Contents

RMBS

Non-QM tipped as 'next opportunity'

Last year marked the beginning of a transition from a post-crisis distressed recovery trade to a more efficient market for the US securitisation sector, underpinned by robust performance and favourable economic conditions. Against this backdrop, mortgage credit and private credit financings are expected to remain a strong source of risk-adjusted returns.

Greg Parsons, ceo of Semper Capital Management, characterises the post-crisis period as comprising three chapters: the distressed credit chapter, dominated by uncertainty around credit impairment; the recovery trade chapter, in which uncertainty remained around economic sustainability; and the active recovery chapter, to which the ABS market is now transitioning. "The opportunity has shifted from capitalising on uncertainty around a transitional market to stability. Securitisation asset classes remain well bid, but the market structure still allows active managers to drive value," he explains.

He continues: "Where we're deploying capital, we're long biased in residential mortgage credit. US economic growth and rising home prices - which have returned to pre-crisis highs - means it is possible to make isolated, clean bets in terms of analysing credit."

Indeed, the emergence of credit risk transfer (CRT), single-family rental (SFR) and non-performing/re-performing loan transactions has provided new ways of capitalising on the re-underwriting of the residential market. In particular, CRT has come of age as an asset class, according to Parsons.

He points to the first MACRs (modifiable and combinable REMICs) options being utilised (see also SCI 17 May 2017), as well as structural changes that make the asset class REIT-eligible and bankruptcy-remote from GSE restructuring. Additionally, CAS and STACR deals have successfully weathered the first test of their credit enhancement in the aftermath of hurricanes Harvey and Irma.

"We're yet to see fundamental credit impairments in the CRT sector, following the hurricane damage sustained in Florida, Houston and Puerto Rico. Indeed, the asset class continues to perform well," says Parsons.

The average CAS and STACR loan exposure to Hurricanes Harvey and Irma is 7.2%, according to Fitch figures. The rating agency calculates that 30-plus day delinquencies across the two programmes rose from 1.04% on 1 October to 5.60% on 1 December for hurricane-affected areas only. In contrast, 30-plus day delinquencies across the entirety of both pools rose from 0.71% to 0.84% respectively.

Fitch expects the GSEs to provide affected loans with maturity extensions corresponding to the number of delinquent payment months, with most modifications likely to be accepted by the end of January. Consequently, CRT performance should show signs of improvement by late spring/early summer.

Underlining CRT performance, in a review of 82 CAS and STACR bonds issued from 2013 to mid-2017, Fitch last week upgraded 56 classes - 10 of which rose to investment grade - and affirmed the ratings on the remainder. The agency notes that the rating actions reflect improvements in the relationship of credit enhancement to expected pool loss.

On average, CAS and STACR last cashflow tranches were upgraded by 1.5 and 2.1 notches respectively, according to Wells Fargo figures. Further up the capital structure, 14 first cashflow and 13 middle cashflow classes were upgraded, by an average of close to three notches.

Meanwhile, as the supply of NPL/RPL assets declines as the GSEs work through their holdings, non-QM RMBS is emerging as the next opportunity set in the residential mortgage space. "Post-election originations of non-QM loans have increased dramatically, with demand for capital driving the growth of this sector. Regulatory constraints on banks have allowed private market solutions to fill the gap," Parsons observes.

He continues: "However, if there are enough incentives and the economics work, banks may begin addressing the perception of regulatory risk. The current administration is more pro-deregulation and if the regulatory constraints diminish, banks will likely step into the non-QM space."

Away from mortgages, Semper is pursuing opportunities in private credit asset-backed financings across assets such as NPLs, merchant financing and bridge lending. "These transactions are undertaken on a tri-party basis, whereby Semper is the capital partner with another firm that is actively involved with the assets, such as an NPL workout specialist. The aim is to structure a financial relationship with operating partners," Parsons explains.

Such investments are typically more appropriate for funds with a multi-year lock structure. As such, liquidity is traded for increased yield.

Looking ahead, 2018 could prove to be the year that the 'risk-on' environment switches to 'risk-off'. "Tensions in South East Asia and Europe, plus questions around stock market valuations, the current administration and rates are all potential triggers for significant volatility that is unrelated to the economy and housing. Nevertheless, volatility provides technical opportunities to find value. We're positioning to be in the more liquid and senior credits, with less duration, so if one of these factors triggers volatility, we can take advantage," Parsons concludes.

CS

Structured Finance

SCI Start the Week - 15 January

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

Pipeline
Last week saw a ramping up of additions to the pipeline, led by ABS and RMBS. There were seven ABS and an ILS added, along with nine RMBS, a CMBS and two CLOs.

The ABS were: US$1.25bn BMW Vehicle Owner Trust 2018-A; US$1.15bn CarMax Auto Owner Trust 2018-1; CNY4bn Fuyuan 2018-1 Retail Auto Mortgage Loan Securitization Trust; Hertz Vehicle Financing II Series 2018-1; US$393.611m Marlette Funding Trust 2018-1; US$1.223bn Santander Drive Auto Receivables Trust 2018-1; and US$750m Westlake Automobile Receivables Trust 2018-1. The ILS was US$200m Vitality Re IX Series 2018-1.

The RMBS were: US$401.21m COLT 2018-1 Mortgage Loan Trust; Fleet 2018-01; US$463.72m JPMMT 2018-1; Kenrick No.3; Lanark 2018-1; A$750m National RMBS Trust 2018-1; US$500m NRZ 2018-PLS1; Precise Mortgage Funding 2018-1B; and US$462m Sequoia Mortgage Trust 2018-2.

US$192m WFCM 2018-BXI was the CMBS. The CLOs were US$550.875m Neuberger Berman CLO XVI-S and US$409.2m Tralee CLO IV.

Pricings
There were also a few ABS and RMBS prints. The ABS consisted of US$190m CPS Auto Receivables Trust 2018-A, £487m E-CARAT 9 and US$1.227bn GM Financial Consumer Automobile Receivables Trust 2018-1, while the RMBS were £636.5m Finsbury Square 2018-1, €2.266bn Hipototta 13, A$1bn RESIMAC Triomphe Trust RESIMAC Premier Series 2017-3 and €2.268bn STORM 2018-I.

Editor's picks
CRTs coming to America?: Capital relief trades (CRTs) have become an established feature of the European securitisation market, with multi-billion euro deals frequently issued to achieve regulatory capital relief (see SCI's capital relief trades database). Although these transactions have not yet been embraced by US banks, that is expected to change...
Barclays adds to US CRT impetus: Barclays recently completed Colonnade Global 2017-4 Financial Guarantee, a rare US$100m risk transfer transaction referencing a US$1.25bn portfolio of US corporate loans. Adding impetus to a growing American capital relief trades market (SCI 8 January), the jurisdiction of both the deal's counterparty and investor is the US...
UBI Banca debuts SRT: UBI Banca has executed its first capital relief trade, dubbed UBI 2017 RegCap 1. The approximately €100m cash collateralised financial guarantee references a €1.9bn corporate portfolio...

Deal news
• Natixis has closed its first European managed cashflow CLO 2.0 deal. Dubbed Purple Finance CLO 1, the €308.4m transaction is managed by Natixis Investment Managers affiliate Natixis Asset Management and is backed by primarily senior secured euro-denominated leveraged loans and bonds issued by European borrowers.
• Quaestio, the Italian rescue fund, has closed its investment in the mezzanine tranche of Monte dei Paschi's €25bn non-performing loan securitisation. The transaction is a crucial part of the restructuring plan that was agreed with European authorities last July and a breakthrough that is expected to boost NPL securitisation deal flow (SCI 5 July 2017).

Capital Relief Trades

Carillion liquidation met with cautious optimism

The Irish stock exchange announced this week that a company, believed to be liquidated construction giant Carillion, triggered a credit event for HSBC's US$300m CLN dubbed 'Metrix portfolio distribution'. Despite the event, the market's initial reaction remains cautiously optimistic given the sturdy performance of synthetics over the last four years.

Metrix was closed at end-2015 (see SCI's capital relief trades database). Dutch pension fund PGGM made a second loss investment in the deal.

"Many recent corporate deals have priced aggressively and attached at 0% and it will not be a surprise if some of them include Carillion, which will definitely dent their expected returns. A less aggressive stance by investors in this sector should be expected," says one market source.

Nevertheless market sources emphasise that losses in synthetic securitisations have remained within expectations, while there has been more disclosure and various ways to conduct a more a detailed analysis of the portfolio. Issuance growth in recent years - with Deutsche Bank figures showing €20bn of issuance in 2013 and €94bn in 2016 - testifies to the strong performance of the structure.

The Metrix portfolio comprises 152 corporate loans. In terms of geographical diversification, approximately 92% of the initial portfolio is concentrated within the European Union, Switzerland and Norway (UK 61%). The top five industries in the portfolio include business services (12%), construction and building (11%), finance (7%), telecommunications (6%) and metals and mining (6%).

According to a Moody's report published alongside the transaction's rating, for each defaulted obligation in the deal, the actual recovery amount will be derived from the loan work-out process following HSBC's standard procedures. The work-out process will continue until the sale or the write-off of the defaulted reference obligation.

If the work-out process is not completed on a date that falls 60 business days before the final maturity, the recovery rate will be estimated based on HSBC financial provisions or market value quotations. Along with the occurrence of a credit event, accountants will verify compliance with the eligibility criteria and replenishment conditions, as well as the computation of any losses.

SP

CLOs

CLO collateral defaults eyed

 Defaulted collateral in US 2.0 CLOs rose through December, as increased leveraged loan defaults filtered through from November. While defaults in European 2.0 CLOs have remained steady, CLO managers have notably moved out of previously heavily weighted positions to boost performance.

Defaults in the S&P LCD/LSTA leveraged loan index last month rose above 2% for the first time since June 2016. Deutsche Bank CLO analysts comment that this is on the back of Expro Oilfield Services filing for Chapter 11 in December, along with Pacific Drilling, ExGen Texas Power, Cumulus Media and Walter Investment Management defaulting in November.

As a result, the 12-month trailing default rate rose to 2.07%. However, the analysts point out that measured by loan count, the default rate stands at 1.80%.

In line with this, defaulted collateral in CLOs rose through December and WARFs of post-crisis CLOs have risen slightly across all vintages except 2014. The portion of collateral rated Caa1 or triple-C plus by Moody's and S&P has also risen for most vintages.

However, despite a momentary pause in September and October, spreads on CLO collateral have continued to tighten. This has been at around 2bp a month, with the more recent vintages showing the most dramatic tightening.

The Deutsche Bank analysts note that CLOs from the 2013 and 2014 vintages are increasingly holding a greater proportion of cash and account for most of the deals amortising. They add that this indicates healthy principal paydowns on the January payment dates for amortising deals and highlight rising diversity scores, mainly in more recent vintages.

In Europe, meanwhile, CLO defaults continue to trend down - with defaults and distressed assets remaining low in CLO 2.0 portfolios and spreads grinding tighter. Bank of America Merrill Lynch European securitisation analysts suggest that with tightening loans spreads since mid-2016, refinancing and repricing could be putting some assets out of reach for CLO managers.

Manager performance differentiation is expected to emerge over the course of 2018, particularly given "pockets of weakness in credit markets." The BAML analysts note recent drops in exposure to certain assets, such as Ineos - formerly the largest exposure in CLO 2.0 portfolios, as of early 2017 - possibly following its refinancing in October 2017.

After SFR Group, Ineos is the second-largest exposure reduction and has moved from being the largest European CLO 2.0 holding, as of May 2017, to the ninth largest. The analysts indicate that the reduction is due to the tight pricing of the euro loans - at Euribor plus 200bp, with a 50bp floor - which has posed problems for managers in meeting weighted average spread constraints.

SFR Group mainly funds Altice Group's telecom operations in France and is the highest individual exposure in European CLOs. The credit has experienced some volatility since November 2017, in part due to weak results in 3Q17 and management changes.

Reduction in exposure was also seen in respect of Western Digital and Constantia Flexibles, which could be explained by loan repayments. Additionally, a lack of loans in Wind Tre's recent refinancing may be the reason for the reduction in CLO holdings in that name over 4Q17.

The BAML analysts point out that some of the largest increases in exposure in Euro 2.0 CLOs towards the end of 2017 are accounted for by large leveraged buyouts. For example, managers increased their exposure to Nordic payments company Nets - after it was bought out by Hellman & Friedman - along with Paysafe, after it was taken private by CVC and Blackstone.

Overall, however, defaults only accounted for 0.18% of total European CLO 2.0 assets, as of December 2017. The most significant was Concordia Health, accounting for 0.15% of defaults, to which 20 deals managed by CELF, GSO, Alcentra and ICG have exposure. Other defaulted loans include those from Famar, creatrade, GST AutoLeather and 21st Century Oncology - albeit total exposure to these names is small.

The main cause of distress comes from New Look FRNs (accounting for 0.3% of 2.0 collateral), which have seen steady pricing declines since June 2017, given that credit insurance has been withdrawn from New Look's suppliers. The other main distressed exposure is Deoleo (at 0.13%), which has suffered from high raw material costs and has seen its pricing for first-lien euro term loans drop by over five points to trade in the mid-60s, from a threshold of 80.

RB

Structured Finance

Market moves - 19 January

Houlihan Lokey has acquired corporate finance advisory firm Quayle Munro, adding a new capability in data and analytics, as well as expanding its financial institutions focus in Europe. Based in London with a team of 40 financial professionals, Quayle Munro's client list spans the globe and includes private and publicly listed companies, financial sponsors and entrepreneurs. The data and analytics group will continue to be headed by Andrew Adams, Quayle Munro's ceo, who will also serve as co-head of Houlihan Lokey's UK corporate finance business.

CMBX roll
The IHS Markit CMBX.11 index is set to launch on 25 January, referencing 25 risk retention-compliant US conduit CMBS deals issued between June and December 2017. Morgan Stanley CMBS strategists note that 48% of these transactions utilise the horizontal structure to satisfy risk retention requirements, while 28% are vertical and 24% are L-shape. Consequently, the index will reference risk retention-held junior tranches, including 12 of the 25 triple-B minus bonds that were retained by the risk retention party and 15 double-B bonds that were retained at issuance. As such, investors are expected to benefit from exposure to junior tranches of deals that they would not have been able to access in the cash market.

Europe
Lucy Graham has joined Cairngorm Capital as an investment director. She was previously a senior corporate finance partner at Clydesdale Bank and has over 20 years' experience in leveraged finance and corporate law. Graham spent a decade in the bank's leveraged finance team generating bespoke structured finance solutions.

The Carlyle Group has promoted eight of its staff to partner, 19 to md and 31 to principal/director. Among the new mds are Martin Glavin (whose focus is on European structured credit) and Merrill Goulding (distressed credit), both of whom are based in London.

Cloudscraper - a commercial real estate exchange for buying, selling and financing - has appointed Matthew Webster as its cfo. Webster was previously global head of real estate finance at HSBC and has also held senior real estate roles at Hypo Real Estate, Goldman Sachs, Morgan Stanley and Fitch. Cloudscraper is headquartered in London, with offices in Tel Aviv, Dublin and Berlin.

Angus Duncan has joined Hunton & Williams as a partner in the firm's London office. He has more than 25 years of structured finance and specialty finance experience, having worked on Europe's first CRE CDO, first pro rata CLO, first European CLO managed by a hedge fund and first catastrophe bond transaction incorporating a tri-partite repo structure. He was most recently at Winston & Strawn and spent over a decade at Cadwalader and at Allen & Overy. He began his career at Slaughter and May.

Baljit Khatra has joined Hymans Robertson as a risk transfer consultant, based in the firm's Birmingham office. He previously spent seven years at Mercer, in its strategic solutions group, working on a number of longevity swap transactions.

Monetary penalties
The Federal Reserve Board has terminated enforcement actions relating to residential mortgage loan servicing and foreclosure processing issued in 2011 and 2012 against 10 banking organisations. Goldman Sachs has agreed to pay US$10m, Morgan Stanley is paying US$8m, CIT is paying US$5.2m, US Bancorp is paying US$4.4m and PNC is paying US$3.5m. Enforcement actions against these five banks, plus Ally Financial, Bank of America, HSBC, JPMorgan, Morgan Stanley and SunTrust have now ended. With the latest penalties, the Federal Reserve Board has now assessed penalties totalling approximately US$1.1bn against all Federal Reserve supervised firms under mortgage servicing enforcement actions.

North America
Alternative asset manager Drift Capital has changed its name to Charleston Capital. The firm is based in Charleston, South Carolina, and provides structured credit solutions to fintech-enabled non-bank financial services companies. The firm has also appointed Edward Hamilton as head of capital markets. Hamilton has previously worked at BroadStreet Group, Kidder Peabody and Paine Webber.

Mitsubishi UFJ has appointed Andy Vestergaard as cio for its MUL Railcars division. He joins MULR following 20 years of service with GATX, the last four years as vp and executive director of rail structured finance.

Pacific Life has named Kevin Byrne as ceo of its rebranded asset management business, Pacific Global Asset Management. Byrne has been svp of finance and risk management for Pacific Life's retirement solutions division for the past five years and before that was evp and cio for AXA Equitable Life Insurance Company. Pacific Asset Management is included in the new business, but retains its current leadership under senior mds Dominic Nolan and James Leasure.

Victory Park Capital has hired Todd Kushman as a principal and head of capital markets. He is the former co-founder, partner and chief operating officer at Torrey Pointe Capital and will lead Victory Park's capital markets initiatives, including optimising and identifying new alternative investment product offerings. Before Torrey Pointe, Kushman was md at Cerberus Capital Management, coo at Ally Financial and built the structured product derivatives trading desk at Bear Stearns and its successor, JPMorgan.

NPL progress report
The European Commission has released its first progress report on its Action Plan for reducing non-performing loans, which shows that it is on track with implementing the plan. The report states that as of 2Q17 the total volume of NPLs across the EU stood at €950bn, with the overall NPL ratio declining to 4.6%, which is down by roughly one percentage point year-on-year and by a third since 4Q14. NPL ratios have fallen in nearly all member states: nine had ratios above 10%, at end-2Q17, while 10 had ratios below 3%. In the spring, the Commission will propose a comprehensive package to further reduce the level of existing NPLs and to prevent the build-up of NPLs in the future - including a blueprint for the establishment of national asset management companies, measures to further develop NPL secondary markets and improvements to data availability and comparability.

Open Banking initiative
Moody's notes in its latest Credit Outlook publication that the UK's Open Banking initiative – which launched on 13 January - is credit positive for UK consumer securitisations because it will improve underwriting and collection efficiency for non-bank lenders. The initiative requires the UK's nine largest providers of current accounts (AIB, Bank of Ireland, Barclays, Danske Bank, HSBC, Lloyds, Nationwide Building Society, RBS and Santander) to share their customer data with third parties if the customer gives permission. By directly accessing current accounts, the lenders will be able to view data on its customers' disposable income and spending patterns, complementing the less detailed data that credit reference agencies provide. Of the approximately £32bn of UK consumer ABS that Moody's publicly rated in 2017, around half were backed by pools solely originated by non-banks.

RTS hearings
ESMA and the EBA are holding a joint public hearing on the new EU Securitisation Regulation at the EBA's premises on 19 February. The hearing will cover the two organisations' recently published consultation papers on draft regulatory technical standards (RTS) under the Securitisation Regulation (SCI passim), including disclosure requirements, homogeneity criteria and risk retention.