News Analysis
RMBS
Busy start for UK RMBS
UK RMBS has come flying out of the blocks in 2018, with the end of the Term Funding Scheme (TFS) and Funding for Lending Scheme (FLS) only partly explaining the new-found enthusiasm for issuance. Recent JPMorgan figures put UK RMBS issuance at over £3bn for 2018 already, with US dollar tranches and Islamic finance techniques both seen, and even the possibility of a seven-year fixed rate tranche mooted, while RIPON paper coming into secondary and the proposed RMAC call both add spice to the sector.
The drawdown period for FLS ended last month, with the drawdown period for TFS ending at the conclusion of this month – although of course a bank which draws down on 28 February theoretically has until 28 February 2022 before it needs funding again. With their cessation the UK's banks lose access to cheap funding, once more thrusting forward RMBS as an option, and this circumstance certainly appears to explain at least part of the increase in issuance.
"TFS is not the only factor, but it is one of them. There may have been a couple of deals scheduled for the back end of last year which got delayed – for example I seem to remember hearing that London Wall's Fleet 2018-1 was expected then – but others have come out this year specifically because TFS is ending," says Rob Ford, partner and portfolio manager at TwentyFour Asset Management.
He continues: "It tells you everything you need to know with respect to Kenrick No.3 that the previous Kenrick transaction was done in 2013. In the period since then, with FLS and TFS, West Bromwich Building Society decided not to issue RMBS."
The non-banks have not had access to TFS and building societies have had access to strong deposit funding and funding in the wholesale market. Most also have covered bond programmes and direct issuance through covered bonds remains cheaper than RMBS, but recent issuance proves that RMBS remains an available option.
"If banks are willing to take a little yield curve risk then they can issue one-year CDs at similar levels to a three-year RMBS. Those offer easy execution, none of the documentation and structuring effort or costs and decent pricing, so although RMBS becomes another option in the armoury, it is unlikely that it will become the 'go to' funding tool," says Ford.
He continues: "A lot of issuers stepped back when TFS came in and the likes of Brass No.6 and Gosforth Funding 2017-1 only came out when it was announced that TFS would end. I would not be at all surprised to see almost all the other banks dipping their toes back into the water this year, but I would be very surprised – with perhaps the exception of Clydesdale Bank, which has been a regular issuer and will have its 2014 Lanark deals redeeming – if they did so more than once."
Already into the market have come £636.5m Finsbury Square 2018-1, £383m Kenrick No.3, Lanark 2018-1 which had a US$300m 1A tranche and a £285m 2A tranche, £330m London Wall Mortgage Capital Fleet 2018-1, £255m Precise Mortgage Funding 2018-1B, £1.05bn Silverstone Master Issuer 2018-1 and £250m Tolkien Funding Sukuk No.1, which broke new ground as a sharia-compliant RMBS (SCI 29 January 2018).
With all the funding Nationwide Building Society has available to it, a further Silverstone transaction this year appears unlikely. That may disappoint some investors, as the 2018-1 had for a time been set to issue seven-year fixed rate paper, which might have been attractive to the UK institutional investor base. However, that tranche was not ultimately included and there are no indications that other issuers will include one.
Ford adds: "If the banks are trying to wean themselves off the surfeit of central bank funding then they still have Bank of England repo facility available to them. They are not going cold turkey."
For example, when Brass No.6 was issued by Yorkshire Building Society in October 2017 – not long after the end of TFS was announced – the deal was sized at £2.6bn but only £250m was sold, with the rest kept on balance sheet and therefore available to be used for repo. While repo might not be as efficient as TFS, it is still cheaper than RMBS issuance.
Non-conforming issuers may be more prolific than the banks. Ford believes another Fleet and another Chartered Court transaction are both possible this year, for example. Challenger banks such as Virgin Money, which brought two Gosforth deals in 2016 and another last year, might also be active.
March should bring an auction of Bradford & Bingley mortgages by UKAR. There is a £5.5bn portfolio and PIMCO, Cerberus, Och-Ziff and M&G Prudential are understood to be shortlisted.
Much of the Bradford & Bingley portfolio consists of buy-to-let mortgages. There may be another source of BTL Bradford & Bingley paper in the following month, as April will mark 12 months since a consortium of banks pledged to hold some £6.271bn of RIPON 1 for a period of one year.
As of the end of that year, on 25 April, that consortium will be able to sell 25% of their holdings. Bank of America Merrill Lynch analysts reckon there could be £970m of RIPON 1 paper hitting the market, £780m of which is rated triple-A.
"I would put my money on it coming and I would have thought it will get easily absorbed. I'm sure there have been investors teed up to take that paper for quite some time already, so it might not even get marketed in the public space," says Ford.
Any concerns about oversupply would therefore be misplaced, it would seem. Primary issuance so far this year has typically priced at the tight end of talk and has generally been oversubscribed, even when auto ABS or the €2.268bn STORM 2018-I have provided competition.
If that level of paper has not forced spreads wider, as it most likely would have done previously, then the extra paper from RIPON 1 should also be absorbed well. Ford notes: "[RIPON 1] may be a consideration for issuers timing their own moves, but it should not be a challenge in any other sense."
A tender offer made last month by Clifden IOM No.1 for all outstanding bonds in the RMAC/RMACS programme took the market by surprise, and Clifden has this week upped its offer. This appears to be in order to acquire majority interest in the various series and restructure them, but the originator is considering redeeming the notes.
All RMAC deals are callable and Paratus AMC declared its interest in calling a range of RMAC series late last year. Clifden IOM No.1 has amended the terms of its tender for some of the notes, bringing forward the expiration date from 7 March to 26 February. It has also increased the price.
The likelihood of a call for RMACS is harder to gauge and will depend on several factors. Whatever happens, it will likely prove instructive for other would-be offerors and could lead to more such deals.
With so much going on in the sector, there is plenty for investors to keep track of. While there are no more UK RMBS in SCI's deal pipeline right now, the early-year rush has put 2018 on course for a much improved year-end total.
Before the financial crisis, RMBS was both a funding management and capital management tool. The current regulatory framework means that securitisation is no longer efficient for capital management, but it still has a role as one funding tool among a range of options.
Amid the increased issuance, investors have shown that demand for RMBS remains high. Ford says: "Triple-A floating rate RMBS remains a fantastic product, particularly in a rising interest rate environment. This is a product which has proven over the last decade that it can weather the very hardest of economic crashes with the underlying assets barely flinching."
JL
21 February 2018 16:36:00
News Analysis
CDS
Synthetics spur CDS expansion
An evolving synthetic securitisation landscape is fuelling the expansion of the CDS market and CDS-linked products. However, the regulatory hurdle of the fundamental review of the trading book (FRTB) looms on the horizon.
Dmitry Pugachevsky, director of research at Quantifi, comments that the financial crisis negatively impacted the image of synthetic and CDS-backed products. Now that the dust has settled, however, views on the model have changed and "interest has picked up," he says.
Nevertheless, activity is restricted to a smaller number of investors at the higher end of the risk spectrum. Selwood is one hedge fund that has recently boosted its trading of CDS-backed products, including bespoke tranche opportunities, from £300m to £1bn. Much of the rise in volume has been in correlation trading, says Pugachevsky, driven by the higher-yielding opportunities that are on offer.
One bank that is increasing its engagement in the CDS space is MUFG, which has launched a new CDS business in the US. It initially launched a single-name CDS capability in Europe and Asia two years ago and, having been well received by a number of clients, the decision was made to replicate the model in North America at the start of the year.
Matt Simpson, head of credit trading at MUFG and heading up the venture, agrees that the synthetic market is seeing a resurgence. He adds that while MUFG doesn't structure synthetic CDOs, the business is growing on the back of offering single-name risk transfer and CDS liquidity to firms that do structure synthetic CDOs.
Potential volatility isn't a motivating factor in the CDS business launch; rather, it is ultimately a response to client demand, with "a steady growth in the number of asset managers expanding in the CDS space." This has been in tandem with reduced capital charges on cleared products over the last 12 months.
Simpson stresses that the CDS landscape is much less liquid, with far lower volumes than pre-crisis, but he notes that spreads are also trading much wider. As a result, he says that strategies have changed and there is greater scrutiny on individual names in the space than there may have been pre-crisis.
Pugachevsky agrees that scrutiny has increased on the underlying assets. "Attention to detail is something that has changed among participants...with an extra level of attention being paid to default risk and...what will happen in the event of a default."
A potential hurdle to the ongoing growth of the CDS market is the introduction of the FRTB framework in 2019. Pugachevsky suggests that it could be damaging for structured credit trading in general and adds that regulators still "take a punitive approach to CDS products."
FRTB is already having an impact, with shorter maturities on the underlying products being seen more often - "possibly because banks are thinking about the additional risk of FRTB coming in," says Pugachevsky. Firms can, however, use one of two FRTB models and he indicates that most large banks will adapt the "less punitive" internal model.
RB
21 February 2018 16:49:33
News Analysis
NPLs
Indian investment boost expected
India's latest guidelines aimed at speeding up non-performing loan resolution is likely to increase banks' credit costs and undermine earnings in the near term. The new regime, however, is also expected to boost NPL investment in the country.
"The new regime forces speedier resolution and provides certainty of timelines for large account resolution. I would expect a deepening of credit markets, as a result of this," says Sakate Khaitan, partner at Khaitan Legal Associates.
India has already attracted more investment, following the introduction of a bankruptcy framework last year (SCI 9 June 2017). For instance, ICICI, Bank of India and an Apollo Global Management affiliate have agreed to work together to resolve debts in the country. Additionally, Bain Capital and Piramal Enterprises have signed an accord to create a strategic partnership to invest in Indian restructurings.
According to the new regime, banks will have to sign a restructuring plan within 180 days for large corporate loans. Failure to do so will trigger an insolvency proceeding, which suspends management and control moves to a court-appointed restructuring professional.
If no resolution plan is approved by the court within 270 days, the debtor is liquidated. Furthermore, smaller loans of less than R50m must be reported on a monthly basis, and there is a weekly reporting requirement for anything above R50m.
Previous legal regimes allowed banks to restructure using any one of several guidelines, which the new regime has consolidated into a single guideline. Fitch anticipates the regime to result in a rise in bad loans, as banks will be forced to reclassify NPLs previously recorded as special mention loans or restructured loans.
More accounts are also likely to be pushed towards insolvency courts and liquidation, particularly since the new guidelines require all of a borrower's lenders to agree on a resolution plan to keep it away from the courts. Moreover, "an increase in liquidation would raise the likelihood of banks taking large haircuts on bad loans than they expect," states Fitch.
However, Khaitan does not expect a significant rise in NPL volumes. He concludes: "The time period for classifying a loan as non-performing remains unchanged. The new regime simply rationalises the restructuring process by repealing overlapping processes, while providing strict timelines and parameters for restructuring."
SP
23 February 2018 14:53:35
News
Structured Finance
SCI Start the Week - 19 February
A look at the major activity in structured finance over the past seven days.
Upcoming event
SCI Risk Transfer & Synthetics Seminar - 13 March, New York
SCI's Synthetic Securitisation Seminar provides an in-depth exploration of how synthetic securitisation is being utilised to transfer risk, achieve capital relief and create bespoke investment opportunities in the post-financial crisis environment. Panels cover capital relief trade structuring and regulatory considerations, issuance trends, index tranches and mortgage credit risk transfer.
Pipeline
There were a dozen ABS added to the pipeline last week, but only one CLO. There were four commercial MBS and one residential.
The ABS were: US$197.549m Amur Equipment Finance Receivables V Series 2018-1; Asset-Backed European Sec Transaction 15; US$608m Business Jet Securities Series 2018-1; C$632.9m Ford Auto Securitization Trust Series 2018-A; US$1.08bn Honda Auto Receivables 2018-1 Owner Trust; US$1.034bn Hyundai Auto Lease Securitization Trust 2018-A; US$753.19m John Deere Owner Trust 2018; US$1.3bn Nissan Auto Receivables 2018-A Owner Trust; US$525.74m OneMain Financial Issuance Trust 2018-1; US$175m Oportun Funding VIII Series 2018-A; US$175m Purchasing Power Funding 2018-A; and €1bn Red & Black Auto Germany 5.
€413.7m Ares European CLO IX was the CLO. The CMBS were US$365m GS Mortgage Securities Corporation Trust 2018-CHILL, US$475m Hilton Orlando Trust 2018-ORL, US$640m SBA Tower Trust Series 2018-1C and US$300m UBSCM 2018-NYCH, while the RMBS was US$480m Sequoia Mortgage Trust 2018-3.
Pricings
There were 11 ABS prints, as well as 12 CLOs, a pair of CMBS and four RMBS.
The ABS were: US$550.94m ARI Fleet Lease Trust 2018-A; US$1.575bn Bank of America Credit Card Trust 2018-A1; US$192.94m BCC Funding XIV Series 2018-1; US$500m Credit Acceptance Auto Loan Trust 2018-1; US$880m Drive Auto Receivables Trust 2018-1; €854m Driver Fourteen; €1.5bn FADE Series 32; US$200m Flagship Credit Auto Trust 2018-1; US$1.25bn GM Financial Automobile Leasing Trust 2018-1; US$507.47m Navient Private Education Refi Loan Trust 2018-A; and US$230m Orange Lake Timeshare Trust 2018-A.
The CLOs were: €469m Avoca CLO XV; €473.5m BlackRock European CLO 2016-1; US$457.88m Crown Point 4 CLO 2018-4; US$469m ECP CLO 2015-7; US$517.86m HPS Loan Management 2015-6; US$380m ICG US CLO 2014-2; US$410m KKR CLO 13 2012-1; US$527.55m Northwoods Capital XVII 2018-17; US$509.9m Palmer Square CLO 2018-1; US$436.05m Steele Creek CLO 2014-1; US$932.4m TPG 2018-FL1; and US$666m Venture XII 2012-12.
€403.81m Pietra Nera Uno and US$1bn UBS 2018-C8 were the CMBS. The RMBS were US$296.03m Citigroup Mortgage Loan Trust 2018-RP1, €1.326bn FORDless STORM 2018, £1.05bn Silverstone 2018-1 and £250m Tolkien Funding Sukuk No.1.
Editor's picks
IFRS 9 credit event pay-out challenged: Synthetic securitisations are unlikely to trigger CDS credit events following an increase in IFRS 9 provisions, given that such events are expected to be traditionally defined. Capital relief trade issuers therefore do not expect much disruption from IFRS 9 transactions, other than the added benefit of mitigating the accounting standard's provisioning impact...
'Academic' SBBS to 'lack demand': A European Systemic Risk Board task force has published a paper arguing that European safe bonds, SBBS (SCI 7 July 2017), are a plausible concept under "certain conditions". The programme has its critics, however, who suggest that the bonds may be plausible from an academic perspective but lack any demonstration of how they may work in practice...
French ABS to benefit from new regime: The creation of a new SPV regime in France (SCI 11 October 2017) will boost the country's ABS sector by simplifying the existing investment framework and streamlining the origination of loans and structuring of transactions. It is also hoped that the new vehicle will enable France to compete with other jurisdictions in attracting foreign capital for a range of credit initiatives...
'Test case' mortgage deal disclosed: Permanent TSB unveiled this week its Project Glas portfolio of distressed mortgages, as the Irish lender seeks to offload approximately €4bn of non-performing loans. The portfolio is understood to comprise a mix of buy-to-let and home loan assets and is being seen as a test case for further Irish NPL issuance...
Risk retention relief for CLOs: The US Court of Appeals for the DC Circuit last week reversed a lower court decision and ruled in favour of the LSTA in its lawsuit against the SEC and the US Fed, concluding that open-market CLO managers are not subject to risk retention rules. The outcome is expected to benefit smaller CLO managers, as well as boost the supply of refinancings and resets...
Deal news
• Two more firms have launched inaugural CRE CLOs, with a US$480.4m transaction from Argentic Silverpeak and a US$510.2m transaction from Bridge Investment Group. The transactions are further examples of a surge in CRE CLO issuance since the start of 2018, indicating a trend of investment firms favouring the CLO structure over traditional CMBS, particularly due to the flexibility the structure offers for financing transitional properties.
• Obvion has preplaced a static RMBS that does not feature a time call option. Dubbed FORDless Storm 2018, the €1.41bn securitisation is backed by mortgages on residential properties located in the Netherlands extended to 6,863 prime borrowers.
19 February 2018 11:30:10
News
Capital Relief Trades
Risk transfer round-up - 23 February
Deutsche Bank is said to be marketing another capital relief trade, dubbed CRAFT 2018-1. This follows last month's CRAFT risk transfer transactions - a bilateral deal and a syndicated one (SCI 5 January).
Standard Chartered is also believed to be marketing another transaction. Additionally, sources point to one or two CRE and infrastructure transactions that closed last year, raising speculation about a growing trend in these asset classes for 2018. Commodities are another potential area of activity, with some market participants anticipating interest from insurance firms.
22 February 2018 09:38:06
Market Moves
Structured Finance
Market moves - 23 February
North America
David Sykes has rejoined Chapman and Cutler as a partner, expanding the firm's San Francisco office and asset securitisation department. Prior to rejoining, he was most recently at Renew Financial where he served as general counsel.
Onex has appointed Tate Abols to its investor relations and fund development team as md. Abols was most recently a principal on the Onex Partners team and prior to this was at RBC Capital Markets in the M&A group.
Brian Grow has been named president of Morningstar Credit Ratings. He takes over from Vickie Tillman who retired late last year. Grow was most recently md in RMBS and ABS at the firm and has been with Morningstar since 2011.
BlueMountain Capital Management has hired Colin Teichholtz in the newly created position of head of global governments and agency MBS, effective immediately. He was previously partner and member of the executive committee at Pine River.
Olshan Frome Wolosky has hired John Moon to the role of partner in the litigation practice. Prior to joining Olshan, Moon was a partner in the financial and securities industries practice at Miller & Wrubel, where he represented clients in securities regulatory matters and in complex civil litigation involving structured finance. He also represented financial institutions in civil disputes involving CDO's, CLO's and warehouse agreements.
Sequioa Economic Infrastructure Income Fund has hired Tim Drayson and Kate Thurman as independent consultants. Drayson was most recently global head of corporate sales and deputy head of the European corporate debt platform at BNP Paribas. Thurman has recently worked as a credit researcher and debt portfolio specialist for Rogge Global Partners, New Bond Street Asset Management, Dresdner Bank and independently as a consultant.
EMEA
Fair Oaks Capital has hired Tyler Wallace to the role of md, starting next week. Wallace is coming from MeDirect, previously known as MedBank, where he was head of corporate credit.
The European Investment Fund is hiring a structured finance analyst at associate level on a three year contract working with both cash and synthetic securitisation processes. Banca IMI is also expanding and is looking to hire a senior risk transfer solutions structurer, based in Milan.
Partnerships
PeerIQ has partnered with Cross River with the goal of facilitating capital sourcing between non-bank lenders and institutional loan buyers. The result of the effort could help community banks and other loan buyers to more easily access the marketplace loan sector.
RAIT Review
RAIT Financial Trust has concluded its review of strategic and financial alternatives (SCI 8 September 2017), which included operational/strategic refinements, recapitalisation and a sale of all or part of the company. However, at this time, the board has determined that RAIT should take steps to increase the company's liquidity and better position it to meet its financial obligations. These steps include: the cessation of RAIT's lending business and the reduction of costs within its other operating businesses; continuing to sell RAIT's property portfolio, while servicing and managing its existing commercial real estate loan portfolio; and engaging a financial advisor to assist RAIT during this process.
Tender offer
Clifden IOM No.1 has launched a cash tender offer for Fairhold Securitisation CMBS bonds. The purchase price for the class A and B notes is respectively 40% and 1% of the principal amount, with an additional 20% and 4% offered as an early tender premium. The early tender deadline is 2 March, while the expiration deadline is 18 May and settlement is expected on 23 May.
NPL financing
Banca IFIS has closed its second non-performing loan securitisation, backed by mainly secured assets originated by an undisclosed large Italian banking group and purchased by a Cerberus affiliate in November. The bank acted as lender, with an investment of about €40m via subscribing to the senior and part of the junior notes.
STS analysis
In order to help market participants transition to the new STS regime, PCS is launching STS Reports, which will analyse a securitisation against the criteria set out in the STS regulation. The aim is to determine whether the transaction meets those criteria and, if it does not, which criteria are not met and why. The analysis will be provided on request.
Auctions ended
The AOFM has completed its RMBS divestment process. Results for its eleventh and final auction were released on 22 February, indicating that A$312.88m (amortised face value) of paper was sold. Bids for the IDOL 2010-1 A2, SMHL 2011-2 A, SMHL 2012-1 A3, TORRENS 2010-2 A4 and TORRENS 2010-3 A5 bonds were accepted at over par.
23 February 2018 16:07:28
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