Contents

Insurance-linked securities

Bright start for UK ILS

The first UK ILS launched last month, coinciding with the introduction of the nation's new ILS regulatory and tax regime, designed to put the UK on an even footing with other jurisdictions (SCI passim). NCM Re is a US$72m collateralised quota share reinsurance transaction that underwrites a portion of Neon Syndicate 2468's property treaty reinsurance and direct facultative portfolios.

NCM Re is the first UK-domiciled protected cell company. In order to come to market at the same time as the UK's new ILS regulations came into force, the deal was a while in the making.

"The legislation was originally due in the summer before it then became delayed, so discussions began some time ago. The team here has experience in other jurisdictions, for example Mark Gibson has done several ILS deals in Bermuda previously, so this was an exciting step for Neon," says Deepon Sen Gupta, corporate strategy director at Neon Underwriting.

Mark Gibson, reinsurance and alternative capital director at Neon Underwriting, adds that the ability to support the growth of this new UK market was attractive to the company. While Neon is ultimately owned by American Financial Group, it operates within Lloyd's in the London market.

"The proposed UK regime allowed us to bring something different to investors and it was interesting to gauge their appetite. Investors were interested in the new jurisdiction, and many were keen to support it; but it was not a major element in their decision-making process. From our perspective it was useful to have the extra choice," he says.

As the deal was a first not just for the UK, but for Neon as well, Intertrust also played a key part in bringing the deal to market. As a firm with a track record in structured finance and capital markets, and the expertise and experience to understand complex transactions and work flexibly to resolve issues, Intertrust Group global head of capital markets Cliff Pearce notes that Intertrust was a good fit for achieving a quick turnaround on the deal and working to tight deadlines.

"This is the first ILS transaction under the new UK regulatory regime, so there really were no precedents to follow. That made it even more important to bring the experience we have from similar transactions in other jurisdictions and to then work co-operatively with the regulatory bodies to ensure that the transaction stayed true to the regulatory guidelines," says Pearce.

That co-operation with the regulators was important as the nascent legislation will still have issues to iron out; no new regulations can foresee every possible eventuality. In the course of putting together the deal there were frequent conversations with the regulators as issues and possibilities were thought through.

"This is new for everybody, including the regulators, so there will be challenges and the framework needs testing. The original legislation contemplated the use a simpler - single use - vehicle than the one we ultimately established. While the regulators may have expected us all to start slowly, we have really sought to push the boundaries right away," says Gibson.

Gibson notes that the legislation is designed to make multiple issuance relatively straight-forward. It has "a broad initiative that says once your vehicle is up and running, and provided that you stay within the broad remit of your original business plan, then you can do more issuances in the future and get approval afterwards, rather than having to get approval in advance each time".

That is one way in which the regulatory regime seeks to be accommodating. The experience from Neon and Intertrust is of a regulator keen to help, not hinder. Such a welcoming environment is likely to encourage further issuance.

"One of the great things about being involved in the very first deal is that we have already had interest from other parties that are looking to issue ILS going forward. There seems to be a lot of interest out there and a number of reinsurers were keeping their powder dry as they waited to see who would be the first-mover and how it would work out, but now they are priming deals and are ready to go," says Pearce.

He continues: "It will take some time for the market to gather momentum but what we have seen is that there absolutely is desire to be involved. The UK government is happy because this deal shows that the new regime ticks the boxes the government wanted ticked. It is great to be involved in the development of this market."

Neon also believes being a first-mover in the market has been advantageous. Sen Gupta comments: "This deal is all about Neon lighting the way - being bold, pushing boundaries and doing things innovatively. While competitors were focusing on sidecars in Bermuda, we were unafraid to do something different and we are very happy to see that paying off."

While Neon was putting its deal together, the pipeline was full of sidecar-type transactions from other sponsors being put together in jurisdictions, but there were no other UK deals. Gibson thinks that will change.

He adds: "It is never too early for us to be thinking of our second issuance, although we are not going to put a timeframe on that just yet. Ours is a multiple issuance vehicle and that is part of why it was more complicated to establish than originally envisaged; but now we have the first deal out there we can easily follow it with another one."

JL

Structured Finance

Call for transparency underlined

A push for transparency is a common thread among European initiatives to reinvigorate the securitisation markets. Communication and standardisation are expected to play significant roles in facilitating this effort.

Christian Thun, ceo at European DataWarehouse, agrees, in principal, that better communication is required to improve transparency in the European securitisation market. "Reading through the STS regulation, communication is only mentioned a handful of times in the text," he notes. "But transparency is the overarching goal - this is clear not only in the STS rules, but also in initiatives such as AnaCredit, MiFID and so on. A big motivation for European policymakers is to bring transparency to an opaque market, and communication and standardisation are vital elements of this effort."

The STS securitisation framework, for example, contains two specific clauses regarding communication: noteholders must be notified promptly about cashflow events; and a dispute resolution mechanism must be provided for noteholders. "Regulators have two crucial roles to play. The first is to prod the market towards certain behaviours through regulation, which they are doing. The second is to reassure participants and interpret the grey areas," observes Mike Manning, ceo of DealVector.

He continues: "In particular, this new push towards improved transparency and communication for the purpose of protecting investor rights and resolving conflicts risks colliding - even if just in perception - with older prohibitions against collusive communications. Regulators will have to ensure investors are comfortable utilising the new communication vehicles that emerge."

International Solutions Network senior md Michele Kelsey notes that the European DataWarehouse has addressed the need for better data, but the next step is to bring this data to life by allowing all parties to a deal to communicate effectively. In a new Whitepaper commissioned by DealVector, she highlights policymaker recognition that confidence needs to be restored to the European securitisation markets through tighter controls and authenticated communication, as well as increased information-sharing across all parties to a transaction.

"To facilitate confidence in the European securitisation market, issuers and investors need a level playing field. But how can it be level when one party does not have access to full transparency?" Kelsey asks.

She continues: "The STS initiative espouses increased connectivity and transparency. Making information readily available in a standardised format will increase investor comfort with new asset classes and create a more liquid market."

In terms of bringing data to life, Thun says information that is stored somewhere doesn't help if it isn't reaching the end-user, thereby making it useful for decision-making. He points to solutions like Bloomberg, DealVector or others offering a way of potentially bridging that communication gap by providing an anonymous method of matching holdings and networking with other market participants. Nevertheless, such a solution hinges on enough participants being on the same platform, meaning that coverage is key.

However, Thun suggests that reluctance to be the first-mover may hamper efforts to improve communication and that a regulatory push could make all participants move at the same time. "When the ECB reached out to the ABS market in 2012 and asked for loan-level data, no banks were eager to be the first in providing it. So, the ECB created a level playing field by requiring issuers to submit data as of the beginning of 2013 to the European DataWarehouse, in order to become part of the collateral framework. Now, regular disclosure is normal market practise."

Manning adds that adoption is being held back by a cultural barrier rather than a technical one. "Investors have historically viewed themselves as isolated and aren't used to working with each other. We need to see more examples of cases where this isn't a zero-sum game; for instance, circumstances where common owners of a bond cooperate to unlock the underlying economic value of the collateral."

The next step in policymakers' efforts to overcome information asymmetry is the push to create central data repositories. Thun confirms that the European DataWarehouse is seeking to become the first securitisation repository under the new ESMA guidelines.

"This will entail mapping the existing ECB templates to the new ESMA requirements to ensure compliance," he explains. "We're already reviewing the ED platform and considering the technical requirements. The aim is to make a solution available by year-end, so that we can begin reporting documentation, exposure information and loan-level data by 1 January 2019."

Away from regulations, one pressing issue that underlines the need for a better networked market is the phase out of Libor. A number of long-dated securities reference Libor, yet the index is set to be replaced by 2021.

Manning says that the mechanisms incorporated in the documentation for addressing this issue are often inadequate. "In practice, they will most likely end up using the last Libor quote available, which turns floating notes into fixed notes. The alternative is to vote to swap to another reference point, but this requires reaching all noteholders."

CS

NPLs

Distressed exchange queried

China Huarong Asset Management, one of China's largest state-owned distressed debt managers, yesterday launched a Beijing-based bad debt exchange. The exchange is expected to provide an inventory of what's available in the Chinese non-performing loan market rather than a trading platform that can facilitate transactions.

"NPLs are illiquid, so to appropriately price them can take months of due diligence and underwriting. An exchange just states that an NPL portfolio exists for sale. You can't simply price and trade these deals prudently without doing proper due diligence, which can take months," says Andrew Brown, partner at Shorevest.

He continues: "Price depends on extensive due diligence on a number of factors, including where underlying loans are in the litigation process, the hierarchy of the claims, valuing the underlying collateral, its liquidity and the sector and geography it is in, among other things. Moreover, the timing and development of multiple exit strategies must be considered for resolution."

The new entity, dubbed Huarong Zhongguancun Distressed Asset Exchange, is the first institution in China that is dedicated to the trading of NPLs. However, what the term 'trading' could involve remains unclear. It could refer to actual transactions or to a register of available opportunities. Huarong could not be reached for comment.

Yet although extensive due diligence may preclude the actual buying and selling of transactions, the Huarong exchange may serve other purposes. Brown explains: "As an information source, it can encourage investors by showing what's available in the market, along with generic characteristics of the portfolio. But, again, before you can actually price a transaction prudently, you have to carry out extensive due diligence, which can take months."

The event coincides with a continuing accumulation of Chinese non-performing exposures. According to official data, by the end of 3Q17, commercial bank NPL volumes reached RMB1.67trn (US$265.5bn), a RMB34.6bn increase compared to end-2Q17. However, the NPL ratio levelled off at 1.74%, equivalent to the figure at end-2Q17.

While official figures for commercial banks hover below 2% of total assets, analysts suggest that the true figure could be as high as 15%. Shorevest estimates that China's bad loan volume has hit US$3trn.

The level of bad debt in China has surged since 2013, bringing a surplus of NPL deals to the market and adding pressure on Beijing to resolve the issue. The government has imposed rules on the courts to enforce creditor rights, collateral coverage has increased and - in contrast to the 2005-2008 cycle, when banks sold to asset management companies - the borrowers tend to be privately-owned firms instead of state-owned firms.

The latter tend to be more policy-oriented and this makes any recovery via the courts a more cumbersome procedure. The current cycle began in January 2015, when asset management companies began selling assets to investors (SCI 15 June 2017).

SP

Secondary markets

Euro secondary picking up

Activity in the European securitisation secondary market is gradually picking up, albeit from a low starting point.

December saw a significant drop in volumes and left secondary spreads unchanged on the month. Since the start of 2018 trading activity has slowly increased week on week, but still remains intermittent and a pick-up in BWIC supply has only been evident over the past week or so. Overall, participants appear to be awaiting the return of the primary market to full speed.

Nevertheless, sentiment remains as positive as it has been for months and market tone is still very strong. Consequently, secondary prints have driven spreads ever tighter throughout January across all ABS/MBS sectors and the CLO capital structure.

Month-end means a halt in progress and there is currently only one BWIC on today's European schedule. However, there are already a couple visible for tomorrow.

Today's auction is due at 15:00 London time and involves two slices of Munda CLO I - €3m MUNDA 1X D and €7m MUNDA 1X E. Neither tranche has covered on PriceABS in the past three months.

Secondary markets

US ABS diverted

US ABS primary market activity is diverting attention away from secondary, but demand is still outstripping supply.

Since the beginning of the month focus has been on the strong new issuance volumes and secondary activity, particularly on BWIC, has lagged. Nevertheless, there is a strong buying bias across sectors pushing pricing levels higher as last year's demand for paper continues.

As a result secondary spreads have edged in across the board this month and bonds that do appear on BWIC continue to trade inside talk. Autos, cards and student loans have received the bulk of the focus in secondary of late, but other sectors are generating interest too and prices in more off-the-run paper appear now to be moving faster.

Today's US ABS BWIC calendar is once again limited so far, but one highlight is a $54.46m chunk of aircraft ABS AIRSP 2007-1X G1 due at 11:30 New York time. The bond hasn't covered on PriceABS in the past three months.

Secondary markets

US CLOs on the up

Pricing levels across the US CLO secondary market have kept increasing through January.

"Everything is getting tighter in secondary," says one trader. "Meanwhile, new issue spreads are tightening and then those bonds are trading up in the secondary market too."

The driver behind spreads narrowing is currently a simple one, according to the trader. "For the past two or three weeks it's been the same story across the board - customers have money and they need to spend it."

There is activity throughout the capital stack, but the trader adds: "We are seeing a lot of equity trade at the moment. There could be a range of reasons for that, from reinvestment terms getting looser, to valuations issues, or it could just simply be people rotating out of the sector."

There is currently no equity on today's US CLO BWIC calendar with volumes hampered by month-end and only two fairly small lists from higher up the stack circulating. However, there are already two equity auctions visible for tomorrow, 1 February, both due at 11:00 New York time.

One is a single $950k line of CFIP 2014-1I INC. The bond has not covered on PriceABS before.

The other is a 15 line $118.975m list comprising: APID 2017-27X SUB, CGMS 2017-2A SUB, CGMS 2017-2X SUB, CGMS 2017-3X SUB, CIFC 2013-1A SUB, CIFC 2013-1X SUB, CIFC 2013-2A INC, CIFC 2014-1A INC, CIFC 2014-1I SUB, CIFC 2016-1X SUB, CIFC 2017-1X SUB, ICG 2016-1X SUB, MIDO 2017-7X INC, OCT29 2016-1X SUB and OCT30 2017-1X SUB.

Only CIFC 2013-2A INC has covered on PriceABS in the past three months - at 46.36 on 30 January.

ABS

BEV auto ABS prepped

Tesla is marketing an inaugural US$608.08m securitisation backed by 8,879 retail auto lease contracts originated by the firm's finance arm, Tesla Finance. The transaction, dubbed Tesla Auto Lease Trust 2018-A, is backed by the discounted value of remaining monthly lease payments and base residual values from the pool.

Moody's has assigned provisional ratings to the transaction of Aaa on the US$422.61m class A notes, Aa2 on the US$40.14m class Bs, A2 on the US$27.97m class Cs, Baa2 on the US$23.71m class Ds and Ba3 on the US$31.62m class E notes. There is a US$62.03m tranche held for the purposes of overcollateralisation.

The rating agency says that the strength of the transaction includes the high credit quality of the lessees and the build-up of credit enhancement as the collateral pool amortises. In terms of the lessees, they have a weighted average FICO of 767, which is lower compared to deals from BMW and Mercedes - which average 780 - but high compared to other recent lease pools securitised by Ford, Nissan and Hyundai.

However, Moody's says that it has applied a 50% haircut to the market residual values in the case of the Aaa notes - which is more severe than for most Aaa rated auto lease transaction pools, where the haircut is typically 35%-36.5%. One of the reasons for this is the financial weakness of the manufacturer, given its very short operating history, coinciding with near-term credit risks linked to its plan for an unprecedented ramp up in the production and sale of the Model 3 battery-electric vehicle (BEV).

Further weaknesses include the limited performance data for the company, which only appears to be present on 4,344 used Model S and Model X vehicles sold in 2017, as of the 30 November 2017 cut-off date. Additionally, all the vehicles backing the Tesla 2018-A collateral pool are BEVs of two models and there is high geographic concentration, with 47% of the exposures located in California, 10% in Florida and 6% in New York.

The remaining average lease size is US$68,486 and the average remaining term is 20 months, while the average original term was 35 months. Lead underwriters on the transaction are Citi and Deutsche Bank.

RB

ABS

Turkish auto deal prepped

The first public Turkish ABS transaction, Driver Turkey Master (see SCI's deal pipeline), has been provisionally rated by both Fitch and Moody's. The TRY1.94bn transaction securitises Turkish auto loan receivables originated by Volkswagen Dogus Finansman (VDF) and features a one-year revolving period.

VDF is 51% owned by VW Financial Services and 49% owned by the Dogus Group. While it is the first transaction sponsored by VDF, parent company VW Financial Services is the largest auto finance service provider in Europe.

There will be a total issuance of TRY1.5bn across Series 2018-1, 2018-2, 2018-3 and 2018-4, with each series amount yet to be decided. There is also a TRY440m subordinated note. At the end of the revolving period, each investor can extend the revolving period for their series or initiate their amortisation; in the former case the interest rate and maximum issuance amount may be amended.

The Series 2018-1 class A notes, 2018-2 class A notes, 2018-3 class A notes and 2018-4 class A notes have been rated single-A minus by Fitch, which is that rating agency's rating cap for Turkish structured finance transactions. Moody's has rated them each Baa1, which again is constrained by a rating ceiling.

The pool is highly granular and has total exposure to top 20 obligors constituting only 1.97% of the securitised pool. A third of the pool is located in the Istanbul area. The weighted-average down payment rate is high at 41.7% and the weighted-average remaining term of the pool is 26 months.

There are 61,479 borrowers with 65,554 contracts. New vehicles account for 84.7% of the pool and all loan receivables are current as of the cut-off date, although delinquencies of up to six days are allowed.

Subordination and initial overcollateralisation provide "strong" credit enhancement, notes Moody's. There is also an increased target overcollateralisation if cumulative gross-loss triggers are breached, and a pre-funded reserve deposited in the cash reserve account which can be drawn upon during a disruption period.

Historical performance data is limited and coincides with economic growth in Turkey, so the data does not cover an economically stressed period. The nature of the revolving master structure also provides a rating challenge.

The transaction is expected to close in March.

JL

ABS

Auto giant expands Euro footprint

Moody's and DBRS have assigned provisional ratings of Aaa/AAA to the €483.2m class A notes and Aa3/AA to the €40.8m class B notes, and there is an unrated €129m class C note. Legal final maturity on the notes is February 2028.

Moody's notes that the ratings reflect the originator's strong experience in fleet lease products and securitisation, having previously issued lease ABS transactions in the Netherlands, Germany and the UK. Additionally, the portfolio is a diverse mix of vehicle brands and manufacturers.

The rating agency does highlight, however, that there is a significant dependency on LeasePlan France, which is acting as originator, servicer, maintenance coordinator and residual value guarantor and realisation agent. This is mitigated by the nomination of a back-up servicer and back-up maintenance coordinator at closing.

Lease termination poses a further risk as many of the products have a number of maintenance service components and, while maintenance service fees are not securitised, lessees may cancel the lease contracts should maintenance services not be provided. While this could occur in the event of originator insolvency, this would be mitigated by the appointment of a back-up maintenance coordinator.

DBRS notes that the underlying agreements are discounted at a uniform fixed rate of 5%, while the notes are floating rate. To mitigate interest rate risk, an interest rate swap is provided by ABN Amro.

Of the lease agreements in the initial portfolio, 94% relate to diesel vehicles, although 86% meet the Euro 6 emission standard. Nevertheless, DBRS suggests that due to ongoing restrictions on the manufacture and sale of diesel cars throughout Europe, diesel car registrations and residual values continue on a negative trend.

Moody's comments, however, that the risk of customer set-off rights and/or early termination rights in case diesel cars are banned is marginal, as long as there is no evidence that manufacturers have illegally manipulated emission levels. The agency says though that even should that occur, investors would only be impacted negatively if the manufacturer or seller doesn't provide remedy under the transaction's R&Ws.

RB

Structured Finance

SCI Start the Week - 29 January

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

Pipeline
The balance of additions to the pipeline last week closely followed that of the week before. There were another seven ABS added, along with four CLOs, five CMBS and a couple of RMBS.

The ABS were: €723.75m Driver Espana Five; Fair Hydro Trust Series 2018-1; US$266.45m GLS Auto Receivables Trust 2018-1; Golden Credit Card Trust Series 2018-2; US$591.5m SoFi Consumer Loan Program 2018-1; US$171.73m United Auto Credit Securitization Trust 2018-1; and US$800.97m World Omni Auto Receivables Trust 2018-A.

US$308.2m Deephaven Residential Mortgage Trust 2018-1 and US$916.6m Invitation Homes 2018-SFR1 were the RMBS. The CMBS were: US$1.287bn BANK 2018-BNK10; US$1.3bn FREMF 2018-K72; US$471m InTown Hotel Portfolio Trust 2018-STAY; US$200m JPMCC 2018-BCON; and €404m Pietra Nera Uno.

The CLOs were: €458.3m Barings Euro CLO 2018-1; US$407.5m Crown Point CLO IV; €324m GLG Euro CLO IV; and US$368.1m VMC Finance 2018-FL1.

Pricings
A further 13 ABS priced, along with an ILS, seven CLOs, a CMBS and seven RMBS. That single ILS was US$200m Vitality Re IX Series 2018-1 and the CMBS was US$192m WFCM 2018-BXI.

The ABS were: US$442m AASET 2018-1; US$1.026bn Ally Auto Receivables Trust 2018-1; US$114.039m Avid Automobile Receivables Trust 2018-1; US$1.8bn Citibank Credit Card Issuance Trust Citiseries 2018-A1; US$1bn Citibank Credit Card Issuance Trust Citiseries 2018-A2; US$550m Exeter Automobile Receivables Trust 2018-1; US$2.186bn Ford Credit Auto Owner Trust 2018-REV1; CNY4bn Fuyuan 2018-1 Retail Auto Mortgage Loan Securitization Trust; US$750m Golden Credit Card Trust Series 2018-1; £545m MotoPark Finance; US$1bn Navient Student Loan Trust 2018-1; US$170m Sonic Capital Series 2018-1; and US$1.2bn Toyota Auto Receivables 2018-A Owner Trust.

The CLOs were: US$381m Canyon Capital CLO 2014-1R; US$409.6m Crestline Denali CLO XVI; €2.835bn FT PYMES Santander 13; US$517m Sound Point II CLO 2013-1R; US$256m TICP CLO IX; US$560m Vibrant CLO VIII; and US$384.1m Voya CLO 2016-1R.

The RMBS were: US$1.2bn Benchmark 2018-B1; £314m London Wall Mortgage Capital Fleet 2018-01; US$705m-equivalent Lanark 2018-1; US$725m New Residential Mortgage Loan Trust 2018-1; €11bn Orange Lion XVI; US$462m Sequoia Mortgage Trust 2018-2; and US$242.521m Verus Securitization Trust 2018-1.

Editor's picks
Slicing the risk: Capital relief trade issuers and investors are weighing in on the virtues of a structuring technique dubbed 're-tranching'. The innovation involves slicing in two the junior risk, in an attempt to cope with higher capital requirements under the CRR (SCI 23 February 2017)...
Hovnanian highlights 'need for change': A group of funds, led by Solus Alternative Asset Management, is seeking to prevent a deal between GSO Capital Partners and Hovnanian Enterprises which has the potential to fundamentally undermine trust in credit derivatives. A federal court is due to hear arguments today, but regardless of the outcome market participants say change is needed...
Landmark financial guarantee completed: The EIB and Credit Agricole completed an innovative synthetic securitisation in late December. Dubbed VIADUC, the risk transfer transaction combines a guarantee by the EIF - which covers Credit Agricole's large corporate clients - with a commitment by the French lender to provide €830m of subsidised loans to French SMEs and medium-sized companies (see SCI's capital relief trades database)...
Going green: Representatives from Clifford Chance, TMF and Ygrene Energy Fund recently discussed the current status of green ABS during a live webinar hosted by SCI (view the webinar here). This Q&A article highlights the main talking points from the session, including the established asset classes, those that are developing, and what is next for the sector...
Latin America poised to grow: The Latin American structured finance market is expected to be boosted by an improving economic environment across the region, with several countries likely to see growth in 2018. Issuance is anticipated to grow in Brazil, Argentina and Mexico across a range of asset classes, although uncertainty surrounds looming elections and a limited derivatives market hampers cross-border capabilities...

Deal news
• Intesa Sanpaolo last month returned to the risk transfer market with another GARC transaction. Dubbed GARC-SME 6, the €120m cash collateralised deal references a €2.5bn Italian SME portfolio.
• The Canadian province of Ontario has launched the country's first ABS backed by utility cost recovery charges. The transaction, dubbed Fair Hydro Trust, has yet to be valued but comprises three tranches and is designed to finance lower electricity costs for 5.05 million households and businesses throughout the province.
• Värde Partners is tapping the market with a debut US$368.1m cashflow CRE CLO. The transaction, entitled VMC Finance 2018-FL1, is expected to close on 8 February and comprises 24 first-lien whole loans and pari-passu participations secured by commercial real estate properties spread across 12 US states.

Capital Relief Trades

APRA signals change in tone

The Australian Prudential Regulatory Authority has set out its priorities for 2018, most notably with regards to bank capital. The Australian regulator is considering changes to its overall approach to capital requirements in a number of areas where its methodology is more conservative than minimum international requirements.

Adjustments to the risk-based capital framework is expected to lead to revisions in credit risk weightings. Consequently, in early 2018, APRA will commence public consultation on associated changes regarding minimum bank capital. This will include consultation on the broad set of proposed changes early in 2018 and subsequent individual consultations on specific prudential standards over the course of 2018 and 2019.

These will be followed by consultations on revisions to capital requirements for operational risk, interest rate risk in the banking book and market risk, as well as associated changes to reporting and public disclosure requirements. However, despite changes in the capital framework, the latest information paper notes that the quantum of capital required would remain unchanged.

Capital levels for Australian banks have been growing over the past decade in response to the financial crisis and changes in international capital standards, as well recommendations by Australia's own financial system inquiry that the major banks' capital be "unquestionably strong." In mid-2017, APRA decided not to wait for the finalisation of the Basel rules - announced in December 2017 - and decided that a CET1 ratio of 10.5% would be sufficient.

Following Basel Committee recommendations, APRA will also introduce a leverage ratio requirement, with consultations commencing in early 2018. The aim is to finalise this prudential standard in late 2018 or early 2019.

The change in tone on behalf of the regulator could have an impact on capital relief trade issuance from the jurisdiction. APRA does not allow synthetic securitisations, but it does permit significant risk transfer transactions in the form of traditional securitisations.

The introduction of the leverage ratio has driven European banks, such as Rabobank and Credit Foncier, to utilise the true sale format in an effort to reduce the size of their balance sheet (SCI 4 April 2017). It remains to be seen whether Australian banks will follow the same route.

SP

CLOs

CLO reissues debut

The first two US CLO reissues closed this week, adding another US$1.12bn to Anchorage Capital Group's AUM. A reissue differs to a refinancing or reset as it involves calling a pre-existing CLO and rolling the assets into a new SPE.

JPMorgan arranged both reissues - the US$508.75m Anchorage Capital CLO 3-R and the US$614.15m Anchorage Capital CLO 4-R - following the optional redemption of Anchorage Capital CLO 3 and Anchorage Capital CLO 4 on 17 January. The assets of the pre-existing CLOs were sold to newly created SPEs via participation at closing and were elevated to assignment shortly thereafter.

CLO analysts at JPMorgan suggest that reissues are emerging now because many deals that were refinanced or reset in 2016-2017 prohibit any further refinancings using the original SPV. However, higher costs are typically associated with CLO reissues than resets, given the need for a new SPV.

"The primary motivation for a refinancing, reset or reissue...is to decrease the weighted average liability costs of the CLO capital structure and improve CLO equity cashflow returns. Recently, the term curve of CLOs has steepened and shorter-duration refinancings are pricing at tighter spreads than longer-duration CLO resets or reissues. This term curve allows CLO equity investors to potentially realise higher equity returns via refinancing," the JPMorgan analysts observe.

They continue: "However, this must be counterbalanced with the fact that CLO equity holders prefer to have longer-term non-mark-to-market financing. Additionally, CLO managers prefer to extend deals, as in a reset or a reissue, in order to lengthen out fee streams."

The triple-A rated (Fitch and S&P) class AR notes of both Anchorage reissues printed at three-month Libor plus 105bp. SCI's primary issuance database shows that five classes of Anchorage 4 were refinanced in April 2017 (with the class A1AR and A1BR notes both pricing at 114bp) and four classes of Anchorage 3 were refinanced in October 2016 (with the class A1R pricing at 143bp). The original CLOs were issued in 2014.

Meanwhile, in the new issue market, Dryden 57 Senior Loan Fund hit the headlines last week when its class A tranche printed at three-month Libor plus 101bp - a new post-crisis tight for US CLO spreads. The class A1A tranche of Madison Park Funding XXVII and the class A1 tranche of Neuberger Berman Loan Advisers CLO 27 both priced at plus 103bp earlier in the same week.

CS

CLOs

TPG moves into CRE CLOs

TPG RE Finance Trust (TRTX) is marketing an inaugural US$932.4m CRE CLO. The transaction, entitled TRTX 2018-FL1, is the second-largest CRE CLO to be issued post-crisis and will initially be collateralised by 26 mortgage assets, secured by 63 properties.

Moody's and KBRA have assigned expected ratings of Aaa/AAA to the US$491.831m class A notes and KBRA has provisionally assigned triple-A to the US$72.259m class AS notes, double-A minus to the US$55.943m class B notes, single-A minus to the US$52.446m class C notes, triple-B minus to the US$73.425m class D notes, double-B minus to the US$37.295m class E notes and single-B minus to the US$37.296m class Fs. All notes have a stated maturity date of February 2035 and there are also preferred shares totalling US$111.885m.

The collateral consists of 25 non-controlling participations (accounting for 96.1% of the assets) and one whole loan (3.9%). Combined with related non-trust companion participations, these assets represent a total balance of US$2.1bn.

The related companion participations held outside the trust consist of 17 assets, with both a funded and unfunded pari passu participation. In addition, there are six fully funded pari passu companion participations and two unfunded pari passu companion participations.

All of the companion participations are currently held by affiliates of the seller, TPG RE Finance Trust CLO Loan Seller, a subsidiary of TRTX. Over the life of the transaction, principal proceeds received on the collateral assets can be used to acquire eligible funded companion participations.

The collateral properties are located in 13 states, with the three top exposures being California (22.8%), New York (15.4%) and New Jersey (10.7%). The pool has exposure to six property types, which include office at 38.8%, multifamily at 23.5%, lodging at 19.1%, mixed use at 12.5%, industrial at 3.9% and retail at 2.3%.

KBRA comments that almost all - 23 or 90.9% - of the loans were originated by TPG Finance Trust, a commercial mortgage REIT managed by TRTX. The remaining three loans were originated by Column Financial and then acquired by TRTX.

The loan proceeds were used to refinance existing debt, on 13 loans, or for property acquisitions, also 13 loans. The rating agency adds that the securitisation is a part of TRTX's overall operating and financing strategy.

KBRA comments that while it may be the first CRE CLO from TRTX, the firm is a commercial real estate finance company with significant experience investing in and managing CRE and other real estate debt across North America. Additionally, TRTX is supported through its ownership by TPG Global, a global private investment firm with current AUM of US$73bn.

The rating agency adds that the transaction's exposure to primary markets (71.8%) is the highest of the nine CRE CLOs it has rated in the last 12 months, which ranged from 28.3% to 68.3%. The transaction benefits from this because primary markets have diverse economies and favourable demographics that can better withstand fluctuations and downturns in the national economy, compared to tertiary markets.

RB

Insurance-linked securities

'No end in sight' for ILS growth

Last year was unprecedented for the global ILS market, with record issuance of around US$10bn and non-life ILS capital reaching a record US$88bn by year-end, up 17% from 2016. While some analysts note that the record issuance was largely driven by the first half of 2017, a continuation of unabated growth in terms of new issuance and secondary market activity in 2018 is expected.

According to ILS analysts from Willis Towers Watson Securities, 2018 will see the ILS sector recover from the impact of recent natural disasters, aided by an influx of investors to the ILS space. They suggest further that the market was able generally to withstand any shocks from natural catastrophe losses in the past year, due to funds reaching out to their investors and risk partners.

The analysts comment that while 2017 was one of the most trying years for the ILS market - with a hyperactive hurricane season, as well as earthquakes and wildfire activity - it largely overcame it. Only an estimated 13 transactions are likely to be severely affected and, while the total impaired cat bond capacity is US$985m, the estimated principal loss is approximately US$480m.

The analysts go so far as to say that there is "no end in sight to ILS growth as a long-term trend", although 2018 is seeing firms compete for market share. As a result, incumbent ILS investors are looking to compete by replacing commoditised and easily syndicated covers with bespoke structures, which claim to add value through customisation.

WTWS analysts are equally positive about the secondary ILS market, with expectations for a "very robust issuance season" for 2018. They suggest, however, that after the impact of wildfires through the US, investors are calling for recalibrated wildfire modelling.

Swiss Re ILS analysts comment that while 2017 was a record year for issuance, this was driven by 1H17, which saw US$8.4bn issued. In contrast, 2H17 saw unusually light issuance of US$2.13bn - the lowest total since 2009.

The analysts also comment on the "unrelenting barrage of catastrophic events" in 2H17, which led to increased volatility and large bond price swings, ultimately resulting in further spread tightening. As such, the analysts expect many sponsors will return to utilise the capacity provided by the ILS market.

The firm says that while 2H17 was very light in terms of new issuance, the transactions seen were "quite remarkable", with four being from sponsors using broadly syndicated catastrophe bonds for the first time. Also for the first time, deals included global pandemic cover, as well as retrocession and European flood on an indemnity basis.

While the ILS market grew to a record level of US$27bn outstanding, the Swiss Re analysts suggest that a dip in market size at the mid-point in 2018 wouldn't be surprising, as US$4.6bn is scheduled to mature. Overall, however, the analysts conclude that they expect a robust new issue pipeline in 2018 and that pools of investor capital "provide reason for great optimism."

RB

RMBS

UK sukuk 'RMBS' first

Al Rayan Bank is marketing its first £250m sharia-compliant UK securitisation. Dubbed Tolkien Funding Sukuk No.1, the deal is a static securitisation backed by first lien Home Purchase Plans (HPPs) extended to 1,672 customers and secured by residential properties in the UK.

Moody's and S&P have assigned provisional ratings of Aaa/AAA to the £250m class A note, which represents the only offered tranche, although the current pool balance is approximately £301.4m. The transaction is the first UK sukuk structure and the first securitisation issued under the Al Rayan Bank label the agencies have rated.

The HPPs are structured as 'Diminishing Musharak with Ijaara' (reducing co-ownership with lease) arrangements. In practice, this means that the client chooses a property, agrees the price with the vendor and then purchases the property with the bank. The bank then sells its share in the property to the client in installments over a fixed term.

The client pays rent to the bank for the portion of the property owned by the bank, with the rent assessed quarterly and benchmarked to the Bank of England base rate, although the rent can be fixed for a period of time.

Moody's adds that its expected loss on the pool is 2.5%, which is higher than the UK prime sector. This is due to limited historical delinquency and default information, the policies and procedures of Al Rayan Bank and current economic conditions in the UK and the possibility of an increase in the benchmark reference rate and the impact this may have on the HPPs.

The rating agency notes that operational risk exists in Al Rayan Bank acting as originator and servicer, while Elavon Financial Services will act as cash manager through its UK branch. To mitigate the operational risk, Homeloan Management will act as back-up servicer.

Moody's also highlights that there is a risk of spread compression and rental rate risk due to the absence of a swap for floating rental rate contracts (which account for 44% of the pool) and fixed rent contracts (which account for the remainder of the pool). Clients have the option to switch from a floating to fixed rental rate during the life of the HPP, which could lead to a risk of spread compression, should a significant portion of the pool switch from floating to fixed.

The rating agency comments that should such a switch occur after the step-up date, the asset would be repurchased by Al Rayan Bank. Regardless, the agency says it has compressed the spread in the transaction to take potential basis and fixed-floating mismatch into account.

The transaction could also be threatened by developments in the Islamic finance market, including the recent case of UAE-based company Dana Gas being informed that its issued bond is not Sharia-compliant. Moody's suggests that similar challenges could be brought against the Tolkien transaction, but notes that this is mitigated by a number of factors, such as the assets and liabilities of the sukuk all being regulated under English law.

RB

RMBS

Interest shortfall risk spied for VOLT deals

Many 2017 VOLT deals did not receive principal payments in the January 2018 remittance cycle, as the pace of liquidations has slowed dramatically. This appears to be connected to an increase in REO-to-rental activity, which is increasing upward pressure on the expected average lives of senior notes and is increasing risk of interest shortfalls.

Reduced liquidation principal coupled with the absence of servicer advancing meant that some deals did not even have enough funds to cover interest payments, note Wells Fargo RMBS analysts. In those cases the reserve account had to be used to provide additional funding.

VOLT 2017-NP10 has not received a single principal payment in its three months of existence. This deal has only 3.1% of unpaid principal balance in REO assets, whereas other VOLT deals typically have 20%-30%.

"While it is unclear why REO sale volume dropped this month, we believe a part of the REO properties may have followed the rental approach instead," say the analysts. VOLT deals allow a certain portion of loans to be rented out if that can ultimately result in a higher recovery, although rented properties are unlikely to be liquidated for some time, which extends the overall deal liquidation pipeline.

VOLT 2017-NPL1 until VOLT 2017-NPL5 are subject to a 5% rental cap, whereas deals from VOLT 2017-NPL6 onwards are capped at 10%. Most deals remain some way from reaching their cap, although the number of rental properties in most deals are increasing rapidly, suggesting a ramping up of REO-to-rental activity.

As many of the 2017 NPL deals were issued at historically tight spread levels, there is not thought to be much rate incentive to call deals early. An increase in REO-to-rental activity suggests slower liquidation and therefore longer average lives for the seniors, although this will be mitigated somewhat by the rental caps. Furthermore, the significant coupon step-ups which kick in after the deals pass their expected maturity should provide additional extension protection.

"However, if the subdued liquidation activity continues in the near term as the issuer diverts REO properties to rentals, the reserve accounts could be depleted, which would increase the risk of interest shortfalls. Looking at the deals from VOLT 2017-NPL2 to 2017-NPL6, if they continue to draw at the same rate as this month, they would run out of reserve funds in three months," the analysts warn.

The only sources of payments to the bonds are mortgage assets and the reserve account, so once the reserve account is depleted the only way to avoid interest shortfalls will be selling off loans, unless organic liquidations pick up the slack. Such a process would have to be managed properly to avoid sub-optimal dispositions.

The analysts predict that the net effect of this development is that expected average lives of NPL seniors will increase slightly and there could be a higher risk of interest shortfalls. They say investors should be cautious in monitoring the levels of reserves, discretionary sale activity and pace of increase in rental properties.

They add: "While we believe this does not pose an immediate credit concern, we are closing our recommendation on NPL seniors. The increased uncertainty in the sector from the dominant issuer may command overall wider yields. In addition, with increasing short term rates, the yield-based pricing convention in the sector means that yields would have to increase even if inherent credit spreads remain constant."

JL

Structured Finance

Market moves - 2 February

North America

CVC Credit Partners has named Gretchen Bergstresser as global head of performing credit - a new role within the firm - having led its US performing credit strategy. Phil Raciti, senior md in CVC's New York office, will become head of US performing credit. Additionally, from 1 February partner and London-based senior portfolio manager Jonathan Bowers will become a senior adviser to the business in a part-time capacity in order to pursue other opportunities. Andrew Davies, senior md in the London office, has consequently been promoted to head of Europe.

Och-Ziff Capital Management Group has announced that Robert Shafir will succeed Dan Och as ceo, effective 5 February, 2018. As part of the transition, Shafir will join the board of directors on the same date. Och, the company's largest shareholder, will continue to serve as chairman of the board through 31 March, 2019, after which time he expects to remain involved with the firm. Shafir, who previously served as the ceo of Credit Suisse Americas and co-head of private banking and wealth management, will provide day-to-day leadership and management of the company. He will also be responsible for the planning and execution of the firm's strategic direction, financial objectives and client engagement.

Tennenbaum Capital Partners has opened an office in Atlanta and has hired two new executives, Kenneth Saffold, director and Kathleen McGlynn, vp. Saffold will work from the new office and was previously svp at Capital One Healthcare. McGlynn was previously assistant vp at Oaktree Capital Management.

Pennybacker Capital has appointed Dave Stahl as md, distressed credit and special situations. His primary responsibilities will include overseeing investments within the special situations strategy and expanding Pennybacker Capital's distressed investment capabilities across the firm. Stahl joins Pennybacker after a combined ten years at Lone Star Funds/Hudson Advisors where he most recently served as director of special assets, and previously directed both acquisitions and asset management teams focusing on distressed credit.

Mark Hanslin has joined Partners Group as a portfolio manager working in CLO management and BSL/liquid loans investment. He was previously at Mountain Bridge Advisors working as portfolio manager and CLO and bank loan strategies advisor.

Strategic Value Partners and its affiliates, SVP Global, has hired Dagmar Kent Kershaw to its advisory council. Kershaw was previously head of the credit fund management team in Europe and Australia at Intermediate Capital Group.

EMEA

Bain Capital Credit has acquired Habitat Inmobiliaria, a Spanish real estate developer. Habitat has built more than 60,000 properties throughout Spain since 1953 and has a ready-to-build landbank of 2.5m square metres. Bain Capital Credit states that it plans to create a large real estate platform around the Habitat business.

Securis has appointed three new portfolio managers in Richard Godfrey for traded risks; Herbie Lloyd, non-life; and Andrea Cavalleri, life. The firm has also promoted Paul larrett to chief underwriting officer and head of analytics (non-life). Fergus Reynolds has been promoted to head, non-life origination, moving up from his role as head of international at the firm. In investor relations: Weston Tompkins and Yuko Hoshino have been promoted to co-head's of investor relations and global distribution. Neil Strong has also left the firm in his role of global head of origination at the firm.

Asia

Artex has launched Artex Risk Solutions in Singapore and has hired Vic Pannuzzo as chief executive to lead the new office. Pannuzzo was previously regional md at Aon Global Risk Consulting in Singapore. It is the firm's first office in the region and will oversee the growth of Artex's Asia Pacific captive and risk solutions strategy.
Analytics collaboration

Moody's Analytics has partnered with Citi to provide its CLO cashflow and data analysis on the Citi Velocity platform, allowing all Citi Velocity users to access comprehensive analysis of CLO tranches powered by Moody's Analytics. Users will benefit from a consolidated tear-sheet that includes price/yield tables across defaults, prepayments, reinvestments and call scenarios for the global universe of CLOs. They also gain deal metrics that highlight exposures to headline industries and distressed assets, as well as comparative analytics of managers' performance.

Auction results

The AOFM has sold A$361.57m (amortised face value) of RMBS bonds - at above par - in its latest auction. The paper put up for bid comprised Apollo 2010-1 A2s, Puma P-16 A3s, REDS 2009-1 A1s, Torrens 2010-1 As and Torrens 2011-2 A2s.

Company rebranding

Redpoint Capital Partners has changed its name to Park Cities Asset Management, LLC effective immediately. Park Cities will continue to be led by managing partners Andy Thomas and Alex Dunev.

CDS court ruling

A US district court has given Hovnanian the green light to complete its debt refinancing deal with GSO, which has been opposed by a group of investors led by Solus Alternative Asset Management (SCI 25 January). While market participants cry foul over the manufactured credit event required to receive the financing from GSO, the court denied Solus' preliminary injunction request to stall the deal. Julia Lu, partners at Richards Kibbe & Orbe, comments: "Market participants will do well to remember that issuers have always had the ability, if not the incentive, to manufacture a credit event, and that other market participants may supply such incentive."

Data Partnership

A consortium led by Blackstone has announced that private equity funds managed by Blackstone - together with Canada Pension Plan Investment Board and GIC - have entered into a partnership agreement with Thomson Reuters for Thomson Reuters' Financial & Risk business. Under the partnership agreement, the Blackstone-led consortium will own 55% of the equity in a new corporation created to hold the F&R business and Thomson Reuters will retain a 45% equity stake, at an overall valuation of US$20bn. Reuters News will continue to remain a part of Thomson Reuters and will not be included in the assets being acquired. The new F&R will enter into a 30 year contract for the exclusive rights to distribute Reuters News through all F&R products. Reuters News will continue to have complete editorial independence from F&R and Thomson Reuters, as it does today. Canson Capital Partners, BAML, Citigroup, and JPMorgan are acting as financial advisors to the Blackstone-led consortium, and Simpson Thacher & Bartlett is acting as legal counsel. Debt financing related to the transaction is being provided by JPMorgan, BAML, and Citigroup. Dechert is acting as legal counsel to GIC. The agreement is expected to close 2H18.

EBA stress test

The EBA has launched its 2018 EU-wide stress test - which will, for the first time, incorporate IFRS 9 - and released the macroeconomic scenarios. The adverse scenario implies a deviation of EU GDP from its baseline level by 8.3% in 2020, resulting in the most severe scenario to date. The EBA expects to publish the results of the exercise by 2 November 2018.

ILS

Nephila Holdings, parent company to Nephila Capital Ltd, has expanded its weather and ESG-driven business with the launch of a new specialty division, Nephila Climate (NCx). NCx is dedicated to weather risk transfer and climate resilience products. Richard Oduntan, the head of Nephila's weather risk investment team, has been named ceo of NCx. Barney Schauble will act as chairman of Nephila Climate.