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SCI Start the Week - 12 April

Category: Capital Relief Trades CLOs CMBS

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A review of securitisation activity over the past seven days

Last week's stories
Collection boost?
NPL sales increase pending amid uncertain timing
Inclusive approach
ABCP to facilitate sustainable asset transition
Positive prospects
Margin loan CRTs on the agenda
Pockets of value
Patient investors can find bargains in depressed CMBS sector
No area of the US securitisation market has been as severely punished by the events of the last year as the CMBS market, and prices for large quantities of bonds incorporating hotel, office space and retail assets have fallen off a cliff. Yet, amid the general maelstrom, there are rich rewards for the discerning investor.

"Within the CMBS fallout, there are pockets of value. The key is to find a bond which is unloved but investor friendly," explains Karlis Ulmanis, portfolio manager at Dupont Capital. Ulmanis manages a $800m structured finance and RMBS portfolio. 

For example, only a couple of weeks ago, Ulmanis was able to pick up a split rating BBB/BB legacy CMBS bond with a price discount of some 15% and yields approaching 20%. Pre-Covid, he estimates that this deal would have yielded in the region of 3% or 4%.

Moreover, the weighted average life of the note is only 18 months, so the value of the price discount is realised very quickly. The defeasance was 20%.

The transaction incorporated 32% retail assets, 15% office space assets and 8% hotel assets, so clearly there risk was entailed. Nonetheless, all collateral was current, there had been no delinquency for four years and the average LTV was 55%.

"This bond was very appetising. I look through 18 to 20 bonds before I find one that I like. This was a really clean bond, and even after running stress tests and reducing collateral by 48%, there were no losses," he says.

As a rising tide lifts all boats, a falling tide drops all boats, and quantities of perfectly good CMBS bonds have been depressed by the negative press the sector has received. Morgan Stanley reported last week that CRE transaction volumes decreased by 59% YoY in February and 53% on a YTD basis. Office, industrial, retail, apartment and hotel volumes declined by 71%, 69%, 66%, 33% and 49% YoY respectively.

It was also reported last week that the Houston hotel market has suffered a dramatic reverse and grave uncertainty faces many properties which back numerous CMBS deals. This is not an outlier, but  representative of the difficulties faced by the sector across the country.

Asset managers are trying to offload large quantities of deals with substantial hotel, retail and office collateral which are then offered into the secondary market by boutique brokers. It is here that the bargains can be found, but investors have to be careful and sift through the yards of poor quality assets.

"I've seen a lot of brokers trying to unload their stuff. The thing is, there is some really bad stuff out there and you have to pick through it," says Ulmanis.

But, within the acres of toxic waste, it is possible to find conduit deals which enjoy a good track record, robust credit enhancement and healthy debt service coverage ratio. These transactions have become undervalued in the sell-off.

He also believes that the mall sector is due for a revival as vaccinations become more widespread and the country emerges from lockdown. While the revival might be only short-lived as long-term structural issues could erode profitability, there may well be a 2021 bounce which will lift currently undervalued CMBS transactions with lots of mall assets.

"As Covid subsides, I expect a temporary uptick, especially in malls. People want to get out and go to the mall, to see things and see people. Longer term, however, they might have problems," he says.

Simon Boughey

Other deal-related news

  • The Securitisation Capital Markets Recovery Package measures have been published in the EU Official Journal, meaning that the STS synthetics framework and improved non-performing loan ABS rules will come into force on Friday (SCI 6 April).
  • Judge Maryellen Noreika of the US District Court for the District of Delaware has dismissed a lawsuit brought by the CFPB against National Collegiate Master Student Loan Trusts, finding that the suit was constitutionally defective due to the CFPB's untimely attempt to ratify the prosecution of the litigation in the wake of the Supreme Court's decision in the 'Seila Law LLC v. Consumer Financial Protection Bureau' case (SCI 6 April).
  • Colony Capital subsidiary CLNC Manager has signed definitive agreements with Colony Credit Real Estate to consensually axe their management agreement (SCI 6 April).
  • A sum of eight new GACS non-performing loan securitisations priced in late 2020, with a cumulative balance of €3.4bn (securitising a cumulative original GBV of €13.4bn of NPLs), according to JPMorgan's latest Italian NPL Performance Tracker report (SCI 7 April).
  • The growth of ESG investment criteria will have limited impact on CLOs and manager flexibility, according to a new report from Moody's
  • LocalTapiola Finance is in the market with a rare Finnish prime auto ABS, dubbed LT AutoRahoitus or 'Tommi 1' (SCI 7 April).
  • UK Mortgages has signed a new warehouse facility - called Cornhill Mortgages No.7 - arranged by Santander to fund the forward flow purchases of newly originated buy-to-let mortgage loans under the company's ongoing arrangement with Keystone Property Finance (SCI 7 April).
  • Banco delle Tre Venezie has amended its Magnolia BTV securitisation to provide for the transfer of an additional €140m portfolio to the SPV, financed with a further issuance of €116m class A and €24m class J notes (SCI 7 April).
  • DBRS Morningstar has taken rating actions on 50 European securitisations, following the finalisation of its European legal criteria (SCI 7 April).
  • Brighten Home Loan is readying its inaugural RMBS - the A$250m Solaris Trust 2021-1 - which is backed by loans predominantly to non-Australian resident borrowers (SCI 8 April).
  • STS Verification International has developed a new verification report template and introduced an amended fee schedule to reflect the specifics of on-balance sheet synthetic securitisations, in light of the publication of the new STS Regulation and CRR amendments in the EU Official Journal (SCI 8 April).
  • illimity Group asset management company illimity SGR has completed the first closing of its illimity Credit & Corporate Turnaround fund, dedicated to investments in unlikely-to-pay loans to SMEs with revival and relaunch prospects (SCI 9 April).
  • The number of mortgages in forbearance dropped in the last week by the biggest amount in six months, according to Black Knight
  • The US securitisation industry has welcomed the signing into law by New York governor Andrew Cuomo of a new statute that should ease the transition from Libor to SOFR for contracts governed by New York law (SCI 9 April).
  • Marston's reports that it has secured waivers and amendments to its bank, private placement and securitised facilities for the financial periods up to and including 1 January 2022 (SCI 9 April).

Company and people moves

  • Peter Hancock has joined the board of ILS marketplace Ledger Investing (SCI 6 April).
  • Ira Reid has joined McLaughlin & Stern as special counsel to the bankruptcy and restructuring group (SCI 6 April).
  • Morgan Lewis has strengthened its structured transactions practice with the addition of partners Steven Becker and Alex Velinsky, who will be resident in New York and Washington, DC respectively and arrive from Hunton Andrews Kurth (SCI 6 April).
  • Stuart Kovensky has stepped down as Onex Credit's co-ceo and cio, but will remain on the firm's board. Co-ceo Jason New has been named head of Onex Credit as a result (SCI 6 April).
  • Channel Capital Advisors has appointed Ian Watson as group coo, reporting to Walter Gontarek, ceo and chair (SCI 7 April).
  • Winstead has promoted nine associates to of counsel, including Erika Larson and Norene Napper (SCI 7 April).
  • Digital-lending platform auxmoney has secured a €250m investment for its marketplace loans from Citi and Chenavari Investment Managers (SCI 8 April).
  • Elementum has promoted Lynette Pirilla Walter to chief legal officer (SCI 9 April).
  • Additionally, Elementum (Bermuda) has recruited John Drnek as general counsel (SCI 9 April).
  • US Bank has promoted John Stern to president of its global corporate trust and custody business, within the firm's wealth management and investment services unit (SCI 9 April).


Recent research to download
The Collins Amendment - March 2021
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