News Analysis
CMBS
Direct issuance achieves CMBS firsts
The recent US single-asset/single-borrower CMBS from the Shidler Group - HMH Trust 2017-NSS (see SCI's primary issuance database) - debuted a new direct issuance model, at least post the financial crisis. The transaction features several innovations, including a unique risk retention structure and extra borrower control.
Proceeds from the US$204m transaction were used by the Shidler Group to finance a 2,883-room portfolio of 22 select-service and extended-stay hotels. Richard Jones, chair of Dechert's global finance and real estate practice groups, says that in the case of HMH Trust 2017-NSS direct issuance allowed the borrower to raise funds directly (without the bank acting as a lender) and then hire the bank as an advisor and to distribute the bonds in the transaction.
While direct issuance is essentially a typical 144A securitisation, the loan is only funded through and at the time of the sale of the bonds. There are certain motivations for and positives of structuring a transaction in this way.
"The two major benefits are, first, the ability to craft one's own loan. The bank is your advisor, but not your lender. It is more efficient, as you streamline the process and you don't have two sides clashing over the loan documents," comments Jones.
He continues: "Second, you take the poisoned chalice of risk retention away from the banks. You can get paid for this and monetise the reduction of the bank's need to otherwise deal with the risk retention."
The transaction was rated by S&P and Morningstar as AAA/AAA on the US$72.2m class A notes, AA-/AA- on the US$23.3m class B notes, A-/A- on the US$17.4m class Cs, BBB-/BBB- on the US$22.9m class Ds and BB-/BB- on the US$36.1m class E notes, with S&P assigning a rating of single-B minus on the US$32.1m class F notes. The loan has 22 separate borrowers, all SPEs majority owned and controlled by Jay H Shidler.
For the purposes of satisfying risk retention, the sponsor deposited US$10.3m into an eligible horizontal cash reserve account maintained by the certificate administrator. Jones notes that this cash-based horizontal risk retention structure is unique and has certain benefits, while also adding complexity.
"Another unique factor in this transaction was that risk retention was held in cash," he explains. "This is a novel use of the risk retention rule, which had received no attention since the rule became effective. Here was a securitisation with cash actually in the deal - something that hasn't been seen since the industry matured. The rating agencies reacted well to the additional collateral and ultimately so did investors."
He adds that the complexity involved may mean it hinders this element of the structure's attractiveness to other borrowers. "The cash risk retention option is quite complex and the calculus around securitisation execution with this feature will remain complex and therefore this might not be taken up by many sponsors for quite some time."
Equally, while the direct issuance model gives the borrower more control over the process, it also provides a set of challenges because the sponsor "takes rate, spread and proceeds risk right up until the closing of the securitisation", says Jones. He adds that in a more traditional securitisation model, the sponsor "receives a term sheet or perhaps even a commitment letter from a bank and then it's the bank's job to get the loan securitised. Here, the buck stops with the sponsor."
Jones suggests that while not welcomed by banks, they have accommodated the deal and recognise that direct issuance won't replace them entirely, but rather it will be another "arrow in the quiver of options for borrowers in the SASB market."
In terms of investor reception, he comments that as a new transaction, there were concerns about its acceptability, but that ultimately the market "absorbed the entire deal and at good pricing", with investors feeling adequately compensated. This resulted in the transaction being oversubscribed. Nevertheless, Jones suggests that with better understanding of the model and involvement of more well-known parties, so greater acceptance will follow.
While the transaction embraced an innovative approach to risk retention in order to monetise an otherwise illiquid part of the deal, risk retention continues to be an ongoing concern, Jones says. Further, he suggests that risk retention is a "long-term niggling, weeping sore that will not go away and in fact gets more problematic over time."
Jones comments that while there might be enough bank capital and third-party purchasers to absorb risk retention supply currently, this is a finite amount, particularly while the risk retention element remains completely illiquid. He concludes: "Risk retention was not going to be a 2017 problem, but a 2Q18 and 3Q18 problem. Lack of liquidity of risk retention investments is its main drawback and that lack of liquidity will continue to be a problem for capital formation in the US."
RB
1 September 2017 12:25:23
News
Structured Finance
Hurricane Harvey impact weighed
While the picture is not yet clear in terms of the total damage inflicted by Hurricane Harvey, it looks set to impact several sectors across securitisation. RMBS and CMBS appear likely to be most affected, along with credit risk transfer transactions and potentially auto ABS.
CMBS 2.0 transactions are set to be most affected, with Morgan Stanley estimating that 241 deals are exposed to damage inflicted by Hurricane Harvey. Two of these deals have exposure greater than 15%, 11 have exposure over 10% and there are 58 deals with more than 5% exposure.
In terms of property type, multifamily, office and retail have the most exposure, making up 80% of CMBS 2.0 exposure in Houston. The exposure comprises 239 multifamily loans totalling US$2.6bn, 117 office loans totalling US$2.5bn and 188 retail loans totalling US$2.3bn, according to Morgan Stanley figures.
The 2015 vintage has the most exposure, with 176 loans totalling US$2.1bn. The 2014 vintage is exposed to 127 loans totalling US$1.7bn, the 2013 vintage is exposed to 141 loans totalling US$1.2bn and the 2016 vintage is exposed to 103 loans totalling US$1.1bn.
CMBS strategists at the bank suggest that CMBX.8 has the greatest exposure to the storm across 68 loans totalling US$958m, with CMBX.6 next highest at 70 loans (US$920m) and CMBX.7 third highest with 83 loans (US$788m). In terms of delinquencies, these are currently quite low, with only six loans totalling US$66m delinquent and nine loans totalling US$102m in special servicing.
The strategists also note that there are 77 Freddie K deals that are affected. These have exposure to 235 loans totalling US$4.2bn encumbered by multifamily properties located in Houston.
According to Morningstar Credit Ratings, 1,529 CMBS properties in Texas are affected by Hurricane Harvey, with a balance of US$19.4bn potentially at elevated risk due to flooding caused by the storm. The agency adds that most of these - totalling US$16.24bn - are in Harris County, which has been significantly affected by flooding.
The next worst hit areas, according to the agency, are Fort Bend (with US$1.43bn of exposure), followed by Galveston County (US$551.8m). Third most affected is Nueces County (US$468.7m) and fourth hardest hit is Brazonia County (US$424.9m).
Morningstar adds that office revenue growth in Houston is already flat at a 16.1% vacancy rate, which will likely be made worse by the disaster. Furthermore, the agency comments that flood damage could affect the payoff of roughly US$1.13bn in loans that mature over the next 12 months.
S&P also identifies 30 loans totaling about US$127m secured by 35 properties in Nueces County, with the majority of it - US$123m - in Corpus Christi, and lodging, retail and multifamily comprising most of the exposure. The agency points to 24 rated transactions with exposure to Nueces County, just one of which has exposure exceeding 5% of its pool balance.
CSMC 2007-C4 has one loan - the US$9.2m Corpus Christi Medical Tower (accounting for 5.5% of pool) - that is secured by a large office in Corpus Christi. The remaining 23 transactions each have less than 2.6% exposure, according to S&P.
RMBS is also likely to be impacted by the disaster, largely felt in Houston, Beaumont, Victoria and Corpus Christi. According to JPMorgan RMBS analysts, concentrations in these MSAs are similar across CAS and STACR transactions and range from 1%-3%.
The Morgan Stanley strategists suggest that while exposure in CRT deals is relatively low, it is "worth monitoring" because of tight credit enhancement levels in CAS and STACR deals. They note that the CAS programme has slightly more exposure than STACR and 2015 vintage deals typically have more exposure within both programmes, while 2017 deals have the least exposure.
Forbearance options - such as where Fannie Mae and Freddie Mac offer assistance - will not help investors in some earlier CRT deals, as each month in forbearance might still bring a borrower closer to a 180-day credit event. However, the STACR programme appears to allow for a longer delay in defining a credit event in the event of a disaster.
Houston's concentration in single-family rental deals, meanwhile, is between 7% and 20%. The JPMorgan analysts comment that three types of insurance are required in SFR deals - storm, earthquake and flood insurance - and flood insurance coverage is required for properties in a FEMA designated special flood hazard area (SFHA). However, there are extra risks around vacancy and rental income, according to JPMorgan - although there may be provisional insurance that covers up to 12 months of rental income and these transactions can "usually withstand up to 15%-20% vacancies before running into cashflow issues."
The analysts also identify 10 legacy RMBS transactions with exposure of up to 25% to the hurricane. All are mainly exposed in Houston, with eight out of 10 having exposure entirely in Houston.
WAMMS 2003-MS3 has more exposure in Corpus Christi at 10.3% and another, MSDWC 2002-AM2, has greater exposure in Beaumont of 1.6%. The largest three transactions in terms of exposure are SASC 2004-GEL1, CMC4 1997-NAM3 and SASC 2003-S1, which have exposure in Houston at 25.2%, 22.5% and 20.7% respectively.
The top 10 prime jumbo 2.0 transactions with exposure are from the Sequoia Mortgage Trust shelf, with the 2012-4, 2012-5 and 2012-2 deals being most exposed to properties in Houston at a concentration of 6.1%, 5.5% and 4.9% respectively.
The Morgan Stanley strategists cite the aftermath of Hurricane Katrina as a case where total delinquencies in affected RMBS climbed from low single-digits to over 40%, although the spike was short-lived. Regardless, delinquency rates remained above 10% for nine or 10 months and remained twice as high as those in the rest of the country for roughly 1.5 years. It is therefore likely that delinquencies in the Harvey-affected areas will "head higher".
Finally, in the ABS space, Wells Fargo structured product analysts suggest that Hurricane Harvey could have a negative impact on subprime auto ABS - due to higher delinquencies in the near term from displaced people and jobs, as well as damaged vehicles. The analysts conclude that Texas tends to have the largest state exposure on average at 15.6%, but they do not expect "significant disruptions in cashflow to subprime auto ABS deals from Texas concentrations."
RB
1 September 2017 10:16:43
News
Capital Relief Trades
Risk transfer round-up - 1 September
As expected, August was a quiet month for capital relief trade issuances. But market sources continue to expect activity to significantly pick up in Q4.
Among the transactions anticipated next quarter are two commercial real estate deals in Germany and a significant risk transfer trade between a British bank and Ares Management. Regarding Q4 activity overall, one source states: "It is unlikely to be as active as last year, due to the implementation of Basel capital floors, but we do expect activity."
1 September 2017 10:38:27
News
CLOs
CLO secondary trading slows
Primary CLO issuance is booming, although secondary market activity has dipped this year. The glut of refinancings seen earlier in the year appears to have played a significant part in this.
In the primary market, almost US$12bn of US CLOs was issued in the first three weeks of August, enough to make the month the second busiest of the year. The busiest month was June, when US$15bn was issued.
FINRA TRACE data for US CLOs and CDOs - as well as CBOs, but these are understood to account for a small proportion - from the start of the year to 24 August totals US$49.19bn, which compares to US$61.79bn in the same period of 2016. Weekly trace volumes in the 10 weeks to that date averaged US$874m, slowing significantly from the average over the year of US$1.45bn per week.
The average monthly TRACE volumes for July and August in 2012-2016 were US$9.63bn and US$6.24bn. This year, however, volumes have been just US$3.4bn and US$3.78bn, underlining the recent slow-down.
For the first time since 2012, non-investment grade rated trading volumes are actually higher than investment grade volumes. The total for the former reached US$30.35bn while the latter languished on US$18.84bn.
Non-IG rated trading volumes have accounted for 62% of total volume, compared to an average of 43% for 2013-2016. JPMorgan analysts attribute this reversal to the substantial amount of CLO refinancings this year, which have allowed investors to reposition their portfolios without relying on trading in the secondary market.
US CLO BWIC data as of 25 August also points to an August slow-down. There was only US900m in BWIC volume, which is barely more than half the US$1.65bn monthly average for the year. The year-to-date total of US$12.45bn compares to US$18.77bn for the same stretch of 2016.
There have been 3090 BWIC line items recorded YTD, compared to 4130 in the same period of 2016. Again, the JPMorgan analysts expect volumes to pick up over the rest of the year as the refinancing wave slows, possibly creating more demand for secondary CLO activity.
The triple-A tranche has typically accounted for 40%-55% of total BWIC volume, but this year triple-A activity has represented only 26% of all BWIC volumes. BWIC volumes for IG-rated tranches are US$6.07bn YTD, which is 51% less than in the same period of 2016.
CLO double-B BWIC activity has become the most active tranche. There has been US$3.58bn in notional and 1098 line items.
It is a slightly different secondary market picture in Europe, where BWIC activity by notional amount is up 12.6% on YTD 2016. By line item count, however, European CLO BWICs are down 3.75% on last year, indicating that trades are less frequent but larger by notional amount.
July and August European BWIC total volumes have been €275m and €257m, which are €103m and €121m less than the monthly average for 2017. Triple-A, double-A and equity tranches have only seen single digits in BWIC volume in August.
JL
Job Swaps
Structured Finance
Job swaps round-up - 1 September
EMEA
Credit Suisse has hired Constantin Hulst as a CLO structurer to its European CLO origination team in London, reporting to Michael
Malek, head of European CLO structuring. Hulst was previously at BNP Paribas, where he was an analyst and structurer in the CLO team.
North America
Allianz Global Investors has hired Mona Mahajan as its new US investment strategist. She will report to Neil Dwane, global strategist. Mahajan was previously portfolio manager and product specialist for MetLife Investments' structured finance fixed income strategy. In this role, she was responsible for portfolio management, relative value strategy, tactical positioning, client relationship support and marketing.
Mount Street Mortgage Servicing has expanded into the US, with the opening of a new office in Atlanta. Mount Street US will initially manage a US$7.2bn portfolio of highly-structured complex commercial real estate loans and is actively building its team. The firm has appointed Christie Calhoun senior director and head of the Atlanta office, while Toni Walker has been named senior director and head of US servicing and asset management. Calhoun was previously a director at Situs Asset Management and an avp at TriMont Real Estate Advisors, while Walker was an svp at TriMont and md at CW Financial Services, before working as a CRE consultant.
Technology
With a growing number of lenders and aggregators actively considering entering the private label RMBS market, Clayton Holdings has launched what it calls a securitisation readiness solution for non-agency assets. The end-to-end offering includes advisory and preparedness support for pre-securitisation due diligence review, originator and guideline assessment and ongoing monitoring structure and set up. The solution aims to assist compliance with the new requirements for private label securitisations and to ensure that asset reviews and reporting capabilities will meet current guidelines prior to issuance.
1 September 2017 16:57:00
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