Contents

CLOs

Middle market boost?

Two significant trends are emerging in middle market CLOs that are expected to boost diversity across the sector. However, it remains unclear whether these developments will ultimately translate into increased volumes.

According to DBRS md and head of structured credit Jerry van Koolbergen, one trend is the emergence of US insurance company interest in the space and the other is the expansion of middle market product types in Europe. "The European market is seven to eight years behind the US. European alternative lenders have now established unlevered middle market funds, including retail distribution. As returns tighten due to competition for assets, these lenders are beginning to seek low leverage from banks," he explains.

He continues: "Banks are, in turn, beginning to take more diversified and more senior risk. The next iteration of this trend is to syndicate the risk more broadly to investors that require ratings."

Credit Suisse is believed to be the first bank to syndicate such leverage to other participants as part of its portfolio lending business. BNP Paribas, Citi, NatWest and SG are other players in this space in Europe.

DBRS has rated two portfolio financings, otherwise known as warehouse facilities, designed to syndicate this leverage: Be-spoke Loan Funding (SCI 3 October); and a private pan-European deal. "The Be-spoke facility was interesting because it is a warehouse that could transition into a syndicated CLO, which is a lifecycle that makes sense and which follows market practise in the US. In the case of Be-spoke, bank lenders to the portfolio financing sought ratings - for regulatory capital reasons - but usually it is pension and insurance funds," explains van Koolbergen.

He confirms that there is strong interest in middle market CLOs from investors and those interested in providing leverage, and he expects more rated warehouses to emerge in Europe. "Middle market loans provide covenant and control protections that seem antique compared to broadly syndicated loans, whose offsetting benefits are yield and liquidity. The emergence of rated warehouses signals interest in more diverse middle market CLOs, but it remains unclear whether this will translate into increased volume - although it seems logical that it will in Europe, given we're seeing the same players and similar use of leverage as in the US."

However, van Koolbergen notes that a significant barrier to the development of a middle market CLO market in Europe is currency. "It's difficult to execute the same swaps as in broadly syndicated CLOs; perfect asset swaps could be utilised, but there isn't a deep market for them and they're costly," he observes. "Plus, middle market portfolios tend to be more concentrated - comprising 20 to 40 loans - so the impact of FX is magnified. One way to solve this could be to bring a regional CLO, albeit this would impact portfolio diversity."

Meanwhile, insurance companies are expressing their interest in middle market lending most visibly by participating in syndicated mezzanine, with their participation almost tripling over the last few years to account for 40% of the investor base. "Some insurers have departments to lend directly to middle market companies. Others have recently built departments or created joint ventures with middle market leaders, such as AIG and Ares' Varagon joint venture. Others work contractually with middle market lenders to originate assets or manage separate accounts on their behalf," van Koolbergen notes.

He adds: "The middle market is a good candidate for illiquid and longer-term assets that insurers look for, along with a proliferation of rating types to help optimise their investments."

Van Koolbergen anticipates that banks involved in portfolio lending could retreat from the middle market when the credit cycle turns, creating further opportunity for insurers. Concurrently, the asset risk profile will transition from short-dated to longer-dated, and ratings on those facilities would be more attractive for syndication to insurers.

CS

CMBS

UK CMBS could signal turning point

Bank of America Merrill Lynch is marketing a Blackstone-sponsored UK CMBS - the first European conduit CMBS since early last year - signalling a possible turning point for the asset class and a potential surge in issuance. Dubbed Taurus 2017-2, the £347.929m transaction is backed by a single floating-rate loan, which is secured by a portfolio of 127 predominantly logistics properties with an appraised value of £545.6m and let to over 1070 tenants.

The European CMBS sector has experienced limited issuance over the last few years across the continent and the UK, with the last European conduit transaction - Taurus 2016-2 DEU (see SCI's primary issuance database) - also coming from BAML in May 2016. Taurus 2017-1 is understood to be a privately placed transaction.

Matthias Baltes, md and head of EMEA CRE finance at BAML, explains that the CMBS sector has struggled to compete with direct lending, with CMBS being a less economical choice in commercial property, causing issuance to drop off. This latest transaction, however, could signal that the European CMBS market may be turning a corner.

Baltes comments: "Investor demand is there for CMBS, but ‎issuance has been tempered by the direct loan market. Recently the cost of issuing deals and the returns available have turned in favour of CMBS. While this remains the case, we hope to issue more CMBS in the near future, across Europe, and we are positive for more CMBS from other market participants."

DBRS and Fitch have assigned provisional ratings to Taurus 2017-2 of respectively AAA/AAA on the £164.48m class A note, AA/AA- on the £53.22m class B note, A (low)/A on the £33.69m class C note, BBB (low)/BBB on the £51.83m class D note and BB (low)/BB- on the £44.709m class E note. The LTV ranges from 31.73% on the class As to 67.13% on the class Es, with a WAL of 4.85 years for all notes and debt yields ranging from 19.1% on the A notes to 9% on the Es.

The portfolio is notably granular, comprising mainly SMEs involved in logistics, catering to towns and cities with 500,000 or more people and are typically no more than 20 miles from the nearest large city. A variety of businesses are represented in the pool and the diversity of the collateral is considered a strength of the transaction.

Additionally, logistics is seen as a very strong area economically, supported by the strong performance of e-commerce, so it is regarded as a fairly defensive portfolio. There is no meaningful concentration in any individual tenant, with a wide variety of warehouse tenants, dispersing the threat of concentration risk.

DBRS notes that the portfolio also benefits from a high occupancy rate of 92% and no single tenant represents more than 2% of gross rental income. Additionally, the properties are geographically well diversified across 101 towns and cities in the UK, with more in economically strong regions of East England and Greater London.

BAML purchased the loan from Brockton Capital in an off-market deal, for a purchase price of approximately £560m, inclusive of transaction costs. The bank undertook a thorough assessment before buying the loan to ensure it - and the CMBS - would appeal to investors.

Baltes says: "The loan was extended against the portfolio as a whole and we analysed it thoroughly. Investors appreciated the transaction's strengths, including the fact that the properties are under-rented."

He adds that if the warehouses do become vacant, they are relatively small and easily filled.

Additionally, Baltes says that investors take comfort from the "strength and quality of the sponsor and asset manager" in Blackstone and M7 Real Estate respectively, which is something "investors value." So far, the investor response has been "net positive", according to Baltes, and he is hoping to attract a "wide investor base".

DBRS concurs that both Blackstone and M7 Real Estate have a large degree of experience in both the logistics and UK real estate market. M7 Real Estate has invested alongside Blackstone, contribution 5% of the equity in the deal, further aligning their interest. A further strength of the deal, say DBRS, is that the sponsor has the opportunity to extract "significant reversionary value through the implementation of its business plan", due to the portfolio being under-rented.

Structurally, DBRS notes that the deal benefits from minimum debt yield cash trap covenants, which test quarterly on each interest payment date. Equally, despite the relative high total leverage of the transaction - at 79.9%, including mezzanine facilities - the sponsor has invested £120m, representing a significant amount of equity.

Furthermore, DBRS notes that the facility allows the sponsor to sell the entire portfolio without repaying the loan if it is sold to a company owning the CRE assets with an aggregate market value of not less than €2bn in Europe, or not less than €5bn worldwide. Another risk in the deal is that the loan structure does not include financial default covenants prior to a permitted change of control, but includes other events of default, such as a missed payment and borrower insolvency.

BAML provided £436.58m in acquisition financing, consisting of a 66.4% LTV £364m senior term loan and a £72.8m mezzanine term loan. Additionally, a £3.9m capex facility was funded at closing, split into a £3.25m senior facility and a £650,000 mezzanine facility. The mezzanine facilities are structurally and contractually subordinated to the senior facilities and not part of the contemplated transaction, according to DBRS.

RB

Structured Finance

SCI Start the Week - 13 November

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

Pipeline
There were even more additions to the pipeline last week than there had been in the week before. The new arrivals consisted of 18 ABS, eight RMBS, three CMBS and two CLOs.

The ABS were: US$221.2m Access Point Funding I 2017-A; US$560m Ally Auto Receivables Trust 2017-5; US$194m Aqua Finance Trust 2017-A; US$172.5m CIG Auto Receivables Trust 2017-1; US$755.5m CNH Equipment Trust 2017-C; US$263m Flagship Credit Auto Trust 2017-4; US$167.37m First Investors Auto Owner Trust 2017-3; Sfr300m First Swiss Mobility 2017-2; US$1.846bn Ford Credit Auto Owner Trust 2017-C; US$579.8m Harbour Aircraft Investments Series 2017; US$530m Juniper Receivables; US$801.49m MMAF Equipment Finance 2017-B; Orbita Funding 2017-1; US$750m Santander Retail Auto Lease Trust 2017-A; US$373.68m SCF Equipment Leasing 2017-2; US$585m Sprite 2017-1; US$175m Upstart Securitization Trust 2017-2; and €248m Wizink Master Credit Cards 2017-03.

The RMBS were: EDML 2018-1; US$141m Ellington Financial Mortgage Trust 2017-1; Grand Canal Securities 2; A$700m Liberty Series 2017-4 Trust; A$750m Medallion Trust Series 2017-2; NZ$250m Resimac Versailles Trust Series 2017-1; US$1.83bn Towd Point Mortgage Trust 2017-6; and US$253m Verus 2017-SG1.

CD 2017-C6, US$1bn GSMS 2017-GS8 and £347.929m Taurus 2017-2 UK were the CMBS. The CLOs were US$512m OHA Credit Partners XV and €351m St Paul's CLO VIII.

Pricings
It was by no means one-way traffic, as a significant number of deals also departed the pipeline. These consisted of 18 ABS, four RMBS, four CMBS and 14 CLOs.

The ABS were: US$1.3bn AmeriCredit Automobile Receivables Trust 2017-4; £315m Auto ABS UK Loans 2017; US$550m CARDS II Trust Series 2017-2; US$502m DLL Securitization Trust 2017-A; US$565m DriveTime Auto Owner Trust 2017-4; €142.5m Evora 2017-1; US$245m GoodGreen 2017-2; US$846m Hyundai Auto Lease Securitization Trust 2017-C; €336.6m IM EVO Finance 1; US$300m Laurel Road Prime Student Loan Trust 2017-C; US$250.152m Lendmark Funding Trust 2017-2; US$750.9m Navient Student Loan Trust 2017-6; US$343.65m NP SPE II Series 2017-1; £300m PCL Funding III; US$691m SoFi Consumer Loan Program 2017-6; US$1.2bn Toyota Auto Receivables 2017-D; US$480m WAVE 2017-1; and US$592m World Financial Network Credit Card Master Note Trust Series 2017-C.

US$865m Invitation Homes 2017-SFR², US$343.51m MetLife Securitization Trust 2017-1, US$127.332m RCO 2017-INV1 and A$500m Triton Trust No.7 2017-2 were the RMBS. The CMBS were US$1.55bn Caesars Palace Las Vegas Trust 2017-VICI, US$250m CSMC Trust 2017-CALI, US$250m CSMS 2017-1A and US$1.47bn FREMF 2017-K69.

The CLOs were: US$1.208bn Antares CLO 2017-2; US$768.35m Apidos CLO XXVIII; €411m Aqueduct European CLO 2-2017; US$385.83m Atlas Senior Loan Fund 2013-1R; US$753m Atrium CDO 2015-12R; US$503m Barings Middle Market CLO 2017-1; €428m-equivalent Black Diamond CLO 2017-2; €361.2m Cairn CLO VIII; US$510m Carbone CLO 2017-1; US$478m Dryden Senior Loan Fund 2013-30R; US$461m Octagon 34; US$319m Saranac CLO 2014-2R; US$408.4m Steele Creek CLO 2017-1; and US$340m TIAA Churchill Middle Market CLO II.

Editor's picks
EMIR inaction could be 'grave': The risks from industry inaction regarding EMIR are "grave" and could have "serious negative consequences" on the European securitisation sector, according to Bank of America Merrill Lynch European securitisation analysts. Along with a recent ISDA whitepaper, they outline recommendations to limit the regulation's detrimental effect on the market...
NPL equity acquired: Hedge fund Elliott Management has acquired an equity piece in Attica Bank's non-performing loan securitisation, reducing the exposure of Aldridge EDC, the original investor (SCI 7 July). Details of the transaction have not been disclosed, but local industry sources and growing momentum in the Greek NPL market, suggest that Elliott coveted exposures to Greek assets...
Airline bankruptcy exposure gauged: A number of aircraft ABS have been impacted by the bankruptcy of several large carriers in Europe, with the Castlelake 2015 and 2016 transactions disproportionately affected, according to a new Deutsche Bank analysis. However, in most cases, narrow-body aircraft are expected to have little difficulty finding a new home - helping to mitigate the impact on investors in these deals...
AXA boosts risk transfer foothold: AXA IM's structured finance unit raised over €1bn in total commitments for the AXA IM Partner Capital Solutions VII fund at the end of September, following its launch in July 2017. The capital was raised from repeat and new clients and is the largest amount that AXA IM has raised for capital relief trades, reflecting an increased asset management foothold in the alternative credit space...

Deal news
• Aqua Finance is marketing its first public term securitisation. US$194m Aqua Finance Trust 2017-A is collateralised by a pool of retail instalment sale contracts and agreements primarily used for water treatment equipment and home improvements.
• Caesars Entertainment Operating Company emerged from bankruptcy last month. The restructuring of its affairs has resulted in the preparation of a CMBS - Caesars Palace Las Vegas Trust 2017-VICI - which is now marketing.
• DLL Finance, a Rabobank subsidiary, is in the market with an inaugural equipment ABS. Dubbed DLL Securitization Trust 2017-A, the US$501.5m transaction is backed by 24,080 loans and leases mostly originated by dealers to finance primarily agricultural equipment.
• An unusual US RMBS transaction is being marketed. The US$127.332m RCO 2017-INV1 RMBS is collateralised by residential rental mortgage loans.

Regulatory update
• The Australian Office of Financial Management has resumed its RMBS divestment programme, after putting it on hold two years ago, having failed to sell any assets in its fifth auction (SCI 5 November 2015). The Treasurer has determined that RMBS market conditions have improved sufficiently to warrant restarting the regular auction process.

Capital Relief Trades

Risk transfer round-up - 17 November

RBS hit the market this week with its first DBRS-rated risk transfer transaction, dubbed Nightingale Securities 2017-1. The £390.2m CLN references a mixture of asset types, with a WAL of 4.5 years and a sequential amortisation structure, as per CRR/SRT rules.

Meanwhile, Lloyds is rumoured to be marketing two capital relief trades - a mid-cap deal and a large real estate transaction.

CLOs

CLO with euro, dollar seniors prices

Black Diamond Capital Management last week priced a CLO with both euro-denominated and US dollar-denominated notes. The senior notes of Black Diamond 2017-2 have been rated triple-A by S&P.

The €142m A1 notes and US$55.8m A2 notes priced at plus 0.86% and plus 1.3%. Both classes of notes were rated triple-A by S&P, as were the €30m A3 notes and US$15m A4 notes, which will pay fixed coupons of 1.2% and 3.4% respectively.

S&P rated the €56m B notes double-A, the €30.9m C notes single-A, the €23m D notes triple-B, the €18m E notes double-B and the €12.1m F notes single-B minus. The €21.5m M1 and US$23.6m M2 subordinated notes were not rated.

At closing, the transaction will benefit from a natural foreign exchange hedge since the amount of US dollar liabilities issued by the A2 and A4 notes will closely match the US dollar assets. However, the collateral manager is also able to hold additional US dollar-denominated assets.

The issuer will also use the notes' issuance proceeds at closing to acquire a European-style currency call option with a maturity of five years. This enables the issuer to receive US dollar proceeds at a specified strike price on the exercise date.

"The collateral manager will exercise the currency call options on the exercise date. The manager may sell the option at any time after rated notes have been fully redeemed or prior to the rated notes being redeemed if the option is sold to redeem all classes of rated notes. In the event of the option being exercised or sold, US dollar-denominated proceeds received will be deposited promptly into the US dollar-denominated principal account to be applied on the next payment date in accordance with the principal waterfall," the S&P says.

The transaction allows for 15%-20% of the assets in the collateral pool to be US dollar-denominated. Up to 30% of the loans, excluding US dollar collateral, can be covenant-lite. Up to 50% of the US dollar pool can be cov-lite.

A maximum of 2.5% of the loans in the collateral pool can be unhedged collateral obligations and a maximum of 10% of the assets can be fixed-rate, so long as fixed-rate collateral obligations denominated in US dollars represent up to 5%.

S&P notes that Black Diamond CLO 2017-2 has higher total leverage, higher subordination, higher weighted-average cost of debt, higher modelled WAS and WAC and a lower scenario default rate than other broadly syndicated CLOs it has recently rated. The CLO is expected to close on 20 December. Its effective date is six months after closing.

JL

Capital Relief Trades

Call for increased standardisation

Ahead of the EBA's public hearing tomorrow on its significant risk transfer (SRT) discussion paper (SCI 28 September), SCI undertook a straw poll of industry opinion on the document. The exercise revealed an overall positive response, although some areas for improvement were highlighted, especially regarding transaction standardisation.

Giuliano Giovannetti, ceo of Arch Mortgage Insurance, says that the EBA's SRT guidelines are a practical step forward for the capital relief trade market. In particular, he welcomes the increased clarity around a handful of structural elements, including excess spread, pari passu agreements and upfront premiums.

"The fact that synthetic excess spread is being contemplated is a positive development, as it makes sense for capital relief trades to have a similar mechanism as cash excess spread," he observes. "The EBA proposal seems, however, quite harsh for synthetic trades, and the reasoning that favours trapping is all but clear."

Giovannetti continues: "What the trapped amount should be is up for discussion. A reasonable compromise would be to trap some - a thin layer of capital retention at the bottom of the structure, perhaps."

Robert Bradbury, md at StormHarbour, suggests that the immediate impact of synthetic excess spread becomes less obvious when taken in a wider context. "We're aware that an increasing number of transactions are being specifically structured to maintain efficiency within the new securitisation framework and taking into account other regulatory developments. Some originators may be unwilling to build up a potential first loss position via synthetic excess spread when they also have to take into account changes to provisioning under IFRS 9."

He warns that the level of SRT achieved by originators can change over time and recommends regular tests to continually compare the protected tranche and portfolio to realised and expected losses. "It will be interesting to see how tests on retained capital versus expected loss apply across different portfolios. We expect longer-dated portfolios of renewables or project finance to be impacted differently relative to portfolios of large corporates, for example, as well as tranches to generally become thicker as a range of new regulations become effective."

Bradbury suggests that this is something that needs to be taken into consideration at the structuring phase of the transaction. "We could also see transactions emerge that incorporate additional goals different than pure regulatory capital relief; for example, driven by hedging provisioning on a forward-looking basis," he comments.

Fiona Walden, senior underwriter at Liberty Specialty Markets, agrees that more requests for thicker tranches are likely to emerge. "To date, tranches have been 0%-7%/8% and we think that is growing to 0%-12%, although it would not make sense from an economic capital standpoint for tranches to get much thicker than that. It would be good to have more insurers in the market because that will help it to scale, and offering different tranche profiles could bring in new insurers," she says.

Risk transfer volumes totalled around €25bn-€26bn last year and while no small number in itself, it is dwarfed by the €15trn loans held by European banks. To create meaningful volumes and make synthetic securitisation a meaningful tool for the banking sector, Giovannetti calls for increased standardisation and reduced complexity for all parties.

He notes: "The focus so far has been on standardising the tests for SRT in the absence of many bespoke transactions, which is like nailing jelly. Standard transaction templates sanctioned by the regulators would help much more and would make the SRT tests easier for originators and regulators, at least in the most common cases which can satisfy most banks."

Finally, Giovannetti points out that mortgages are penalised under the new securitisation regulation - which he describes as "a pity", given the asset class is the one most investors are familiar with and can therefore provide capital relief at a cheaper cost. He concludes that risk transfer is facilitated more efficiently on the most common asset classes.

CS

Structured Finance

Job swaps round-up - 17 November

EMEA

CSC has hired Jonathan Hanly as md to its Ireland office, Hinnerk Koch as md to its Luxembourg office and Aline Sternberg as head of transaction services in the UK. Hanly has previous executive leadership roles with the Intertrust Group, SFM Europe and RBS. Koch has significant experience in the alternative finance and securitisation markets in Luxembourg, having spent seven years specialising in capital markets with SFM Europe (now the Intertrust Group), and Sternberg formerly served as a senior transaction manager with Intertrust.

North America

Apollo Global Management has promoted lead partner for private equity Scott Kleinman and md James Zelter to the newly created positions of co-presidents, reporting to senior md and co-founder Josh Harris. The pair will have full responsibility for all of Apollo's revenue-generating and investing businesses, with Kleinman focusing on the firm's equity and opportunistic businesses, and Zelter focusing on its credit and yield businesses. They both will continue to serve on the investment committees in their respective areas of focus.

Highland Capital Management has recruited Andrew Parmentier as a partner, expanding the firm's executive committee. Parmentier will serve as Highland's chief strategy officer and head of thematic investing. He previously co-founded Height Securities and before that was a partner and md at FBR Capital Markets.

Acquisitions

Alter Domus, a fully integrated provider of fund and corporate services backed by the Permira funds, entered into an agreement on 10 November to acquire Cortland Capital Markets Services in the US. The terms of the transaction have not been disclosed. The transaction marks the fourth deal Alter Domus has signed since the strategic investment by the Permira Funds in May 2017. The acquisition of Cortland represents a significant milestone for Alter Domus, establishing a major presence in US credit, real estate and loan services alongside the existing private equity clients served.

BNP Paribas Asset Management has acquired - through its incubation fund - a 10% stake in Caple, with the aim of providing an alternative credit offering for European SMEs. The partnership was formed under BNPP AM's SME Advanced Solutions platform, a recently-launched initiative within its private debt and real assets investment group, led by David Bouchoucha. The open architecture platform will source senior unsecured fixed rate loans of between €500,000 and €5m across multiple origination channels in Europe, including banks and fintechs, and distribute them to institutional investors. It will initially target SMEs in the UK, Germany and the Netherlands, before broadening out more widely across Europe.

ILS

Swiss Re has appointed Weilong Su to the position of ILS trading analyst at the New York office. He was previously a natural catastrophe specialist and property treaty underwriter at the firm. Swiss Re has also hired Jordan Brown as a vp, ILS structurer at the New York office, having previously served at Guy Carpenter as vp in ILS origination and structuring.

Robert Bray has been hired by GC Securities, the ILS arm of Guy Carpenter, as avp for ILS structuring and origination. Bray was most recently an associate at Regions Securities.