Contents

NPLs

MPS solvency plan outlined

Monte dei Paschi di Siena (MPS) has set out a plan to demonstrate its solvency to regulators, paving the way for a precautionary recapitalisation by year-end. The plan hinges on the lender's ability to dispose of its €30bn non-performing loan portfolio - including via a securitisation - which it was unable to achieve in December, when it was forced to seek a government bailout (SCI 21 December 2016).

According to Massimo Famularo, head of Italian NPLs at Distressed Technologies, the proposed securitisation structure can deal effectively with the bid-ask gap relating to the NPL sale. "An important challenge is the size of the senior tranche," he says.

Based on information disclosed so far, expected recoveries could comfortably sustain a transfer price of €4bn-€5bn. Any sale will be accompanied by write-offs, which explains the necessity of capital injections, with senior financing provided by Fortress and several US banks.

Sources expect the size of the MPS securitisation to equal 20% of the €30bn NPL portfolio. The junior tranches will be bought by Credito Fondiario, Fortress and Atlante II.

The litmus test of a recapitalisation is whether it is consistent with state aid rules. The restructuring plan includes cost-cutting measures designed to return MPS to profitability, as well as the Italian government's €6.6bn cash injection, which - along with the bail-in of junior bondholders - will be used to cover a €2.2bn loss.

"It is this plan that allows the government to claim that the bank is solvent," says Famularo.

Precautionary recapitalisations - involving an injection of funds for solvent banks to address a capital shortfall identified under the adverse scenario of a stress test - are not subject to the Bank Recovery and Resolution Directive. The ECB has designated MPS as being solvent, despite the bank's previously declared intention to write down assets, resulting in losses of €4.8bn.

Meanwhile, concerns remain regarding the applicability of the MPS model to the Veneto banks. "Politically that would work, since they can show that the bank is solvent," says Famularo.

However, the Veneto banks are not systemic and may thus not fall under the umbrella of a precautionary recapitalisation as stipulated under state aid rules. Additionally, Atlante has already provided €3bn, so further involvement of the fund is unlikely.

Famularo insists that demonstrating solvency offers the authorities a strong political incentive to apply the same approach to the Veneto banks, even if the MPS plan is not economically viable. In this regard, another state entity might step in to fill a €1bn capital shortfall.

He notes: "To avoid liquidation and resolution, another state entity - maybe Cassa Depositi e Prestiti or Poste Italiane - may be considered, allowing for the disposal of the NPLs in a similar fashion to MPS."

Banca Popolare di Vicenza and Veneto Banca have followed a similar trajectory to MPS, according to Moody's. The banks' recent announcements state that they, like MPS, meet Pillar 1 requirements under the baseline scenario of the stress test, but report negative CET1 capital under its adverse scenario. This opens the door to a precautionary capital increase.

Market participants remain optimistic regarding investment activity in the Italian NPL market. "With the exception of MPS and Veneto, the top three banks are selling portfolios. We are also seeing activity from midsized banks, with smaller deals at €200m-€300m. Within this context, Creval, for instance, is expected to issue a securitisation under GACS."

Once a political fix is found for MPS and the Veneto banks, the eventual creation of a secondary market for NPLs is anticipated to occur. Additionally, a moral suasion - whereby problematic banks influence other banks in dealing with their NPL issues - can stimulate a virtuous circle.

One source, for instance, observes that two to three bilateral trades - where banks will finance up to 60% of the deal - are expected.

In the meantime, the market awaits due diligence on the MPS NPL portfolio. A mandate for structuring the NPL disposal is expected by end-June, followed by a finalisation of the deal by year-end.

SP

NPLs

Bankruptcy reform opens floodgates

India's bankruptcy law has attracted increased investment in its non-performing loan market, following reforms to the enforceability of contracts. However, concerns remain over whether associated time-bound decisions can be achieved, due to the complexity of the legal system.

"The main issue with the Indian NPL market was the enforceability of contracts," observes Sakate Khaitan, partner at Khaitan Legal Associates.

The recently amended arbitration law stipulates that an Indian arbitration must be completed in 12 months, with a possible extension of six months, if necessary. This is accompanied by financial incentives for strict adherence to the timeline, which are removed if the timeline is not followed.

Increased investment activity in the sector suggests that investors have responded positively to the reforms. For instance, ICICI, Bank of India and an Apollo Global Management affiliate have agreed to work together to resolve debts in the country. Additionally, Bain Capital and Piramal Enterprises, a diversified Indian company, have signed an accord to create a strategic partnership to invest in Indian restructurings.

Others are also teaming up with Indian firms. Edelweiss Group, a Mumbai brokerage firm, signed an agreement last autumn with Caisse de Dépôt et Placement du Québec, for the Canadian fund to invest up to C$700m in distressed assets and private debt in India over four years. As part of the deal, Caisse de Dépôt plans to take a 20% stake in Edelweiss Asset Reconstruction Company, which has about US$5.4bn in assets.

The new bankruptcy law is aimed at cleaning up the nation's mountain of debt, making it easier to dissolve a company and recover money. Indian banks held about US$105bn in gross non-performing loans, as of 30 September, according to the Reserve Bank of India. The country's banking sector has been suffering NPL issues for several years, reaching 9.5% of loan book at the end of last year, according to Credit Suisse figures.

The issue derives from a 10-year lending spree, mainly to infrastructure firms, which have suffered sharp losses from large investment projects. The problem is magnified for state banks, which hold two-thirds of banking sector assets. Non-performing or restructured loans accounted for 15% of their loan book at the end of last year, according to Credit Suisse.

The reforms mean that factors that could delay arbitrations - such as arbitration fees - have been subjected to caps, along with reductions in fees if there are any delays. This is preceded by a nomination stage, where the arbitrator has to declare - through a declaration of conflict - independence from the parties involved in the dispute.

Probably the most important development of the law, however, is a creditor-appointed restructuring professional and financial committee, which are independent from the borrower's management. An insolvency resolution process (IRP) can supervise management and implement a resolution within a time-bound schedule.

At the same time, the tribunal that oversees the arbitration has no discretion over the IRP. The maximum time for resolution is 270 days. If this doesn't occur, the company is liquidated, followed by a typical waterfall where senior creditors are prioritised.

Implementation has its challenges, however. "There is not sufficient money to allow stressed assets to be sold, with a lack of take-off financing in the infrastructure market and a lack of capital market depth on both the debt and equity side," states Khaitan.

For Saleem Siddiqi, managing partner at Musst Investments, the bankruptcy law will be "a litmus test" for the development of investment activity in the nation's capital markets. Another issue is the lack of resolution expertise.

"Once creditors retain control through IRPs, they will quickly realise the shallowness of India's resolution expertise," notes Khaitan.

He suggests that the only way for investors to navigate these challenges is through secondment of people with global expertise in resolution or hiring firms, such as Alvarez and Marsal, with years of expertise in the field.

According to Saswata Guha, a director in Fitch's bank ratings team, there are question marks over whether the time-bound decisions can be achieved due to the complexity of the legal system. "Decisions at an insolvency court can be challenged at a higher court. Moreover, the loans tend to be large corporates. This usually means large resourceful firms, who can get good legal support."

Such complexity became evident last year with the first test case of the new law. In 2016, ICICI began an insolvency proceeding against Innoventive, the first move by a bank to recover assets under the new law.

Innoventive argued that a special act by the state of Maharashtra, where the company is based, had resulted in suspension of the company's liabilities for a year, thus nullifying ICICI's claim at the time. After a hearing, the National Company Law Tribunal - the body adjudicating cases under the new bankruptcy law - moved to admit the case. However, Innoventive challenged the constitutional validity of the new law.

Further, state banks have come under fire, following cases of embezzlement. Consequently, haircuts from asset sales are heavily scrutinised by the government in an attempt to prevent them from benefitting borrowers, with the downside being delays in decision-making. The Reserve Bank of India has proposed oversight committees to oversee the decision-making process, but this remains just a proposal.

Nevertheless, Khaitan is optimistic. "The crucial element of the law is that it reduces the time to resolve assets. That reduces the cost of capital, bringing more money in and spurring more debt issuance."

SP

Structured Finance

SCI Start the Week - 5 June

A look at the major activity in structured finance over the past seven days.

Pipeline
With many market participants decamping to Barcelona this week for the industry conference, there was a notable slow-down in last week's pipeline additions. The final count consisted of seven new ABS, an ILS, two RMBS and a CMBS.

The ABS were: US$259.71m CCG Receivables Trust 2017-1; Citizen Irish Auto Receivables Trust 2017; US$231.684m CommonBond Student Loan Trust 2017-A-GS; US$2.075bn Domino's Pizza Master Issuer Series 2017-1; US$1.25bn GM Financial Automobile Leasing Trust 2017-2; €600m SC Germany Auto 2017-1; and US$147.5m United Auto Credit Securitization Trust 2017-1.

US$250m Spectrum Capital Series 2017-1 was the ILS, while the RMBS were DCDML 2017-1 and US$350m Sequoia Mortgage Trust 2017-4. The CMBS was US$204m HMH Trust 2017-NSS.

Pricings
There was good variety to the completed issuance. As well as six ABS prints there were four RMBS, four CMBS and six CLOs.

The ABS were: €567m Azzurro SPV 2017; US$210m Cajun Global Series 2017-1; C$500m Glacier Credit Card Trust 2017-1; US$250m Higher Education Student Assistance Authority (State of New Jersey) SLRB Series 2017-1; US$160m Oportun Funding VI Series 2017-A; and CNY4bn Rongteng 2017-2 Retail Auto Mortgage Loan Securitization.

The RMBS were: €10.5bn BPCE Home Loan FCT 2017-5; A$900m Harvey Trust 2017-1; A$2.4bn Medallion Trust Series 2017-1; and US$308.29m Nationstar HECM Loan Trust 2017-1.

The CMBS were: US$330m CGDB Commercial Mortgage Trust 2017-BIO; US$185m Del Amo Fashion Center Trust 2017-AMO; US$786.6m JPMCC 2017-JP6; and US$1.09bn Morgan Stanley Capital I Trust 2017-H1.

The CLOs were: US$349m ABPCI CLO II; US$347.7m Cutwater 2014-1; €363.7m GLG Euro CLO III; US$456.87m JPM Credit Advisors CLO 2017-1; US$349.2m MP CLO VI 2014-2; and US$561m Octagon Investment Partners XXXI.

Editor's picks
STS strikes investor and issuer balance: Further details have emerged over the STS securitisation agreement that was finalised this week (SCI 31 May). Most notably, the authorisation process for third parties that support verification and compliance with STS requirements strikes a balance between issuer and investor considerations...
MARF listing breaks new ground: The Mercado Alternativo de Renta Fija (MARF) has admitted a new synthetic securitisation dubbed FT PYMES Magdalena, set up by Banco Santander's securitisation management company, Sociedad Gestora Santander de Titulización SGFT. The move sets a precedent in terms of synthetics being publicly listed and is seen as a test case for the 2015 amendments to Spain's securitisation law...
Credit-scoring models contrasted: The importance to ABS of the VantageScore credit-scoring model continues to grow, with structured finance transactions increasingly using the credit metric. As such, rating agency DBRS believes investors would benefit from a greater understanding of the FICO alternative...
US CLOs stable: The US CLO secondary market continues to be stable. "The market is taking a bit of a pause and we're in the gap between last week's CLO conference in New York and Barcelona next," says one trader. "Overall market tone remains cautiously optimistic..."

Deal news
Blackstone is in the market with a US$330m CMBS backed by a two-year floating rate commercial mortgage. Dubbed CGDB 2017-BIO, the transaction is backed by a first lien on the borrower's fee and leasehold interests in a portfolio of 18 life science, office, laboratory and medical properties.

Regulatory update
A deal has been reached on the long-awaited new EU securitisation regulations, including a framework for STS securitisation. In what is being seen as a major step forward for the European ABS market, the European Commission, Council and Parliament reached a compromise yesterday evening, with risk retention requirements to remain unchanged at the current minimum of 5% and several punitive regulations omitted (SCI 19 May).

Structured Finance

European market growth predicted

European securitisation market participants expect the number of investors to grow and participation by investors to increase. Increased investor support is identified in a recent DBRS survey as one of the most important changes required in order to grow the securitisation market, while regulatory concerns once again dominate.

The DBRS survey was conducted before the European regulatory changes were announced last week (SCI 31 May). Responding before that STS announcement was made, survey participants identified 5% risk retention as adequate to align issuer and investor interests, with STS thought to be overall an impediment to the growth of the securitisation market.

Issuance expectations for the year are higher than 2016 expectations had been in last year's survey. Issuance growth is expected to come from non-traditional markets, with alternative collateral securitisation types from Italy and Spain as well as increased French issuance. The UK and Italy are expected to be the largest securitisation regions.

Most survey participants predict distributed issuance of less than €90bn, with 62% predicting less than €80bn and 89% expecting less than €100bn. DBRS calculates that the average of the scores equates to around €76bn, which is only €1bn more than predictions last year.

Total issuance is predicted by 75% of respondents to be less than €225bn, with more than half thinking it will be less than €200bn. The average expectation is for €198bn in 2017, which is €3bn more than in 2016.

Market participants generally expect their participation in the securitisation market to increase, with 42% expecting it to increase a little but only 13% expecting to decrease participation. A further 6% expect their participation to increase by a lot.

As for the number of investors, 41% expect an increase and 39% expect the number of investors to stay steady, although 18% expect a decrease in investor numbers and 1% expect number to increase by a lot.

When asked about which sectors might see an increase in issuance over the next 12 months, 20% selected alternative products, most notably from Italy and Spain. DBRS attributes this to an ongoing expectation for NPL or RPL transactions to come from these countries.

The next most-selected sector for increased issuance is ABS, with 14% and a diverse regional expectation - notably France. RMBS, leveraged loan CLOs and covered bonds were each selected by 13%, with autos and SME CLOs trailing and CMBS proving least selected.

"Given a choice of funding, there is a divergence in terms of priority based on job roles within the industry. Retail deposits are preferred by bankers and arrangers over securitisation and covered bonds, but issuers and bank treasuries prefer to make use of capital market instruments. The choice of instrument varies, but whole loan sales are clearly lowest on the list of priority. Issuers currently prefer senior unsecured, arrangers and treasuries prefer securitisation, and bankers prefer covered bonds," adds DBRS.

As has consistently been the case over recent years, regulation is seen as the biggest impediment to the development of the securitisation market. Regulation was identified by respondents as the most significant barrier, with STS - again, before last week's announcement - and Solvency II considered the high priority items.

"Interestingly, after the regulations focus, participants prioritised an increase in investor interest, and the removal of central bank intervention as high priority items to address. In terms of the number of votes, after 'all regulations', these two items received the next highest number of votes. Increased investor participation had a higher average rank, with more participants prioritising it within their top three," says DBRS.

JL

Structured Finance

CHOICE Act passes in House

The US House of Representatives has passed the Financial CHOICE Act. The legislation aims to replace much of the Dodd-Frank Act, specifically criticising Dodd-Frank's "one size fits all" approach to securitisation and doing away with risk retention requirements for all asset classes except RMBS.

The Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs (CHOICE) Act (SCI passim) intends to provide regulatory relief for small banks and credit unions. The House voted by 233-186 to pass the bill.

The bill describes Title IX of the Dodd-Frank Act as "a grab bag of items culled from the wish list of congressional Democrats and their political allies that in most instances have nothing to do with addressing the causes of the financial crisis" and "a missed opportunity to streamline and rationalise the SEC's balkanised and overly bureaucratic structure". Much of the Financial CHOICE Act's response to Title IX concerns changes to the SEC, but ABS is also covered.

The Financial CHOICE Act acknowledges the common perception that a misalignment of incentives in the originate-to-distribute model caused the creation of poorly underwritten mortgage loans, contributing to the housing market collapse. However, the Act notes that "the multi-trillion dollar ABS market is much broader than residential mortgages" and that many of these other securitised asset classes "performed well during the crisis".

"Unfortunately, the Dodd-Frank Act essentially treats all of these categories of ABS as subprime residential mortgages. By failing to differentiate among types of borrowers, collateral, maturities, and investors, Dodd-Frank's 'one size fits all' approach hampers market efficiency and harms those borrowers that rely on the ABS market," says the Act.

The Financial CHOICE Act argues that Dodd-Frank will increase costs for businesses and consumers that rely on the ABS market for credit. It provides the example of a business taking out a loan that becomes part of a CLO then finding it more difficult and costly to refinance or roll over that loan if the CLO market shrinks because of the Dodd-Frank Act's risk retention requirements reducing market capacity. Because of this, the Financial CHOICE Act eliminates the risk retention requirements for ABS other than residential mortgages.

JL

NPLs

NPL RMBS redemptions spike

US non-performing loan RMBS early redemption activity has hit record levels this year. US$5.3bn of bonds have been called since the beginning of 2017, compared to about US$2.4bn in 2016, according to Wells Fargo figures.

Last month alone saw issuers calling 14 deals, amounting to almost US$2.5bn in current balance. This total easily surpassed the previous record from April, when 11 deals totaling around US$1.6bn were called.

Lone Star - with its VOLT programme - was the standout sponsor, as it accounted for nine of the May redemptions (about US$1.9bn in current face value). Structured products analysts at Wells Fargo note that Lone Star has significantly ramped up its call activity in the past three months, redeeming more than US$3.3bn of bonds during the period.

"However, this spike in activity could be due to a pent-up redemption pipeline. Before March 2017, its last redemption we saw was in October 2015," the analysts note.

Deals issued in 1H16 accounted for the majority of Lone Star's calls last month. The Wells Fargo analysts suggest that this makes sense, as the funding costs in these deals are among the highest in the sector, with the senior notes paying 4%-4.25% in coupon (and they had just become eligible for redemption).

"Interestingly, two higher cost 2015 VOLT deals - 2015-NP13 and 2015-NP14 - are still outstanding. We believe they are likely targets for redemption in the near future," they observe.

The other deals called last month comprise ARLP 2015-1, BOMFT 2014-18NP, PRET 2016-NPL3, RMAT 2015-1 and SMLC 2014-NPL2. BOMFT, GCAT, PRET, STWH and VOLT transactions were redeemed in April, while the March redemptions consisted of VOLT deals only.

Elevated NPL call activity in the past three months may have been an anomaly, according to the analysts. They indicate that issuers were likely catching up on redemptions, as well as focusing on retiring the more expensive early-2016 deals.

Nevertheless, with new issue senior yields hovering around a record low of 3.25% and there being strong demand for shorter-duration assets in general, issuers are expected to remain active in redemptions to take advantage of lower funding costs in the primary market. At US$6.5bn, NPL RMBS issuance through May has already doubled the volume from the same period in 2016, with Lone Star, Pretium (PRET), Bayview (BOMFT) and Angelo Gordon (GCAT) among the most active issuers.

"Issuance volume should remain healthy, in our opinion, and the favourable refinancing conditions have reduced extension risks, at least among the larger issuers. In this tight spread environment, we continue to like NPL seniors for their short duration and attractive carry," the analysts conclude.

CS

Marketplace Lending

Marketplace ABS evolving

At the upcoming SCI Marketplace Lending Securitisation Seminar in New York on 22 June, panellists will discuss the structuring and evolution of marketplace loan ABS. The fact that deals are increasingly incorporating features to reduce risk is one area that is expected to be covered.

Ram Ahluwalia, ceo of PeerIQ, notes that more standardisation is still needed for marketplace loan ABS, given transactions differ structurally. He says: "On recent deals, structurally we've seen increased credit enhancement on unsecured personal loan deals from some issuers. Each issuer has its own template and there is a lack of standardisation in documentation, structure and reps and warranties."

Platforms are also taking a larger role in the process. "In terms of trends though, we're seeing issuers taking control over the securitisation process. There's a growing need for greater verification and data; repeat issuance is a trend; and there is a rise in the number of new issuers; as well as the growth of multi-seller transactions," he adds.

This trend is supported by the recent US$495m Prosper Marketplace Issuance Trust Series 2017-1 - the first ABS launched by Prosper via its own branded shelf, when previous deals had been issued by Citi on the CHAI shelf. Rated by KBRA and Fitch, the deal comprises US$311m A/A- class A notes and US$70.67m BBB/BBB- class B notes. KBRA rated the US$113m class C notes single B-plus, but these are unrated by Fitch.

Lending Club too has tapped the ABS market and is currently looking to market a major multi-seller consumer loan ABS. Ahluwalia suggests that this is a "significant milestone" for the firm and means it is "now able to provide a repeat path to liquidity for whole loan buyers."

There is also some evidence that marketplace loan ABS performance has improved over time, with spreads tightening and increases in credit enhancement on certain transactions (SCI passim), which has helped facilitate better engagement across the industry. "New issue and secondary spreads have tightened considerably. This is more to do with investor confidence and the increasing role that bulge-bracket banks are playing in the asset class than the deals themselves improving or changing structurally. We are also seeing increased participation across the board, especially from rating agencies, with even Fitch now coming in to rate the recent Prosper deal," comments Ahluwalia.

Additionally, while the impact on marketplace lending is difficult to assess, risk retention rules have had some effect. Ahluwalia says that one possible downside is that the requirements have removed the ability of some issuers - that may have already been holding 5% risk or more - to differentiate themselves when every participant is held to the same standard.

He adds that regardless of risk retention, marketplace loan ABS has become a more established asset class, helped by the growth of new firms entering the market as well as repeat issuers. As a result, he forecasts 45% growth of new marketplace loan ABS issuance this year.

Ahluwalia concludes: "Investors are generally more confident with the asset class in general, not necessarily due to risk retention, and this has also been seen in rating agencies with S&P coming into the space. This is quite a change from when rating agencies said they'd never rate the stuff."

SCI's third annual Marketplace Lending Securitisation Seminar will be held at the offices of Arnold & Porter Kaye Scholer at 250 West 55th Street, New York, on 22 June. Further details and the link to register are available here.

RB

Structured Finance

Job swaps round-up - 9 June

North America

Brian Ford has been appointed head of structured finance research at Kroll Bond Rating Agency, starting the role in New York next week. He previously spent five years at the rating agency, but was most recently at Barclays, where he was credit strategy vp. He has also worked at Citi and began his career at Eaton Vance.

Hudson Structured Capital Management has appointed Jason Carne to its advisory board for the re/insurance investments of the HSCM Bermuda Management Company. He was previously at KPMG, where he spent almost 20 years and founded the ILS practice. Hudson Structured was set up by ex-Goldman Sachs structured finance chief Michael Millette in 2015 (SCI 17 August 2015).

Risk retention

The US SEC and Federal Reserve have filed a responsive brief in the LSTA's ongoing lawsuit relating to risk retention for CLO managers. The LSTA objects to the SEC and Federal Reserve labelling CLO managers as 'securitisers'.

Categorising managers as securitisers would make them subject to the risk retention requirements of the Dodd-Frank Act. The LSTA also believes it was a mistake to tie the required amount of first-loss horizontal risk retention to 5% of the fair value of a CLO, rather than something closer to its credit risk, as mandated by the statute.

The LSTA wants to overturn a December 2016 court decision (SCI 3 January 2017) granting summary judgement to the federal agencies and requests that the court vacates the risk retention rules as applied to CLO managers.

Settlements

The Securities Division of the Office of Maryland Attorney General has reached a US$95m settlement with Deutsche Bank, resolving financial crisis-era civil claims that Deutsche Bank misled investors in its securitisation and sale of RMBS and related CDOs. As part of the settlement, Deutsche Bank will be required to provide US$80m in relief to Maryland consumers, with the remainder earmarked for restitution for state and local government investments. The US$95m settlement is the largest reached by a state for Deutsche Bank's financial-crisis era RMBS-related conduct.