Contents

Marketplace Lending

MPL sector shakes off reputational threats

With continued growth of the marketplace lending ABS sector and repeat issuance from a range of firms, the market appears to have shaken off its label as an esoteric asset class. At the same time, a potential resolution to the ongoing Madden case suggests that the sector could finally be overcoming its reputational issues.

Last quarter was strong for the marketplace lending ABS sector, which saw volumes of US$2.6bn, representing 7.6% growth in issuance over 3Q16, according to PeerIQ figures. Issuance volumes now total US$23.8bn across 96 deals and, in line with other asset classes, there has been 15 months of spread tightening - along with and "acceleration of the deal calendar."

Vincent Basulto, partner at Richards Kibbe & Orbe, says that, in general, the market has shaken off its label of being an esoteric asset class. While still relatively new, it has built up a bigger data set and has therefore managed to attain the status of a more mainstream asset class.

Equally, while concerns about increased delinquencies persist, it is acknowledged that delinquencies are generally on older loans and, therefore, older ABS. Basulto says that the securitisations are structured in a robust enough fashion that investors are sufficiently protected and platforms have also amended their lending strategy to reduce the likelihood of future defaults.

However, a recent report from the Federal Reserve of Cleveland accused the marketplace lending industry of a number of damning indictments, such as predatorial lending practices and negatively impacting the financial wellbeing of borrowers. After an outcry from industry figures, such as the Marketplace Lending Association, the report was retracted.

Basulto explains: "The report has been taken down because it was recognised that it used a range of data from storefront firms, payday lenders and so on. It was a mixed data set, not exclusively about marketplace or online lenders. The Cleveland Fed has acknowledged this and consequently the report isn't generally applicable to marketplace lending."

The Marketplace Lending Association issued a strongly worded statement criticising the report, stating "the Cleveland Fed researchers relied on a data set almost entirely of traditional non-online loans to grab 90,000 random borrowers for their analysis, labeled them peer-to-peer with no evidence that they were peer-to-peer and then brutalised the new peer-to-peer lending industry with their analysis of those traditional loans."

TransUnion also reportedly said it has no understanding of how the Federal Reserve Bank of Cleveland could have used its data to reach the conclusions it did.

Adding further to the furore, the Cleveland Fed was accused of using the retracted study to block the 'Protecting Consumers Access to Credit Act' bill by US Representative for North Carolina Patrick McHenry. The bill is intended to overturn a decision in the Madden versus Midland case against the "valid when made clause", which allows sales of legally made loans in one state to parties in other states, even if the loan exceeds the interest rate cap in the state of the borrower.

Basulto comments that while the data from the Cleveland Fed's report overall might be invalid, the study may serve as a worthwhile reminder to the lending industry to reevaluate their lending practices.

This year has also been marked by increased ABS activity from Lending Club, with the lender issuing its first self-sponsored securitisation in June (see SCI's primary issuance database) under the Consumer Loan Underlying Bond Credit Trust programme. It then went on to issue a further two ABS, with the most recent closing at the end of November - the US$330m Consumer Loan Underlying Bond Credit trust 2017-P2.

Additionally, the platform issued a US$25m tradeable pass-through certificate - dubbed the CLUB certificate - which the lender describes as a "first-of-its-kind" transaction within the marketplace lending arena. Basulto comments that it indicates a desire to engage a wider range of investors, although notes that it isn't so much an innovation as applying old technology to a new lending model. He adds that Lending Club has essentially structured a group of loans as a single security with a CUSIP.

Basulto says: "The pass-through structure brings investors added value because they can be more selective about the loans they have exposure to. It is thought to have been tailored to investor demand from a pension or insurance firm and it highlights the willingness of lending firms to broaden their investor base and to accommodate a variety of investor demands."

PeerIQ also comments that the pass-through certificate is an important milestone for Lending Club, as it helps it expand its investor base because the product enjoys greater marketability through being in a security format and opens up liquidity possibilities in OTC markets. Furthermore, it may enable lower financing costs, as the CUSIPs enjoy lower-cost repo financing as an alternative to higher-cost credit facilities.

PeerIQ adds that the product helps Lending Club address investor demand for secondary market liquidity and "obviates the need to build a distinct secondary market". The firm concurs with Basulto that the product helps from the valuation angle too, as the "price discovery generated from markets in CUSIPs" will help valuation firms "calibrate pricing to observed trades in the market." Basulto says that he suspects other firms will look to launch similar products, but it is too soon to say whether it will become ubiquitous.

While the industry continues to move forwards and platforms continue to issue ABS, it's notable that several firms have yet to post a regular profit. Even Lending Club, the largest platform in the US, has failed to escape from loss-making territory.

Basulto remains sanguine on this topic, however. He says that it's not too much of a "red flag", but indicates that the lender may look to start turning a profit, should the venture capital funding it is reliant on dry up.

Looking ahead, Basulto suggests that smaller firms may need to scale up in order to make their business model viable. He concludes that the industry is set to continue in much the way it did in 2017 and predicts steady issuance, although he is keeping an eye on the impact of the new OCC head and the interim head of the CFPB.

RB

Capital Relief Trades

Basel 4 proportionality expected

The Basel Committee last week finalised the long-awaited Basel 4 reforms (SCI 8 December). The proposals have received an overall positive reception from the market, although much will depend on how the rules are translated into the CRR. Indeed, the prospect of proportionality at the EU level appears to be more promising (SCI 23 October).

According to last week's agreement, the capital floor has been set at 72.5%, as expected. Compared to previous proposals, the treatment of residential mortgage loans has improved for both high and low LTV buckets, given a proposal called loan splitting. Under this proposal, the first 55% LTV of the loan will receive a risk weight of 20% and any higher LTV part a 75% risk weight.

Reductions in risk weights will also be introduced for corporate exposures (by 5%-10%) and SMEs, which have been trimmed from 100% to 85%.

The better treatment of very high LTV mortgages under loan splitting is positive news for Dutch banks, given their large mortgage exposures (SCI 25 April). However, risk weights for Dutch mortgages are poised to increase by approximately two times - which is still significant, but much less than earlier estimates that went up to four times.

Still, there is no guarantee that these high capital requirements will apply, as Basel 3 is not law but merely a guideline. Indeed, the regulatory focus now shifts to Brussels, where lawmakers have to transpose the new Basel framework into the CRR.

"Much will depend on significant risk transfer discussions with the EBA and what transpires at the CRR level," says Rob Koning, head of the Dutch Securitisation Association. "In our discussions, we find that SRT deals are becoming more expensive, due to the higher risk weights of retained tranches under amended CRR rules - the latter requiring the sale of thicker tranches."

Regarding SRT in particular, he observes two issues with the EBA's SRT proposal. The first is the calculation of future excess spread into capital requirements, while the second is the exclusion of time calls from synthetic securitisations, given the expensive premiums that banks have to pay. Other issuers have highlighted the same challenges at a recent public hearing of the EBA's SRT discussion paper (SCI 24 November).

For these reasons, Koning expects whole loan sales to remain more attractive in the Netherlands, at least in the short to medium term - although SRTs will remain a crucial part of Dutch banks' risk transfer strategies. He notes: "If you want to transfer, say, 10% of mortgages on bank balance sheets, you need a combination of SRTs and whole loan sales."

However, uncertainty over the conversion of Basel 4 into the CRR seems to overshadow such statements. Dealing with it might involve a regulatory approach dubbed "proportionality".

"I think this is an approach that Dutch banks may call for," says Koning.

The term is slightly elusive and implementation will depend on the particularities of each EU economy. However, according to Martin Neisen, Basel 4 leader at PwC: "It could involve a more risk-sensitive standardised approach."

He explains: "You could do this through a more granular definition of exposure classes and the consideration of additional risk indicators. This would mean that the SA becomes slightly more complex, but also more proportional."

Sam Theodore, head of financial institutions ratings at Scope, adds: "All other banks in the US are regulated on a local basis. Similarly, Basel cannot be applied blindly in the EU."

He continues: "In the EU, for instance, you could imagine a loan-by-loan approach that takes into account the credit quality of particular asset classes and their importance to the local economy."

Indications that the EU may be heading in that direction are already in sight, as evidenced by the more risk-sensitive approach to FRTB, the Basel Committee's regulatory framework for market risk capital requirements. Furthermore, in November 2016 the EBA called for a proportional approach to the Basel proposals, following a request for advice by the European Commission.

More recently, the Commission confirmed that it will scrutinise the impact of Basel 4 for capital requirements before the proposals are amended into the CRR. It notes in a release: "The agreement will now be subject to a thorough Commission consultation and impact assessment to evaluate the consequences for the EU economy before it can be translated into EU law, taking into account the results of the impact assessment."

Regarding the transition period for Basel 4, banks will have quite some time to comply, as full implementation is only required from 2027 onwards. Nevertheless, Rabobank credit analysts expect that many banks will comply as soon as possible, since - as with previous Basel 3 standards - the market's focus will immediately shift towards the fully loaded metrics.

SP

ABS

Debut SLABS more of a 'distressed bond'

After a Brexit-related delay, the UK government has closed Income Contingent Student Loans 1 (2002-2006), its debut £3.94bn student loan securitisation (SCI 1 November and 29 March). The transaction has been hailed as a success by ABS analysts, but it may have deterred some traditional ABS investors and has led to suggestions that it's not a recognisable ABS product at all.

Rob Ford, partner and portfolio manager at Twenty Four Asset Management, says that the transaction signals the government's commitment to reducing its student loan book and to do this by harnessing securitisation. He expects that there will be one to two deals a year going forward and says that the government has done "remarkably well" to close their debut.

The transaction does feature, however, several departures from traditional securitisations - with the portfolio being a major one. Ford says: "Typically, securitisations with a more seasoned portfolio are more attractive, but this transaction is almost the opposite... Given that the portfolio comprises debt of graduates from 2002-2006, it is likely that many of the remainder of the obligors at this stage are those that are unlikely to fully repay their student loans or ever reach the 17k threshold needed before they trigger repayments."

Another element that may give an ABS investor reason to pause is the way the senior notes are tied to 12-month Libor - something that deterred Ford. "We normally invest across a range of ABS all the way down the capital structure, but a few things made this deal more difficult for us. One is that the A1s are tied to 12-month Libor, so will reset once a year. This opens us up to much more interest rate risk than a normal three-month floating rate ABS bond, which is exacerbated with the threat of further rate rises from the BoE in the future," he comments.

As a new transaction, it also lacks the liquidity that ABS investors are typically drawn to. Ford comments that, without being able to trade the notes on the secondary market easily, he has to look at it from a relative value perspective compared to other asset classes. In this case, he says, other asset classes win out, such as those with longer performance history.

While the deal may not suit the usual ABS investor, Ford says that £811m class A1 notes may appeal to bank treasuries, as they offer a higher rate than the one-year CDs these firms often issue to fund and hedge their investments. He adds that the £697m class A2s and £121m class Bs appeal largely to pension and insurance firms, where the longer average WALs of 11.5 years and 12.5 years respectively match the long-dated liabilities that these firms typically have and offer the additional benefit of being eligible under Solvency 2 for matching adjustment purposes.

The unrated class X notes are a slightly different story, however, where the significant extra risk involved suits firms like hedge funds and private equity firms. Ford explains: "The X notes are the first loss class and have likely been bought up by hedge fund and private equity firms that are taking on a lot of risk in the hope of a big return. Everyone that doesn't pay will go in the X tranche."

He continues: "There was a big discount - buying the £1.9bn tranche for less than £200m - mainly because they expect to see all the losses. After 25 years, the student loan debt is written off, with any losses flowing through to the X notes - although they may get some principal back earlier than that through the payment waterfall."

Rabobank credit analysts also comment that all of the notes priced at a discount to par and there was solid investor demand. The class A1s (rated single-A by S&P and Fitch) offer a coupon of 12-month Libor plus 135bp at a price of 99.03, while the A2s (also rated single-A from S&P and Fitch) have a fixed rate coupon of UK Treasuries plus 200bp and a price of 93.123. The analysts comment that demand for these notes was "generally good", with orders of around £900m to £1bn of these notes.

The class B tranche is rated triple-B and offers a coupon of LPI plus 300bp (DM), while the £1.919m unrated X notes were priced at 8.5c. There was around £5bn in demand for these notes.

Ford suggests that later deals will likely comprise the 2007-2010/2011 cohort, possibly with a higher price - due to a younger obligor base - and so are likely to be repaid more quickly. He adds that another deal will likely come around the March or April mark, as that is when the loans reset. He foresees the transactions getting smaller as further ABS are issued, although structurally he doesn't expect any major changes.

While the transaction may have been heavily subscribed, Ford says overall it wasn't for him, particularly in terms of the level of risk that is being taken on. He concludes. "As a more straightforward asset manager, however, and ABS investor, this isn't...what we do. We don't like to gamble on things with less surety on getting our money back. In many ways, the deal is more like a distressed bond than an ABS."

RB

Structured Finance

Directive to reform NPL landscape

The EBA has this week published further draft technical standards and guidelines relating to the updated payment services directive - PSD2 - which comes into effect next month. PSD2 will significantly affect the volume and management of European NPLs.

The EBA's latest final draft technical standards cover both the future EBA register under PSD2 and central contact points under the directive. This week the EBA also published final guidelines on security measures under PSD2, building on similar publications in the preceding weeks.

The burst of activity is in advance of the January 2018 deadline for market participants to comply with the directive, which was originally approved by the European Parliament and Council toward the end of 2015. The directive builds upon the first payment services directive, which was introduced in 2007 and provided the legal foundation for a single market for payments in the EU.

"PSD2 will harmonise payment systems and is part of regulators' efforts to increase competition. The field is currently dominated by the big banks so PSD2 goes some way to ending that stranglehold and making the market more accessible," says Harish Kumar, md, Alvarez & Marsal.

He continues: "This will be particularly important for default rates and management of NPLs. The increased transparency will improve both underwriting and the management of distressed loans."

PSD2 will have a significant effect on the treatment of NPLs. It should improve risk assessment, improve underwriting, increase the number of market participants and even lower borrowing costs.

One of the main impacts will be increasing market accessibility. Currently the big banks are at a distinct advantage by virtue of the scope of data they have on consumers, but PSD2 will - with a borrower's consent - make transaction information visible to other lenders, who can then build up a much clearer picture.

"That means a lender can see how much cash a borrower has incoming and how much is being spent and where. That would allow loans to be far more efficiently and effectively underwritten, for example. It will also attract new players in the market increasing options for consumers," says Kumar.

Better underwriting thanks to reduced information asymmetry is only one aspect, however. PSD2 is also significant for NPLs because of its application post-default.

"The transparency brought by PSD2 will help lenders to make informed decisions on debt restructuring strategies, because they no longer have to rely on the limited information provided by the borrower themselves or the credit bureaus, and the accurate view of cashflows means restructuring can be done far more effectively. It also helps to design effective arrears management processes and procedures," Kumar notes.

The directive also opens the door for new products. For example, a lender that can access your accounts might be able to advise you on where you are paying too much for your credit. A mortgage provider might be able to offer a better deal.

While the big banks are likely to lose business, their competitors and consumers both stand to gain substantially. However, that is not to say that there are no challenges. As well as technical issues to iron out, the need to balance transparency with privacy will also be paramount.

Kumar says: "While PSD2 looks great on paper, there are going to be challenges. In May 2018 the EU's General Data Protection Regulation will come into force. Firms will have to strike a balance between data protection and open banking."

One element of this balance with transparency appears to have been resolved, as the European Commission published a final regulatory technical standard a couple of weeks ago confirming that screen scraping will not be allowed. The Commission had earlier refused to ban screen scraping, arguing that it would disadvantage third-party providers, but this has had to be weighed against the risk of those providers accessing data above and beyond what a borrower has consented to.

This regulatory technical standard is expected to become applicable around September 2019. It must first be agreed by the European Council and Parliament.

JL

RMBS

Debut Russian RMBS 'just the start'

VTB Capital has closed an inaugural RMBS under the Russian government-backed AHML programme, which the bank suggests could be one of many securitisations to come, across a range of asset classes. The RUB48.2bn transaction is a securitisation of the mortgage portfolio of the bank's retail arm, VTB24, is secured by privately-owned apartments and features a single-tranche pass-through structure, offering a fixed annual coupon of 11.5%.

Andrey Suchkov, head of securitisation at VTB Capital, comments that the RMBS provides a range of benefits to investors. "The transaction is backed by a government guarantee and so they have a quasi-government status, which is a positive for investors. Investors also get the benefit of preferential tax treatment and low regulatory capital requirements," he comments.

While the transaction is guaranteed by the Russian government, Suckhov says that the securities will be sold to a range of private investors. These will be mainly non-government pension funds, insurance firms and banks.

All the investors in the deal are Russia-based, largely because the transaction is issued in rubles. Suchkov says that to attract foreign investors, the deal would have required the implementation of a cross-currency swap, which would have eroded the profitability of the transaction.

Aiming the transaction squarely at domestic investors has, however, raised additional challenges. Suchkov comments: "A significant amount of investor education around the structure was needed, particularly as straightforward products are more widespread in the Russian market than complex, structured ones. For example, there were investor concerns about prepayment risk, which we needed to educate investors on."

Additionally, Suchkov explains that investors demand liquidity in the domestic RMBS market - which is lacking. As such, he says that VTB has the challenge of establishing a secondary market, which will only come from more primary issuance.

Suchkov adds: "We would like to structure around RUB150bn in the year ahead in terms of both private and AHML-backed issuance, but to do this, we need to establish a proper market. That will be quite a challenge in the year ahead."

This latest deal is unusual for an RMBS, says Suchkov, as it features only a single tranche. However, this is because investor protection is provided by the government guarantee. While it also has an interest rate swap, Suchkov says that he foresees later deals featuring structural enhancements.

In general, VTB Group has its hopes set on buoyant issuance for the future, not just in RMBS. Suchkov concludes: "We are hoping to expand the asset classes we securitise and are looking at securitising car loans and consumer loans next year. Car loans, in particular, is something we're working on and where there could be significant demand in Russia. These deals will be offered domestically, which will be a challenge, as they aren't used to auto and consumer ABS and it is another case of market-making and investor education."

RB

Structured Finance

NPL expansion accelerates

Banca IFIS has closed two disposals totalling €336m of retail and corporate non-performing loans. The transactions coincide with a significant expansion of the bank's NPL division, which is currently shifting its focus to the salary-backed loan market.

Through 2017 Banca IFIS raised the target for NPL acquisitions to €5bn. This follows the implementation of its 2017-2019 strategic plan - approved in March 2017- though which it intends to purchase €10bn-€15bn of NPLs during the period.

A crucial factor to the expansion of the NPL division has been the bank's recovery machine. Laura Gasparini, head of NPL transactions at Banca IFIS, observes: "We have a peculiar model for transforming NPLs into RPLs. We try to understand how many retail debtors we have, ticket size and percentage of SME loans with personal guarantees, among other factors."

The shift to the salary-backed loan market, on the other hand, offers opportunities to the bank's retail customers and follows the acquisition of Cap.Ital.Fin, a company specialising in salary-backed loans and payment delegations. "Salary-backed loans are an extrajudicial approach, whereby we provide the debtor with a voluntary loan in exchange for a fifth of his or her salary," says Gasparini.

The first of the bank's latest transactions, completed with Intesa Sanpaolo, comprises a portfolio of unsecured receivables from leasing contracts - without the asset guarantee - totalling 2,400 positions for a nominal value of approximately €85m. The second portfolio - which was bought in the secondary market from an Italian company active in the NPL space - comprises 21,000 positions for a nominal value of approximately €251m, of which 75% are banking loans, 15% are consumer loans and the rest are auto loans.

The transactions, however, had their own challenges. In particular, the leasing receivables are sold without the underlying asset - yet the underlyings can be found and need to be managed. Furthermore, for secondary trades, there is insufficient information provided for valuation purposes.

Looking forward, Gasparini notes: "We see a crowded market in large deals sold in the primary market and a less crowded market in small deals. The positioning of the firm depends on where you want to stay and create value through the NPL recovery value chain and transformation. We see opportunities in the primary market for small deals and in the secondary market as a whole."

The focus on the secondary market is explained by Banca IFIS's track record and knowledge of originators, the latter enabling the bank to price secondary deals more accurately. She adds: "We will also focus more on the unsecured space, rather than the secured. Our value proposition is on transforming NPLs into RPLs, compared to the secured space, where you just have to wait for the asset to be sold."

SP

Structured Finance

SCI Start the Week - 11 December

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

Pipeline
A mixed bag of securitisations remained in the pipeline by the end of last week. ABS and CMBS accounted for the majority of deals, with a handful of CLOs and RMBS also marketing.

The newly announced ABS transactions comprised: US$572.22m Conn's Receivables Funding Series 2017-B, US$265.8m Consumer Loan Underlying Bond Credit Trust 2017-NP2, US$74m Continental Credit Card ABS 2017-1 and US$1.5bn Nissan Auto Receivables 2017-C Owner Trust. The CMBS are: US$240m CSMC Trust 2017-PFHP, US$160m Diamond Issuer Secured Cellular Site Revenue Notes Series 2017-1, US$942.737m MSCI Trust 2017-HR² and US$744.8m WFCM 2017-C42.

The RMBS entering the pipeline last week include US$419.55m Finance of America Structured Securities Trust 2017-HB1, €172m SRF 2017-2 and US$365m Tricon American Homes 2017-SFR², while the CLOs are US$480m Arbor Realty Commercial Real Estate Notes 2017-FL3, US$407.8m BlueMountain Fuji US CLO III and US$1bn BXMT 2017-FL1.

Priced
ABS also accounted for the majority of pricings last week, followed by CLOs. A couple of Australian RMBS and a CMBS also printed.

Of the ABS new issues, a handful were auto deals: US$200m American Credit Acceptance Receivables Trust 2017-4, US$500m Avis Budget Rental Car Funding Series 2017-2, US$126.32m CarNow Auto Receivables Trust 2017-1, CNY3.5bn Driver China Eight and US$575m OneMain Direct Auto Receivables Trust 2017-2. The remainder were student loan transactions (£1.7bn Income Contingent Student Loans 1 (2002-2006), US$539.4m Nelnet Student Loan Trust 2017-3 and US$425m SoFi Professional Loan Program 2017-F), consumer loan deals (US$270m Foundation Finance Trust 2017-1 and US$275m Mariner Finance Issuance Trust 2017-B) and esoteric deals (US$131m Tesla 2017-2 and US$1.025bn Wendy's Funding Series 2018-1).

Of the CLO prints, the majority were refinancings: US$539.66m Babson CLO 2013-1, US$449.46m Dryden 37 Senior Loan Fund, US$612.3m Golub Capital Partners CLO 21(M)-R, US$400m Golub Capital Partners CLO 28(M)-R and US$432.16m KVK CLO 2013-1. A trio of new issues also priced: US$399.9m MMCF CLO 2017-1, €413.9m OZLME III and US$409m Wellfleet CLO 2017-3.

The A$400m Pepper I-Prime 2017-3 and A$750m Progress 2017-2 Trust RMBS, as well as the A$300m Think Tank Series 2017-1 CMBS rounded out last week's pricings.

Editor's picks
New investment era embedded: It has been a banner year for US CLOs, with new issue volumes already topping US$100bn, plus resets and refinancings accounting for a further US$140bn. Not only have risk retention requirements embedded successfully, despite initial concerns regarding their implementation, they have also created new investment opportunities...
Confidence boost for synthetic NPL deals: A recent Ashurst survey notes that securitisation may prove to be the most prevalent method of non-performing loan resolution in Greece in the early years of the market, given the established infrastructure for this type of transaction. Indeed, NPL investors rank Greece in their top-two southern European target investment countries for the next 12 months...
Innovative financial guarantee printed: Raiffeisen's €1.2bn ROOF Slovakia 2017, which is believed to be the first synthetic securitisation of Slovak assets (SCI 1 December), strengthens the bank's common equity tier 1 ratio (fully loaded) by around 12bp at the group level. The bank plans to be a programmatic issuer of risk transfer trades via its 'ROOF' securitisation platform...
Auto ABS spread distortion eyed: European auto ABS bonds are trading at similar spreads to unsecured corporate debt issued by the same parent company, indicating a distortion of risk in the market. The trend may eventually be broken, however, as the ECB slows its ABS purchasing programme and regulatory changes taking affect next year broaden the European investor base for auto ABS...

Deal news
• TCG BDC, formerly Carlyle GMS Finance, has teamed up with Credit Partners USA, a subsidiary of Canadian pension firm PSP, in a US$400m CLO. MMCF CLO 2017-1 is a static middle-market CLO and the first to be serviced by Middle Market Credit Fund (MMCF).
• Blackstone Mortgage Trust, a Blackstone-owned REIT, is marketing an inaugural US$1bn CRE CLO. Dubbed BXMT 2017-FL1, the transaction is the largest CRE CLO since the crisis and will initially be backed by 31 equally-sized non-controlling interests that are collateralised by 71 properties.

Capital Relief Trades

Risk transfer round-up - 15 December

Barclays has returned to the capital relief trade market with another Colonnade transaction. Colonnade UK 2017-1 financial guarantee references a £2.6bn corporate portfolio. Under the senior guarantee, Barclays will buy protection for both principal and interest, which is a typical feature of Colonnade transactions (SCI 8 September).

The deal follows rumours of another corporate risk transfer transaction from Italian lender UBI Banca. Meanwhile, Deutsche Bank is said to be readying another CRAFT trade, dubbed CRAFT 2017-2. The German lender's transaction is expected to close by year-end.

The last CRAFT deal was closed in the spring. The €371m CLN paid Libor plus 10.75% (see SCI's capital relief trades database).

CMBS

Debussy trigger breach eyed

DBRS has downgraded its rating on the Debussy DTC class A notes to double-B (low) from triple-B (low) and placed the deal under review with negative implications. The move reflects the imminent decrease in credit characteristics of the UK CMBS, due to Toys 'R' Us's (TRU) proposed company voluntary arrangement (CVA), which could result in the transaction suffering an ICR trigger breach or interest payment default next year.

The £263.2m Debussy DTC is backed by a single interest-only loan that is secured by 30 TRU mega retail stores and one distribution centre, which are mainly located in secondary and tertiary markets in the UK. All properties operate under individual triple-net leases to Toys 'R' Us, with leases expiring in February 2036 or February 2037. TRU is currently paying above-market rent, with an annual rental rate increase based on the RPI, subject to a 1% floor and a 2.5% cap.

The loan matures in July 2020: there is no extension option, but the maturity date could be potentially extended to July 2023, two years before note maturity. The interest cover ratio currently stands at 138%.

The CVA proposal was announced on 4 December and TRU's creditors are scheduled to vote on it on 21 December. If agreed by at least 75% of its debtors, the CVA will enable TRU UK to restructure its finances and reposition its real estate portfolio. If more than half of its debtors vote against the CVA and no agreement is reached, TRU could be forced to file for bankruptcy in the UK, which is highly likely to result in store closures.

TRU currently operates 88 permanent and 21 temporary stores in the UK. The CVA proposal splits the property portfolio into five categories based on store profitability and size.

Under the proposal, Category 1 stores are performing well and do not require any modifications. Category 2 and 3 stores require downsizing: there would be seven months to agree the terms of a downsize, after which a 15% reduction in rent will be proposed as an alternative.

Additionally, the proposal entails immediate rent reductions for all unprofitable stores. Category 3 and 4 stores would have immediate rent reductions of 35%.

As Category 5 stores have been deemed to have no future viability, following an immediate rent reduction of 50%, store closures would begin in spring 2018.

The proposal also includes lease termination rights, with a 45-day notice period for properties in Categories 2 to 5, and will change the rent collection cycle for all property categories from quarterly in advance to monthly.

Of the 31 securitised assets in the Debussy transaction, seven (representing 13.3% of total annual rental income) fall into Category 1, while seven (16.6%) fall into Category 5, according to DBRS. The remaining 17 assets require a mix of downsizing and rent reductions.

The latest reported market value and vacant possession value of the portfolio are £359.4m and £196.4m respectively, based on the assumption that the assets would be let at current rent or market rent. Should the CVA proposal be implemented, TRU would pay below the currently reported market rent, which DBRS suggests may result in a possible ICR trigger breach and/or interest payment default during 2018 - thereby causing the loan to be transferred to the special servicer.

The deal features an ICR covenant whereby the borrower must ensure that rental income is at least 1.15 times debt service.

CBRE valued the property portfolio at £194.5m in 2013 on the basis of vacant possession. As such, Bank of America Merrill Lynch European securitisation analysts believe this could reflect the downside scenario for noteholders, if the CVA is rejected and the business put into administration. On this basis, they estimate that only the class A notes are covered with a loan-to-vacant-possession-value of 94.7%, while the class B and C notes could be exposed to principal shortfalls of roughly 80% and 100% respectively.

The BAML analysts also suggest that a new, lower property valuation based on the terms of the CVA could trigger a control valuation event. They calculate that if the valuation were to decline by a third, the controlling class would transfer to the class B notes.

DBRS notes that the transaction's £3m reserve account could be used to pay interest due on the securitised loan, if the change from a quarterly to a monthly collection cycle means rental income is insufficient to pay interest on the loan. Similarly, the £19.3m cash in the borrower security reserve account could be used to pay interest due on the class A notes, mitigating the risk of a note payment default.

Overall, the BAML analysts question the fact that the CVA has been filed on the part of the OpCo Toys 'R' Us, whereas the creditors of the OpCo are largely the PropCo - which is Toys 'R' Us Properties (UK). "Given that the OpCo and the PropCo ultimately have the same parent (Toys R Us Inc), in our understanding, is there potentially a net benefit from shifting value away from the PropCo to the OpCo at the expense of the PropCo's creditors?" they ask.

Based on the assessment that Debussy could continue to perform in the event of a TRU insolvency by reletting the properties to new tenants at significantly reduced market rental levels, it is unclear whether the tenant's proposed CVA would be less deleterious for the CMBS than reletting the properties. Further, in an insolvency process, a court appointed administrator would be accountable to maximise the value of the estate for all creditors.

"We think this has the benefit of assuring alignment of interests with creditors. Trading could continue out of the profitable stores, while unprofitable stores could be closed - which is not dissimilar to the OpCo's CVA proposal, in our view," the analysts observe.

Ahead of the CVA vote, separate Debussy class A, class B and class C noteholder meetings have been convened for 18 December. The meetings are being held to consider/pass an extraordinary resolution to amend the notice period required to convene a noteholder meeting and to reduce the percentage of noteholders required to sign an effective written extraordinary resolution. A group of noteholders holding over 80% of the principal amount outstanding of the notes contacted the issuer to request that amendments be made to enable directions to be given to the issuer, the note trustee and the servicer sooner than is currently permitted under the transaction documents.

S&P - the other rating agency on the deal - lowered its single-A minus rating on the Debussy class A notes to triple-B in July, following a review of the transaction, but is yet to take any action related to the CVA. DBRS confirmed its rating on the deal in July, but assigned a negative trend to the class A notes. It says it intends to review the transaction again once the outcome of the CVA proposal is more visible.

CS

RMBS

Freddie innovation continues

Freddie Mac continues to expand its credit risk transfer remit, pricing two innovative securitisations last week. The first deal references relief refinance loans, while the second is backed by affordable single-family rental (SFR) properties.

Dubbed FRESR 2017-SR01, Freddie Mac's inaugural US$161.12m SFR transaction is backed by 59 loans originated primarily by CoreVest American Finance (see SCI's primary issuance database). Of the 2,355 properties securing the deal, 94% are affordable to families earning less than 100% of area median income (AMI). In addition, 71% are affordable to low-income families earning less than 80% AMI and more than 12% affordable to families earning 50% of AMI or less.

The loans were not underwritten by Freddie Mac at the time of origination, but meet its current underwriting standards. "Single-family rentals provide an important alternative for the millions of families looking for options beyond rental apartments, who may not have the means to - or choose not to - purchase a home. We are using our multifamily financing capability to help meet this critical need and ensure that as families grow, their homes can grow with them," comments David Leopold, vp of targeted affordable sales and investments at Freddie Mac Multifamily.

The transaction comprises US$20.27m 3.06-year class A1 notes (which priced at swaps plus 23bp), US$93.57m 4.62-year class A2 notes (33bp), US$47.27m 9.36-year class A3s (64bp) and US$161.11m 5.81-year class XAs (which weren't offered). The certificates are backed by corresponding classes issued by CoreVest American Finance 2017-2 Trust and guaranteed by Freddie Mac (representing approximately 80% of the US$202m AFL 2017-2 deal).

Co-lead managers and joint bookrunners on the deal were Morgan Stanley and Wells Fargo, while Drexel Hamilton and Bank of America Merrill Lynch were co-managers. The certificates are expected to settle on 18 December.

Freddie Mac also priced its first STACR deal to reference loans that meet the Home Affordable Refinance Program (HARP) eligibility criteria, with LTV ratios of between 60% and 150% that were refinanced under the GSE's relief refinance programme. Additionally, the transaction introduces discount and interest-only notes to its credit risk transfer platform.

The STACR 2017-HRP1 deal - which has a 25-year legal final maturity - is aimed at investors that are seeking a longer maturity and seasoned collateral. The pool has an unpaid principal balance of approximately US$15.04bn, consisting of 82,552 fixed-rate single-family mortgages with an original term of 241 to 360 months, funded by Freddie Mac between 1 April 2009 and 31 December 2011. It has a weighted average credit score of 741 and roughly 95% of the loans have been current for the prior 36 months.

Fitch notes that the borrowers have weathered severe economic stress with minimal delinquencies, showing a strong willingness and ability to pay. The current mark-to-market CLTV of the borrowers has improved to 82% from 98% at the time of the relief refinance loan.

Rated by Fitch and Morningstar, the transaction comprises US$50m B/BB- rated class M2 notes (which printed at par, with a coupon of one-month Libor plus 245bp), US$50m B/BB- class M2Ds (printed at 96.29, with a 125bp coupon), US$75m unrated class B1s (par, with a 460bp coupon), US$75m unrated class B1Ds (87.26, with a 250bp coupon) and US$25m unrated class B2Ds (45.86, with a 300bp coupon). A B1I interest-only exchangeable note was also offered.

As loans liquidate or other credit events occur, the outstanding balance of the notes will be reduced by the actual loan's loss severity percentage related to those credit events.

Freddie Mac retained in their entirety the AH and M1H reference tranches, as well as a portion of the credit risk in the M2, B1 and B2 tranches. Credit Suisse and Bank of America Merrill Lynch are co-lead managers and joint bookrunners.

This latest iteration of the STACR series follows the introduction in October of the STACR SPI structure, which offers investors a cash format via participating interests (SCI 17 October).

CS

Structured Finance

Job swaps round-up - 15 December

North America

Angelo, Gordon has promoted Josh Baumgarten and Adam Schwartz to the roles of co-cio, active 1 January, 2018. Baumgarten is currently deputy cio at the firm while Schwartz is currently head of the company's real estate group in the US and Europe. Michael Gordon will continue in his role of ceo and co-cio.

Lee Shaiman has been hired as executive director of the LSTA beginning 2018. Shaiman has over 30 years industry experience having previously worked in senior roles at ArrowMark Partners, GSO Capital Partners/Blackstone Group, UBS Warburg, and Dillon, Read & Co. His experience ranges from serving as the lead portfolio manager and a member of his previous firms' investment committees to forming high yield capital markets and syndicate functions to running corporate finance and high yield research functions.

OnDeck has hired Kelly Merrill as svp for finance and Erich Wust as svp for portfolio management. Merrill was previously cfo of GE Real Estate and she will be based in OnDeck's New York office and Wust was previously at SunTrust Bank, most recently as svp of wholesale modelling and analytics. He will be based in Arlington, Virginia.

Europe

Fulcrum Asset Management has recruited Matthew Roberts as a partner, responsible for the creation of a new alternatives group that will invest in real assets and credit. He joins from Willis Towers Watson, where he was a portfolio manager for the Towers Watson Partners Fund and related strategies. Prior to this, he ran its multi-asset and multi-strategy hedge fund research teams.

NN Investment Partners has hired Eric Verret as head of corporate loans to its alternative credit team. He was recently business leader for a division of GE Capital in London where he headed a team to originate and structure loans to finance European loan portfolio acquisitions by financial sponsors. NN IP has also appointed two new independent external members to its Alternative Credit Investment Committee, Uwe Seedorf and Hein Brand. Seedorf has been chief credit risk officer at GE Capital and held a number of senior roles at the firm since 2001, while Brand holds a number of board and advisory roles but was most recently ceo of ING real estate.

Validus Holdings has made three leadership appointments designed to enhance the development and execution of its global strategy: Kean Driscoll becomes global head of reinsurance (in addition to his roles as president of Validus Holdings and ceo of Validus Reinsurance); Peter Bilsby becomes global head of insurance (in addition to his role as ceo of Talbot Group); and Lixin Zeng becomes global head of the firm's asset management business (in addition to his role as ceo of AlphaCat Managers). These appointments reflect an organisational change that results in three new reportable segments for the firm: reinsurance, insurance and asset management. Within the insurance segment, Bob Livingston has also been named chairman of Western World Insurance Group (in addition to his role as ceo), while Jonathan Ritz becomes president of Western World Insurance Group (in addition to his role as ceo of Validus Specialty).

ILS

Craig Wenzel has joined Gallatin Point Capital as md. He was most recently md and head of Alternative Capital for XL Catlin. Wenzel is replaced at XL Catlin by Daniel Brookman who now takes up the role of md and head of alternative capital at the firm, promoted from svp.

AOFM auction results

The AOFM sold A$439.24m in amortised face value of bonds at its latest RMBS auction on 14 December. Bids at over par were accepted on its holdings of the Apollo 2009-1 A3, Apollo 2011-1 A2, REDS 2010-1 A, REDS 2010-2 A2 and Firstmac 2-2011 A3 notes.

Attorney promotions

Cadwalader, Wickersham & Taft has promoted a number of securitisation attorneys to its partnership, effective from 1 January 2018. They comprise: Kahn Hobbs, who is based in Charlotte and primarily focuses on CMBS and resecuritisations; Claire Suzanne Puddicombe, who is based in London and focuses on CLO and financing transactions; Greg Prindle, who is based in New York and focuses primarily on representing investment banks and other financial institutions in the area of structured finance; Jason Schwartz, who is based in Washington, DC and focuses on tax issues relating to CLOs and other financings; Nathan Spanheimer, who is based in Charlotte and represents investment banks and other institutional lenders in secured commercial lending transactions and CLOs. The firm has also promoted Gary Schuler - who is based in Charlotte and advises clients primarily on MBS - to counsel.

CLO manager acquisition

Hayfin Capital Management is set to acquire Kingsland Capital Management, with the aim of establishing a footprint in the US CLO market and further broadening its syndicated loan and high yield credit offering. The purchase increases Hayfin's assets under management to around €10bn through the addition of the circa US$1bn currently managed by Kingsland in CLO format. Headquartered in New York, Kingsland was founded in 2005 by Joyce DeLucca and has since issued over US$3bn of CLOs across seven vehicles. Kingsland will operate as a wholly owned subsidiary of Hayfin, with its team of eight investment professionals continuing to manage its active CLOs. Hayfin will provide the capital Kingsland requires to satisfy risk retention regulations and develop global client solutions in the liquid sub-investment grade credit space by combining the skillsets of its US and European teams.

Direct Lending Launch

Blackstone/GSO Capital Partners has launched a direct lending business and, concurrently, GSO will be concluding its investment sub-advisory relationship with FS Investments' funds effective 9 April, 2018. During the interim, GSO will continue to provide investment services to the FS Funds and in consideration of such services and GSO's partnership with FS Investments in the FS Funds' business over the last decade, GSO will receive payments totaling US$640m from FS Investments, substantially all of which are expected to be paid in 2018. Blackstone anticipates utilising those cash proceeds for the benefit of its shareholders and will provide additional details on those actions early next year. The US$640m in cash proceeds represent approximately three years of revenues from the FS Funds. In addition, GSO expects to begin its new direct lending business and generate additional revenue in 2018. GSO anticipates that its internal direct lending business will fully replace, and ultimately exceed, the current revenues and earnings to Blackstone shareholders from the FS Funds.

FINO disposal

UniCredit has agreed further steps to sell down its position in the FINO portfolio to below 20%. Of the original €17.7bn gross book value of the portfolio, the Fortress vehicles (Fino 1 Securitisation and Fino 2 Securitisation) totalled €14.4bn, while the PIMCO vehicle (ONIF) totalled €3.3bn (with UniCredit retaining a 49.9% interest in the note issuances). Following a competitive process, Generali Group has now purchased 30% (€990m GBV) of the ONIF notes held by UniCredit. In addition, UniCredit has entered into an agreement with funds managed by King Street Capital Management for the disposal of a portion of its retained exposure in the class B, C and D notes issued by Fino 1 Securitisation and Fino 2 Securitisation. The bank has notified the ECB of its intention to recognise significant risk transfer on the three securitisations and expects a net positive impact on CET1 of 10bp.

NPL templates

The EBA has published data templates that are designed to create the foundation for non-performing loan transactions, including secondary market initiatives, across the EU by providing a common data set for screening, financial due diligence and valuation of NPL transactions. The templates are built on existing reporting and consist of loan-by-loan data, including information on counterparties, the collateral provided and national specificities. Adoption of the templates is expected to widen the investor base, lower entry barriers to potential investors, improve data quality and availability, and support price discovery.

OTC agreement

The Basel Committee, FSB, CPMI and IOSCO have agreed to evaluate the effects of the interaction of post-crisis regulatory reforms on incentives to centrally clear OTC derivatives. Over 2017-2018 a joint derivatives assessment team (DAT) is undertaking a review of the incentives for central clearing arising from the interaction of a number of reforms. Additionally, the Basel Committee is also reviewing the impact of the Basel 3 leverage ratio on banks' provision of clearing services. The Basel Committee and DAT have prepared qualitative surveys and will use responses to those surveys, as well as other input analyses, to evaluate the effects of reforms on incentives to centrally clear OTC derivatives.