Contents

ABS

NPL secondary 'needs AMC blueprint'

The European Commission has confirmed progress on NPL secondary markets. It has highlighted the creation of NPL secondary markets through improved data standardisation as well as work towards a blueprint for an asset management company (AMC).

Speaking at a recent conference on Italian and European NPLs, European Commission financial services and capital markets union director Mario Nava noted that standardisation remains a priority. He says: "The sooner we deal with it the better. In particular, we asked the EBA [in April] to develop data templates and we have very frequent interactions."

The Commission considers the most important issues for standardisation to be templates for data harmonisation and an information platform to facilitate transactions. Both measures are aimed at price discovery.

"The aim is to correct the oligopsonistic nature of the market. The importance of price discovery in any market cannot be underestimated," notes Nava.

While AMCs such as NAMA and SAREB are already extant, Nava believes the market would benefit from an AMC blueprint that allows to better bridge the bid-ask gap. He has not, however, laid out further details as to what this might include.

Nava says: "We are not working on AMCs since we want to develop characteristics that fit it with European legislation. If the blueprint is followed then AMCs may bring added value."

He adds: "The work we are doing with the ECB and the EBA is ongoing and we are confident that there may be another element to the puzzle. There is no silver bullet for NPLs, with different actions needed that do not contradict each other."

The greatest challenge for an AMC proposal come from the BRRD's state aid rules. Consistency with BRRD rules refers to the concept of precautionary recapitalisation, whereby banks are recapitalised without resolution if some specific criteria are met.

In this respect the EBA's AMC proposal from February offers a clue as to how such a blueprint could work and the issues associated with it. The proposal attempts to address the BRRD challenge through a "clawback mechanism" involving equity warrants.

The warrants issued to national governments at the time of the asset sale to the AMC would be triggered if the final sale price is lower than the real economic value, with the assets transferred to the AMC at the point of sale.

The AMC would then set a timetable to offload the assets at the real economic value. If that value is not achieved, the bank must take the full market price hit, covered if necessary by warrants exercised by the national government as state aid (SCI 14 March).

The mechanism, however, would likely have to deal with a number of technical uncertainties. According to Moody's, if the market value of bad loans on final disposal were lower than anticipated at the time of their transfer to the AMC, the value of the state aid provided to the bank would be commensurately higher, potentially triggering further burden-sharing.

This is because the realised loss of the AMC would suggest that the "real economic value" of the assets estimated at the time of their transfer was too high, and hence that the state aid provided at the time compensated the bank for an unrecognised but real loss.

In this scenario, the "precautionary" argument justifying exemption from full burden-sharing as required by the BRRD would fall away, and the imposition of losses on shareholders and creditors equal to at least 8% of assets would presumably follow.

Furthermore, there is also the question of defining the term "real economic value" and the risk that AMC purchases above market value would fall within the definition of extraordinary public support.

On the issue of reducing the NPL stock, Nava notes the connection between the stock and sale of NPLs as the impetus behind the publication of the Commission's latest consultation on Pillar one prudential rules for newly originated NPLs.

This consultation follows the action plan for NPLs and is part of the general attempt to support a significant and sustainable reduction of NPL levels within the EU. It is open until the end of this month.

The rationale for a pan-EU provisioning backstop is that automatic EU-wide brakes on the build-up of future loans that turn non-performing can be expected to provide incentives for banks' management to prevent the accumulation of NPLs altogether through better NPL restructuring and stronger origination standards.

Nava observes: "We published the document on secondary markets as there is a connection between the stock and sale of NPLs. Both the timing of NPL sales and the reduction of the stock are important."

At the same time, feedback from the Commission's July consultation has been completed. The first screenings have confirmed obstacles which were already known, such as issues relating to the licensing regime, the transfer of NPLs and the judicial framework. The completion will be followed by an impact assessment that will elaborate on the cost and benefit for removing each of the obstacles.

SP

Capital Relief Trades

Mixed portfolio SRT printed

NatWest has originated a capital relief trade dubbed Nightingale Securities 2017-1. Unusually, the £390.2m CLN references a mixed portfolio of asset classes. It is also the first DBRS-rated synthetic securitisation for the RBS Group.

The synthetic securitisation, structured in the form of a financial guarantee (SCI 18 April), was priced in the typical 9%-12% range for these trades. It features a WAL of 4.5 years, a sequential amortisation structure as per CRR/SRT rules, a 10-year credit protection and two-year replenishment period. In terms of tranche thickness, the threshold is at 8.25%, while the triple-A tranche attaches at 29.5%.

Rated by DBRS the deal comprises £3.3bn triple-A rated class A notes, £191.8m double-A class B, £52.3m double-A class C, £60.8m double-A class D, £133.4m single-A class E, £33m single-A class F, £78.7m single-A class G, £210.2m triple-B class H, £34m triple-B class I, £44.7m triple-B class J, £134m double-B class K, and £21.2m double B class L.

Carlos Silva, svp, DBRS, says: "This was a challenging transaction from a rating perspective as it was composed of a number of assets including SMEs and CREs, which can have very different risk drivers. Including multiple assets does provide something different in terms of diversification, but can add additional complexity to documentation and portfolio analysis, requiring multiple methodologies and three separate analytical teams."

The transaction, though, was simpler in other respects since the credit protection covered only principal and not both principal and accrued interest. Covering both principal and interest provides benefits in terms of capital relief but also adds an additional risk (SCI 8 September).

The issuer's rationale for originating a trade with diverse asset classes is not clear, although it is possible that NatWest owner RBS does not see the assets as differentiation of risk types given the high granularity of the portfolio.

The initial guaranteed portfolio totals £4.7bn. The transaction consists of a junior financial guarantee for the credit risk transferred via a funded CLN and a senior unexecuted and unfunded financial guarantee for the rated tranches.

Under the junior financial guarantee, NatWest will transfer the credit risk of the initial £390.2m (corresponding to the first 8.28% of the portfolio). Under the unexecuted senior financial guarantee, the bank will transfer the remaining credit risk (from 8.28% to 100%) of the same portfolio. The issuer is also holding an additional 20% of each reference obligation as risk retention. When retention is included, the total portfolio size reaches £5.9bn.

The initial portfolio of £4.7bn consists of loans to SMEs (54.9%), commercial income producing real estate (IPRE) (31.9%) and residential IPRE (13.2%). The replenishment criteria allows 54%-60% for the SME portfolio, 30%-33% for the commercial IPRE portfolio and 7%-16% for the residential IPRE.

The risk transfer transaction follows official announcements by the Royal Bank of Scotland regarding its third successive quarterly profit for 3Q17, as it gradually resolves its legacy issues.

According to Credit Sights, the bank's CET1 ratio rose 70bp to 15.5% during the quarter, while management is heading for a 30bp uplift when IFRS 9 is implemented on 1 January 2018. Its cost cutting is on track with savings of £708m in the first three quarters of the year, versus the full year target of £750m. Asset quality continues to improve with continuing low loan impairments and impaired loans reducing further to 2.7% of total loans.

SP

Capital Relief Trades

SRT concerns acknowledged

Attendees of a public hearing on the EBA's SRT discussion paper have raised concerns in relation to excess spread, time calls and commensurate risk transfer tests (SCI 28 September). The EBA has acknowledged the concerns, but as its consultation is still ongoing it has not provided detailed responses.

The trapping mechanism is a key requirement for excess spread. The amount of excess spread not absorbed by losses during a given year should remain trapped in the transaction in the form of a funded reserve account, available to absorb losses in future years.

According to one public hearing attendee: "The EBA's main concern during the hearing was the so-called difficulty of calculating excess spread. However, this is simply not true, since as issuers we have the accounting numbers that show earnings on portfolios, we know the premiums for investors and we can estimate the servicing costs."

As for time calls, objections were advanced on the prohibition of using time calls for cash securitisations. One issuer asks: "If you can recognise time calls for synthetics then why not for cash deals?"

The EBA's response alludes to the misuse of time calls during the crisis, although attendees contrasted the differences pre- and post-crisis, pointing to the beneficial usage of time calls for risk transfer purposes.

The third main topic is the commensurate risk transfer tests. The discussion paper aims to provide a more harmonised assessment of the concept of commensurate risk transfer through two options.

The first option is an enhancement of existing tests by introducing a new requirement on the minimum thickness of the first loss tranche and introducing a test of commensurate risk transfer, based on a comparison of the capital relief achieved by the originator with the portion of total portfolio losses that is transferred to investors. The second option comprises a new test that is able to measure both SRT and commensurate risk transfer.

Under the first option, the way the mechanistic tests are applied to existing SRT deals causes them to fail, even if they achieve SRT, due to the way they are designed.

An issuer says: "For instance, if a 0%-9% attachment point is a first loss tranche, I can pass the first loss test since I transfer 80% of it, but if that piece includes mezzanine tranches then you could fail the mezzanine test since you do not transfer at least 50%."

Under the second option, the effect of the test is to require banks to sell universally all of the subordinated tranches. This raises the cost of the credit protection and it forces issuers to sell tranches in excess of the expected loss of the portfolio.

Further concerns were raised in relation to the triggers for a pro rata amortisation structure. According to the discussion paper, pro rata amortisation should only be used in conjunction with clearly specified contractual triggers determining the switch of the amortisation scheme to a sequential priority, safeguarding the transaction from the possibility that credit enhancement - and with it the extent of risk transfer - is too quickly wiped out during the life of the transaction.

Despite a positive reception on the inclusion of pro rata amortisation, given that it keeps the cost of protection stable, participants also pointed out that some of the triggers would not work in all cases. A noted example in this respect is the trigger stipulating that the concentration of exposures in high credit risk (PD) buckets increases above a pre-specified level.

"The concern here is that if you are doing a deal with a granular pool of assets, you will never have loans that end up as a significant share of the portfolio," says one source.

Other topics included improved feedback between regulators and issuers prior to SRT regulatory recognition, progress which was recognised by both regulators and issuers.

Despite the aforementioned concerns, market participants remain positively predisposed towards the SRT paper. It is considered as the first step towards SRT trade standardisation, something that may ultimately bring the CRR closer to extending the STS label to synthetic securitisations.

The EBA's consultation on SRTs runs until 19 December.

SP

RMBS

Thinking outside the box

Investor demand is driving an expansion of the US prime RMBS credit box. Following years of issuance focused on what could be termed 'super prime' mortgage securitisations, the market has now moved on to what may instead be classified as 'expanded prime'.

The US prime RMBS market has been dominated by super prime from the crisis right up to 2016. It is in this last year that the box has started to loosen.

"That super prime issuance had very impressive metrics: weighted average credit score of high-760s to the low-770s; no credit blemishes; moderate LTVs; DTI of high-20s to low-30s. Expanded prime does not differ radically, but it might include minor blemishes, for example, but always with compensating factors; so for example where FICO is lower the LTV might also be kept low," says Jack Kahan, md, RMBS, Kroll Bond Rating Agency.

Neil Aggarwal, portfolio manager and head of RMBS, Semper Capital Management, believes the expansion beyond what was previously being securitised in the non-QM space is a function of rates, yield and origination targets. He says that a big contributor to the expansion of the RMBS securitisation credit box has been demand-driven.

"The focus in non-QM had been on loans which look like agency collateral for all intents and purposes other than the fact that they were jumbo loans. Now we are seeing lower FICO scores being included and a few other changes. 2017 has been the year in which yield spreads have rallied such that the demand from investors for higher spread assets has fed into origination channels," says Aggarwal.

He adds: "The origination spreads on non-QM versus QM rates have compressed. Borrowers have been willing to pay these rates more recently because the spread on non-QM mortgages has compressed - and it has compressed precisely because these originators are now able to securitise."

Redwood Trust has brought its first two Sequoia Mortgage Trust CH deals - Sequoia Mortgage Trust 2017-CH1 and Sequoia Mortgage Trust 2017-CH2 (see SCI's deal database) - to the market in the second half of this year. The CH series designation explicitly sets these deals apart from Redwood's previous Sequoia super prime transactions.

The CH series RMBS include loans that possess expanded credit collateral attributes such as credit scores as low as 660, DTI ratios as high as 50% and LTVs above 80%-85%. The loans also have less stringent income qualification requirements.

Sequoia Mortgage Trust 2017-CH2 closed last month, just one week after Sequoia Mortgage Trust 2017-7, which was a traditional super prime RMBS. Comparing the two is instructive.

The two deals have similar sized pools, but the 2017-CH2 transaction has a weighted average LTV of 75.2% compared to 68.5% for 2017-7. Weighted average FICO is 740 for 2017-CH2 (compared to 772 for 2017-7) and DTI is 37.28% (compared to 32.7%).

While the collateral may be slightly different to the super prime deals, Kahan notes that expanded prime remains worthy of being called prime. Investors are happy with the risk profile and higher coupon.

Kahan notes: "We have rated two transactions - both Sequoia Mortgage Trust 2017-CH1 and 2017-CH2 - with a significant percentage of expanded prime. Both have senior classes we have rated at triple-A with credit enhancement two times as high as the senior classes in Sequoia super-prime transactions."

Investor comfort with the product is a point which Aggarwal also makes. He adds: "In many ways, whether this product is labelled 'prime' or 'expanded prime' is not too important and comes down to the interpretation of individual investors. The market has become much better at doing its own upfront due diligence and what really matters is whether investors believe in the credit and the collateral."

As for an expansion of the non-prime credit box, Kahan notes that there are very few boundaries left to push. He says: "Non-prime RMBS is already using alternative documentation, although even there they must use some form of income verification. Non-prime right now looks similar to pre-crisis subprime but with better underwriting."

Kahan continues: "There is not much room to loosen credit. We have already seen FICOs down to 500, LTVs of up to 95%, and even very patchy documentation, with income verification based on as little as one month of bank statements, for example."

While the market is moving from a focus on super prime to more accommodation of expanded prime, another change is also anticipated. When the FOMC meets next month, the overwhelming market expectation is that there will be a rate hike.

"While the Fed moving the front-end of the curve has been telegraphed, the real story might be at the long-end. Comparing the 10-year with the two-year note, the spread at the start of 2014 was 260bp and now it is inside of 60bp, so we are flatter than we have been since before the crisis," says Aggarwal.

He adds: "The 10-year is buoyed, partly because of some market sentiment that the Fed may be looking at out-dated or less relevant metrics, so while the pressure on the front-end of the curve has been expected, the demand and depth has been robust at the long-end." RMBS typically trades at a discount and shortens through outperformance of prepayments and accommodative policy, but this is founded on the idea that longer rates will stay low.

JL

ABS

Inaugural inventories ABS is sector 'holy grail'

Trafigura has launched a 'pioneering' debut commodities securitisation marking a milestone for the sector. The US$470m non-recourse funding programme, Trafigura Commodities Funding (TCF), is backed by inventories of crude oil and refined metals and is structured with a senior and junior tranche.

TCF is a stand-alone vehicle, incorporated in Singapore, and has issued US$470m of senior funding notes, comprising the senior tranche, as well as a subordinated loan from Trafigura, forming the junior tranche. The proceeds of the notes enable TCF to purchase crude oil and refined metal inventories sold by Trafigura across 12 jurisdictions in Europe, the Middle East and Asia-Pacific.

All the commodities are sold on a true sale basis under a commodity purchase agreement, granting the issuer the right to sell each commodity back to Trafigura at the expiry of the underlying contracts. Trafigura also has the flexibility for early repurchase of the commodities owned by the issuer.

Laurent Christophe, Trafigura's head of corporate finance, comments: "The goal of the TCF programme is to replicate the success of the trade receivables programme that we established over a decade ago, but with inventories. It is ultimately the holy grail for the sector, bridging the gap between the fixed income and commodities markets, by transferring commodity risks to a fixed income product whilst carefully mitigating those risks and opening it up to a whole range of fixed income investors."

Christophe notes that the banks which serve as original noteholders took a very involved role in the transaction: "We wanted to work with investors with both commodity and structuring experience and with a strong connection to Singapore," he says.

He continues: "We worked with the banks in a very cooperative way and they co-arranged the transaction." Additionally, he says that while there were certain hurdles to getting the deal over the line, it has created a better product.

Christophe adds: "There is always a lot of education in a new transaction and a degree of resistance in structuring anything new but [the banks] helped a lot with the robustness of the structure and resulted in something that is much better than we expected." As a result, he says that while pricing is always tough for an inaugural deal, it has initially sold at a competitive price compared to other finance sources available to the firm.

Christophe says that while the sector may have been waiting for such a product to emerge, Trafigura had a head start with its combination of commodities and securitisation experience. This helped the firm maintain the needed "time, stamina and commitment" to establish the funding platform, which took close to two years to establish.

Part of the reason for the long process is that while receivables ABS largely handles credit risk, there are a multitude in commodities. Christophe explains that in securitising commodities there needs to be consideration of "price risk to fraud risk and liquidity risk and so on which this structure addresses". In doing so, the transaction also creates a pool of liquidity for the firm, alongside the debt market, and it helps satisfy certain regulatory requirements.

Another unusual element of the programme is that the securitisation vehicle is Singapore-registered, whereas the firm usually registers vehicles in Ireland. The reason for the change is that as Trafigura is a Singapore-registered firm, it is committed to "propel innovation" in the Asian financial sector, something that this transaction "cements".

Furthermore, unlike some commodities-backed ABS that have been brought to market, such as the recent US$150m diamond ABS from Diarough, TCF would not struggle to dispose of its assets, due to the liquidity in the oil market. Conversely, if a company sold a large quantity of diamonds in one go, for example, it could "rock the whole market".

Further ahead, the company is optimistic in terms of further transactions and hopeful that TCF will not remain the only such one in the market. Christophe concludes: "We have the ability to scale up now the programme is established, and with over US$10bn in commodity inventories at Trafigura, we certainly have a lot of scope for growing the programme with additional issuances. We hope the market broadens out and other firms get involved; this would help the market to become more liquid."

Trafigura will look to market the deal next year. It is not yet rated but has been structured to a rating agency methodology and expects to receive a single-A rating on the senior tranche when it is marketed. The six banks with which it has been privately placed in the first instance are DBS, Mizuho, Natixis, Oversea-Chinese Banking Corporation, The Bank of Tokyo-Mitsubishi UFJ and Westpac.

RB

ABS

Inaugural island auto ABS markets

My Money Bank (MMB) is marketing an inaugural €527m static cash auto ABS. The transaction, titled SapphireOne Auto 2017-1 (see SCI's deal pipeline), is backed by 39,122 non-delinquent auto loan (64%) and lease (36%) contracts to borrowers in the French overseas territories of La Reunion, Guadeloupe, Martinique and French Guiana.

The transaction is provisionally rated by Moody's and Fitch, respectively, as Aaa/triple-A on the €390m class A notes, Aa1/double-A on the €36.9m B notes, A1/single-A on the €36.9m C notes, Baa2/triple-B on the €21.1m class Ds and Ba1/double-B plus on the €15.8m class E notes. The notes' respective WALs are 1.1 years, 2.7 years, 3.1 years, 3.6 years and 3.7 years.

Rabobank's ABS analysts comment that only the A tranche will be offered, with investor discussions expected to start between 27-29 November and pricing expected the following week. The analysts add that the residual value component accounts for around 8% of the balance with the deal lacking ECB repo eligibility which, they add, will be an important factor for bank investors.

MMB is the former GE Money Bank French operation, currently owned by Cerberus. The loans were originally originated by Société Réunionnaise de Financement (Sorefi) with operations in the French territory of La Réunion, and Somafi-Soguafi which operates in the French territories of Guadeloupe, Martinique and French Guiana. Both originators are ultimately owned by MMB, located in Paris, with the obligors located in the four aforementioned territories.

The loans underlying the portfolio are fully amortising and have a weighted average seasoning of 18 months, with 63.6% auto loan instalments, 28.5% auto lease instalments and 7.9% residual cash flows related to auto lease contracts. The portfolio further comprises 83.7% new car and 16.3% used car loans or leases, with the top three manufacturers being Peugeot (17.8%), Renault (10.8%) and Volkswagen (9.8%).

Moody's comments that the transaction is strengthened by the static structure, granular portfolio and the application of French law in the relevant overseas territories. The rating agency says, however, that challenges to the transaction include the small unrated originators and the highly connected nature of the originating and servicing subsidiaries of MMB, with the originators also acting as servicers on the transaction.

Further challenges include the regional concentrations in the four small regions and the residual value risk. Moody's comments that the residual value risk is mitigated to an extent by the portfolio composition and additional credit enhancement.

The arranger is Credit Agricole, also acting as swap counterparty and underwriter. Agent, custodian and issuer account bank is BNP Paribas, while trustee is EuroTitrisation.

RB

Structured Finance

SCI Start the Week - 20 November

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

Pipeline
There were considerably fewer ABS added to the pipeline last week as additions became more evenly distributed. There were six new ABS announced, as well as five RMBS, eight CMBS and seven CLOs.

The ABS were: CNY3.5bn Driver China Eight; €530m Ginkgo Compartment Sales Finance 2017-1 (re-offer); US$1bn Honda Automobile Receivables 2017-4 Owner Trust; CNY4bn Huitong 2017-1 Retail Auto Mortgage Loan Securitization Trust; CNY3bn Toyota Glory 2017 Phase II; and Volta V.

The RMBS were: US$210.16m Angel Oak Mortgage Trust I 2017-3; €1.458bn BBVA RMBS 18 FT; US$671.69m JPMMT 2017-5; Pepper Prime 2017; and US$271.09m Progress Residential 2017-SFR².

The CMBS were: US$540m BBCMS 2017-GLKS; US$273.7m BX Trust 2017-CQHP; US$696.7m CCUBS 2017-C1; US$855.3m CSAIL 2017-CX10; US$427m MSC 2017-ASHF; US$700m MSCI Trust 2017-CLS; US$258.5m Velocity Commercial Capital 2017-2; and US$785.9m WFCM 2017-C41.

The CLOs were: US$440.7m BSPRT 2017-FL2; US$610.53m Golub Capital I Partners CLO 23(B)-R; €301.45m Halcyon Loan Advisors European Funding 2017-2; £4.3bn Nightingale Securities 2017-1; €418.7m Oak Hill European Credit VI; US$611.45m OCP CLO 2017-14; and US$259.8m RAIT 2017-FL8.

Pricings
A long list of ABS deals departed the pipeline. As well as 16 ABS prints there were also seven RMBS, a CMBS and two CLOs.

The ABS were: US$221.2m Access Point Funding I 2017-A; US$500.3m Ally Auto Receivables Trust 2017-5; US$172.5m CIG Auto Receivables Trust 2017-1; US$755.5m CNH Equipment Trust 2017-C; A$329.3m Eclipx Turbo Series 2017-1; US$167.37m First Investors Auto Owner Trust 2017-3; Sfr300m First Swiss Mobility 2017-2; US$263m Flagship Credit Auto Trust 2017-4; US$1.846bn Ford Credit Auto Owner Trust 2017-C; US$612.24m MMAF Equipment Finance 2017-B; £310m Orbita Funding 2017-1; US$1.04bn Santander Retail Auto Lease Trust 2017-A; US$301.85m SCF Equipment Leasing 2017-2; US$175m Upstart Securitization Trust 2017-2; US$373.8m Volvo Financial Equipment Master Owner Trust Series 2017-A; and €248m Wizink Master Credit Cards 2017-03.

The RMBS were: US$1.2bn CAS 2017-C07; US$141m Ellington Financial Mortgage Trust 2017-1; A$1.2bn Liberty Series 2017-4 Trust; A$2.649bn Medallion Trust Series 2017-2; US$320.3m Sequoia Mortgage Trust 2017-CH2; US$1.83bn Towd Point Mortgage Trust 2017-6; and US$253m Verus 2017-SG1.

US$1.062bn CD 2017-CD6 was the CMBS. The CLOs were US$512.25m OHA Credit Partners XV and €351m St Paul's CLO VIII.

Editor's picks
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...
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...
Mortgage ILS breaks new ground: Arch Capital Group recently closed its first public rated mortgage ILS (SCI 18 October). Dubbed Bellemeade Re 2017-1, the US$368.11m transaction features structural departures from previous deals in the programme, while Morningstar Credit Rating's rating facilitated wider interest and broadened investor participation...
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...

Deal news
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.

CLOs

CLO managers 'can benefit' from 2018 volatility

Increasing corporate sector volatility will test European CLO managers next year, believe structured finance analysts at Bank of America Merrill Lynch. While the recent price volatility in major CLO exposures seen across Europe is set to continue, managers who can rise to the challenge will be able to really set themselves apart.

European CLOs have been exposed to volatility in the past week, with several high yield borrowers seeing major changes in the pricing of their debt. As a result this has led to spread widening for European speculative grade debt instruments with a knock-on effect for European CLOs, which may continue to struggle going into 2018, according to the analysts.

The iTraxx Crossover spreads widened around 27bp from the start of November to the 15th, but recovered by the end of the week. The same trend was seen in the ICE BAML Euro High Yield Index which widened 46bp over the same time period, with the single-B sub-index widening 114bp and sterling high yield spreads widening around 36bp.

The analysts highlight the performance of Altice, which is one of the largest exposures in European CLO portfolios, accounting for about 1.7% of CLO 2.0 holdings. Altice's shares fell over 40% after its recent 4Q17 earnings announcement and its bonds have performed badly, with 6.25% notes due 2025 from Altice Luxembourg falling over 10 points over the same period.

CLO exposure to Altice is largely through the firm's subsidiary, SFR Group. SFR has seen less significant price reaction.

There have also been weak performances from UK issuers with the 10 weakest performers in the iTraxx Crossover index in the last month including many UK firms. These include New Look, Boparan, Iceland, Pizza Express and Premier Foods, with the first three accounting for 0.5% of total 2.0 CLO portfolio holdings.

European corporate price volatility appears to be driven by idiosyncratic company issues rather than market trends, although this may not hold true for UK companies. The analysts note that Altice's performance downturn, for example, seems to have been driven by technical factors affecting the stock as well as debate surrounding the firm's ability to drive performance in mature assets.

Another major European CLO exposure - Italian firm Astaldi, which was the weakest performer in the iTraxx Crossover index in the last month - suffered changes to its bond prices. It seems that this was related to losses on its Venezuelan exposures, which does not have much impact on other European issuers.

Generally, the analysts suggest that credit conditions look stable for European corporates, with strong macroeconomic trends for the eurozone, little refinancing risk and the expectation that the ECB is unlikely to start to raise rates until 2019. The UK, however, might see weaker factors driving performance for these issuers and the analysts are positing a cautious outlook in the consumer sector.

The economists also suggest that UK consumption will be subdued through 2018. This is something that CLO managers may be looking at given that UK consumer exposure is around 4.5% of European CLO 2.0 collateral.

The structured finance analysts add that with little performance differentiation across the 2.0 CLO space, volatility in 2018 could provide CLO managers with an opportunity to distinguish themselves. They conclude that with the many possibilities for volatility in 2018 such as Brexit, US rate hikes and commodity price volatility, so CLO performance may start to diverge as managers take different approaches to managing the various risks.

RB

CMBS

UK CMBS prices tight

Taurus 2017-2 UK, a rare single-loan UK CMBS (SCI 17 November), has priced. All offered tranches were well covered and final spread levels were set below initial price talk and at the tighter end of guidance, although concerns have also been raised.

Initial price talk for the £164.48m senior A tranche, rated triple-A by Fitch and DBRS, was in the three-month Libor plus 90-area. It priced at plus 85bp and Rabobank reports that it was 2.4x covered, with even better coverage for the lower-rated tranches.

The B, C, D and E notes had subscription levels of 2.7x, 4.4x, 4.9x and 2.6x. Rabobank believes this is a good indication that investors remain receptive to issuance for rarer sub-asset classes, in contrast to UK consumer and auto ABS.

The £53.22m B tranche was rated double-A and double-A minus, the £33.69m C tranche was rated single-A, the £51.83m D tranche was rated triple-B and the £44.7m E tranche was rated double-B and double-B minus. The £0.1m X tranche was not rated and was retained.

Aza Teeuwen, partner and portfolio manager at TwentyFour Asset Management, says the triple-As looked like "reasonable value" but that the triple-Bs were "less appealing, even though they were 5x oversubscribed". While the LTV at the triple-B level is reasonable, 12.9% relative debt yield poses significant risk that there could be shortfall if the properties have to be sold.

Taurus 2017-2 UK is expected to settle on 6 December. It is a single-loan CMBS secured by UK real estate collateral with a legal final maturity date in November 2027. Bank of America Merrill Lynch, which is arranger and lead manager, will retain on an ongoing basis a material net economic interest of at least 5% of the underlying loan.

However, Teeuwen questions the commitment of Blackstone, the sponsor. He notes that Blackstone has stated its aim to build a portfolio of €6.5bn and sell the platform in the next 24 months, with a similar platform already sold to a Chinese investor this year.

"We question the commitment from both the sponsor and the asset manager to be the hands-on manager that a portfolio like this requires. Given this is an aggressively structured cov-lite loan, lacking change of control clauses and any form of amortisation, there is a great deal of reliance on there being a strong and experienced new sponsor in two years," says Teeuwen.

The single loan has an LTV of 67.13% and is backed by a portfolio of predominantly last mile logistics properties - essentially smaller warehouses - spread over the UK. The 127 properties have an appraised value of £545.6m and are let to over 1,070 tenants. Debt yield is 9% and current occupancy is 92%.

JL

RMBS

AOFM RMBS bids successful

The Australian Office of Financial Management has completed its latest RMBS auction. The programme was relaunched this month (SCI 8 November), having been put on hold since 2015.

The AOFM auction received bids of A$62.22m amortised face value of Firstmac 2-2011 A3 and accepted A$62.22m. The range of clean price bids was 100.71 to 100.8 and the lowest accepted clean price was 100.71.

Total bids of A$79.957m were received for Firstmac 1-2012 A2 and A$64.515m were accepted. Clean price bids ranged from 101.85 to 102.4 and the lowest accepted clean price was 102.1.

Bids of A$239.679m were received for Progress 2012-1 A and A$26.057m were accepted. Clean price bids ranged from 101 to 101.405 and the lowest accepted clean price was 101.405.

Bids of A$213.974m were received for Puma P-17 A2 and A$46.872m were accepted. Clean price bids ranged from 100.278 to 100.561 and the lowest accepted clean price was 100.561.

Bids of A$279.272m were received for Torrens 2011-1E A3 and A$98.835m were accepted. Clean price bids ranged from 100.31 to 100.826 and the lowest accepted clean price was 100.826.

Bids of A$107.992m were received for Widebay 2009-1 A2 and A$56.917m were accepted. Clean price bids ranged from 100.46 to 100.997 and the lowest accepted clean price was 100.997.

Bids of A$112.953mm were received for Widebay 2010-1 A2 and A$39.128m were accepted. Clean price bids ranged from 100.16 to 100.684 and the lowest accepted clean price was 100.684.

The highest price paid was 102.4 for a A$14.992m piece of Firstmac 1-2012 A2. This piece had an original face value of A$30m.

The lowest accepted price was 100.561 for a A$46.872m piece of PUMA P-17 A2. This piece had an original face value of A$157.5m.

Identities of winning bidders have not been divulged. The AOFM's divestment panel consists of ANZ, CBA, Citi, Deutsche Bank, Macquarie, NAB and Westpac.

JL

Structured Finance

Job swaps round-up - 24 November

EMEA

Alvin Wong has been hired as director at United Overseas Bank (UOB). Previously he was svp at DBS bank where he was involved in structured finance and securitisation transactions.

North America

Ally Financial has hired Josh Wilsusen as md for public policy and government affairs. Wilsusen was previously at Morgan Stanley where he was executive director of government relations and he was also co-chair of the Structured Finance Industry Group's government relations subcommittee.

PHH Corp has hired Albert Celini to the role of svp, risk and compliance where he will stay in the role for a month before assuming the role of chief risk and compliance officer, replacing Leith Kaplan who is stepping down 31 December 2017. Most recently Celini was a risk management consultant with Newbold Advisors and Common Securitization Solutions.

Global promotions

Mayer Brown has promoted 31 lawyers to partner including several with structured finance experience, including Alban Dorin at the Paris office, Michael Gaffney at the Georgia, US office, Darius Horton, Chicago, US and Lindsay O'Neil, Chicago. Dorin has been with Mayer Brown for a number of years and was previously counsel, where he was promoted from senior associate. Gaffney is being promoted from associate in the Banking & Finance practice of the Charlotte office where he represents banks, funds, issuers, borrowers and other entities in structured finance and asset-backed transactions, asset-backed commercial paper conduit programs, fund finance facilities and related matters. Horton is also being promoted from associate in the banking and finance department where he focuses on securitisation and structured finance with an emphasis on RMBS, commercial mortgage loans and unsecured consumer loans. Finally, O'Neil is being promoted from counsel at the firm's Chicago office where she represents issuers, borrowers, underwriters, domestic and international banks and asset-backed commercial paper conduits in a variety of securitisation and other structured finance transactions in both the public and private markets.

ILS

Allianz has appointed Paul Schiavone as global head of Allianz global corporate and specialty's alternative risk transfer (ART) business, taking over from Bill Guffey, who is leaving the firm. Laura Coppola takes over from Schiavone as regional head of financial lines for Allianz global corporate and specialty (AGCS) North America. Schiavone was previously head of financial lines for AGCS North America and will remain in New York, taking the global lead for the company's center of competence for alternative risk transfer and non-traditional (re)insurance. Coppola, is currently AGCS's North American regional head of management liability commercial and will remain based in New York. In her previous role, she was responsible for the development and underwriting of management liability products for public and private commercial customers in the US and Canadian markets.

ILS fund launch

Schroders has launched Schroder Life ILS, as specialist fund that will invest in life insurance-linked securities. The strategy will be run across several funds/mandates in closed-end vehicles with a 10- year maturity and launches with US$750m of committed capital. The strategy has exposure to a range of life and health insurance risks, primarily relating to value of in-force transactions, mortality, morbidity and lapse risks. Schroder Life ILS will be managed by Daniel Ineichen, head of ILS at Schroder Investment Management, Switzerland. Daniel and his team at the Schroders ILS desk will be supported by Secquaero Advisors, Schroder's exclusive advisor with respect to origination, structuring and transaction monitoring of ILS related investments.

Penalties

HSBS Private Bank, the Hong Kong branch of the private banking aspect of HSBC Group, has been fined a record HK$400m, after the Securities and Futures Appeals Tribunal (SFAT) upheld the SFC's disciplinary action against the bank for material systemic failures in relation to the sale of derivative products - namely, Lehman Brothers-related Notes (LB-Notes) and Leveraged Forward Accumulators (FAs) - in the run-up to the global financial crisis in 2008 (Notes 1 to 4). HSBC Private Bank (Suisse) SA's registration for Type 4 regulated activity (advising on securities) has been suspended for a period of one year and its registration for Type 1 regulated activity (dealing in securities) has also been partially suspended under the Securities and Futures Ordinance (SFO) for a period of one year (Note 5). The SFAT said in its determination that the SFC was correct in its findings and concluded that the bank was culpable of material systemic failings in its marketing and sale of derivative products by falling short of the standards set out in the SFC Code of Conduct and ancillary guidelines.

Blockchain

Global Debt Registry has announced it has developed a collateral pledge registry, the first of its kind in the structured credit space, using Hyperledger Fabric, one of the Hyperledger blockchain framework implementations hosted by The Linux Foundation. As the second phase in its blockchain development following the announcement of the Company's first blockchain POC earlier this year, this blockchain proof of concept supports the end-to-end assignment and release of pledge positions, reaffirming GDR's role as an innovative leader in the structured credit space and its continued commitment to enabling the highest levels of trust in these markets.