Contents

Structured Finance

Broad-based recovery underlined

The US recorded US$478bn in new issue securitisation volume through November, marking a 28% increase from the US$372bn recorded through end-2016, according to S&P figures. The big volume stories for the US are how the CLO (SCI 8 December) and CMBS (SCI 13 December) sectors successfully implemented risk retention funding.

Residential mortgage originators also started to address the risk retention puzzle and increased their volumes by over US$30bn. Growth in the non-agency RMBS market occurred not only in traditional sectors, but most notably in non-qualified mortgage issuance. So far this year, S&P reports roughly US$65bn of issuance broken out between traditional (63%), credit risk-sharing/credit risk transfer (30%), single-family rental (5%) and servicer advance (2%) deals.

Meanwhile, the US$47bn in US credit card ABS volume seen so far this year represents a significant increase over previous years and includes most issuers with an existing credit card securitisation programme. S&P notes that volume was driven by a combination of US$50bn in maturing loans, lower spreads, higher liquidity, heightened investor demand and a willingness to keep this funding channel open.

Commercial ABS issuance volume also increased for 2017, totalling approximately US$32bn, up from about US$24bn the prior year. Equipment and floorplan issuance make up about 77% of the total (split about evenly between the two segments), and fleet lease represents the remaining 23%.

"Fleet lease volume was up primarily because of legacy GE Capital fleet assets - which had previously not been financed through ABS - entering the market under Element Financial's fleet lease platform," S&P observes.

In contrast, student loan ABS maintained a consistent issuance level of US$14bn, with stable asset performance through November. Navient Solutions again led volumes, with seven transactions totalling US$6.4bn (see SCI's primary issuance database). However, student loan refinance companies accounted for 12 deals for US$5bn - compared with US$3.8bn issued in 2016 - as they grew their deal sizes (SCI 10 August).

Away from the US, the European securitisation market is set to post modest growth for the fourth consecutive year, coming in at around €89bn in placed volumes. In 2017, issuance was again boosted by flows of legacy assets originated by now-defunct lenders, traded as whole loan portfolios and eventually funded through securitisation by specialist asset managers.

Non-bank sponsor activity made the CLO and UK RMBS sectors the bright spots for European securitisation issuance this year. UK RMBS reached a six-year high to comprise more than 30% of the market, while European CLO volumes were up by about 20% year-over-year to €19bn at end-November (refinancings and resets account for a further €23bn).

S&P cites the first Spanish credit card ABS (Wizink Master Credit Cards 2017-01), a UK student loan transaction (Income Contingent Student Loans 1 (2002-2006) and a revival of Irish and Italian RMBS as other highlights for the region. "These small-scale developments show that some originators are trying to use securitisation technology in new markets, but their volumes did not compensate for a sharp decline in the usually stalwart German auto ABS sector," the agency comments. "Despite taking centre stage in the regulatory and policy debate over the past two years, there still weren't many transactions backed by loans to SMEs, and securitisation only played a limited role in helping fund the divestment of southern European banks' non-performing loan portfolios."

Among other international ABS markets, Chinese securitisation continues to show significant growth (SCI 28 November), with volume expected to be up by 72% annually for full-year 2017. Additionally, Australia has seen new issue volumes more than double over the first 11 months of the year, compared with the same period in 2016. Canada and Latin America displayed moderate growth this year, while Japan is poised to experience a modest decline in issuance of 10%.

S&P forecasts that total securitisation volumes in the US will hit US$505bn-US$535bn next year, while the Canadian, European, Chinese, Japanese, Australian and Latin American markets will respectively post totals of US$18bn, US$95bn-US$105bn, US$220bn, US$47bn, US$40bn and US$19bn-US$25bn.

CS

Capital Relief Trades

IFRS 9 volatility persists

The Bank of England did not disclose any data on the capital impact of IFRS 9, following the recent PRA stress tests, as had initially been expected - although subsequent statements by the central bank signal no overall impact for stress-based capital requirements. However, sources in the capital relief trade market note that the need for managing IFRS 9 volatility remains.

According to the Bank of England's financial stability report (published concurrently with the stress tests), although the timing of the losses will come forward due to IFRS 9, stress scenario severity will not be adjusted as a result and the new accounting standards will not cause an increase in capital requirements. Yet the central bank confirmed that it will take steps to ensure that the interaction of IFRS 9 accounting with its annual stress test does not result in a de facto increase in capital requirements.

"The fact that the bank didn't disclose any data on stress test outcomes under IFRS 9 might imply that the impacts were somewhat higher than anticipated," says a structurer at a large European bank. "The planned timing shows it is yet to determine how IFRS 9, stress testing and the regulatory capital framework should interact to avoid increases in stress-based capital requirements."

IFRS 9 introduces a forward-looking view of credit quality, under which banks are required to recognise impairment provisions and corresponding impairment losses before the occurrence of a loss event. This is reflected in the standard's three credit stages, with stage two requiring banks to provide for lifetime expected credit losses when there is a significant decline in creditworthiness but a loss event has not yet occurred (SCI 23 June).

Nevertheless, despite expected amendments in PRA methodology, the need to manage IFRS 9 volatility remains. There is significant potential for IFRS 9-driven volatility in regulatory capital during the course of a normal economic cycle - which will not be addressed by changes to the stress testing framework - and the BIS has not yet addressed the fundamental question of how the regulatory capital framework will be adapted in the long term to take account of the expected loss provisioning framework under IFRS 9.

This raises the prospect of significant risk transfer trades that are able to hedge IFRS 9 volatility. Yet SRTs, as currently structured for RWA relief, may not necessarily work for the accounting standard. IFRS 9 provisions deal with expected losses, while regulatory capital addresses unexpected losses.

"Would you choose the asset you want to hedge for IFRS 9 purposes in an SRT or pick different assets? Significantly deteriorated assets under IFRS 9 would not normally be the most appropriate to go into an SRT," observes the structurer.

There are two main challenges for IFRS 9 synthetic securitisations. The first is creating a hedge for investors that is able to offset any increase in lifetime expected losses. The main impediment here lies in the definition of a credit event.

Unlike traditional synthetic securitisations, the trigger point for IFRS 9 transactions is a rise in provisioning after a loan has become impaired, rather than a typical credit event. Provisions increase when an asset moves from stage one to stage two, at which point lifetime loan-loss provisions must be made.

According to Azad Ali, partner at Fieldfisher: "Credit event payouts will have to be synchronised with IFRS 9 lifetime expected loss provisions, rather than incurred losses."

In particular, definitions of credit events might have to be adjusted, given that current definitions are driven by regulatory capital requirements rather than accounting principles. In this regard, the restructuring credit event would be most suited to capture IFRS 9 provisions. In substance, this would generally be aimed at a restructuring of the underlying obligation, involving forgiveness or postponement of principal, interest or fees that are likely to result in a diminished financial obligation.

Second, being forward-looking, IFRS 9 calculations are inherently more complex than current IRB calculations. Consequently, convincing an investor to rely on these internally modelled losses will be challenging.

The structurer comments that the second issue might be dealt with via a derivative swap solution to offset losses similar to an interest rate swap, although the difference with an interest rate swap is the fact that changes in economic value are recognised - as opposed to an IFRS 9 customised solution.

Other issues would have to be reflected in pricing. Ali notes: "Banks may overestimate provisions and provisioning increases means payouts by investors. Consequently, investors will have to pay attention to that and it must be reflected in pricing."

Regarding the cost of the protection, he states: "Banks are paying a lot to buy protection for the first loss piece. And if this cost is reflected in the P&L, this would dilute the benefits of synthetic securitisation."

In response to the implementation of IFRS 9 in January 2018, the EU has developed a transitional relief model for financial institutions, while the Basel Committee assesses the longer-term regulatory treatment of the new impairment model. Under the proposal, where IFRS 9 impairments cause an institution's CET 1 capital to drop, it will be allowed to add back in a portion of the impairments for a transitional period. The European Parliament has proposed the introduction of a transition period of up to five years beginning in 2018.

SP

Structured Finance

SCI Start the Week - 18 December

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

Pipeline
ABS additions to the pipeline finally dropped off last week, but RMBS, CMBS and CLOs continued to be added. The RMBS were US$165m Ajax Mortgage Loan Trust 2017-B, €900m HT Abanca RMBS II, US$883.8m JPMMT 2017-6 and Liberty Series 2017-4 Trust.

US$600m Atrium Hotel Portfolio Trust 2017-ATRM, US$1.395bn FREMF 2017-K729, US$560m GSMSC 2017-FARM, US$891m UBS 2017-C7, and US$300m WFCM Trust 2017-SMP accounted for the CMBS. The CLOs were US$509.95m Carlyle US CLO 2017-5, US$413m Elevation CLO 2017-8, US$610m Fortress Credit BSL V and the €375m Oak Hill European Credit Partners IV refi.

Pricings
The clear-out continued, as several deals departed the pipeline. In total there were seven ABS prints as well as five RMBS, three CMBS and eight CLOs.

The ABS were: CNY4bn Bavarian Sky China 2017-3 Trust; US$572.22m Conn's Receivables Funding Series 2017-B; US$150m Consumer Loan Underlying Bond Credit Trust 2017-NP2; US$50m Continental Credit Card ABS 2017-1; US$419.55m Finance of America Structured Securities Trust 2017-HB1; US$722.5m KDAC Aviation Finance; and US$1.5bn Nissan Auto Receivables 2017-C Owner Trust.

€6.025bn Brera Sec 2017, €2.55bn Caixabank RMBS 3, €172m SRF 2017-2, US$200m STACR 2017-HRP1 and US$365m Tricon American Homes 2017-SFR² were the RMBS. The CMBS were US$140m BAMLL 2017-SCH, US$240m CSMC Trust 2017-PFHP and US$1.5bn FREMF 2017-K71.

The CLOs were: US$471.5m AIMCO 2015-AR; US$512.5m Allegro CLO VI 2017-2; US$563.15m CIFC Funding 2015-1R; US$460m CIFC Funding 2015-2R; US$463.79m Golub Capital Partners CLO 2015-22(B)R; €1.93bn IM Sabadell PYME 11; US$812.93m Sound Point CLO 2017-4; and US$820m Stewart Park CLO 2015-1R.

Editor's picks
Basel 4 proportionality expected: The Basel Committee has 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)...
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...
Directive to reform NPL landscape: The EBA has 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...
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 - dubbed VTB24 - is secured by privately-owned apartments and features a single-tranche pass-through structure, offering a fixed annual coupon of 11.5%...
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...

Deal news
• 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.
• 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.
• 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.

Capital Relief Trades

Landmark shipping SRT completed

Further details have emerged of Nord LB's landmark shipping significant risk transfer trade (SCI 8 December). Dubbed Northvest 2, the financial guarantee is believed to be the largest post-crisis synthetic securitisation of shipping assets.

Nord LB's latest transaction references a €10.1bn mixed portfolio of around 4300 high quality loans, including €1bn of shipping loans. Other assets in the portfolio include renewable energy, infrastructure, aviation and German medium-sized corporate loans.

According to the terms of the transaction, the first-loss piece remains on the bank's balance sheet, while the investor - Christofferson Robb - purchases a tranche of approximately €500m in a deal with no replenishment features. Other features include a pro-rata amortisation structure, with performance triggers, although Nord LB refrained from labelling the amortisation as such. In particular, the lender states that the amortisation structure could be described "at best" as pro rata, qualifying that there is no amortisation if the triggers fall below certain thresholds.

The investor was drawn by the mixed nature of the portfolio, which mitigates risk and helps with expected recoveries. The issuer, on the other hand, benefited from the due diligence capabilities and track record of the investor - albeit due diligence was restricted by the blind nature of the pool.

The bank's credit-based business model was another positive element. A Nord LB source observes: "Given the issues of low interest rates and other challenges currently facing the banking sector, our expertise in illiquid asset financing helps generate fees, interest and cashflows."

Nord LB launched the first Northvest transaction in March 2014, which referenced €11.4bn across four asset classes and increased it in September 2015 by a further €5.1bn. An additional tranche from the portfolio was placed with investors in May 2017 (see SCI's capital relief trades database).

Nord LB operates as lead arranger in Northvest transactions. Caplantic supports with structuring and placement, while also undertaking reporting and risk management responsibilities. Caplantic is based in Hanover and is a joint venture between Nord LB, Talanx and Bankhaus Lampe.

Nord LB is aiming to reduce its exposure to shipping to below €10bn in the medium term.

The latest Northvest deal allows the German lender to reduce its risk-weighted assets by around €3.7bn, thereby boosting its CET1 ratio by around 12%. CET1 and total capital ratios for 3Q18 stood at 11.5% and 16.9% respectively. The bank is targeting a year-end CET1 ratio of 12%.

SP

Capital Relief Trades

SRT investor concerns disclosed

AFME, in association with the International Association of Credit Portfolio Managers (IACPM), has responded to the EBA's significant risk transfer discussion paper. The response reveals investor-related concerns around certain aspects of the paper, most notably on the early termination of credit protection.

The responses that have been disclosed thus far - especially during the EBA's public hearing last month - focused on the issues of excess spread, time calls and the commensurate risk transfer tests, voiced primarily by issuers (SCI 24 November).

An originator's bankruptcy exposes investors to deterioration of the originator's servicing standards. This is why investors are keen to have an early termination clause, as the originator's bankruptcy occurs, which also happens to be a market standard and an investor requirement.

However, the AFME/IACPM response notes that the discussion paper's suggestion for including the originator insolvency as an early termination event is not a necessity, while the joint associations would not support it being required by the regulatory framework. The risk of originator insolvency for the protection provider is typically that insolvency will lead to the originator ceasing to pay the credit protection premium or ceasing to service the portfolio to an appropriate standard.

Provided that the protection premium continues to be paid and investors can remain comfortable that the counterparty risk they assume is appropriately mitigated and servicing will continue to an appropriate standard, the response concludes that originator insolvency does not have to be an early termination event. Some ways of achieving protection for counterparty risk would include depositing cash in a manner that is segregated from the bankruptcy estate of the originator, or including downgrade triggers requiring the deposit of cash with another bank or investment of cash in eligible collateral held at an independent custodian.

The response, however, notes that depositing the cash with a third-party bank - even under these circumstances - would fall foul of the eligibility conditions for STS treatment set out in Article 270 of the CRR, which the joint associations do not view as a sensible outcome.

Regarding continuity of servicing, the report suggests that originator insolvency need not be a termination event in itself. Rather, it should be a termination event only when combined with at least one servicing failure in the portfolio and the failure to appoint a back-up servicer.

Another reason why the aforementioned early termination clause is not necessary is the BRRD, although the report does not explicitly refer to it. In particular, investors already noted on the eve of the EBA's publication of its SRT discussion paper that the bankruptcy event is a very remote one that comes after all the measures contemplated in the BRRD for a financial institution undergoing a bankruptcy procedure (SCI 28 September).

The BRRD stipulates that as originators enter resolution, structured finance transactions are subject to specific provisions safeguarding the transaction's counterparties, through partial property transfers and other resolution measures.
Another subject that the response elaborated on was the cost of credit protection.

The EBA's discussion paper suggests that SRT may be disallowed in cases where premiums paid tend to exceed lifetime expected losses of the underling portfolio, reiterating concerns raised by the Basel Committee regarding the materiality of SRT in such cases. However, as the response notes, it would be surprising if the protection premiums did not exceed LEL (assuming the protection completely covers tranches that map to the EL of the underlying portfolio). Market pricing would therefore reflect the expectation that LEL will be covered by estimated future premiums (present value).

Furthermore, where the detachment point of the protected tranche is above the level of LEL, the premiums also need to account for the protection covering some or all of the unexpected losses against which the bank is required to set aside regulatory capital.

The EBA's proposals also do not take into account the future returns that investors expect to make. Any comparison of premium costs to portfolio characteristics should account for the future premium payments by a fair market rate. As the response notes, as long as the originator demonstrates that they have conducted a fair auction with investors before agreeing a premium, it should be considered a fair market rate and it should not be a barrier to achieving SRT.

Finally, comparing the cost of protection against income generated by the portfolio is misleading and should not be a barrier to achieving SRT, according to the AFME/IACPM response. Focusing on the income generated on particular loan products that may be in the portfolio is misleading because the interest rate on the loan is often only one aspect of the total return earned by the bank from the customer on a relationship-wide basis. Consequently, the reasonable cost of protection on the portfolio would rise accordingly.

SP

Capital Relief Trades

Project finance risk transfer completed

Santander has completed a synthetic risk transfer securitisation, transferring risk on a €2.3bn portfolio of loans originated in Spain and other EU countries. Scope Ratings has rated the transaction triple-A.

The synthetic project finance CLO references a portfolio of 241 loans originated by Banco Santander. The deed was executed yesterday, 21 December.

Scope has rated the €1.514m A tranche at triple-A. It has rated the €132m B tranche, €212 C tranche, €143m D tranche and €172m E tranche at double-A, single-A plus, triple-B plus and double-B plus, respectively, and has not rated the €120m F tranche.

Scope's ratings reflect the risk for the credit protection seller - Boadilla Project Finance CLO (2009-1), which will be renamed Renew Project Finance CLO 2017-1 - to make payments with respect to a credit event under the terms of the credit protection deed. They do not address potential losses arising from early termination or any market risk.

The transaction is structured contractually as an executed credit protection deed in accordance with Basel 3 and EBA guidelines regarding significant risk transfers (SRT). The legal maturity date is 30 September 2045.

The reference pool is static and comprises 241 senior secured, first-lien project finance loans. These projects relate to renewable energy, transport, social infrastructure and technology, media and telecommunications, and are located in Spain, Portugal, France, Germany and other EU countries.

There is no FX risk because non-euro reference obligations are converted to euros at a fixed rate. All reference obligations are scheduled to repay before the transaction's legal maturity.

Meanwhile, Scope and Moody's have both assigned ratings to a credit protection deed between Santander UK and Red 1 Finance CLO 2017-1. Red 1 is a synthetic securitisation of a static £916.8m portfolio of 25 commercial real estate loans.

Scope and Moody's have rated the £696.748m A tranche triple-A. The £68.758m B tranche, £41.255m C tranche, £22.919m D tranche, £25.21m E tranche and £22.92m F tranche have been rated double-A plus/Aa2, single-A plus/A2, triple-B minus/Baa1, double-B/Baa3, and single-B minus/Ba2.

Red 1 CLO is a synthetic securitisation of 25 UK CRE loans granted or entered into by Santander UK group entities for the acquisition of 144 properties in the UK. Santander has entered into a credit protection deed with the issuer that protects Santander against 95% of the credit losses stemming from the pool of loans.

JL

NPLs

Sharp rise in Italian NPL ABS expected

Italy is set to see a jump in GACS-eligible securitisations in 2018, potentially totalling €40bn-€45bn in gross book value of sold non-performing loans, compared with €8bn this year. Scope Ratings suggests that should Banca Monte dei Paschi di Siena NPL ABS not close next year, GACS-eligible securitisations in the jurisdiction should still double 2017's total.

Scope anticipates that Italy will continue as the main European market for NPL securitisations in 2018, driven by a range of factors. These include Italian banks seeking to further offload the high number of NPLs on their balance sheets, the GACS guarantee creating a broader investor base and the more attractive price of GACS-eligible NPL securitisations for sellers, compared to portfolio sales.

Additionally, the third-party servicing market in Italy is well established and can handle more NPL securitisations, and there is an improved ability of sellers to collect and present data necessary to analyse underlying assets. Finally, the rating agency says that there is a comparatively low forbearance ratio, which makes NPLs the main assets to securitise, rather than reperforming loans.

If NPL ABS perform in line with expectations, Scope anticipates that investor appetite will grow in 2018, alongside greater secondary market liquidity. The agency suggests that with a liquid enough market, investors that have purchased portfolios directly from banks may look to securitise these, with or without the GACS guarantee on the senior notes.

It adds that a secondary seller has an advantage in that it can "formulate a strategy for each exposure and also to clean the data, thus facilitating the data collection and presentation phase of a securitisation." Should a secondary market also develop in this way, Italian NPL securitisation issuance could total in excess of €40bn-€45bn next year.

This year has been notable for public NPL securitisations in several countries with NPL ratios above the EU average, with Ireland, Italy and Portugal all seeing transactions close. Scope adds that it expects these NPL securitisations to all show stable performance in 2018.

Despite growing NPL ABS volumes, NPLs and forborne exposures on banks' balance sheets are still high in certain countries and the NPL ratio in Europe stands at 5.1%. By comparison, it stands at around 1.5% in the US and Japan, as of end-2016.

Scope notes that the majority of countries with high NPL ratios have two-thirds or more of forborne exposures reported as NPLs, although in Spain just over a third of forborne exposures were reported as NPLs. Ireland has managed to reduce its NPL ratio from 21.6% in December 2014 to 11.7% in June 2017 - achieved mainly through the direct sale of NPL portfolios to investors, followed by securitisation, which was harnessed by investors for capital gains or to optimise the capital structure of the acquired portfolios of NPLs.

This differs from Italy, where banks have used securitisation to move NPLs off their balance sheets and to take advantage of the GACS guarantee. Portuguese bank Caixa Economica Montepio Geral also used securitisation to offload NPLs as an alternative to a portfolio sale (SCI 19 October).

Spanish banks have largely used portfolio sales to reduce bank balance sheet exposure to NPLs and focused on restructuring NPLs to forborne loans. As such, NPL securitisations in Spain in 2017 have largely comprised of loans that had been forborne and were performing when the transaction closed, as opposed to actual NPLs.

Scope notes that the benefit of a securitisation of NPLs versus a portfolio sale is that the overall interest rate used to discount future cashflows is normally lower for a securitisation. The seller can therefore obtain a higher transfer price for the NPLs, reducing the potential loss between the book value and the sales price of the NPLs.

Buyers of the junior notes find that the increased leverage compared to a bilateral portfolio sale may improve their rates of return and there is less need for funding compared to a portfolio purchase. Portfolio sales, however, can be completed more quickly as they involve single asset selection and a bilateral agreement on data for valuation - the acquirer can also select the servicer for the NPLs.

Scope expects performance of European NPL securitisations in 2018 to be strong, driven by a solid economic backdrop in Europe. A similar number of NPL ABS are anticipated in Ireland and Portugal next year, while securitisations in Spain will continue to focus on reperforming loans. The first Greek public securitisation of NPLs is also expected in 2018, provided the availability of experienced special servicers improves.

RB

NPLs

PPC benchmark securitisation pending

Finacity has been awarded the role of securitisation advisor on behalf of Greece's Public Power Corporation (PPC). The move is expected to pave the way for the first Greek securitisation for a corporate entity and establish a benchmark for other non-performing loan transactions.

A consortium led by Finacity and Qualco has been tasked with enhancing PPC's working capital and managing the arrears of its clients. Finacity will conduct a feasibility study to evaluate the extent to which PPC will be able to raise funds using its receivables portfolio as collateral, while Qualco will be responsible for the portfolio management and debt servicing of current, non-current and non-performing receivables. Junior members of the consortium include Deloitte, KPMG, Deutsche Bank, IBM Hellas and Estia Business Group.

Study components will include data analytics and liquidity of the pool, the servicing of the receivables and legal and accounting aspects. The initial goal is to look at NPL receivables, but the intent is to gradually cover the whole portfolio.

"PPC is limited in its financing, which tends to be bank based, so securitisation aims to help with liquidity and diversification of funding sources," says John Doyamis, president of Estia Business Group. "This coincides with funding levels of 9.4% for corporate bonds, which is very expensive. Furthermore, securitisation doesn't require a corporate guarantee, since you only have to focus on the quality of the assets."

Moreover, sources in the Greek NPL market note that through a securitisation, PPC can reduce its responsibilities as a quasi-public institution, given the leeway this option offers to more forcefully maximise recoveries.

Securitisation reporting is another positive feature, according to Jason Kim, senior director at Finacity. "It can be used as a receivables management tool, since it allows investors and the company to have insight into that granular detail, which is crucial for maximising proceeds," he says. "Furthermore, the securitisation of NPLs would be credit enhanced and other assets would not be encumbered."

The structural format will be a true sale securitisation. Kim observes: "Receivables will be securitised in true sale fashion, given that synthetics are not done for funding purposes. Additionally, it may end up being public or private, but it will be a non-recourse transaction."

The study coincides with a period of rapid reorganisation for Greece's electricity authority. An agreement to sell PPC-owned lignite-fired power plants - currently producing nearly half of PPC's electricity - is pending.

The process was launched following Greece's latest bailout review to bring around 40% of the PPC's lignite-fired generation capacity under the control of other market participants. Along with other measures, the divestment of lignite plants is expected to bring the market share of PPC below 50% by 2020.

The feasibility study will be finalised in 1Q18.

SP

ABS

Embracing a tactical approach

David Moffitt, head of tactical investment opportunities at LibreMax Capital, answers SCI's questions

Q: How and when did LibreMax Capital become involved in the securitisation market?
A: LibreMax Capital was established in October 2010 by founding cio Greg Lippmann and founding president Fred Brettschneider, who previously worked at Deutsche Bank and Credit Suisse together. The firm - which focuses exclusively on structured credit - employs 38 people in New York and has an AUM of over US$2.6bn.

Our US$1.37bn flagship hedge fund invests across RMBS, CMBS, CLOs and consumer ABS, including marketplace loans. This strategy has quarterly liquidity.

We also manage a US$590m Value Fund - which has a three-year lock-up - a Fixed Income Alternative Monthly Core fund, a CLO equity opportunities fund and a couple of managed accounts.

Q: What are your key areas of focus today?
A: My sense is that asset management in credit is heading in two directions: towards liquid, lower duration investments or towards longer-duration capital, which tends to be a better holder of illiquid assets; each has a different return profile. My role at LibreMax falls squarely into originating assets in the second camp.

I have been tasked with sourcing tactical opportunities and special situation investments. The thesis is to raise vehicles to tap the more illiquid, bespoke assets that require longer-duration patient capital.

These vehicles are private equity-style funds, with a five-year initial term and the ability to stretch longer if needed. The opportunity set spans permutations on illiquidity, complexity, credit risk and the ability to structure asymmetries in outcome.

At present, we're focusing on private credit assets because there is a unique opportunity to raise and deploy long-dated capital to provide liquidity in situations where broker dealers have retreated. When volatility or distress returns, as they inevitably will, it will be the patient capital vehicles that will likely be the providers of liquidity.

The key is to identify partners who are seeking liquidity and structure transactions directly with them. As such, we prefer bilateral transactions - including capital relief trades - as differentiated origination is important to our investors.

Q: What are some key areas of consideration for you regarding regulatory capital trades?
A: Cheap assets are very difficult to find, so the alternative may be to embrace complexity or duration - or move down the credit curve to find yield.

In regulatory capital transactions, we tend to favour loan books and prefer portfolios to be core to the institution. If there's a default, we like to see that the origination banker is also at risk. This means that the entire institution is incentivised to do the right thing regarding the business and the transaction.

As part of our investment process, we diligence bank origination process and portfolio and recovery management teams, analyse historical default and recovery history of the bank and identify any outliers in terms of performance or portfolio composition. We prefer there to be a loss mitigation team behind the portfolio - thereby creating alignment of interest - and typically invest in the 0%-10% part of the capital structure.

Q: What major developments do you expect from the market in the future?
A: Risk transfer technology is broadening to accommodate higher ROE requirements, new business lines, risks and regions. However, aside from the global SIFIs, few US banks are involved in the credit risk transfer market. Super-regional banks in the US seem the most likely candidates to benefit from the technology, but there is some reticence to be the first mover.

US banks cleaned up the asset side of their balance sheets quickly post-crisis, so the need for credit risk transfer in Europe is greater. Similarly, banks were able to raise capital relatively cheaply in the US, whereas capital has been very dear in Europe. However, as US banks feel pressure to improve ratios and be more efficient allocators of capital, the pressure to embrace credit risk transfer is certainly increasing.

CS

Structured Finance

Job swaps round-up - 22 December

CDS options clearing

LCH's CDSClear has become the first platform to clear credit index options, with post-trade services for both dealer-to-dealer and dealer-to-client flows provided by MarkitSERV. The service is expected to benefit members and clients in a number of ways, including full cross-margining of options with indices and single-name CDS, multilateral netting from facing a single counterparty (LCH) and increased ability to manage bilateral initial margin versus cleared initial margin. Roll-out will be introduced in two phases: the first will cover both interdealer and client flows for one-month, two-month and three-month expiries on the iTraxx Main and Crossover five-year on-the-run indices; the second will involve one-month, two-month and three-month expiries on the CDX IG and HY five-year on-the-run indices.

GSE capital reserve

The FHFA and the US Treasury Department have agreed to reinstate a US$3bn capital reserve amount under the senior preferred stock purchase agreements for Fannie Mae and Freddie Mac, beginning in 4Q17. The FHFA says that while it is apparent that a draw will be necessary for each GSE if tax legislation results in a reduction to the corporate tax rate, it considers the US$3bn capital reserve sufficient to cover other fluctuations in income in the normal course of each enterprise's business.

North America

Ares Management has announced several executive appointments, effective from 1 January 2018. Co-founder and president Michael Arougheti has also been named ceo, while co-founder, ceo and chairman Tony Ressler will continue as executive chairman. Additionally, cfo Michael McFerran has also been named coo and strategy & relationship management group head Ryan Berry has been appointed chief marketing & strategy officer. Berry and McFerran will also join the board of Ares Partners Holdco, the sole owner of the general partner of Ares.

NPL disposal

Bain Capital Credit and Castello SGR are set to acquire a portfolio of 103 residential, industrial and commercial real estate assets - named Project Hemera - from Intesa Sanpaolo. The portfolio comprises assets repossessed from terminated leasing or loan agreements and owned by Intesa through its subsidiaries Intesa Sanpaolo Provis, Intesa Sanpaolo RE.O.CO and Mediocredito Italiano. Aquileia Capital Services will provide asset management for the assets.

Securitisation RTS

The EBA has launched two public consultations on draft regulatory technical standards (RTS) in connection with the new EU securitisation framework: one specifies a set of criteria for the underlying exposures in securitisations to be deemed homogeneous, as part of the STS requirements; the other specifies the requirements for originators and sponsors related to risk retention, which will replace the requirements currently set out in the CRR. The homogeneity requirement aims to facilitate the assessment of underlying risks by investors and enable them to perform robust due diligence, while new provisions have been added to the retention requirements, such as when an entity shall be deemed not to have been established for the sole purpose of securitising exposures. Public hearings will take place on the RTS at the EBA premises on 19 February 2018 and the consultations run until 15 March.

Tax reform concerns

SFIG has sent a letter to the US Senate and House tax reform conferees stating that changes to critical interest deductions and real estate property tax deductions may result in consumers suffering a decrease in disposable income and potentially a decline in home values. Consequently, loan performance may suffer across the financial system, resulting ultimately in reduced availability of credit to consumers. In addition, the association highlights two technical provisions that could have an adverse effect on the securitisation market: treatment of lease transactions and like-kind exchanges. It suggests that the inability in a lease securitisation for the issuer to offset lease income with interest expense would make such deals uneconomical, while eliminating the ability to use like-kind exchanges for non-real estate assets could impact the securitisation of these assets.

UK ILS first

Neon Underwriting, a subsidiary of Lloyds, has received approval from the UK PRA to establish an ILS vehicle - the first to be launched under the new UK ILS framework. Dubbed Neon Capital Managers Re (NCM Re), the transaction intends to raise US$60m in third-party capital.