A$300m DBL Funding Trust No. 1 Salute Series 2021-1 (SCI 15 March).
  • Bank of America is in the market with its third European CMBS in the space of a month, following Taurus 2021-1 UK and Taurus 2021-2 SP (SCI 15 March).
  • Moroccan fertiliser giant OCP Group has subscribed to the notes issued by the first synthetic securitisation in Morocco (SCI 16 March).
  • Kensington Mortgage Company has delinked its Gemgarto 2018-1 RMBS from its tie to three-month sterling Libor by amending the asset, liability and hedge sides of the deal, which matures in September 2065 (SCI 17 March).
  • Pagaya has completed the largest-ever consumer loan marketplace ABS - the US$900m Pagaya AI Debt Selection Trust 2021-1 (SCI 17 March).
  • Sizable auto production cuts due to semiconductor shortages in the US will provide support for used vehicle values, a credit positive for securitisations and captive auto finance companies, according to Moody's (SCI 18 March).
  • The New York Fed's Open Market Trading Desk says it will no longer conduct regular operations to purchase agency CMBS at the conclusion of the current schedule, in light of the sustained smooth functioning of the markets (SCI 18 March).

Company and people moves

  • AerCap Holdings has entered into a definitive agreement with General Electric to acquire 100% of GE Capital Aviation Services, both regular aircraft ABS issuers (SCI 15 March).
  • SoFi is set to acquire for US$22.3m Golden Finance Bancorp and its wholly owned subsidiary Golden Pacific Bank, a California-based community bank that is regulated by the OCC (SCI 15 March).
  • British Business Bank has recruited Jeremy Hermant as a senior manager (SCI 16 March).
  • KBRA has appointed Stacie Olivares as its newest independent board director (SCI 16 March).
  • Scope Group has acquired Euler Hermes Rating, a unit of Allianz SE's credit insurance arm Euler Hermes (SCI 17 March).
  • Freddie Mac has named board member Mark Grier as its interim ceo (SCI 17 March).
  • Signal Capital Partners has held a final closing for a new €900m fund targeting European credit and real estate special situations investments, completing the fundraising between August 2019 and February 2021 (SCI 17 March).
  • Scott Bommer has joined Blackstone as cio of the new Blackstone Horizon platform, an initiative being launched by Blackstone Alternative Asset Management (SCI 18 March).
  • PIMCO has promoted a number of its staff to the position of md, including two professionals with securitisation experience (SCI 18 March).
  • Upstart Holdings is set to acquire Prodigy Software, a provider of cloud-based automotive retail software (SCI 19 March).
  • Credit Suisse has named Ulrich Körner ceo, asset management and a member of its executive board, effective 1 April (SCI 19 March).
  • Zenith Service has appointed Stefano Corbella as head of real estate and UTPs, with responsibility for real estate and unlikely-to-pay stranded credits (SCI 19 March).


Recent research to download
CRT 2021 Outlook - March 2021
Synthetic RMBS - March 2021
CLO Case Study - Spring 2021

Upcoming events
SCI's 5th Annual Risk Transfer & Synthetics Seminar
21-22 April 2021, Virtual Event
SCI's 3rd Annual NPL Securitisation Seminar
26 May 2021, Virtual Event
SCI's 1st Annual CLO Special Opportunities Seminar
29 June 2021, Virtual Event
SCI's 7th Capital Relief Trades Seminar
13 October 2021, In Person Event