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Capital Relief Trades

Santander, Lloyds ride synthetic CMBS wave

Santander and Lloyds have each put together synthetic securitisations of commercial real estate portfolios. The financial guarantees and significant risk transfer deals are the first in a wave of post-crisis synthetic CMBS issuance.

The CRE asset class experienced defaults pre-crisis due to cliff effects or abrupt step-ups in refinancing risk that put off investors. However, asset managers are coming in due to tighter underwriting standards, better interest coverage ratios and lower LTVs which improve the ability for refinancing.

According to Trepp, almost US$27bn in new CMBS issuance hit the market in 3Q17, the highest quarterly total in three years. This explains European asset manager interest in the latest Santander transaction, which sought exposure to high quality real estate (SCI 22 December).

The Santander transaction, dubbed Red 1 Finance CLO 2017-1, saw the Spanish lender buy protection from the SPV on 95% of the credit risk from a £916.8m UK CRE portfolio securing 144 properties. Sources close to the transaction note that the lender sold the bottom three tranches between 0%-9.5%.

The transaction features a WAL of 2.5 years, a 10% clean-up call, regulatory/tax call and no time calls. Given strict PRA requirements, this is a plain vanilla deal, so it includes no credit enhancement features such as performance triggers or synthetic excess spread.

Other features include 5% retention for each loan in the pool and a 1.5-year legal final maturity. Key strengths include an average Moody's LTV of 70.6%, a property grade of 2.2 reflecting a high quality asset base securing the loans and a sequential amortisation structure.

The Lloyds transaction, dubbed Wetherby Securities 2017, consists of 26 tranches: 25 of which have provisional ratings from DBRS and are covered by the senior but unexecuted guarantee on the loan portfolio. The final tranche is an unrated £47.1m piece covered by a junior guarantee.

DBRS says this junior guarantee will be executed and the junior tranche will be sold. It represents the first 7% of credit exposure to the portfolio.

The rated tranches remain unexecuted. The key to achieve regulatory capital relief on these trades is the significant risk transfer obtained by the sale of the first loss position as well as the ratings on the tranches that sit above it. In particular, the bank and the regulator use the external ratings assigned to the rated tranches as a method to measure the risk retained by the bank and calculate the new regulatory capital (SCI 8 September).

The financial guarantees cover a portfolio of 51 loans provided to 34 borrower groups with the biggest borrower group representing 13.5% of the total balance and the top 10 borrower groups representing 57.3% of total balance. The guaranteed amount at closing is £675.3m.

Some of the borrower groups have additional cross-collateralised debt with Lloyds and/or third parties by way of syndication. Including such syndications and other exposures, the borrower group's total exposure is £1.9bn secured by CREs valued at £3.6bn and the average initial LTV is 52.5%.

All loans will mature between June 2019 and December 2021. However, until then, 58.8% of loans will amortise partially and the remaining 41.2% will pay only interest. The transaction does not envisage any revolving period. Consequently, refinanced or extended loans would be removed from the portfolio.

Amortisation to the different guarantee tranches will be allocated sequentially.

There are 356 properties securing the whole portfolio, which is located across all of the UK, with the highest concentration in Greater London (40 properties or 54% by market value). In terms of property types, industrial is the largest contributor (29% or 102 properties), followed by residential/apartment blocks (27% or 95 properties) and office (12% or 42 properties). By value, office is the largest contributor (54%), then industrial (21%), then mixed-use (8%).

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ABS

Dynamica makes ABS bow

Dynamica Retail has issued its first salary assignment and payment delegation loans transaction in Italy. The transaction has a subscribed amount of €166.1m and a maximum note amount of €263.5m.

Dyret SPV is a revolving cash securitisation of consumer loan receivables. Moody's has rated the senior notes A2. That A tranche has been subscribed for €137.2m and has a maximum note amount of €210.6m.

The receivables have been extended by Dynamica Retail to obligors in Italy. The consumer loans securitised are Cessione del Quinto (CDQ) and Delegazione di Pagamento (DP) loans which are collateralised by a portion of the net monthly salary of the employee, with life and unemployment risk covered by insurance policies.

Moody's notes that the loans are typically used for car purchases, property improvements and other general purposes. The rating agency's cumulative default expectation for the asset pool is 14%, recovery rate is 75% and portfolio credit enhancement is 30%.

CDQ and DP products have very low historical losses compared to other personal loan products. The pool is very granular, with the 10 largest borrowers accounting for only 0.51% of the pool. There is also strong geographic diversification.

The complexity of the transaction is interesting, as notes are only partially paid at closing. During the ramp-up period, additional notes may be subscribed up to certain maximum amounts to be able to securitise additional receivables.

The revolving period lasts for one year. There are 8,479 borrowers and weighted average remaining term is 7.79 years. Weighted average seasoning is 21.65 months and the weighted average portfolio interest rate is 4.01%.

CDQ loans are collateralised by a maximum of 20% of an employee's monthly salary and the employer and debtor are jointly responsible for repayment of the loan. Payments are directly deducted from an employee's salary or pension.

DP loans are slightly different, as the combined DP and CDP instalment can represent up to 50% of the borrower's net salary. The lender has a direct claim to the employer only if the employer expressly accepts to be obliged towards the lender to make the payment under the DP loans in its favour.

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ABS

China aircraft ABS placed publicly

China Asset Leasing Group Holdings (CALC) has launched China's first ABS denominated and settled in a foreign currency. It is also China's first ABS in aircraft leasing in the public placement market.

CALC is a full value-chain aircraft solutions provider for global airlines. Its subsidiary, China Asset Leasing Company, has issued the ABS. Huatai Securities (Shanghai) Asset Management is the manager.

The underlying assets are aircraft leases and the ABS is denominated in US dollars. It has been listed on the Shanghai Stock Exchange.

The transaction is China's first asset securitised product denominated and settled in foreign currency, thus setting a significant precedent as a major financial innovation, marking a milestone in China's asset securitisation development history.

"CALC is dedicated to developing innovative finance products with aircraft leasing as the underlying asset. We have set another precedent by introducing foreign currency denominated asset securitised products and providing the aviation industry and the leasing industry with a new financial product category," says Shuang Chen, chairman, CALC.

"After successfully realising the 40th aircraft lease receivables, we are delighted to have introduced the first aircraft leasing ABS which is denominated and settled in foreign currency in the open market in China. Since introducing the realisation of finance lease receivables into China in 2013, CALC has been exploring the development of a variety of products to meet investors' ever-changing demands," says Winnie Liu, deputy ceo and chief commercial officer, CALC.

She adds: "The successful debut of this product category provides another safe, stable and innovative option for US dollar-denominated fixed income products which is still rare in China."

CALC is one of the top 10 global aircraft lessors. Its combined asset value of fleet and order book exceeds US$10bn, and as of 27 December it has a fleet of 106 aircraft. CALC's business model offers services covering an aircraft's full life cycle to meet airlines' fleet management requirements, including services for new aircraft, used aircraft and aircraft coming to the end of their life.

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Structured Finance

NPL acquisition target achieved

Banca IFIS has closed two new Italian NPL transactions totalling around €200m. The latest transactions bring the bank's NPLs under management at end-2017 to over €13bn, while confirming €5bn in total expected NPL acquisitions for 2017.

Banca IFIS targeted €5bn in NPL acquisitions for the year 2017. This follows the implementation of its 2017-2019 strategic plan - approved in March 2017 - which sets a target acquisition of €10bn-€15bn of NPLs during the period (SCI 15 December 2017).

The first of the two portfolios, a €143m deal of 17,000 positions, was sold to the bank by an Italian financial firm operating in the consumer credit sector. The portfolio consists mainly of unsecured retail loans: 79% are consumer loans and the remainder are credit card loans.

The second transaction was closed with an Italian banking group and involved the purchase by IFIS of a mixed loan portfolio consisting of corporate and retail loans equal to around €55m, of which €30m are secured loans.

The transactions follow two NPL disposals in mid-December totalling €336m of retail and corporate NPLs. Those disposals coincided with the bank's shift to the salary-backed loan market, which follows the acquisition of Cap.Ital.Fin, a company specialising in salary-backed loans and payment delegations.

The lender's strategic focus will remain the unsecured space. Laura Gasparini, head of NPL transactions at Banca IFIS, says that the space allows the bank to apply its expertise in value transformation, turning around loans from non-performing to re-performing.

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Capital Relief Trades

Risk transfer round-up - 5 January

Deutsche Bank is understood to have closed two CRAFT risk transfer transactions, a bilateral deal and a syndicated one. The US$147m bilateral deal - dubbed CRAFT 2017-2A - is said to pay 8.75% and feature a 7.5-year WAL, with an expected maturity of July 2025 (see SCI's capital relief trades database).

Other recently-closed capital relief trades include a Barclays transaction referencing US assets.

Insurance-linked securities

'Unique' French windstorm ILS placed

Willis Towers Watson placed €90m of ILS for Covea Mutual Insurance Group last month in a "unique transaction". The transaction was the first time a European catastrophe bond has supported capacity at the bottom of a traditional reinsurance programme and also the first time a European indemnity-trigger cat bond was placed on an annual aggregate basis, the company says.

Hexagon Reinsurance settled last month and provides Covea with two €45m tranches of fully collateralised protection against windstorm risk in France for a four-year period. Covea is France's largest domestic property and casualty insurance group.

Hexagon's structure features an indemnity trigger on an annual aggregate basis with terms mirroring the traditional reinsurance placement, to ensure effective integration within the overall property catastrophe reinsurance program. "We are proud to have supported Covea in its inaugural catastrophe bond transaction," says Bill Dubinsky, head of ILS, Willis Towers Watson Securities.

He continues: "Investors were eager to support the transaction. Hexagon diversifies Covea's sources of reinsurance capacity with competitive pricing."

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Structured Finance

Market moves - 5 January

GSO Diamond Portfolio Fund, a newly formed US$950m investment fund sponsored by GSO Capital Partners, has closed on the acquisition of approximately US$2.4bn in corporate loans and other credit investments from NewStar Financial (SCI 20 October 2017). Immediately following the sale of these assets to the fund, NewStar was acquired by First Eagle Investment Management. NewStar's credit platform and investment teams now form First Eagle's alternative credit group, which has been engaged by GSO to assist in servicing the assets acquired by the fund.

Dyal Capital Partners has made a strategic minority investment in Cerberus Business Finance (CBF), the middle-market lending platform of Cerberus Capital Management. There will be no changes in the day-to-day management or operation of CBF, or to its decision-making or investment process, as a result of this passive non-voting investment.

North America
Richards Kibbe & Orbe has promoted Victor Ludwig to counsel. He practices in the firm's corporate and business transactions group and is based in New York. Ludwig concentrates on credit and credit derivatives, marketplace lending and bankruptcy claims trading, representing both dealer and buy-side clients in analysing and negotiating total return swap facilities. "Victor has established himself as a go-to attorney for both dealer and buy-side clients in the finance and derivatives spaces," says managing partner Jennifer Grady.

Josh van Manen, former regional head of structured finance at Fifth Third Bank has re-joined the bank after three years away. He began his career at Old Kent Bank, which was acquired by Fifth Third, and became a relationship manager in the structured finance group before becoming west region head for structured finance. He was also svp and md in the sponsor leveraged finance team before leaving the bank to found Elevest. He has re-joined as svp and commercial relationship manager in Grand Rapids.

Fried, Frank, Harris, Shriver & Jacobson has appointed Darren Littlejohn as a partner in its derivatives and asset management practices, based in New York. He joins from Blake, Cassels & Graydon and has also worked for Goldman Sachs. "Darren has a very strong derivatives background and unique cross-border experience that will further expand the depth of our structured finance expertise," says Lawrence Barshay, partner in Fried Frank's corporate department and head of its asset management practice.

CanAm Enterprises has recruited Gary 'Skip' Stern as md of legal affairs. He joins from Sidley Austin, where he spent 35 years and led the global finance group and focused on a variety of lending and securitisation transactions, with his securitisation work typically involving representing financial institutions in transactions involving non-traditional and esoteric asset classes.

Ratings
CARE Ratings Nepal has commenced operations after being issued a credit rating licence from the Securities Board of Nepal. The rating agency will provide ratings for various instruments, including structured finance and other debt instruments. The new rating agency is 51% owned by CARE Ratings India, formerly known as Credit Analysis and Research.

Repo agreement
Oxford Lane Capital has entered into a repurchase transaction with Nomura Securities International under which it has sold US$106.2m of CLO securities to Nomura for a purchase price of approximately US$42.5m. Oxford Lane is obligated to repurchase those securities at the end of the repo term for the original purchase price plus accrued by unpaid funding costs. The repo has a nine-month term which may be extended by mutual agreement. The funding cost is three-month Libor plus 3.35%, which may be adjusted if the repo term is extended.

Risk transfer expansion
Freddie Mac has expanded its ACIS programme with a new front-end credit risk transfer offering. ACIS Forward Risk Mitigation (AFRM) allows the GSE to transfer up to US$650m of credit risk on US$21bn UPB of single-family mortgages simultaneously with the acquisition of the loans by securing committed private capital and providing stable pricing over a two-year horizon through end-2019. The covered pool comprises 30-year fixed-rate loans with LTV ratios of 60%-97%.

Settlements
RBS last month agreed a US$125m settlement with California Attorney General Xavier Becerra over misrepresentations about RMBS sold to California's public employee and teacher pension funds, CalPERS and CalSTRS. The RMBS were found to have failed to accurately disclose the true characteristics of many of the underlying mortgages, with due diligence to remove poor quality loans from the investments not adequately performed. RBS was aware of the misrepresentations but failed to correct them, leading to millions in losses to CalPERS and CalSTRS. California has previously clawed back US$150m from Moody's, US$210m from S&P, US$300m from Bank of America, US$102m from Citigroup and US$300m from JPMorgan.

PHH Mortgage Corp has entered into a settlement agreement and consent orders with the Multi-State Mortgage Committee and State Attorneys General in connection with findings related to legacy mortgage servicing activities occurring between 1 January 2009 and 31 December 2012 that were subject to a multi-state mortgage loan servicing examination. Under the terms of the settlement, PHH will pay approximately US$45m in aggregate, adopt negotiated servicing standards and implement a testing and reporting process to ensure compliance with these standards for a period of three years.