Contents

Structured Finance

Increase in liquidity 'hard to measure'

Liquidity in structured products is difficult to quantify, and perhaps even to define. Whichever way it is measured, traders agree that it has increased and predict that over the course of 2018 spreads are going to continue their long tightening trend.

Liquidity is commonly identified by the presence of associated phenomena. Two-way markets made by dealers are considered to be good indicators of liquidity, while size is also often seen to be important.

Liquidity can also be measured by the depth of the buyer base: if there are a lot of buyers then a product is liquid. Bid-offer spread and price transparency are also useful indicators of liquidity, but none of these measures mean anything unless there is a willing buyer.

Matt McQueen, md and head of securitised credit trading at Bank of America Merrill Lynch, notes that liquidity can perhaps best be measured by how large a size can be traded without moving the market. He says: “Agency CMBS is a good example of a market where that holds true. There are plenty of markets out there with transparency, but where it is hard to trade a large amount.”

However it is measured, traders and other market participants broadly agree that liquidity has increased. Investors are expanding their horizons. Insurance companies are looking at paper they would not have considered a few years ago, and so there is now much less paper that is off-the-run and just for hedge funds, because real money has grown far more comfortable even with complex sectors.

Liquidity in RMBS has improved, with dealers net adding US$1.7bn last year. However, this appears to remain a market where despite being able to trade significant size there is limited depth.

US CRT liquidity has also improved. From 30-50 accounts a couple of years ago the market has moved on to 60-80 accounts, says one trader. He reports that liquidity is even better for RPL RMBS, where the bid-ask spread is only around two-four ticks and it is possible to trade “good” size.

“Legacy RMBS has very good liquidity. You can easily sell US$1bn and there is no shortage of buyers. It is harder for triple-A CMBS because of duration, while CLOs are mainly a new issue market,” says McQueen.

He adds: “Agency MBS is a multi-trillion dollar market with buyers all over the world and good transparency. It has better liquidity than Treasuries because you can trade significant size without moving the market.”

There is no such thing as “too much liquidity” notes the other trader, who reports that paper across the ABS market is frequently 5x-10x oversubscribed because there are so many more buyers than there used to be. “Even the least liquid stuff is seeing a huge growth in buyer base and competition continues to drive prices higher and yields tighter,” he says.

McQueen adds: “Banks are not buyers in the same way anymore, but bond funds have grown structured products strategies hugely over 10 years. Insurance companies will also buy more as rates rise because they are just matching liabilities, although if a rate rise is too jarring then it could create forced sellers and put pressure on the market in that way.”

A rate rise would be helpful in discounting fixed-rate ABS trading at a premium. If they rise too far, however, then investors will increasingly take their money out of riskier products and put it into safer ones such as Treasuries.

With the first quarter almost over, volatility has not come to the market in the way some predicted that it might. That means that it would take a significant event, such as a fresh recession, to derail the market’s momentum. With such a prospect not seen on the horizon, spreads are expected to continue trending tighter.

“The market has enjoyed two years of spread tightening without widening and is positioned for strong economic growth, so the biggest concern is inflation and what that does to the yield curve. Risk assets have room to run but if growth continues to be good there will be pressure from the Fed,” says McQueen.

JL

Capital Relief Trades

Grappling with uncertainty

Capital relief trade issuers are incorporating structural features highlighted in the EBA’s risk transfer discussion paper in an effort to gain some regulatory certainty in the absence of any guidance. Challenges remain, though, as significant risk transfer (SRT) recognition will depend on negotiations between national regulators and banks.

“There are a number of grey areas that can affect the SRT status of a deal with national regulators,” says one source. This includes pro-rata amortisation, which the EBA permits and – as opposed to sequential amortisation – helps keep the cost of protection constant and therefore less expensive.

Another example is excess spread, where the trapping mechanism is a key requirement, according to the paper. The amount of excess spread not absorbed by losses during a given year should remain trapped in the transaction in the form of a funded reserve account, available to absorb losses in future years.

Uncertainty still colours structuring decisions because the CRR is silent on many of these structural features that the paper was meant to address. Time calls are an exception in this respect, yet it’s still unclear when a bank can actually use them.

The EBA's discussion paper on SRT, published in September, outlines the common structural features of risk transfer transactions in an attempt to harmonise their regulation and supervision (SCI 20 September 2017). However, the impact of regulatory uncertainty can be observed in specific cases.

“We had experience with a client that complied with the paper’s excess spread features, although the SSM rejected its inclusion,” says one arranger. The discussion paper treats synthetic excess spread as a first-loss tranche, with protection coming from future cashflows rather than existing buffers.

There is, however, less uncertainty when it comes to the commensurate risk transfer tests. The EBA stated in November at a public hearing that it would consider bank recommendations on excess spread, time calls and the commensurate risk transfer tests seriously, but not for several years (SCI 24 November 2017). But sources suggest that national regulators would most probably not take into account recommendations relevant to the tests, given that they are already embedded in the CRR.

Issuers raised the following concerns in relation to the tests. Under the first option, the way the tests are applied to existing SRT deals causes them to fail - even if they achieve SRT - due to the way they are designed.

Under the second option, the effect of the test is to require banks to sell universally all of the subordinated tranches. This raises the cost of the credit protection and it forces issuers to sell tranches in excess of the expected loss of the portfolio.

Nevertheless, the market seems to be divided over the extent of the practice. “Repeat issuers are using their own templates and they are unwilling to change something that the national regulator and the SSM haven’t objected to,” observes Juan-Carlos Martorell, md and co-head of structured solutions at Mizuho. “If we are talking though about first-time issuers, they will probably want to understand the dos and don'ts, so they may be more inclined to incorporate features described in this paper.”

One option to deal with regulatory uncertainty is regulatory calls, a feature that is permitted by the CRR, although it is an option fraught with its own issues. “If a deal is rejected because it features pro-rata amortisation, that wouldn’t constitute a change in regulations,” observes another source. At the same time, the documentation defines regulatory changes broadly enough to deal with “unknown unknowns”.

Accordingly, banks have welcomed the inclusion of an SRT call - “a regulatory call by another name”, as sources refer to it - in the discussion paper, having pushed for it for a long time. The feature allows banks to call a deal if a national regulator rejects capital relief.

“Why spend money and time on a deal intended to last five years, but which has to be called in one year?” asks the source. He adds that investors would think twice before investing in a tranche that was perhaps bought at a premium or where funds were intended to be invested for several years and then called.

The EBA will soon begin to analyse all the responses to the SRT consultation, in order to produce final technical advice that will be submitted to the European Commission by January 2021. If the advice is approved by the Commission, which occurs in the majority of cases, then a vote will follow at the European Parliament.

SP

ABS

Non-traditional ABS growth to continue

There was record ABS issuance in 2017, with the most since the crisis. Non-traditional ABS accounted for around US$27bn, with whole business securitisation issuance reaching a record-breaking US$7.4bn, while aircraft ABS came back strongly after a quiet 2016.

The growth of non-traditional ABS is being driven by investors reaching for yield. Of the various non-traditional sectors, including not only aircraft but also the likes of container or timeshare ABS, WBS stands out as the largest sector, with more than US$20bn now outstanding.

“WBS is not an esoteric ABS asset class anymore; investors have done their homework and the last two or three years have seen huge acceleration in the market,” says Jeffrey Lawrence, cfo and evp, Domino’s Pizza. “The demand is there because investors like this space and WBS is now established as the way to lend to the franchise restaurant space. Paper has performed very well not just for us but for the sector in general.”

A successful WBS must marry the right assets and cashflows. Significant time and energy has gone into educating the market but now that securitisation programmes are becoming more established, the fruits of that labour are clearly starting to show.

“Some general characteristics common to most WBS issuers include: strong market position, brand recognition, recurring revenue and renewal history, strong unit level economics, and a robust business model that would allow for a smooth transition to a backup manager if necessary,” says Xilun Chen, senior director, Kroll Bond Rating Agency.

He adds: “Generally speaking, any company or business could be a WBS candidate; but the ones that do utilise securitisation are typically high-yield, and often have a rating in the single-B category, as the effectiveness of securitisation relies partly on how far one can elevate from the corporate rating."

Chen notes that Kroll’s analysis of a WBS typically focuses on the originating business itself (including fundamentals, competitive landscape and historical performance), the collateral and what is being pledged (which may include top-line cash flows, operating profit or other types of cash flows), and also the transaction structure (which includes leverage, amortisation profile and performance triggers).

Part of the sector’s success, besides the wide variety of assets that are suitable for securitisation, also appears to be its relative insulation from regulatory burdens. WBS is not typically originated to distribute and many deals have significant subordination retained by the originator – frequently up to 70% retained as equity subordinated to the deal.

The other major non-traditional sector is aircraft ABS which has brought episodic issuance for two decades, but achieved a strong year in 2017. After favouring commercial bank funding in 2016, last year pricing improved as investors entered the space and issuers are expected to continue coming to market this year, either matching or surpassing 2017’s total issuance.

While aircraft ABS is traditionally a financing market it is now also a disposition market and predictions commonly put 2018 issuance around US$6bn or more. It remains to be seen whether it can match WBS, but it is attractive to both issuers and investors.

Keith Allman, vp and senior mortgage and structured finance anayst at Loomis Sayles, says: “Market fundamentals make aircraft ABS an appealing asset class. There is huge scope for financing and the yields are still above more on-the-run asset classes, but the complexity is still there.”

Marc Iarchy, principal at World Star Aviation, says: “As an issuer we finance our portfolios on a case-by-case basis. ABS is just one of the tools that we look to use, because we like to have options available.”

For investors, there are also certain challenges that are all part and parcel of the asset class. Mark Hirshorn, svp, US ABS, at DBRS, notes that these can include lumpy cashflows, for example if there is a large, unexpected maintenance payment.

He says: “There are certain challenges with aircraft ABS, not least of which is the fact that these deals tend to have a relatively small number of assets. They are lumpy rather than granular, so investors must get comfortable with the underlying assets and related concentration limits, including jurisdictional limits.”

There has been some recent variety in those underlying assets. Allman comments: “There has been a larger range of collateral in recent deals. We like to see narrowbodies in aircraft ABS, but we are not afraid of widebodies for the right lessee and set up.”

Iarchy notes that the variety of asset types is not a problem. He says: “A couple of months ago there were three different buckets of totally different assets in a deal, for example.”

Iarchy continues: “The Sprite 2017-1 deal was interesting because it was consistent from an age perspective and the quality of credits. That is more important than having just the same type of equipment.”

Allman, Hirshorn and Iarchy all expect aircraft ABS issuance to average US$5bn-US$10bn over the next five years. Allman adds that this year he expects issuance of US$5.5bn-US$6.5bn, with spreads staying constant for a while and widening toward the end of the year. Iarchy also expects issuance this year to be over US$5bn.

JL

ABS

Greek lease ABS prepped

Hertz franchisee Autohellas is in the market with AutoWheel Securitisation, an ABS backed by operational auto leases extended to Greek corporates and SMEs. The €101.5m transaction is the first non-bank leasing securitisation to be executed in Greece.

AutoWheel Securitisation is a cash securitisation with an 18-month revolving period, backed by auto leases and future sales proceeds from the underlying vehicles. The receivables are assigned to the issuer at par, based on a 10.7% annual discount rate equating to the seller’s annualised internal rate of return.

The pool comprises 8,536 leases – accounting for 49% of Autohellas’s total lease book – with the average initial car purchase value standing at €15,787 and the average scheduled gross lease collections at €16,131. The weighted average remaining lease term is 32.8 months, while the residual value to initial purchase price is 36.9% and the weighted average annual depreciation rate is 13%.

Including over 30 brands, the portfolio is well diversified by car brands and by vehicle categories within each car brand. Concentration by borrower group constitutes only a moderate credit risk, according to Scope, as the top one and top 10 exposures account for 2% and 9.7% of the securitisation balance respectively.

Scope has assigned provisional triple-B minus ratings to the deal’s €25m class A1 (which are expected to pay a 2.75% coupon), €35m class A2 (one-month Euribor plus 270bp) and €15.2m class A3 (2.75%) notes, which have an expected WAL of 20 months. There is also an unrated €26.3m class B tranche, which will be retained by Autohellas. Final maturity is 30 September 2028.

The three senior tranches are pari passu and pay monthly interest except for the first 12 months of the transaction, during which the A1 and A2 classes feature an annual coupon. The interest on these tranches will be funded monthly into the liquidity reserve, before being paid to noteholders at the end of this period. Autohellas is providing an irrevocable and unconditional guarantee on all interest and principal payments due to class A noteholders.

The ratings are supported by three reserve accounts maintained by Citi, which mitigate negative liquidity effects from potential temporary capital controls by the state. Meanwhile, asset risks are partially mitigated by lease repurchase guarantees by Autohellas and by early-amortisation triggers, including in a case of default by the sponsor.

Scope also highlights the robust performance of Autohellas’s lease book, which exhibits lower default rates than for other lease products during the last period of severe economic stress in Greece (2008-2016). The agency suggests that this is due to sound underwriting practices, a large share of repeat clients (70%) and positive product features, such as a lower-risk lease purpose, positive borrower selection and security.

However, Scope notes that residual values will constitute up to 40% of the securitisation balance, representing a direct exposure to vehicle-value risk. In addition, the transaction is reliant on the performance of Autohellas as servicer and its subsidiary Autotechnica as car maintenance provider. The replacement of these counterparties may increase operational costs.

Alpha Bank is standing back-up servicer on the transaction.

CS

Structured Finance

Stress scenarios disclosed

The Bank of England has announced that the 2018 stress test scenario for the major UK banks will be the same as that used in 2017, rendering it more severe than the global financial crisis. The scenario will assess the impact of IFRS 9 on the stress test results, but the central bank confirms that although capital ratios are likely to fall more sharply than in previous tests, the transition to the new accounting standard would not change the total amount of losses a bank would incur through a given stress.

According to the concomitant report that was published by the bank, under IFRS 9, losses will be recognised at an earlier stage than under the existing IAS 39 accounting regime. However, as income and cumulative losses over the stress period are unaffected by the move to the new accounting standard, a bank will eventually end up with the same capital resources as it would have under IAS 39. Yet, its capital will fall more sharply and then recover more rapidly.

The mild language of the report is reminiscent of the central bank’s financial stability report that was published along with last year’s stress tests (SCI 20 December 2017). According to that report, although the timing of the losses will come forward due to IFRS 9, stress scenario severity will not be adjusted as a result and the new accounting standard will not cause an increase in capital requirements.

The statements suggest that last year’s stress tests might have had a higher capital impact from IFRS 9 than anticipated. This is why the PRA didn't disclose any data on stress test outcomes under IFRS 9.

Each participating bank will be assessed against a single risk-weighted common equity Tier 1 (CET1) ratio hurdle rate and a single Tier 1 leverage ratio hurdle rate that incorporate their minimum capital requirement and any buffers to reflect their systemic importance. In a change from previous years, systemically important banks falling below their hurdle rate in the stress test will be required to take action to improve their capital position. In previous tests, systemic banks that did not meet the higher standards expected of them but that remained above their minimum capital requirements in the stress test were permitted to take less intensive actions.

On a risk-weighted CET1 basis, the hurdle rate will include each bank’s minimum capital requirement (Pillar 1 plus Pillar 2A) and the capital buffers that will apply to reflect its systemic importance. In previous years, only buffers that reflect global systemic importance have been included.

This year, for the first time, the uplift in group capital arising from the application of buffers reflecting domestic systemic importance (the ‘systemic risk buffer’) will also be included in hurdle rates. Similarly, on a Tier 1 leverage basis, the hurdle rate will incorporate the 3.25% minimum leverage ratio and additional leverage ratio buffers that reflect banks’ systemic importance.

The central bank intends to use the information provided by the 2018 stress test to make adjustments to the hurdle rates against which banks’ performance in this year’s test is assessed. An important consideration in determining the scale of adjustments will be the degree to which provisions made early in a stress, in anticipation of future losses, provide additional loss-absorbing capacity for banks. This will be the focus of analysis in the 2018 stress test.

However, any adjustments to hurdle rates will be subject to constraints. Specifically, the effect of adjustments on system-wide capital requirements will be no bigger than the impact in aggregate of changing the accounting standard; no bank should have a hurdle rate after any adjustment that is below its minimum risk-weighted (Pillar 1 plus Pillar 2A); capital and leverage ratio requirements.

As a temporary measure, transitional capital arrangements are in place, which allow banks to ‘add back in’ a portion of the increase in expected credit loss provisions resulting from the introduction of IFRS 9 expected credit loss accounting to their CET1 capital. These arrangements will be phased out by 2023.

SP

Structured Finance

SCI Start the Week - 19 March

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

Pipeline

There was a somewhat more measured pace of pipeline additions last week. The final count consisted of eight ABS, a CLO, two CMBS and three RMBS.

The ABS were: US$753.59m Daimler Trucks Retail Trust 2018-1; US$200m GMF Floorplan Owner Revolving Trust Series 2018-1; US$578.1m GMF Floorplan Owner Revolving Trust Series 2018-2; RMB4bn Huitong 2018-1 Retail Auto Mortgage Loan Securitization Trust; US$748.6m Navient Student Loan Trust 2018-2; Penarth Master Issuer Series 2018-1; US$647.5m Prosper Marketplace Issuance Trust Series 2018-1; and US$4bn Sprint Spectrum Co Series 2018-1.

US$646m CBAM 2018-5 was the CLO and the CMBS were US$1.325bn BBCMS 2018-TALL and US$839m UBS 2018-C9. The RMBS were RMAC No.1, US$985m STACR 2018-HQA1 and US$139.95m STACR 2018-SPI1.

Pricings

There was a particularly long list of 27 ABS prints. There were also 11 CLOs, four CMBS and three RMBS.

The ABS were: US$251.3m American Credit Acceptance Receivables Trust 2018-1; US$1bn American Express Credit Account Master Trust Series 2018-1; US$500m American Express Credit Account Master Trust Series 2018-2; US$500m American Express Credit Account Master Trust Series 2018-3; €452m Bavarian Sky France Auto Leases 3; €218m BL Cards 2018; US$1.052bn Capital Auto Receivables Asset Trust 2018-1; US$233.75m CommonBond Student Loan Trust 2018-A-GS; US$286.64m Consumer Loan Underlying Bond Credit Trust 2018-NP1; US$225.354m ENGS Commercial Finance Trust 2018-1; US$1bn Enterprise Fleet Financing 2018-1; US$758m Ford Credit Floorplan Master Owner Trust A Series 2018-1; US$523m Ford Credit Floorplan Master Owner Trust A Series 2018-2; US$278.2m Foursight Capital Automobile Receivables Trust 2018-1; US$201.2m JG Wentworth XLI Series 2018-1; US$350m OneMain Financial Issuance Trust 2018-2; US$442.8m OSCAR US Funding Trust 2018-1; US$1.04bn Santander Retail Auto Lease Trust 2018-A; US$768.4m Sapphire Aviation Finance I; US$147m Skopos Auto Receivables Trust 2018-1; US$670m SMB Private Education Loan Trust 2018-A; US$825.33m SoFi Professional Loan Program 2018-B; US$3.9375bn Sprint Spectrum Co Series 2018-1; US$618.49m Synchrony Credit Card Master Note Trust Series 2018-1; US$450.3m Triton Container Finance VI Series 2018-1; €1.533bn VCL 26; and RMB4.5bn VINZ 2018-1.

The CLOs were: US$462.5m Apex Credit CLO 2018; US$714m Ares XLVII CLO; €411m Armada Euro CLO II; US$611m Bain Capital Credit CLO 2018-1; €474m BlackRock European CLO I (reissue); US$564m Galaxy XX CLO; US$246m Golub Capital BDC CLO 2014-1R; US$319m Jamestown CLO II 2013-2R; US$610m KKR CLO 21 2018-21; US$505.7m Palmer Square Loan Funding 2018-2; and US$433.45m Voya CLO 2013-2R.

US$1.4bn BX 2018-BIOA, Canadian Commercial Mortgage Origination Trust 4 Series 2018-4, US$165m Ready Capital Mortgage Trust 2018-4 and US$673m SBA Tower Trust Series 2018-1C accounted for the CMBS. The RMBS were A$400m ConQuest 2018-1, US$444m Nationstar HECM Loan Trust 2018-1 and US$446.17m PSMC 2018-1 Trust.

Editor's picks

Doubling-up on due diligence?: Securitisation investors believe that their own due diligence procedures will still be required on deals carrying the STS label, for fear they may lose the designation. Nevertheless, the STS framework is expected to lead to better quality ABS product, with reliance on the label increasing over time…

Issuers urge goodwill on STS: European securitisation issuers are modelling new transactions and updating legacy deals, across a range of asset classes, to be STS compliant. However, there is agreement that an overly punitive regulatory environment could harm the chances of the framework’s success, with some issuers backing the implementation of a transition period…

Deal news

• Essent Guaranty is marketing a mortgage insurance securitisation, only the second such transaction to be publicly rated since Arch Capital Group debuted the structure (SCI 14 November 2017). The US$360.75m transaction, entitled Radnor Re 2018-1, references a pool of mortgage insurance policies linked to 175,653 residential mortgage loans.

Structured Finance

Market moves - 23 March

CDS clearing developments
Intercontinental Exchange has transitioned index CDS open interest from CME Group to ICE Clear Credit, follows CME Group’s decision to exit the CDS business and transfer client positions to an alternative clearing house. ICE Clear Europe has also launched clearing for North American investment grade and high yield index CDS instruments, thereby providing regional customers the ability to access North American indices under European regulation. Additionally, both ICE Clear Credit and ICE Clear Europe have enhanced systems to accept additional debt tiers to allow members and clients to clear CDS instruments under a new loss absorbing capacity tier, in response to an industry-led initiative to trade CDS instruments on this new debt structure.

CMBS tenders
Clifden IOM No. 1 has re-opened and extended to 28 March the early tender date for the class A notes under its cash tender offer in connection with the Fairhold CMBS (SCI 23 February). However, the early tender premium has been reduced to 15% and the purchase price for notes tendered after 28 March has been reduced to 1%. The firm anticipates announcing the aggregate nominal amount of notes validly tendered and its decision about whether to accept them on 21 May.

Land Securities has launched tender offers for any and all of its Land Securities Capital Markets class A5, A7 and A11 notes at Gilt spreads of 65bp, 60bp and 60bp respectively. The offer expires on 23 March, unless extended, re-opened or terminated by the offeror. Land Securities intends to issue a new sterling-denominated fixed-rate bond, with the potential addition of a sub benchmark-sized tap of the existing £300m A13 notes. Class A5 noteholders that wish to subscribe to the new notes in addition to tendering their notes for purchase will receive priority in their allocation. 

CRM assessed
The EBA has published a report that assesses the current credit risk mitigation (CRM) framework and clarifies the application of the CRR, as part of its work on the review of the IRB approach. The report highlights the limited guidance provided in the current CRR provisions on CRM under the advanced-IRB approach and re-iterates the EBA's belief that fulfilling the RTS on the recognition of conditional guarantees, liquid assets and internal models approach for master netting agreements runs the risk of having disproportionate regulation with limited benefits. Indeed, the authority recommends deleting the RTS on liquid assets from the CRR, while it will monitor the need to deliver on the other two RTS in light of international developments in this area.

EMEA
DBRS has opened an office in Frankfurt, establishing an additional legal entity named DBRS Ratings GmbH to ensure ongoing compliance with applicable regulation in the EU and the UK post-Brexit. Detlef Scholz, head of Europe at DBRS, has been named md of the new entity. The agency says it is currently reviewing applications for a full range of open positions in analytical areas, as well as compliance and support functions. Rating coverage out of Frankfurt will ultimately include the analysis of banks, covered bonds, securitisations and corporate funding structures.

The World Federation of Exchanges has appointed Richard Metcalfe as head of regulatory affairs. He joins the association following a consulting project at BNY Mellon, where he provided advice on the practical implementation of MiFID 2. Before that, Metcalfe was director of regulatory affairs at the Investment Association and held a number of senior roles at ISDA. He reports to Nandini Sukumar, ceo of the WFE.

Fix-and-flip RMBS
Angel Oak Capital Advisors has completed what is believed to be a first-of-its-kind RMBS backed by ‘fix-and-flip’ loans originated by Angel Oak Prime Bridge to residential real estate investors. The US$90m AOMT 2018-PB1 features an 18-month revolving period. The average loan balance in the securitisation is US$199,052, with original terms of between six and 12 months.

Green bond pledge
Christiana Figueres, the former UN climate chief and convenor of Mission 2020, unveiled at the Climate Bonds Initiative’s annual conference a new campaign designed to push public and corporate capital expenditure programmes to align with climate and emissions goals. The Green Bond Pledge seeks commitments from cities, public authorities and the world’s largest corporates to increase their use of green bond finance to ensure new infrastructure meets the challenges of climate change and contributes to the accelerated transformation of the economy that is necessary and achievable by 2020. Developed by international climate finance and sustainability groups, the Green Bond Pledge reinforces the goals of the Paris Agreement and will gather momentum in the run-up to the September 2018 Global Climate Actioon Summit in San Francisco, with the campaign continuing into 2019.

Indemnity fee warning
Paratus AMC has issued an investor notice warning 2003-2005 RMAC RMBS noteholders that Clifden IOM No. 1 and its associates sought to obtain “significant and undisclosed profits” from exercising noteholder voting rights in relation to the redemption of the notes. The firm estimates that the undisclosed ‘indemnity fee’ payable to an Isle of Man entity (SCI 9 March) of “unknown substance” (named as Bernoulli Holdings) totals £22.2m, based on requests made by Clifden to the relevant issuers. In the notice, Paratus reiterates its strong belief that investors should reject Clifden's tender proposal or at least ensure they fully understand what Clifden may attempt to do using the powers claimed under the tender terms, including to amend the tender terms unilaterally.

Manager replacement
Dock Street Capital Management is set to replace Terwin Money Management as collateral manager on Glacier Funding CDO IV. Under the terms of the appointment, Dock Street agrees to assume all the responsibilities, duties and obligations of the collateral manager under the applicable terms of the indenture.

Market risk consultation
After monitoring the implementation and impact of the market risk standard issued in January 2016, the Basel Committee is seeking opinions on proposed changes to the minimum capital requirements for market risk. The proposed changes include: changes to the measurement of the standardised approach to enhance its risk sensitivity; recalibration of standardised approach risk weights applicable to general interest rate risk, FX risk and equity risk; revisions to the assessment process to determine whether a bank's internal risk management models reflect the risks of individual trading desks; clarifications on the requirements for identification of risk factors that are eligible for internal modelling; and clarifications on the scope of exposures that are subject to market risk capital requirements. Its consultative document also proposes a recalibration of the Basel 2 standardised approach for banks with less material market risk exposure. The implementation date of the market risk standard has been extended to 1 January 2022 and the Committee plans to finalise revisions as soon as possible. Comments should be received by 20 June 2018.

Name change
TICC Capital Corp has changed its name to Oxford Square Capital Corp, in order to more closely align its identity with affiliated funds and its investment adviser, which currently manage the portfolios of Oxford Lane Capital Corp and Oxford Bridge. The company remains a publicly-traded BDC principally investing in syndicated bank loans, debt and equity tranches of CLO vehicles and warehouse facilities.

New Indian asset class
Indian rating agency CRISIL has assigned provisional ratings of double-A minus and single-A plus to the R99.75 crore series A1 and R².17 crore A2 pass-through certificates respectively issued by the Vivriti Victor 002 2018 securitisation. The deal is backed by education loan receivables originated by Avanse Financial Services and marks the emergence of a new asset class in India. The transaction has a 'par with excess interest spread' structure, wherein the trust will issue series A1 and A2 PTCs in exchange for a purchase consideration equal to 92% and 2% respectively of the R108.43 crore pool principal at the time of issuance.

North America
Michael McRaith, former director of the US Treasury Department’s Federal Insurance Office (FIO), has joined Blackstone Insurance Solutions (BIS) as an md. He will serve on the BIS senior management team, reporting to BIS ceo Chris Blunt. Prior to his appointment as FIO director in 2011, McRaith served as director of the Illinois Department of Insurance and was a NAIC officer. BIS says it expects to make several additional key hires in the coming weeks and months.

Milliman has introduced property & casualty expertise in its Tampa office, led by consulting actuary John Rollins, in response to the growing demand for the firm's property insurance analytics. The Tampa P&C team will work closely with Nancy Watkins, a principal and consulting actuary in Milliman's San Francisco office, who has deep experience in Florida. Rollins specialises in catastrophe-exposed property and flood insurance, and has experience of structuring and issuing ILS. He previously served as chief risk officer for various insurance entities, including Cabrillo Coastal General Insurance and Citizens Property Insurance Corp.

Russell Gannaway has been promoted to md and commercial credit portfolio manager in PIMCO’s Newport Beach office, focusing on commercial real estate and CMBS. Prior to joining the firm in 2009, he was an associate at JER Partners in New York.

Ari Kavour and Mike Llodra have been appointed co-heads of Wells Fargo’s mortgage finance group, reporting to Chris Pink, head of asset-backed finance and securitisation. Kavour led the firm’s RMBS and mortgage trading team and previously served as head of the agency mortgage trading businesses at Morgan Stanley and Merrill Lynch and spent more than a decade trading mortgage securities at Goldman Sachs. Llodra led the asset-backed finance and securitisation capital markets team – which he will continue to do until a successor is named – having previously worked as a structured finance specialist at Harvard Management and as head of the CDO desks at JPMorgan, Bank of America and Citi.

NPL auction
Freddie Mac has sold via auction 2,150 deeply delinquent non-performing loans totalling US$341m from its mortgage investments portfolio that are currently serviced by New Penn Financial. The transaction - which is expected to settle in May - comprised three separate pools of mortgage loans, two of which consist of geographically diverse properties, while the remaining pool consists solely of properties in Chicago Cook County. Mortgages that were previously modified and subsequently became delinquent comprise approximately 55% of the aggregate pool balance; the aggregate pool has a loan-to-value ratio of approximately 80%. BlueWater Investment Holdings and MTGLQ Investors were the winning bidders, with cover prices between US$50 area and US$90 area.

RMBS settlement
UBS has agreed a US$230m settlement with Attorney General Eric Schneiderman in connection with the packaging, marketing, sale and issuance of RMBS to investors leading up to the financial crisis. The Office of the Attorney General found that, contrary to its representations, UBS sold investors RMBS backed by mortgage loans based on inaccurate statements in prospectus supplements and/or investor presentations. The settlement includes US$189m of consumer relief for New York homeowners and communities – including contributing to more affordable housing construction – and US$41m in cash to New York State. An independent auditor will report on UBS’s compliance with the consumer relief terms of the settlement to ensure that these obligations are met.

SASB RFC
Morningstar is requesting comments on its proposed US single-asset/single-borrower CMBS rating methodology for the purpose of rating SASB deals, rake certificates and large-loan securitisations at issuance and during surveillance. The five key components that drive the agency’s proposed credit rating methodology are: underwritten sustainable net cashflow and sustainable value; borrower leverage; qualitative and quantitative factors; transaction structure; and legal review. Morningstar anticipates recent vintage (2014 to 2017) certificates that it rates to see an upgrade or downgrade of three or more notches as a result of the methodology. Comments should be submitted by 20 April.

Strategic partnerships
Blackstone Strategic Capital Holdings has acquired a passive, minority equity interest in Kohlberg & Company. The fund, a part of Blackstone’s Alternative Asset Management business, specialises in acquiring stakes in alternative asset managers. Terms of the transaction were not disclosed. Kohlberg is based in Mt Kisco, New York, and specialises in middle market investing.

Hudson Structured Capital Management and Everest Re Group have entered into a strategic agreement to collaborate across several areas of activity, comprising co-investment opportunities and transactions that combine HSCM’s intellectual and monetary capital with Everest’s global underwriting expertise, strong balance sheet and highly-rated reinsurance and insurance companies. Everest will also invest across several of HSCM’s investment funds, including as the anchor investor in its newly-created insurance technology strategy.

LCM Partners has entered into a strategic partnership with Brookfield Asset Management aimed at jointly growing LCM’s asset management and credit servicing business globally. Under the terms of the agreement, Brookfield will acquire a 25% strategic interest in Link Financial Group, which operates a pan-European loan servicing platform, with an option to acquire another 24.9% interest over time. Link Financial Group employs approximately 700 people and has acquired over 2,500 portfolios of performing, rescheduled and non-performing loan portfolios since inception. The firm will continue to operate independently under the leadership of the existing management team, with the transaction expected to close during the next quarter.

Capital Relief Trades

Risk transfer round-up - 23 March

Credit Suisse is believed to have priced a capital relief trade referencing a loan book originated in Switzerland. The deal was allegedly 3x subscribed, with guidance at 7.625% but printing at 7%.

Separately, arrangers note an increase in requests for transactions by standardised banks, with deals already said to be in the pipeline. Most of the transactions until now were executed by banks using the internal ratings-based approach for calculating capital requirements, as opposed to the standardised approach.

CMBS

Finnish CMBS debuts RFN feature

Finnish real estate firm Sponda – which was acquired by Blackstone in June 2017 – is in the market with an innovative CMBS. The €540.87m securitisation includes a new structural feature in the form of reserve fund notes (RFNs), which finance the note share portion of the liquidity reserve.

The transaction securitises a single €590.9m loan jointly advanced by Citi, Morgan Stanley and Morgan Stanley Principal Funding to 72 borrowers owned by Sponda. The loan refinanced the existing indebtedness of the borrowers and is available to finance permitted capital expenditure projects, according to DBRS.

The underlying portfolio’s total market value is €887.7m, resulting in a 66.6% senior LTV. The pool comprises 63 commercial real estate assets located across Finland that are owned by individual property-owning companies (propcos). Office space represents 61.7% of the total lettable area, while retail space makes up 17.4% and other commercial assets the remaining 20%.

The assets are heavily concentrated in Helsinki (representing 73.8% of MV), with Tampere and other regions across Finland accounting for the remaining MV. Within the Helsinki metropolitan area, 11.5% of MV is located in Ruoholahti, 17% in Espoo and 45.3% in other locations.

As of 30 September 2017, the portfolio was generating €60.3m of net rent, which equates to a 10.2% debt yield.

DBRS has assigned provisional ratings to FROSN-2018. The capital structure consists of triple-A rated class RFNs (sized at €16.7m), as well as class A1 and class A2 notes, double-A (low) class B, single-A (low) class C, triple-B class D and double-B (low) class E notes. The issuer will advance €27.94m (representing 5% of the securitised senior loan) back to Morgan Stanley and Citi in the form of vertical risk retention (VRR) loan interest to satisfy risk retention requirements.

The RFNs will fund 95% of the liquidity reserve. Post-closing, the RFN proceeds plus a VRR loan interest contribution of €878,947.37 will be deposited into the liquidity reserve. DBRS calculates that the liquidity reserve amount will be equivalent to approximately 27 and 11 months coverage on the notes, based on an interest rate cap strike rate of 1% per annum and the Euribor cap after loan maturity of 4.25% per annum respectively.

The transaction also features a senior expenses reserve, which is expected to be funded to €200,000 and cover one interest period’s senior fees in case the liquidity reserve has been fully depleted or released upon full repayment of the notes. Further, the class E notes are subject to an available funds cap, where the shortfall is attributable to an increase in the weighted average margin of the notes and lost issuer liquidity reserve amount due to issuer account bank insolvency.

The senior loan is expected to be repaid in February 2020; however, the borrowers can exercise three one-year extension options, subject to certain conditions. The final maturity of the notes is 21 May 2028. A prepayment fee equal to one-year make-whole interest is payable by the borrowers, should they prepay the senior loan in the first year.

Sponda was originally founded by the Bank of Finland in 1991 to take over the Finnish and foreign real estate properties held by the Skopbank Group, together with its sizeable equity portfolio, before listing on the Helsinki Stock Exchange in January 1998. Blackstone’s acquisition of the company represented a strategic move into the Nordic CRE market and, following the issuance of FROSN 2018, it is expected to reorganise Sponda’s company structure.

CS