Contents

CMBS

Predicted Euro CMBS pickup awaited

There has been plenty of speculation that European CRE is in the late-cycle stage, and retail exposure has also prompted concerns. With last month's ECB announcement that CMBS is no longer repo eligible, a weak reception for the latest deal, and the increasing use of untranched bonds, the market's future is uncertain.

The success of Taurus 2017-2 UK at the back end of last year had fed into hopes that 2018 would see a pickup in European CMBS issuance. DBRS, for one, predicted at the start of the year that "the market for typical European CMBS conduit transactions [would] cautiously reopen early 2018".

That was followed by last month's Pietra Nera Uno CMBS. However, that transaction met with a rather more mixed reception than had been hoped for - talk is that the seniors were only 1.1x subscribed, although they did price at the tight end of guidance - and looking ahead the pipeline remains bare.

Arne Klüwer, Dentons partner and head of structured finance for Europe, notes that it is difficult to compare investor reaction to the UK Taurus deal and the Italian Pietra Nera Uno. He says: "Italy has some very specific challenges, from the large number of illiquid NPLs to the very slow enforcement process for real estate security. In that sense an Italian CMBS is difficult to compare to CMBS from elsewhere in Europe."

While Italy has its own specific challenges, the anticipated end of the CRE cycle hangs over Europe in general. However, Klüwer notes that this is not as inevitable as some in the market appear to believe.

"The general expectation is that interest rates will rise and that therefore we are late in the cycle, but it is not so straight-forward as it may appear. There needs to be a reason for interest rates to rise and that reason is not currently obvious, so investors may instead simply keep on buying real estate and stock," he says.

Klüwer continues: "I can look out the window here in Frankfurt and see construction continuing everywhere. Offices and luxury living apartments continue to be very popular and this very building, having previously spent a decade empty, is now completely full. That is symptomatic of the whole market here, so although my gut says this has to be over soon, my head asks what the grounds for that will be."

If the real estate wheels keep on turning then that should help CMBS issuance, but the market's exposure to troubled sectors is a concern. This is the case across Europe, from the UK to the continent and from exposure to retail to exposure to speciality properties.

"Some CMBS are certainly exposed to troubled retailers, but it depends on the specific CMBS. We have seen a few insolvencies in Germany and certainly speciality properties can be a concern, for example in the logistics or department store sector," says Klüwer.

DBRS singled out Germany as a jurisdiction where issuance will suffer due to a scarcity of suitable loans and a very competitive lending market. The rating agency anticipates €5bn-€6bn of European issuance this year, mainly through opportunistic issuance "for certain higher yielding and more credit intensive loans which, as in previous years, would not easily find a place in the bank, institutional or debt fund markets, be it due to size, property type or loan structures".

That prediction predated the announcement last month by the ECB that CMBS is no longer repo-eligible. However, a bank could still repo loans, so transactions might instead be packaged into something other than a CMBS, perhaps one which is not even tranched.

"This is a decision which may impact the number of CMBS securitisation transactions being structured. However, it should not necessarily also impact the number of CMBS loans being originated because CMBS loans can still be used as collateral," says Klüwer.

He continues: "It is, however, perhaps also a decision which introduces a more general change of repo criteria, so perhaps ABS repo policy is changing; the reasoning for the change in policy is so vague that this in and as of itself is an indication that there might well be a deeper reason behind this move and that CMBS are just the first asset class to be excluded from ECB repo eligibility."

Non-tranched structures could be preferable to tranched CMBS from a repo perspective. Even without taking repo into account, untranched bonds have grown in popularity, largely due to different capital treatment under Solvency 2, so they appear set to continue to pull focus from CMBS.

"CMBS makes sense in many instances, but increasingly investors want bespoke financing products. We have become increasingly involved in untranched, privately placed transactions that do not fall under securitisation regulation," says Klüwer.

He continues: "With very good underlying assets like Taurus you can place a CMBS with investors but otherwise, if you have gone through the pain of putting together a CMBS that you cannot place. If you cannot place it or repo it then it is not much use."

JL

Capital Relief Trades

Efficiency drive

Credit Suisse is pioneering the re-tranching of capital relief trades, following the implementation of the new securitisation framework in Switzerland (SCI 9 February). However, more widespread re-tranching activity is expected to emerge over the next 24 months, as issuers seek to retain the efficiency of their transactions.

The new securitisation framework became effective in Switzerland on 1 January 2018, without a grandfathering period. The impact of the change on capital relief trades is two-fold: first is that senior tranches have a risk-weight floor of 15% (up from 7% under the previous rules); second is that the new formula to determine risk weights – SEC-IRBA – is more conservative.

Taken together, these factors mean that tranches generally need to be thicker to maintain a trade’s efficiency. Issuers have the option of either selling a thicker tranche to investors at a lower spread - although this may not meet the return target of some of the typical equity tranche investors - or split the risk into different tranches, with the junior piece paying a higher spread and the mezzanine piece paying a lower spread (SCI 26 January).

Robert Bradbury, md at StormHarbour, notes that the latter option may help minimise the impact of the increased risk weight for existing transactions. “Re-tranching helps to protect the amount of risk transfer achieved by further reducing the amount of risk retained, as well as mitigating exposure to credit migration. It is a genuine downside hedge.”

He adds that in a situation where an issuer can’t terminate a trade for a long time, it is better to spend a bit more to minimise the cost of capital. “Re-tranching is in theory more straightforward to achieve than the initial transaction, as most of the work has already been done. The new tranche is likely to be thinner than the existing protection and therefore only adds a relatively small amount to the cost. The new investor already knows what the protection looks like, so they can start working on the basis of the existing agreement.”

Hannes Wilhelm, md at Credit Suisse, says that while it used to be sufficient to hedge only the 0%-5% tranche for a good quality, granular SME portfolio, if this tranching is maintained under SEC-IRBA, the resulting risk weight would be approximately 30%. “In order to reduce the risk weight to 15%, the equity tranche needs to thicken by around 2% - in other words, protection should be purchased on the 0%-7% tranche.”

From an economic perspective, therefore, it makes most sense for an issuer to either re-tranche existing risk transfer transactions or call them. Wilhelm confirms that his firm has already called one deal, which had a call date structured to fall in January 2018.

“But we have two deals from 2016 with regulatory calls in the summer of 2019, so we decided the most economic action would be to issue mezzanine tranches for them, in order to reduce the risk weight. We plan to bring them to market in the next few weeks. Creating the mezz tranches was a straightforward process – the big unknown is the price,” he adds.

Credit Suisse is also currently preparing a new transaction that features a thicker equity tranche. “As the split-tranche concept hasn’t been tested yet, demand is not clear. We made the economics work in this case by reducing the spread,” Wilhelm notes.

Nevertheless, he says there seems to be a good amount of interest for both thicker and mezz issuances. “The nice outcome is that both types of structure are equally efficient and can be placed. Equity investors can also leverage up to meet their absolute return targets with financing providers, whereas mezz investors – which typically include classical ABS investors – require credit enhancement, which is provided by the equity tranche.”

Bradbury anticipates a broader interest in re-tranching activity to begin over the next 24 months, due to the new securitisation rules. “Issuers are already investigating what their options are, but re-tranching makes most sense if a transaction still has a material tenor remaining, e.g. it is still in its replenishment period,” he confirms.

Although the new securitisation framework impacts all assets, non-granular and higher risk assets - such as leveraged loans - generally attract a higher risk weight and so may be natural candidates for re-tranching. It is also expected to be easier to market thicker tranches in the UK, as deals are already rated and there is greater visibility around pricing points.

Nevertheless, structuring a dual-tranche risk transfer trade is more likely to be simpler for new issues, depending on the reference portfolio. “If an issuer starts out knowing that a thicker tranche is needed, it is possible to target the returns and the wider transaction structure accordingly. It becomes more of a commercial discussion, providing the costs and returns meet at an appropriate level for each party. The development of dual-tranche structures in the market is likely to be a step-change, rather than a sudden change,” Bradbury says.

Credit Suisse plans to explore having mezz tranches rated in the future, as it is likely to attract more investors to the risk transfer market. Its CLOCK Finance No. 1 deal, issued in 2007, was rated. However, the rating agencies have amended their approaches to capital relief trades since then, so it remains to be seen whether an external rating for a mezz tranche provides added value.

CS

Capital Relief Trades

CRE CRTs pick up

Synthetic securitisations referencing commercial real estate are attracting more investor interest, following the issuance of three transactions at the end of last year (see SCI’s capital relief trades database). Representing the first post-crisis synthetic CRE deals, issuance is being driven by high risk weights for specialised lending and investor step-in rights.

The three CRE capital relief trades from December comprise: Colonnade CRE 2017-1 (issued by Barclays), Wetherby Securities 2017 (Lloyds) and Red 1 Finance CLO 2017-1 (Santander). “It’s the first time since the crisis that we are seeing this wave of CRE deals,” says one source.

Under Basel rules, the treatment for specialised lending is a hybrid between the standardised approach and the IRB approach, given prescribed standardised input floors. The risk in this asset class is understood to lie with refinancing issues, rather than with credit issues.

This is because even if a borrower can make interest payments, investors still have to deal with refinancing risk at maturity. This, in turn, explains why probability of default (PD) is not used for specialised lending under Basel rules.

Refinancing risk, though, is also partly responsible for investor demand, giving investors in these transactions a premium in a low rate environment. Furthermore, default workouts can be lengthier, something that can impact investor returns.

Sources point to a broad investor base from hedge funds to more conservative players, such as pension funds and insurers. “You can customise the risk profile of these deals, depending on the investor appetite and objectives of the selling bank. Some might want to price them more aggressively, while others might prefer some first loss protection,” states Stephan Plagemann, ceo of Mount Street Portfolio Advisors.

The type of structures that have been issued so far are relatively homogeneous. According to SCI’s capital relief trades database, all three transactions issued at the end of last year were financial guarantees.

Market participants point to the accounting benefits of such a structure, with alternatives including bilateral CDS bringing unnecessary P&L volatility. This is further explained by the fact that a CDS would have to be marked to market.

Risk transfer transactions referencing commercial real estate offer a number of benefits to investors, including step-in rights. The source explains: “Banks will continue servicing these deals independently and be responsible for loan management, including default verifications and portfolio management. However, some CRE deals provide step-in rights or the same rights as those of the lender.”

He continues: “This would entail participation in loan management, such as loan workouts, and there are controlling rights in relation to enforcement. In a synthetic deal, banks usually retain complete autonomy over loan management. CRE assets though are seen as an exit or disposal strategy, which is why they have their own peculiarities.”

Yet not all the deals have step-in rights. “If the portfolios are more granular, then step-in rights would not necessarily be a feature of these deals,” says a structurer.

Furthermore, those step-in rights have to be translated in practice, which can be an issue. “You need clear triggers for step-in rights and a servicer who can monitor those triggers. How this would work in practice remains to be seen,” observes Plagemann.

The structurer adds: “Differences in recoveries might not have to do with the quality of the servicer, but with idiosyncrasies of specific defaults, so having recovery thresholds as performance triggers would not match reality and would be unfair.”

Another challenge is a possible extension of the legal final maturity that might result from long workout periods.

The benefits appear to outweigh the risk, however, with the list extending to protection from adverse selection. Given the lumpy nature of CRE exposures, replenishment criteria are likely to feature investor consent and most deals will have static pools.

SP

Insurance-linked securities

Cyber tops ILS agenda

The insurance sector continues to push the boundaries of innovation, with new product offerings in terror and nuclear risk already structured and a cyber risk ILW said to be in the pipeline. There are also hopes that cyber and terror ILS products may lead to repeat issues and so buck the trend for one-offs in the sector.

Thomas Johansmeyer, avp of PCS strategy and development at Verisk, expresses why the cyber space could see growing structured finance involvement. “There is huge potential for expansion in the cyber risk space,” he says, “particularly because the losses from recent cyber events have exceeded coverage by some way.”

He continues: “Equifax, for example, had coverage of around US$125m and it saw economic losses in the end of around US$1bn - and it was a similar picture with Merck. There is certainly a great potential for the ILS market to help fund the cyber risk space, in this instance in the ILW form.”

One of the issues surrounding cyber and terror risk is that it can be hard to hedge, but Johansmeyer posits that the strong investor appetite for terror-linked products suggests that hedging issues are being worked around. While investor appetite for cyber risk is less easy to gauge without a deal yet closed, he says that there are strong signs of interest from a number of investors.

Johansmeyer says he is also aware of a renewal of a nuclear deal and discussions are continuing around structuring nuclear ILS. The issue with nuclear risk particularly, but also terror and cyber risk, is where to source the capacity to support these products.

Pension funds are typically the main source of investment in ILS products, with capacity of US$30trn, and target allocations for ILS of around 2%-4%. Sovereign wealth funds may also have the capacity and appetite for ILS, Johansmeyer suggests.

Due to the esoteric nature of cyber and terror ILS, however, pension and sovereign wealth funds may lack the inclination initially to get involved. As a result, he comments that it may result in specialised ILS funds entering the cyber and terror space and, indeed, there “are signs of such firms getting involved with terror already.”

A wider concern in the sector is that while ILS issuers have brought several innovative transactions to market, these have often been one-offs. In the push for innovation, many firms don’t appear to gauge investor demand effectively or lay the foundations for programmatic issuance.

Johansmeyer comments: “A big issue with this rush for being the first is that often people haven’t communicated with clients sufficiently to get an idea about whether this is something that they actually want or whether the deals really meet client needs.”

In the fields of cyber and terror risk, however, he feels differently, seeing the chance for higher issuance volumes. Johansmeyer explains: “With terror risk, the deals that have already been done have already seen trades within a few weeks and the index-linked products have been tested in the first 12 months.”

He continues: “Cyber risk could fit in well with the wider ILS market as capital markets and ILS, in particular, is a perfect tool to fuel the growth of cyber risk. It needs the ILS market to help it grow...With the first deal, it should be a useful proof of concept and enable better understanding, which will also help the product grow.”

Furthermore, ILW indices can play an important role in facilitating greater investment. Johansmeyer concludes: “Ultimately, it’s a tall order for an ILS fund to get to grips with the full range of risks in the market from cyber to terror to more vanilla risk products. With the ILW structure, tied to an index, you only really need to understand the index. This streamlines the investment process too, with reduced documentation, which is much easier to process and far quicker to execute.”

RB

ABS

Diesel ban 'bad news' for auto ABS

Germany’s Federal Administrative Court has ruled that cities in Germany can impose restrictions on diesel vehicles. The ruling has the potential to lead to diesel car bans throughout the country, with a potential impact on German auto ABS transactions.

The court ruling follows previous regional administrative court rulings in Dusseldorf and Stuttgart banning diesel cars from the cities. The federal ruling found that the diesel bans comply with existing laws and need to be considered to lower emissions in German cities.

Simultaneously, the city of Hamburg confirmed plans to ban diesel vehicles that don’t meet the EURO6 emissions standard from two inner-city roads from end-April. The new German governmental coalition, however, has stated it opposes such bans and local governments have suggested that alternative routes to improving air pollution in city centres should be considered.

Despite this, Fitch comments that the ruling adds to the general shift by consumers away from diesel cars evidenced by the falling number of new diesel vehicle registrations. This is in tandem with declines in the price of diesel cars and, concurrently, rising diesel car inventories in dealerships.

Sales proceeds of returned vehicles in German auto ABS with direct residual value exposure have dropped by 5%-10% in the last year. However, Fitch notes its rating-specific auto ABS stresses capture potential price declines, supported by the build-up of credit enhancement in seasoned deals.

Overall, the agency states that on testing German auto ABS exposed to diesel cars, the transactions are found to have limited rating sensitivity with a maximum of one-notch downgrade in some deals. It adds that transactions with no residual value exposure would be only indirectly affected by lower recovery proceeds.

S&P comments that greater scrutiny over auto emissions throughout Europe will see diesel car sales continue to fall. The agency adds that resale car price values will come under pressure in light of diesel bans and diesel vehicles may be significantly limited in terms of remarketability, weakening collateral performance of European auto ABS deals.

S&P continues that the impact on specific auto ABS transactions would depend on different parameters, with one being the resale value. A decrease in the resale value of the diesel vehicles backing ABS transactions could negatively affect the recovery values on the defaulted loans.

More generally, new diesel vehicle registrations in some European countries have declined sharply and, while residual values are not stalling yet, there are signs that used car buyers are moving away from diesel to other engine types. Despite this, the agency says it is too soon to adjust the market value decline assumptions it uses to rate European auto ABS transactions.

Rabobank credit analysts note that “all in all this is obviously bad news” for diesel car owners, the market for used cars and potentially also auto ABS transactions. They suggest that the majority of German auto ABS are only indirectly exposed to the residual value risk, which comes from a borrower defaulting and then selling the car, or from default upon selling the car to repay the balloon amount of the loan.

The Rabobank analysts add that outstanding German auto ABS have relatively short WALs of 1-2 years when issued and, assuming that a ban in cities would be gradual, this would limit the possible negative impact. Older transactions will also benefit from more credit enhancement.

Of greater concern perhaps is that in other European countries diesel cars make up around 60% of cars in use. Should these follow Germany’s example, the overall impact could be much larger and where lease contracts are used to a greater extent, they could be more affected due to direct residual risk.

RB

Structured Finance

SCI Start the Week - 5 March

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 seven ABS added to the pipeline last week, as well as a couple of ILS, four RMBS and four CMBS.

The ABS were: US$480m DT Auto Owner Trust 2018-1; US$504m ECMC Group Student Loan Trust 2018-1; US$437m NextGear Floorplan Master Owner Trust Series 2018-1; US$97.03m San Diego City Tobacco Settlement Revenue Funding Corp Series 2018; US$1.18bn Verizon Owner Trust 2018-1; RMB3.77bn VINZ 2018-1; and US$801m World Omni Automobile Lease Securitization Trust 2018-A.

The CMBS were US$1.4bn BX 2018-BIOA, US$1.1bn CGCMT 2018-B2, US$1.36bn FREMF 2018-K730 and US$1.35bn RETL 2018-RVP, while the ILS were US$225m Akibare Re Series 2018-1 and US$200m Kizuna Re II Series 2018-1. The RMBS were US$1bn CAS 2018-C02, ConQuest 2018-1, Pepper Residential Securities No.20 and US$446.17m PSMC 2018-1 Trust.

Pricings
With most of the industry decamped to Las Vegas, there were limited deal prints. The only ABS was a European deal, while three of the five CLOs also came from Europe. There was also a US CMBS.

The ABS was €749m Auto ABS Italian Loans 2018-1 and the CMBS was US$1.36bn FREMF 2018-K730. The CLOs were: €369.75m Arbour CLO III 2016-3R; US$744m Madison Park XXX CLO 2018-30; €908.74m Popolare Bari SME 2017; €362.5m Providus CLO I 2018-1; and US$661.2m Voya CLO 2018-1.

Editor's picks
NPL platform incentives weighed: As part of efforts to facilitate a non-performing loan secondary market, the European Commission is considering a private sector-led platform to handle data warehousing and potentially trade execution. Such an initiative could eliminate information asymmetry and lower barriers to entry, but its success hinges on incentivising both buyers and sellers to use it...
Landmark sukuk could be first of many: The inaugural UK sharia-compliant RMBS recently closed, marking the start of a new asset class in the jurisdiction. Al Rayan Bank's £250m Tolkien Funding Sukuk No.1 (SCI 29 January) signals a high point for the growth and acceptance of Islamic finance in the UK and could be the first of many such securitisations, across a range of assets...
Bank acquisition trend continues: HSH Nordbank has been sold for €1bn to JC Flowers and Cerberus. The agreement is accompanied by a sale of predominantly shipping non-performing loans to an acquisition vehicle of Cerberus and JC Flowers, as well as minority owners GoldenTree Asset Management and Centaurus Capital. The sale reflects an investment trend, whereby private equity investors acquire distressed financial institutions rather NPL portfolios...
US CLOs steady: The US CLO secondary market appears to be holding steady as participants consider their next move. "Superficially it looks like the long-standing pattern in the market will hold, but it feels to me like changes are afoot following the return from Vegas," says one trader...
LCR amendments could be STS 'game-changer': The European Commission's recent draft regulation on the LCR does not ensure STS securitisations are eligible as level 2A assets. Along with other factors, this could result in securitisation remaining a less attractive option compared to other financial instruments...

News
• Consumer protection legislation passed in California last October will collectively strengthen PACE underwriting practices, according to Morningstar Credit Ratings. The agency views most of the requirements as credit positive for future securitised residential PACE assessments and suggests that programme administrators may adopt the new measures on a nationwide basis.
• Bank of Ireland has released its Pillar Three report, which indicates an expansion of its synthetic securitisation exposure. It also provides insight into the lender's counterparty exposures.
• The incorporation of 'stop-advance' provisions in US RMBS 2.0 deals appears to be becoming more prevalent. However, sponsors are implementing this mechanism in different ways, as they seek to mitigate losses and advance timeline ambiguity while maintaining liquidity for high investment grade securities.

Capital Relief Trades

Basel 4 impact 'manageable'

The new Basel 4 capital framework (SCI 14 December 2017) is expected to increase Dutch bank RWAs by approximately 25%, on a pro forma basis, equivalent to around 300bp of CET1. However, the impact is expected to be manageable, considering strong capitalisation and profitability levels, as well as the long implementation timeframe.

Higher capital requirements will be driven mainly by the introduction of output floors for IRB models, calibrated at 72.5% of the RWAs calculated under standardised approaches. This will restrict the regulatory capital benefits that banks can obtain from internal models.

Dutch banks are significantly exposed to this output floor, due to their sizeable mortgage portfolios with relatively high LTV ratios (SCI 25 April 2017). As of end-2017, Dutch bank residential mortgage portfolios accounted for almost half of their customer loan books, with an average LTV ratio of approximately 70%.

According to DBRS, bank capital positions remain strong, with the aggregate CET1 (fully loaded) ratio rising to 15.5% from 13.5% at end-2016, on the back of retained profits and RWA optimisation. The improvement was also supported by €1.6bn proceeds from the issuance of Rabobank certificates at the beginning of 2017.

Dutch banks also reported aggregate net profits of €10.4bn in 2017, up from €8.5bn in 2016, partly reflecting high non-recurring expenses that year. Profitability was resilient, supported by improving core revenues and lower cost of risk, which reduced further in 2017 to 3bp from 11bp in 2016.

The solid growth of the Dutch economy and low unemployment levels, alongside the recovery of the housing market and subdued interest rates, continue to drive the low cost of risk. Asset quality also improved, with non-performing loan stocks down by 10% year-on-year on the back of higher recoveries, while the gross NPL ratio decreased to 3% at end-2017 from 3.3% at end-2016.

“Underlying costs increased, however, and efficiency improvement remains a priority for banks,” notes DBRS.

The output floor reform will be phased in over a five-year period starting from 2022. During this period, DBRS expects banks to increasingly focus on internal capital generation and balance sheet optimisation.

SP

Capital Relief Trades

Risk-sharing on the agenda

Panellists participating in SCI’s Risk Transfer & Synthetics Seminar are primed to discuss everything from traditional capital relief trades through to GSE credit risk transfer and bespoke investments at the event next week. Indeed, the theme of risk-sharing is expected to be explored in some depth across a number of panels.

“Structural issues are key to determining the efficiency of [risk transfer] trades for issuers. There is always a three-way pull between the regulatory requirements, issuer and investor needs,” says Himesh Shah, md at Christofferson Robb and moderator of SCI’s structuring overview panel. This panel - which consists of leading lawyers, issuers, advisors and investors - will provide a first-hand and up-to-date view on current structural issues.

Another panel compares US regulatory attitudes versus European ones, as well as drivers for US banks to begin using risk transfer more widely and the use of credit insurance where regulators don’t recognise synthetic securitisation for capital relief purposes. This panel is moderated by Peter Jurdjevic, md, head of global finance solutions at Barclays Investment Bank.

There is also a panel examining risk transfer issuance trends, emerging asset classes and jurisdictions, and ESG considerations. Kaelyn Abrell, partner and portfolio manager at ArrowMark and one of the panellists, comments: “The CRT market continues to evolve, with expected intermediate-term changes from new CRR and commensurate risk transfer rules. Drawing upon ArrowMark’s tenure in the asset class, ongoing dialogue with various industry participants and opportunistic mindset, we look forward to sharing perspectives related to issuance dynamics, anticipated changes to security structures and expansion of underlying collateral types.”

Meanwhile, the hunt for yield continues to drive investor demand for leveraged credit products, with synthetic bespokes being a key source of growth in the credit derivatives space. David Felsenthal, partner at Clifford Chance and moderator of SCI’s bespoke synthetics panel, notes: “The panel will discuss bespoke products, including concentrated pools, maybe single names, investor perspectives, impact of insufficient assets on development of new products and technical developments.”

The seminar closes with a focus on mortgage risk transfer. The aim of this discussion is to understand the key structural developments in the credit risk transfer space.

Lekith Lokesh, director at Credit Suisse and moderator of the panel, comments: “Topics include a review of issuance volume, trading patterns for 2018 [and] legal/rating agency developments. Current themes under the spotlight are the sale of first-loss risk in GSE and non-GSE CRT; non-US investor demand; [and] reinsurance versus CRT.”

Delegates are welcome to attend a bonus workshop targeted at new entrants to the capital relief trades market.

Hosted by Clifford Chance, the SCI Risk Transfer & Synthetics Seminar will take place on 13 March at 31 West 52 Street, New York. The event is sponsored by Allen & Overy, Arch Capital Services, ArrowMark Partners, Caplantic Alternative Assets, Lloyds, Moody’s, Nomura and Open Source Investor Services.

Other speakers at the seminar include representatives from Chorus Capital, Elanus Capital, Fannie Mae, Freddie Mac, IACPM, IFC, LibreMax Capital, Mariner Investment Group, Mizuho International, Quantifi and West Wheelock Capital. For more information, please click here.

CLOs

ESG embraced in 2.0 CLO

Permira Debt Managers last week priced Providus CLO I, representing its first CLO 2.0 deal and the beginning of a new CLO management platform. The €362.5m transaction is also one of the first European CLOs to adhere to ESG eligibility criteria, including restrictions on the nature of industries in which the fund will invest and a commitment to assess ESG issues ahead of the investment decision.  

Providus CLO I prohibits investment in any security from a borrower whose primary business concerns speculative extraction of oil and gas, production/trade in weapons and trade in hazardous chemicals, ozone-depleting gasses, pornography and prostitution, tobacco, gambling and payday lending activities. The portfolio's reinvestment period will end approximately four years after closing and its maximum average maturity date will be about 8.5 years after closing.

Rated by Moody’s and S&P, the transaction comprises: €203m Aaa/AAA rated class A notes (which priced at three-month Euribor plus 74bp); €18.5m class B1s (plus 112bp), €15m class B2s (2.10% fixed) and €17.75m class B3s (plus 133bp until the end of the non-call period, after which it pays 112bp) (all rated Aa2/AA); €12.25m class C1s (160bp) and €10m class C2s (181bp until the end of the non-call period, after which it pays 160bp) (both rated A2/A); €19m Baa2/BBB class Ds (245bp); €18.75m Ba2/BB class Es (468bp); and €9.5m B2/B- class Fs (621bp). There is also a €38.75m unrated equity tranche.

The deal was arranged by Bank of America Merrill Lynch and features an interest-smoothing account and a frequency switch mechanism. If triggered, the mechanism permanently switches the payment on the rated notes from quarterly to semi-annual.

In order to support the growth of PDM’s CLO management platform, a dedicated CLO team has been established in recent months. It includes PDM veterans Thomas Kyriakoudis (cio) and Ariadna Stefanescu (portfolio manager), who were joined last year by Andrew Lawson (head of capital markets) and credit analysts Charlotte Claracco, Ryan Mcgahon and Natalie Taiwo.

PDM has advised investment funds and products that have provided more than €4.5bn of debt capital to over 100 European businesses since 2007. The firm follows three key investing strategies: structured credit, CLO management and direct lending. Through its Sigma strategy, PDM funds have made over 120 investments backing more than 30 CLO managers. 

The firm debuted in the European CLO market in 2007 with its PDM CLO I transaction (SCI 7 November 2007).

CS

RMBS

Innovative RMBS pair prepped

Two innovative US RMBS transactions are marketing from both sides of the agency/non-agency divide. AIG has brought its debut self-sponsored deal to the market, while Fannie Mae is preparing a US$1.007bn CAS transaction, with notable departures from previous offerings.

AIG's US$446.17m non-agency RMBS, dubbed Pearl Street Mortgage Company (PSMC) 2018-1 Trust, is backed by 726 prime fixed-rate mortgages, acquired by AIG from various originators throughout the US. The firm previously sponsored two RMBS in 2017, under Credit Suisse's shelf.

The PSMC shelf is jointly sponsored by five AIG subsidiaries (AIG Home Loan 1 to AIG Home Loan 5), with each entity providing R&Ws for the loans they've acquired and sold to PSMC. Each of the AIG Home Loan entities will act as sponsor, seller and servicing administrator to the transaction.

Fitch and KBRA have assigned provisional ratings of triple-A to the US$284.43m class A3 notes, US$18.96m class A5s, US$35.47m class A9s, US$56.89m class A19s and US$18.96m class A20s, as well as the notional class AX8, AX9 and AX1 notes. Both agencies have also provisionally assigned double-A ratings to the US$11.38m class B1 notes, single-A to the US$7.36m class B2 notes and triple-B to the US$6.47m class B3 notes, while the remaining US$4.24m class B4 notes are rated double-B and the US$1.12m class B5s are rated single-B by only KBRA. The US$0.89m B6 notes are unrated.

Fitch comments that after reviewing AIG's aggregation processes, it believes that the firm meets industry standards needed to aggregate mortgages for RMBS. Furthermore, the deal is backed by a high-quality mortgage pool comprising 30-year fixed-rate, fully amortising, safe harbour qualified mortgage loans to borrowers with strong credit profiles.

The collateral pool has some geographic concentration, with 34.3% of borrowers located in California, but this is mitigated by the top three Metropolitan Statistical Areas accounting for only 24.6% of the pool. The largest MSA concentration is in San Francisco (at 10.5%), followed by Seattle (at 7.5%) and Atlanta (at 6.6%).

Top originators in the pool include Homestreet Bank at 12.5%, New Penn Financial at 7.8%, American Pacific Mortgage Corporation at 4.8% and Finance of America Mortgage at 4.7%. Various others make up the remaining 70.2%.

Credit Suisse and Wells Fargo are arrangers on the deal.

On the agency side, meanwhile, Connecticut Avenue Securities Series 2018-C02 marks the second CAS transaction from Fannie Mae this year. Unlike previous transactions, however, this features high LTV collateral.

Furthermore, this is the first deal from the programme in which loans refinancing under Fannie Mae's new high-LTV refinance option would remain in the reference pool, instead of being removed like a typical prepayment. Wells Fargo structured product analysts believe that this is likely to have a "mixed effect", whereby "the refinanced borrower would likely receive better terms, thus decreasing credit risk, although at the expense of slower deleveraging in the deal."

KBRA and Fitch have assigned provisional ratings respectively of BBB+/BBB-to the US$188.82m class 2M1 notes, BBB-/BB to the US$222.38m class 2M2A notes, BB/BB- to the US$222.38m class 2M2Bs, B+/B to the US$222.38m class 2M2Cs. KBRA only has rated the US$667.152m class 2M2 notes as single-B plus, while the remainder of the notes are unrated.

JPMorgan is lead manager on the deal, while BNP Paribas is co-lead manager.

RB

Structured Finance

Market moves - 9 March

North America
Anthony Orso has joined NKF Capital Markets as president of capital markets strategies. Orso will support the integration of Berkeley Point Capital with ARA, two companies recently acquired by NKF Capital Markets, an affiliate of the Newmark Group. He will work closely with Jeff Day, ceo of Berkeley Point Capital and Blake Okland, vice chairman and head of US multifamily. In addition, with NKF Capital Markets' investment in CCRE, Orso will act as its liaison with Cantor Fitzgerald's CMBS business, as well as advise the company on its strategic approach to its third-party debt business. Orso was the co-Founder and ceo of CCRE, which he built into a fully integrated commercial real estate debt platform. Over the course of his career, he has completed more than US$250bn in real estate financings.

EMEA
Intermediate Capital Group (ICG) announces it has appointed Andrew Sykes as a non-executive director with effect from 21 March 2018. Sykes also serves as chairman of Smith & Williamson Holdings, having served on the board since 2004, and is a non-executive director of Gulf International Bank, where he serves as chairman of audit and risk oversight committee. He was chairman of SVG Capital until last year, having served on the board since 2010, and as Chairman since 2012.

Acquisitions
AXA is set to acquire XL Group for US$15.3bn in cash, equating to XL Group shareholders receiving US$57.60 per share, a premium of 33% to XL Group's closing share price on 2 March 2018. Upon completion of the transaction, the combined operations of XL Group, AXA Corporate Solutions and AXA Art will be led by Greg Hendrick - currently the president and coo of XL Group - who will be appointed ceo of the combined entity and join AXA Group's management committee, reporting to AXA Group ceo Thomas Buberl. Mike McGavick, XL Group's current ceo, will become vice-chairman of the combined P&C commercial lines operations and special adviser to Buberl.

Arrow Global has agreed on two acquisitions which strengthen the group's investment and asset management capabilities and reinforce its growing presence in Italy. The first is for Europa Investimenti, a leading originator and manager of Italian distressed debt investments, for an equity value of €62m. While the core Europa business is not regulated, due to Europa owning a 74% stake in an Italian real estate fund management company, Vegagest SGR, the transaction is subject to a regulatory change of control approval by the Bank of Italy and is expected to complete in mid-2018. Europa's Milan-based team will add approximately 35 employees to the group. The second is for 100% of Parr Credit, a leading Rome-based servicer of Italian NPLs for an equity value of €20m. There are no regulatory approvals required for the transaction and the acquisition will complete today. The acquisitions will be funded in cash from existing group resources and are expected to be broadly earnings neutral in 2018 and marginally accretive in 2019. The acquisitions are expected to increase the weighting of capital-light asset management revenues, which as at 31 December 2017 account for 22% of the group's total revenues. Parr's Rome-based team will add approximately 200 employees to the group.

Fiera Capital has acquired Clearwater Capital Partners, an Asia-focused credit and special situations investment firm. Headquartered in Hong Kong, Clearwater is a privately held employee-owned asset manager with US$1.4bn AUM. Clearwater's assets will be added to Fiera Capital's private alternative investments division, complementing the firm's existing suite of private alternative investment strategies and adding extensive investment experience and depth through offices and teams across the Asia-Pacific region.

Hercules Capital has acquired Gibraltar Business Capital, a provider of working capital to small and mid-market businesses through Gibraltar's asset-based loan and factoring solutions. Gibraltar will be held as a portfolio company of Hercules. Gibraltar will continue to operate as an independent senior secured asset-based lender to select small and mid-market businesses and operate under the Gibraltar Business Capital brand. Gibraltar and all its existing employees will remain at its headquarters in Northbrook, Illinois.

RMAC MWPs introduced
Clifden IOM No.1 has rejected the tenders of notes it received and withdrawn the offers made in respect of the RMAC 2003-NS1, 2003-NS2, 2004-NS1 and 2004-NSP2 RMBS (SCI 12 January). At the same time, it has introduced make-whole provisions (MWPs) across all outstanding notes issued by RMAC 2003-NS3, 2003-NS4, 2004-NS3, 2004-NSP4, 2005-NS1, 2005-NSP2, 2005-NS3 and 2005-NS4, eight classes of which have seen 100% tenders. The firm has also extended the early tender and expiration deadlines for five RMAC deals. Clifden notes that the MWPs are not materially prejudicial to noteholders, nor do they prevent Paratus AMC exercising optional redemptions in respect of the notes or purchasing the underlying mortgages. Bernoulli Holdings has agreed to indemnify noteholder trustees in respect of certain liabilities, costs and expenses that may be incurred in connection with the implementation of the MWPs. Nevertheless, Paratus AMC says these actions would cause it significant loss as holder of the deferred consideration and residual certificates in the affected securitisations and warns that noteholders may be held liable for any loss caused by Clifden acting as their agent. Paratus AMC had previously stated that the exercise of its optional redemption rights in respect of the notes conferred contractual rights on it, making any interference with the sale of the mortgage loans unlawful. Meanwhile, the issuers have stated that they remain obliged to redeem the notes on 12 March and that they have requested but not received any proof of holding from Clifden or sufficient proof that it has been appointed by noteholders to execute the written resolution on their behalf.

RMBS settlement
RBS has agreed a US$500m settlement with New York Attorney General Eric Schneiderman over its misrepresentations to investors in connection with the packaging, marketing, sale and issuance of RMBS leading up to the financial crisis. The settlement includes US$100m in cash to New York State and US$400m worth of consumer relief for New York homeowners and communities, including funds for the construction of more affordable housing. As part of the settlement, RBS admits that it sold investors RMBS backed by mortgage loans that, contrary to its representations, did not materially comply with underwriting guidelines or with applicable laws and regulations. The bank is the sixth large financial institution to settle with Attorney General Schneiderman since he was appointed co-chair of the RMBS Working Group in 2012 and brings the total cash and consumer relief secured by him in the aftermath of the financial crisis to US$3.7bn.

Data partnership
Thomson Reuters and DealVector have partnered to integrate access to DealVector identity-protected messaging capabilities with Thomson Reuters loan pricing corporation (LPC) desktop products. The integration will enable LPC clients viewing CLO and loan data to connect to holders of those specific assets.

Sustainable action plan
On the basis of the recommendations set out by the High-Level Expert Group (HLEG) on sustainable finance (SCI 6 February), the European Commission has set out a roadmap to boost the role of finance in achieving a well-performing economy that delivers on environmental and social goals as well. The Action Plan on sustainable finance is part of the Capital Markets Union initiative and includes: establishing a unified EU classification system for sustainable investment; creating EU labels for green financial products; clarifying the duty of asset managers and institutional investors to take sustainability into account; enhancing transparency in corporate reporting; and incorporating sustainability in prudential requirements. The Commission says it will explore the feasibility of recalibrating capital requirements for banks for sustainable investments, when it is justified from a risk perspective, while ensuring that financial stability is safeguarded.

Debussy downgrade
DBRS has downgraded its rating on the Debussy DTC class A notes to single-B from double-B (low) and maintained its negative trend on the rating, reflecting the expected value decline of the portfolio following the insolvency of sole tenant Toys R Us. DBRS's new value assumption is £191m, which represents a 2.5% haircut to the most recent vacant possession value of £196m. A company voluntary arrangement has been voted through, resulting in the rent payment from the OpCo switching to monthly and being reduced. Consequently, the projected ICR covenant ratio was breached and not remedied, triggering a loan EOD and transfer to special servicing (see SCI's CMBS loan events database). S&P last month lowered its rating on the transaction to double-B minus from triple-B, following the CVA.

RFC on NPL management
The EBA has launched a consultation on its guidelines for credit institutions on how to effectively manage non-performing exposures and forborne exposures (FBEs), which are designed to ensure that borrowers are treated fairly at every stage of the loan lifecycle. The guidelines specify sound risk management practices for managing NPEs and FBEs, including the governance and operations of an NPE workout framework, the internal control framework and NPE monitoring, as well as early warning processes. The consultation asks for views on the threshold for assessing high NPE banks and the viability of forbearance measures, and sets out requirements for the assessment of NPE management activity as part of the Supervisory Review and Evaluation Process (SREP). The consultation runs until 8 June and a public hearing will take place at the EBA premises on 25 April.