News Analysis
Structured Finance
New dawn for bank funding strategies?
The European securitisation market faces what is expected to be an "interesting" year ahead, as low-cost central bank liquidity dries up and banks adopt new funding strategies. Together with boosting primary ABS issuance, Bank of England and ECB tapering will likely impact the volume of paper being retained.
In the UK, the drawdown periods for the Funding for Lending Scheme (FLS) and Term Funding Scheme (TFS) are respectively set to close at the end of January and February 2018, ending a cheap source of funding for the country's banks. As at 30 June 2017, 43 institutions had participated in the TFS and 13 in the FLS, withdrawing a total of £123.3bn, according to DBRS figures.
UK bank and building society RMBS outstandings are estimated to have fallen by about 70% since the beginning of 2016, as issuers allowed existing deals to run off and replaced them with TFS funding. Similarly, UK prime RMBS volumes are constrained by the fact that transactions have largely been brought by smaller issuers since the FLS was extended in 2014.
However, Prytania Asset Management ceo Mark Hale is optimistic that a combination of the end of FLS and TFS, plus a hike in base rates, will encourage more issuers to tap the UK RMBS market. "All these elements should drive a sustained pick-up in issuance, assuming government policies remain unchanged and barring any shocks. We expect the diversity of funding channels to remain: securitisation is one, but many issuers will continue to weigh the relative costs of retail and wholesale deposits, issuing covered bonds and straight debt as well," he observes.
Gordon Kerr, head of European structured finance research at DBRS, concurs: "We expect to see the return of prime issuers on a regular basis, with increasing volumes as central bank funding tapers. But securitisation isn't the only answer - some cash will likely find a home in covered bonds as well."
With the TFS and FLS beginning to roll off, he anticipates that volumes will pick up gradually in 2018 and 2019, until there is a sizeable funding roll-off in 2020 and 2021 - which will need to find an alternative source of funding. Termination of the Bank of England schemes doesn't represent a cliff edge, however, as the cash is out with banks for four years.
Consequently, if these banks have alternative sources of funding, there isn't an immediate need for them to securitise. At the same time, non-banks are becoming banks - as exemplified by Paragon Group recently rebranding as Paragon Banking Group, in order to optimise its funding and capital position - and diversification of funding sources is increasingly common to both types of institution.
JPMorgan figures show that Virgin Money utilised close to 80% of its total borrowing allowance under TFS, as of 2Q17, which anecdotally supports its return to the primary RMBS market last month with Gosforth 2017-1 - the first print from the issuer since April 2016. Previously, Clydesdale Bank returned to the primary market in June, having utilised 83% of its TFS borrowing allowance by end-1Q17.
Hale suggests that the Gosforth and more recently the Holmes deals can be seen as an early sign that 2018 should see more prime RMBS issuance. "Central bank tapering and a withdrawal of the extraordinary measures put in place by the official sector as a whole in the credit crisis implies more bond supply and a portion of it will come to the securitisation market. At present, demand is sufficient to pick up the slack, but that appetite is vulnerable to volatility. This means the market could reach a new equilibrium, with more supply but lower demand, which could reverse the long-standing trend of spread tightening - especially for ECB-eligible bonds."
Kerr adds that further factors driving increased sterling issuance ahead of Brexit are avoiding the need to include swaps in structures and the desire to bring foreign money back into the sterling market.
Indeed, if supply were to rise, the importance of diversifying investors by type and by geography becomes more significant. "Issuers would be wise to cultivate overseas investors in order to maintain the demand for sterling bonds. If the UK markets begin underperforming in general, issuers can't afford to be blasé about overseas buyers. A specific trigger for volatility is hard to discern right now, but it's impossible to rule out," Hale warns.
As such, more UK lenders are expected to issue in euros and dollars, following the inclusion of a US$421m senior tranche in the recent Gosforth deal (see SCI's primary market database). Yen bonds are a trickier proposition, given that the FX rate is painful for Japanese buyers, although some CLO arrangers are overcoming this with structural solutions.
Nevertheless, Kerr says that it is an open question whether the entrance of new investors into the market and Japanese investors returning is driven by genuine interest in secured products or simply by the search for yield. "These trends will take a while to be realised," he comments.
Meanwhile, in Europe, the expiration of some of the TLTROs in 2018 represents a further €450bn of cash rolling off. However, Kerr suggests that a large portion of recent TLTROs were undertaken less for liquidity reasons and more for the opportunity to access cheap funding for margin, so much of it will probably disappear back onto bank balance sheets and the rest could be funded by covered bonds and securitisations.
As of 1 September 2017, the ECB reported €769bn of outstanding lending volume to euro-area credit institutions under the LTRO/TLTRO programmes. As at end-2Q17, JPMorgan international ABS strategists estimate that €629bn of retained European ABS (ex-UK) is outstanding, of which circa €450bn is RMBS and €75bn is SME ABS. Approximately 70% of outstanding retained European ABS is senior bonds, which is a high-level criterion for ECB collateral eligibility.
Similarly, €79bn of retained UK securitisations are outstanding, a portion of which has potentially been used as collateral with the BoE instead of being distributed in the primary market. The JPMorgan strategists estimate that about 61% of outstanding retained UK ABS are senior bonds.
Despite a backdrop of tight spreads and an unslaked thirst for secondary paper, it appears to be too much effort and cost for some retainers of securitised bonds to re-offer the paper. Nonetheless, Hale notes that "a fair amount" of previously retained paper is hitting the market and there is potential for more, especially if the current rally continues and tapering progresses.
Looking ahead, market participants are focusing on the ECB's monetary policy meeting later this month. The Bank of America Merrill Lynch house view is that the ECB's tapering from €60bn to €40bn monthly purchases in 1H18 will be gradually scaled down to zero by end-2018, followed by a deposit rate hike some time in 1H19.
In terms of the future of its ABS purchase programme - which owns less than €25bn of collateral - Rabobank credit analysts deem a 'hard exit' by the ECB from the European securitisation market as very unlikely. Rather, a 'soft exit' may be an alternative to an overall tapering scenario.
"A soft exit would likely result in some spread widening over time and some distortion of the relative value across the debt capital stack," they observe.
Overall European new issue volume stood at about €135bn year-to-September, of which around €60bn was publicly placed. Given that Q4 is usually the busiest quarter of the year for retained deals, Bank of America Merrill Lynch European securitisation analysts expect total issuance volume in 2017 to reach the €200bn mark.
CS
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SCIWire
Secondary markets
Euro secondary sustained
Activity levels continue to be sustained if not spectacular in the European securitisation secondary market.
"Secondary is still fairly quiet," says one trader. "New issues are coming through at a good steady rate and occupying people's minds."
Overall, the trader adds: "The market feels pretty firm and spreads are holding up across the board. That's being backed up by decent subscription levels in primary and participation in secondary."
The uptick in volumes seen since the beginning of September has continued throughout the past month with regular flurries of BWICs and stronger flows meeting healthy demand in nearly every sector, but most notably in CLOs, Dutch/UK RMBS and prime ABS. That trend hasn't changed in October so far with secondary spreads grinding still tighter and even bonds seen on auction last week printing again at stronger levels yesterday.
There are currently two lists on today's European BWIC schedule. Both are due at 14:00 London time.
One list involves 70.96m of euro- and sterling-denominated UK non-conforming RMBS across five line items - ALBA 2007-1 A3, LGATE 2006-1X A2A, LGATE 2006-1X A2B, SPF 2006-A A and SPS 2004-2X C1C. Two of the bonds have covered on PriceABS in the past three months, both on 20 July - SPF 2006-A A at 98.86 and SPS 2004-2X C1C at 100.07.
The other list consists of two pieces of CLO equity - €3.3m ALPST 2X SUB and €4m HARVT 8X SUB. Neither bond has covered on PriceABS in the past three months.
SCIWire
Secondary markets
US CLOs keep it light
Volumes in the US CLO secondary market remain light, but spreads are still firm.
"Not much has changed over the past month," says one trader. "The bigger issues still apply with heavy new issuance in a re-set focused market holding sway, which means secondary activity has remained a bit light."
The trader continues: "At the same time, there have been no shocks to the downside and investors don't see any viable alternative asset classes, so there is less paper moving around. As a result, BWICs are meeting with good demand and tightening continues throughout the stack, but especially in investment grade."
Within IG it has been higher mezz that has caught the biggest wave of late, the trader notes. "Triple-Bs and single-As have been the recent sweet spot and today there's a triple-B list that I expect to trade very well in particular."
There are currently three BWICs on the US CLO calendar including the triple-B list due at 10:00 New York time. The $15.25m six line auction comprises: CIFC 2017-1X D, JTWN 2015-7X C, OCT30 2017-1X C, SNDPT 2017-1X D, WINDR 2017-1X D and ZIGG 2014-1X DR. None of the bonds has covered on PriceABS in the past three months.
Elsewhere, the trader highlights a Trups CDO list due tomorrow as garnering strong interest. "It appears to be circulating on the back of some first- and second-pay Trups that traded very well last week and the seller is looking to tap into that demand especially around the INCAPs deal."
Due at 11:00 tomorrow the $68.6+m original face four line auction comprises: ALESC 9A A1, INCAPS 1 B2, MMCOMM 3 B and USCAP 6 A1. None of the bonds has covered on PriceABS in the past three months.
News
ABS
Auto ABS value explored
There is still good value to be found among US auto ABS subordinate tranches. This appears to be particularly true for the DRIVE, PART, DTAOT, AMCAR and CARMX programmes.
Spread tiering within non-prime auto ABS endures, with both newer lenders and deeper subprime issuers necessitating higher spread premiums. The tighter end of non-prime auto ABS triple-Bs includes names such as AFIN, AMCAR, SDART and FIAOT, where spread differential to indicative triple-B subprime auto ranges from -10bp for AFIN to 20bp for FIAOT on recent deals.
Losses are also low. For the 2015 vintage, cumulative losses in month 18 are just 2% for AFIN, 4% for AMCAR and FIAOT, and 5% for SDART.
Current hard credit enhancement in month 18 is highest for SDART - which also had highest losses - at 29%. By comparison, AMCAR credit enhancement in month 18 is 18%, for AFIN is 10% and for FIAOT is 10%.
FIAOT ratings tend to be upgraded slightly more slowly by S&P than other deals and FIAOT 2014 triple-Bs have not yet been upgraded at all. Only one of the two FIAOT 2015 triple-Bs has been upgraded by S&P.
WLAKE has achieved better pricing than PART, with a triple-B spread differential to indicatives of 20bp for the former and 45bp for the latter. WLAKE has 9% cumulative losses in month 18 for its 2015 vintage, compared to 5% for PART, but also has higher credit enhancement.
JPMorgan analysts note that both PART and WLAKE have seen consistent upgrade activity from S&P. Triple-Bs on deals prior to 2016 and some 2016 deals have been upgraded already. WLAKE averages an S&P upgrade every 22 months, while PART averages every 34 months.
Among deeper subprime issuers, loss and pricing trends are very similar for ACAR and DTAOT. ACAR has slightly higher cumulative loss in month 18 at 16% for the 2015 vintage, while DTAOT has 15%. As for new issue pricing, the triple-B spread differential for ACAR was 55bp and for DTAOT was 50bp.
For CPS and FCAT, cumulative losses for the 2015 vintage were around 5%-6% in month 18 and the spread differentials on their most recent new issue triple-Bs were 55bp-60bp. CNART shows losses of 26% in month 18 for its 2015 deal, although credit enhancement at that point was 42%.
"Given CNART's weaker performance, its new issue spread differential is also considerably higher at 220bp on its most recent deal. Most CNART triple-Bs have also not seen upgrades from S&P, with the 2014-1 being the only exception," say the JPMorgan analysts.
DRIVE and EART triple-Bs fall at the wide end of the subprime spread differentials at 65bp and 70bp, respectively. DRIVE's 2015 vintage has seen month 18 losses of 11%, lower than ACAR at 16% and DTAOT at 15%, but has higher current CE in month 18 of 39% versus ACAR at 34% and DTAOT at 32%.
EART also has higher spread pickup, lower losses and similar current credit enhancement in month 18 on its 2015 vintage when compared to ACAR and DTAOT. DRIVE and EART are both relatively regularly upgraded.
"Our top pick remains DRIVE subordinates, given the spread pickup and better relative performance to credit enhancement when compared to other deep subprime issuers. In addition, while most subprime ABS programmes are 144A, DRIVE launched an SEC-registered transaction this year, which could potentially expand the investor base and enhance secondary liquidity for the shelf," say the analysts.
DRIVE 2017-1 triple-Bs came out at swaps plus 220bp in June (see SCI's primary deal database). The analysts believe there is pickup in DRIVE versus SDART, noting that the lower collateral quality of DRIVE is balanced by the higher credit enhancement. "We recommend investors add DRIVE, particularly if SDART/Santander Consumer is already approved," they say.
The analysts also prefer PART and DTAOT over newer programmes launched after 2012 that offer comparable spread tiering. The most recent triple-Bs for PART and DTAOT were at plus 185bp and plus 190bp in August.
"In the near-prime space, pricing has been inconsistent as newer programmes such as FCRT and TCFAT have printed at (inopportune) times much closer to (and even wider than) deep subprime than to prime. These near-prime programmes are among the most recent entrants to the securitisation, but the 'newness' concessions should diminish as the programmes season. On the prime side, we like CARMX subordinates," the analysts add.
CARMX has always lagged other prime programmes and even subprime, not least because the pools are backed by used vehicles. The last CARMX triple-B priced at plus 170bp, which was 50bp wide of triple-B prime indicatives and 20bp wide of subprime.
JL
News
Structured Finance
SCI Start the Week - 2 October
A look at the major activity in structured finance over the past seven days.
Pipeline
It was a busy week of comings and goings for the pipeline. At the close of Friday, 11 new ABS remained on the list, along with five RMBS, a CMBS and six CLO/CDOs.
The ABS were: US$1.48bn Business Jet Securities 2017-1; US$523m-equivalent Canadian Pacer Auto Receivables Trust 2017-1; US$206.65m Diamond Resorts Owner Trust 2017-1; US$128.95m Dividend Solar Loans 2017-1; US$400m Ford Credit Floorplan Master Owner Trust A Series 2017-3; US$1bn GM Financial Consumer Automobile Receivables Trust 2017-3; Newday Partnership Funding 2017-1; US$1.5bn Nissan Auto Lease Trust 2017-B; US$200m Oportun 2017-B; Sunrise 2017-2; and CNY3.5bn VINZ
2017-3 Retail Auto Loan Securitization Trust.
The RMBS were: US$119.5m Bayview Koitere Fund Trust 2017-RT4; US$512.45m CIM Trust 2017-7; US$119.5m Freddie Mac Seasoned Credit Risk Transfer Trust Series 2017-3; US$400m Nationstar HECM Loan Trust Asset-Backed Notes Series 2017-2; and US$350.4m Sequoia Mortgage Trust 2017-7. The CMBS was US$705.4m WFCM 2017-C40.
The CLOs and CDOs consisted of: €313.5m Adagio IV CLO; Barings Euro CLO 2017-2; US$712.9m Benefit Street Partners CLO XII; US$200m Cerberus Loan Funding XX; US$2.617bn Colonnade Global 2017-1; and US$340.4m Trups Financials Notes Securitization 2017-2.
Pricings
There was also a long list of deals departing the pipeline, not least a significant number of CLOs boosted by a considerable number of refis. There were six ABS prints along with another six RMBS and six CMBS, as well as 19 CLOs.
The ABS were: €1.075bn Bavarian Sky German Loans 7; US$1.3bn Citibank Credit Card Issuance Trust 2017-A9; €1.55bn Diaz Securitisation 2017; US$926.25m Honda Auto Receivables 2017-3 Owner Trust; €435m Marzio Finance 2017-1; and US$750m Securitized Term Auto Receivables Trust 2017-2.
The RMBS were: €2.075bn Dolphin Master Issuer 2017-1; £500m Holmes Master Issuer 2107-1; €1.276bn Green Apple 2017-1; US$366.6m Mill City Mortgage Loan Trust 2017-3; the re-offered €597m Popolare Bari RMBS 2017; and US$771m Starwood Waypoint Homes 2017-1.
The CMBS were: US$1.2bn BANK 2017-BNK; US$283m COMM 2017-DLTA; US$1bn Great Wolf Trust 2017-WOLF; GS Mortgage Securities Corporation Trust 2017-375H; US$1.2bn STACR Series 2017-DNA3; and US$818.3m UBS 2017-C4.
The CLOs were: US$406.25m Assurant CLO I 2017-1; €361.2m Cairn CLO VIII; US$590.5m CIFC Funding CLO 2013-2R; US$351.4m Crown Point CLO 2015-3R; US$147.84m Crown Point CLO II 2013-2R; US$305.7m Deer Creek CLO 2017-1; US$323m Denali Capital CLO X 2013-1R; US$637m Dryden Senior Loan Fund 2012-25R; US$1.02bn Gilbert Park CLO 2017-1; US$780.13m Golub Capital Partners CLO 18(M)-R 2014; €375m Harvest CLO XII 2012-R; US$690m Madison Park Funding CLO XVIII 2015-18; US$400m MCF CLO 2014-1R; US$932.9m OCP CLO 2014-6R; €413m Penta CLO 2017-3; €532m Richmond Park CLO 2013-1R; US$460m Romark CLO 2017-1; US$811.9m Sound Point XVII 2017-3; and US$407.6m TICP CLO 2017-8.
Editor's picks
New issue CLOs preferable?: US CLO relative value discussions often focus on tranche level - where triple-A paper continues to be the consensus pick, despite spread tiering at the top of the US CLO capital structure compressing dramatically - but the case for new issue CLOs over seasoned paper is made less often. In current conditions, however, vintage could be a particularly relevant factor...
ReoCos boost Italian NPL prospects: The Italian parliament recently approved new amendments to the Italian securitisation law, aimed at improving recoveries of non-performing loans and at facilitating disposals of NPLs by banks, including non-performing lease receivables. Along with a stronger macroeconomic environment, the measures are expected to help boost the liquidity of real estate asset disposals...
Standardisation to bridge synthetic STS gap?: The EBA's recent discussion paper on significant risk transfer (SRT) outlines the common structural features of risk transfer transactions in an attempt to harmonise their regulation and supervision (SCI 20 September). The move ultimately may bring the CRR regulation closer to extending the STS label to synthetic securitisations...
Deal news
• Global Jet Capital is marketing an inaugural US$1.48bn aircraft ABS. Dubbed Business Jet Securities Secured Note Series 2017-1, the transaction is supported by a portfolio of 181 business jet aircraft, representing 154 obligors, with a remaining term of approximately 62.1 months.
• Dividend Finance is in the market with its first term ABS securitisation collateralised by secured residential consumer solar loans. The transaction, Dividend Solar Loans 2017-1 (see SCI's deal pipeline), will issue three classes of notes in an aggregate principal amount of US$128.95m.
• Bank of Montreal is marketing an inaugural auto securitisation, called Canadian Pacer Auto Receivables Trust 2017-1 (see SCI's deal pipeline). The ABS is backed by 42,258 prime retail instalment auto loan contracts and is another first for the bank after debuting the first RMBS sponsored by a major Canadian bank earlier this year (SCI 18 April 2017).
• CFG Holdings is in the market with a consumer ABS backed by a pool of local currency fixed-rate personal loans originated by its subsidiaries in Panama, Aruba, Curaçao and Bonaire. Dubbed CFG Investments 2017-1, the US$222m securitisation features a Cayman Islands SPV as note issuer and a borrower SPE in each jurisdiction.
Regulatory update
• A ruling by the UK High Court could have significant implications for trustees, potentially redefining their role in securitisation. The court's ruling confirms that a trustee cannot outsource decision making and must take responsibility for exercising the discretion that deal documents allow them, although questions do remain.
• The Fed announced last week that it would unwind the System Open Market Account (SOMA) balance sheet, starting next month. This is part of a range of measures suggesting a tightening of monetary policy, in which case investors may wish to prepare for a flattening in the US yield curve, with several trade options available.
News
Structured Finance
Rating agency opens in Europe
KBRA has opened its first European office, located in Dublin, Ireland, and intends to expand into further jurisdictions (SCI passim). Several new hires and some existing staff will support the European effort, which will have a concerted focus on infrastructure and aviation securitisation, along with traditional core business areas.
Kate Kennedy, senior md at the rating agency, comments: "With the opening of our first European office in Dublin, we've hired six people, including the head of our European operation, a compliance officer and analysts covering residential, ABS, project finance and banks/financial institutions. In addition, there will be support from New York. We will focus on ABS, secured lending - which has an ABS-like approach - unsecured lending, project finance, infrastructure and esoteric ABS, particularly aviation."
She continues: "Dublin is something of an aviation hub and we'll be well placed to capitalise on this. We will also be able to focus on European RMBS, another growth sector, which is also particularly relevant too in the NPL space, where we'll also be active."
Mauricio Noe is heading up the European operation and has been with the firm since August last year. He is supported by Garret Tynan, director, European head of infrastructure and project finance; Asia (Joanna) Drobnik, director, financial institutions; Stephen Kemmy, director, RMBS; Gopal Narsimhamurthy, associate director in ABS; and Tim Dyball, director, head of European compliance.
Tynan was previously at KfW IPEX-Bank in London, where he was director, head of origination and execution of infrastructure projects in UK, Europe and North America. Drobnik and Kemmy were previously directors at Fitch, working in the financial institutions and covered bonds teams respectively. Narsimhamurthy has been with KBRA as associate director since March 2017, while Dyball was previously with Goodbody Stockbrokers as senior compliance manager.
Ira Powell, chief operating officer at KBRA, comments that the firm is committed to growing the business, which it has managed to date through a focus on more niche and complex areas that larger rating agencies may not get involved in. He adds that this means covering more challenging and esoteric products, as well as being "extremely vigilant in monitoring our credits", with surveillance being a key part of the firm's strategy.
Powell says that the firm is looking to expand into other geographies "like Asia and Mexico, as a gateway to breaking into Latin America." On the challenges expansion may pose, he notes: "While jurisdictions, such as Mexico, may have a less developed securitisation framework, we are well suited to thrive in such an environment. We have the flexibility to take on a range of jobs of all sizes and to act more quickly than larger firms."
Of note is the company's focus on infrastructure and project finance in its new Dublin office. Powell comments: "We certainly see project finance as a growing area and an area with a lot of crossover into renewables. We're seeing growth here too in wind, solar, tidal and also hydro power."
He adds that much of project finance requires an integration of different expertise, which suits the firm's general approach. He says that KBRA has always striven to match up expertise across a range of business areas, which is "something larger rating agencies don't do."
As well as the aviation sector, KBRA intends to apply its aviation expertise to the shipping sector - although, as Powell explains, the sector is inherently "harder" than aviation - but expects to see more activity as banks lighten their exposure. He adds that the shipping sector is complicated by the fact that a large portion of it is non-performing.
Powell believes too that the marketplace lending sector will continue to be of interest in Europe. He says: "In Europe, it is generally more heterogeneous across the structured finance spectrum and this is no less true in marketplace lending. We think more securitisations will likely come through in time."
The online lending industry has suffered a number of setbacks in recent months, such as SoFi ceo and co-founder Mike Cagney resigning amid speculation of misconduct at the company, and in the UK RateSetter left the peer-to-peer industry body due to breaching transparency rules. Originations across platforms in the UK and US are now also growing less rapidly than in previous years, although Powell isn't overly concerned about this.
He says that it would be "more worrying if originations were growing in this credit environment, as it could suggest loosening of lending standards." He adds that the landscape continues to develop, with more platforms diversifying funding sources and concludes that this will be "a defining factor in platform success or failure."
RB
News
Structured Finance
Credit unions to tap ABS market?
US credit unions could soon tap the securitisation market after the National Credit Union Administration stated that such institutions have the authority to issue ABS. The move follows legislation that allows credit unions to adopt powers granted to federal institutions, meaning 3,600 federal credit unions could adopt the ruling immediately.
The opinion was aired by the NCUA on 21 June, following its findings with the Federal Credit Union Association. These stated that not only do credit unions have the authority to issue ABS, they also have the ability to handle the associated risks, including credit, liquidity, operational and strategic risk.
As of April 2017, credit unions possessed US$921bn of loans across a diverse portfolio. However, with a finite amount of deposits available to provide lending capital, credit unions may seek to raise further capital through securitisation.
Additionally, while the number of credit unions has been shrinking, their share of the consumer loan market has been increasing. DBRS comments that in the 12 months to 1Q17, credit unions have experienced a 10.8% growth rate in total loan portfolios.
The agency suggests that credit unions may look to securitise their second largest asset class, auto loans and auto leases. With new and used auto loans and leases accounting for 35% of credit union loans and these loans making up 20% of the total US auto lease and auto loan market, as of 1Q17, the institutions could become a major constituent in the auto ABS market.
Further opportunities for credit unions present themselves in the withdrawal of large banks from the auto loan and auto lease sector. The institutions also show superior performance in 0-30 day and 0-60 day delinquencies, compared to banks, captives and finance company originators.
Credit unions currently fund new loan originations by reallocating retained earnings, but this is limited by the number of credit union members. DBRS comments that credit unions have, however, been increasing the total number of members and in 1Q17 had increased membership by 1.2%.
The rating agency adds that credit unions considering securitisation would need to "evaluate the economics and complexities involved." In particular, the low APR of credit union products presents challenges in balancing the need to achieve a note interest rate that is attractive to investors, while maintaining sufficient transaction enhancement.
The agency adds that the cost of issuing ABS, which can be sizeable, would need to be assessed by credit unions as economically viable before going down the securitisation path. DBRS concludes that credit unions would need to also accept a reduced level of control over the securitised portfolio and undertake the necessary efforts to achieve essential ABS elements, such as true sale and bankruptcy remoteness.
RB
News
Capital Relief Trades
Risk transfer round-up - 6 October
Barclays has completed another DBRS-rated capital relief trade, dubbed Colonnade Global 2017-1 Financial Guarantee (see SCI's capital relief trades database). Similar to the bank's previous Colonnade Global 2017-3, the credit protection covers both principal and accrued interest (SCI 8 September).
Barclays bought protection under a similar financial guarantee for the first-loss piece, but has not yet executed the contracts relating to the rated tranches. Under the guarantee agreement, the bank will transfer the remaining credit risk (from 7.1% to 100%) of the US$2.8bn portfolio.
Under the senior guarantee, Barclays will buy protection against principal losses, as well as - prior to the occurrence of a credit event - interest accrued and unpaid on the reference portfolio for a period of eight years. The transaction has a three-year replenishment period, during which the bank can add new reference obligations or increase the notional amount of existing reference obligations.
News
CLOs
Risk retention capital largely deployed?
The availability of risk retention financing has been one of the main reasons that CLO supply has outpaced most projections. Responses to JPMorgan's Q4 CLO survey suggest that US$115bn out of total risk retention capacity of US$200bn may now have been deployed.
The survey ran from 25-28 September, with CLO debt investors accounting for more than half of respondents. CLO equity investors and CLO managers also accounted for significant sections of the respondent population.
While CLO supply has surprised to the upside, the question now is how much more supply is still to come. This rests largely on how much risk retention capital financing can be raised.
Survey responses as to how much risk retention capital financing has been raised in the US CLO market ranged from US$1bn all the way up to US$500bn. However, excluding that US$500bn outlier, the mean response was US$13.5bn.
JPMorgan believes the median value could be more telling. The median response indicated US$10bn in risk retention has been raised for US CLOs. Assuming 5% risk retention, that median figure suggests that there is US$200bn of capacity for US CLO supply.
"To be fair, risk retention capital is currently being used for new issue CLOs, CLO resets, and CLO refinancings out of the scope of the Crescent no-action letter, so this US$200bn is not purely for new CLO formation. Also, there has been a combined US$115bn in new issue and reset US CLO formation already in 2017, which suggests that over half of estimated risk retention capacity may have already been deployed," says JPMorgan.
In the previous JPMorgan quarterly survey, the biggest concern for the market was expensive valuations (SCI 18 July). This time around there are three concerns which equally dominate: exogenous shock, lack of loan collateral, and CLO spread tightening.
CLO spread tightening is the "stand out concern" to JPMorgan. CLO debt investors have limited call protection and spread compression has increasingly pushed the call option of current CLOs further in the money. For equity investors, too, spread compression means continued erosion of equity economics as loan asset spreads compress.
Lack of loan collateral may appear an odd concern considering 2017 supply has hit a record of US$729.9bn in new loan supply. However, repricings account for US$323.1bn and refinancings account for US$221.7bn of institutional loan volume this year. Gross issuance may be in record territory, but net new activity is actually just US$193.8bn.
"Compared to the record years of 2007 (US$316bn), 2006 (US$264bn), and 2014 (US$246bn) loan supply in 2017 looks moderate and lends to investor concern around lack of loan collateral as a major risk. With some expecting a light loan calendar in October, asset sourcing difficulties may delay some new issue transactions from pricing," says JPMorgan.
The other major concern - exogenous shock - cannot be discounted. This category would include events such as a war with North Korea. Other concerns ranking below those main three include loan default risk, CLO spread widening, regulatory changes and loan spread tightening.
Another hot topic in the CLO market is always relative value. Investors appear to be prioritising new issue paper (SCI 25 September).
In the survey, 32 votes were cast for positioning in favour of the new issue CLO market. There were 24 votes for resets and 21 votes for refis.
The US primary market is seen as the part of the CLO market with the most value, receiving a total 39 votes, compared to 36 votes for the US secondary market, 14 for European primary and 12 for European secondary. The US primary triple-A tranche is the most valued tranche, while the US secondary double-B tranche is also popular.
JPMorgan notes that the US double-B tranche has been the second-most active tranche on BWICs in the last 12 weeks. In Europe, investors see most value in primary CLO equity and secondary double-B.
JL
News
CLOs
Direct lending warehouse formed
Bespoke Capital has established a direct lending warehouse facility, set up as a cashflow securitisation dubbed Be-Spoke Loan Funding, to fund a portfolio of loans granted to Spanish SMEs. The initial transaction portfolio - comprising 21 obligations - stands at €70.8m, with warehouse notional expected to reach €400m, as of the last drawing point.
DBRS has assigned final ratings to the warehouse of double-A (low) on the senior notes and double-B on the mezzanine notes. Be-Spoke Loan Funding will continue to purchase new assets from Bespoke Capital, subject to collateral quality tests and concentration limits. RBS will subscribe to the senior and mezzanine notes and has veto rights over the inclusion of new assets in the portfolio.
The warehouse has a 12-month investment period, followed by an amortisation period, and will reach its maturity at the earlier of the CLO closing date, a liquidation date or September 2025. The eligibility criteria state that only senior secured or unsecured Spanish companies with a turnover of at least €7.5m are eligible, and each loan has to be rated by DBRS as single-B (low) or above.
The maximum advance rate for each of the senior and mezzanine notes is determined by collateral quality tests. The single-obligor concentration is limited to 2.5% of the target securitisation amount, while there is a single-industry concentration limit of 10%.
The rating agency uses a CLO asset model to determine a lifetime pool default rate at the required rating levels for each drawing point. For the first drawing point in a post-pricing scenario, an increase in the risk score by 15% would lead to the downgrade of the senior notes to single-A (high) but will have no impact on the mezzanine notes, according to DBRS. An increase in the risk score by 30% would lead to a downgrade of the senior notes to triple-B (high) but will have no impact on the mezzanine notes.
The rating agency adds that for the last drawing point, an increase in the risk score by 15% would lead to the downgrade of the seniors to single-A (high) and a downgrade of the mezzanine notes to double-B (low). An increase in risk score by 30% would lead to a downgrade of the seniors to triple-B and a downgrade of the mezzanine notes to single-B (low).
The ratings are supported by the financial strength and capabilities of transaction parties, the quality of origination, underwriting and servicing practices and the operational capabilities of key parties. The ratings also reflect the ability of the transaction to withstand stressed cashflow assumptions and repay lenders according to the terms of their investment, along with the soundness of the legal structure.
RB
News
NPLs
NPL coverage guidance strengthened
The ECB has launched a public consultation on a draft addendum to its guidance on non-performing loans, under which banks will be expected to provide full coverage for newly classified NPLs. The new rule aims to reinforce guidance with regards to fostering timely provisioning and write-off practices.
The addendum specifies quantitative supervisory expectations for minimum levels of prudential provisions for all exposures that are newly classified as non-performing in line with the EBA definition of 90 days past due, as of 1 January 2018. They take into account the length of time a loan has been non-performing and the extent and valuation of collateral.
Specifically, banks are expected to provide full coverage for the unsecured portion of new NPLs after two years and for the secured portion after seven years. Further, banks are expected to explain any deviation from the guidance to supervisors. Based on these explanations, the ECB will assess the need for additional supervisory measures.
The European NPL stockpile stood at around €1trn at end-2016, accounting for 5.1% of total loans. The banking systems in 10 EU countries have average NPL ratios of over 10% and a large number of banks have even higher ratios.
The ECB required banks with high levels of NPLs to submit NPL strategies in 1H17. The central bank says that many banks have made notable progress and submitted credible reduction plans, albeit some banks still need to improve.
The ECB will hold a public hearing as part of this consultation on 30 November 2017 at its headquarters in Frankfurt, Germany. It plans to present further proposals for addressing existing NPL stocks, including appropriate transitional arrangements, by end-1Q18.
SP
News
RMBS
Pre-funding mechanism highlighted
Belmont Green Finance (BGF) is in the market with an inaugural £201.53m UK non-conforming RMBS. Dubbed Tower Bridge Funding 1, the securitisation comprises newly-originated first-lien mortgages originated through the Vida Homeloans brand.
Moody's and DBRS have assigned provisional ratings to the transaction of Aaa/AAA on the class A notes, Aa2/AA (High) on the class Bs, A1/A (High) on the class Cs, Baa2/BBB on the class Ds and Ba2/BB on the class Es. The unrated Z1 and Z2 notes will be retained to satisfy risk retention, with the Z2s also funding the general reserve fund. The size of the notes is not yet established.
Rabobank credit analysts comment that the transaction has some notable features, including the fact that the underlying pool is sized at £202m with an additional maximum £30.2m to be purchased by the issuer through the pre-funding principal reserve. DBRS adds that this pre-funding mechanism allows the issuer to purchase newly originated mortgages, prior to the first interest payment date, with the proceeds of the pre-funding reserve.
The majority (67%) of the pool is buy-to-let mortgages and the remainder is first-lien owner-occupied. The majority (71%) of the loans are interest-only and 0.8% are also partial bullet loans, with 11.8% of the portfolio subject to at least one CCJ. Self-employed, retired or unclassified borrowers account for 43.9% of the portfolio.
Of the prior CCJs, 8.2% are more than 36 months old. Furthermore, all borrowers must have a minimum period of clean payment history on all secured credits and on the most superior tier products offered by BGFL the clear period is a minimum of 36 months.
The portfolio yields a WAC of 4% and, following reset, the buy-to-let loans become three-month Libor tracker loans and the owner-occupied loans revert to pay the Vida Variable Rate (VVR), according to DBRS. This is a discretionary variable rate, plus a margin, and the weighted-average reversionary (stabilised) margin is 4.8% over either VVR or three-month Libor.
Of note is the low seasoning of the mortgages, only two months on average, with all the loans being originated after November 2016. The weighted-average LTV is also relatively high at 69.5%.
However, the transaction features significant credit enhancement on the senior notes, at 20.5%, which comes from subordination and a non-amortising reserve fund. This is made up of 2.5% of tranches A to Z1 at closing, as well as a liquidity reserve comprising 1.5% of the A and B notes, although this is not funded at closing.
BGF is a specialist UK lender that offers a full suite of mortgage products and it will act as mortgage portfolio servicer on the deal, delegating to Homeloan Management. The lender is owned by Pine Brook Advisers.
DBRS notes that the risk associated with the new originator and low portfolio seasoning is mitigated by the fact that the loans have made at least one monthly mortgage instalment and are originated in line with underwriting policies developed under the UK FCA's guidance. Furthermore, BGF has been regulated by the FCA since 3Q16 and, along with a degree of automation in the underwriting system, every loan is finally underwritten manually by an experienced team of underwriters.
Joint-arrangers on the transaction are RBS, trading as Natwest Markets, and Macquarie Bank, with Natwest Markets acting as swap counterparty. Collection account provider is Barclays.
RB
News
RMBS
Rated RPL deal debuts
Chimera Investment Corp is marketing its first rated re-performing loan RMBS, dubbed CIM Trust 2017-7. The US$512.45m securitisation is backed by 3,548 seasoned performing and re-performing first-lien mortgage loans, with US$34.4m of the pool balance comprising non-interest bearing deferred principal amounts.
Fitch and DBRS have assigned provisional ratings to the transaction of AAA/AAA on the US$264.17m class A notes, AA/AA on the US$47.66m class M1 notes, A/A on the US$23.83m class M2 notes, BBB/BBB on the US$13.07m M3s, BB/BB on the US$34.33m B1s and B/B on the US$37.41m B2s. The US$91.98m class B3 notes are unrated.
Fitch suggests that a potential challenge for the transaction is that the collateral pool consists primarily of peak-vintage seasoned re-performing loans. Additionally, 6.8% of the loans are 30-days delinquent and 1.1% of the loans were 60-days delinquent, as of the cut-off date.
Of these, 59.7% have either experienced a delinquency in the past 24 months or had an incomplete pay string. The agency adds, however, that the remaining 32.4% of the loans have been paying for the past 24 months and 83.2% of the loans have been modified. The modifications occurred two years ago for 67% of the modified loans.
Only two loans, representing less than 0.1% of the pool, are designated as QM Safe Harbour. The remainder are not subject to the ATR/QM rules.
Limited excess cashflow is another weakness, according to Fitch, due to the inclusion of corresponding interest-only notes for all of the non net-WAC classes (classes A, M1, M2 and M3). This results in nearly all the interest from the collateral being used to pay interest to the bonds.
A positive for the transaction is that there is a "solid alignment of interest", whereby the sponsor - as majority-owned affiliate - will retain a 5% eligible horizontal interest in the securities to be issued. Fitch also regards the transaction's R&Ws and enforcement mechanisms to be of Tier 1 quality, along with the life-of-loan R&Ws.
A further strength of the deal is the sequential pay structure, whereby the subordinate classes don't receive principal until the senior classes are repaid in full. According to the agency, this causes the difference between Fitch's expected losses and the subordination to be higher than in other recently rated RPL transactions.
In terms of the collateral, the transaction benefits from geographic diversity, with approximately 13.6% of the pool concentrated in California and 10.7% in Florida. In terms of property type, 88% are single-family and 96% are owner-occupied.
Chimera has previously been involved as an issuer in 16 unrated RPL securitisations since 2014 and completed five prime jumbo RMBS from 2008 to 2012.
RB
Job Swaps
Structured Finance
Job swaps round-up - 6 October
North America
Roy Guthrie is to succeed JP McNeill - who is transitioning into a long-term strategy role as vice-chairman of the board - as chairman and ceo of Renovate America. Among his previous roles, Guthrie served as cfo and evp of Discover Financial Services and as president and ceo of various Citigroup businesses. Renovate America has also appointed Ari Matusiak as the newly-created chief strategy officer and Patrick Moore as coo, replacing co-founder Nick Fergis. Additionally, the board has retained Skadden Arps and Navigant to conduct a third-party review of the company's practices and procedures, with the aim of identifying the areas where it can improve.
Adams Street Partners has hired Justin Lawrence as principal. Lawrence joins a growing team led by Bill Sacher and Shahab Rashid, former Oaktree Capital executives, who co-founded Adams Street's Private Credit strategy. Prior to joining Adams Street Partners, Lawrence was vp in the direct lending group at Ares Management.
Greenbacker Group has closed a financial transaction to improve its balance sheet, add new financial resources and increase its management capabilities. The firm has taken a minority investment of US$4m, as well as a new US$1.5m secured loan, from a group of investors led by Kedrick Cerry (KCI). Greenbacker has also hired Ron Iervolino and Robert Brennan as co-chairmen, both of whom are investing alongside KCI. Iervolino was most recently head of Guggenheim debt capital markets and is currently a partner at Franklin Park. Brennan ran the commercial real estate finance businesses at Guggenheim Partners, Credit Suisse and Donaldson Lufkin and Jenrette, and he was a founding investor in Pillar Financial.
US Bank has named Rafael Herrera as the market leader of its corporate trust group in Texas. Herrera is svp in the US Bank global corporate trust services group and is located in Houston. Herrera has more than 25 years of experience in financial services, including leadership roles with Security Pacific National Bank, JPMorgan and Bank of New York Mellon. He has worked with leading investment banks, collateral managers and various market participants in the CLO and ABS markets during his career.
Vincent Chan has been hired by Assurant to lead its new CLO business. He was previously md at The Gapstone Group and before that a structured credit trader for Elliott Management.
EMEA
Mayer Brown has appointed senior structured finance lawyer Merryn Craske as counsel in the firm's banking & finance practice in London. She joins Mayer Brown from Cadwalader, where she was counsel in the London capital markets group.
Robus Group has hired David Riley as risk consultant to its Guernsey office. He was previously a senior account executive and business development manager in captive solutions at Marsh.
Cairn Capital has appointed Andrew Burke and Asif Godall as co-cios. They will report to Paul Campbell, who will continue to head the real estate debt business. Burke joined Cairn Capital in 2006 and is head of leveraged finance and a member of the executive management committee. Prior to Cairn Capital, he was at Harbourmaster Capital Management. Godall joined Cairn Capital in 2016 as deputy cio, with direct responsibility for multi asset credit and is a member of the executive management committee. He was previously global head of traded credit at HSBC.
BDC reorganisation
Griffin Capital Company has completed the reorganisation of Griffin Capital BDC Corp assets into the Griffin Institutional Access Credit Fund, after Griffin BDC shareholders overwhelmingly approved the transaction last month. Griffin Institutional Access Credit Fund commenced operations in April and is sub-advised by Bain Capital Credit.
Appeal rejection
The US Court of Appeals for the Second Circuit has rejected the appeal of Nomura Asset Acceptance Corporation (NAAC), Nomura Home Equity Loan (NHEL), Nomura Credit & Capital, Nomura Securities International, Nomura Holding America and RBS in connection with the proceedings initially commenced by the FHFA. The action alleged that the GSEs purchased RMBS issued by NAAC and NHEL, for which the offering materials contained untrue statements or omitted material facts concerning underwriting standards and the characteristics of the loans, and sought rescission of the purchases. The District Court held that the FHFA proved that the offering materials contained misstatements entitling it to rescission and ordered the defendants to pay US$806m to the GSEs, following which Nomura appealed.
Punch redemption
Heineken is set to refinance and redeem the Punch Taverns Finance whole business securitisation using intercompany debt. The move follows Patron Capital's acquisition of Punch Taverns and the sale to Heineken UK of the Punch A portfolio (SCI passim). Heineken last month placed €800m of 12-year EMTNs at 50bp over mid-swaps, with the firm stating that the proceeds will be used for general corporate purposes, including the refinancing of existing debt.
New securities market
The Malta Stock Exchange (MSE) has received regulatory approval to launch a new Institutional Financial Securities Market (IFSM), open to issuers that fall under wholesale securities market rules and eligible only to institutional investors. The minimum denomination requirement is €100,000 and the securities admissible to listing include asset-backed debt, convertible debt securities, derivatives and insurance-linked notes. IFSM will be regulated by the MFSA and is recognised as an EU-regulated market and therefore benefits from both UK HMRC recognition and withholding tax exemptions.
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