News Analysis
Capital Relief Trades
Seeking to scale
The capital relief trades (CRT) market suffers from a material gap between banks’ needs and the availability of investor capital, within the strategy. To facilitate growth, one of the next steps should be to attract greater buy-in from long-term investors, especially pension funds and their investment consultants.
Kaikobad Kakalia, cio at Chorus Capital, believes that long-term investors - especially pension funds - are the “essential link” in enabling the CRT/risk-sharing market to scale. “Capital relief generated by risk-sharing issuance from the largest banks accounts for only basis points of their capital and is therefore small in the context of their balance sheets. Most issuers would like to scale their issuance to more meaningful levels, but this requires specialist asset managers with suitable skills and the ability to channel large pools of investment capital.”
He says there is a material gap between the needs of the banking sector, its available assets and the amount of investor capital available in this strategy. “Awareness of the attractive risk/return profile of the strategy needs to become more widespread in order to attract long-term capital from pension funds. In order to create more awareness with pension funds, asset managers need the buy-in of specialist consultants, who advise pension funds on their asset allocation and manager selection. This is critical to unlocking vast pools of long-term capital.”
Consultants including Aon Hewitt, NEPC, Pavilion, StepStone and Willis Towers Watson act as gatekeepers to large pension funds that employ them to design their asset allocation strategy. As such, the ability of specialist investment managers to market to pension funds is complicated by this gatekeeper relationship.
Kakalia notes that capital relief trades are complex and in order to originate interesting investment opportunities, asset managers like Chorus Capital require specialist knowledge of bank regulation, strategic capital management objectives and the capability to underwrite portfolios of credit assets. For this reason, few pension funds invest directly in capital relief trades, preferring instead to employ specialist asset managers. Pension funds also require advice on how to invest in the strategy from their investment consultants.
“The consultant helps translate the strategy and identify appropriate asset managers. The asset manager helps to access the opportunity and overcome the complexity of the asset class,” he explains.
Chris Redmond, global head of credit & diversifying strategies at Willis Towers Watson, notes that the risk transfer space arguably represents the pinnacle of complexity that pension fund clients invest in and there are hurdles for some. “Capital relief trades work well for pension funds - given the typically favourable regulatory environment – and are an efficient means of gaining exposure to certain assets. We’ve executed almost US$5bn of capital relief equity over the last three years and try to encourage clients to consider allocating to the space. We’d like to do more, but the bandwidth of some pension funds precludes it.”
Redmond says that since Willis Towers Watson employs 130 people in research, it was easier to devote the time and resource for his firm to get up to speed on capital relief trades. But he points out that other consultants with fewer resources may elect to focus their efforts on more traditional markets and that it’s often “difficult to take the next step without a track record”.
Willis Towers Watson began allocating to CRTs in late 2014, as the transactions appeared to be one of the most attractive opportunities at that time from a risk/reward perspective. “We believed that risk transfer would be an asset class for the future, based on our views around the recapitalisation of the European banking sector,” Redmond explains.
He continues: “If we’d only have been able to deploy US$300m, say, and never made another investment in the CRT space, it wouldn’t have been a terribly good return on our time. But the decision is less about how long a given opportunity will last and more about whether we can achieve reasonable scale; in other words, the ability to apply a decent amount of capital across our client portfolios.”
When constructing portfolios for clients, Willis Towers Watson’s mindset is that every asset class competes for capital, so it’s a question of understanding the underlying sources of return. CRTs are more opaque instruments, meaning that the premium for illiquidity and complexity needs to be attractive and stacked up against – say – taking direct exposure to credit. The next step is to evaluate a manager’s skill and undertake a relative value assessment.
The firm tends to work with managers to define the optimal investment with regard to size, terms and cost. “We’re unusual in that we like to be involved in product design and strategy focus, and we can be quite prescriptive. For example, we have a bias away from corporate mid-market lending CRTs and prefer more secured assets,” Redmond confirms.
Although the emergence of syndicated risk transfer trades has lowered the barrier to entry to the market, such instruments are not represented in industry indices, which still drive significant investment focus and behaviour. “We understand that some pension funds have preferred to invest in AT1s, which, to date, have provided similar returns but without the pain of grappling with the complexity of capital relief trades,” Redmond observes.
Kakalia points out that AT1s generate exposure to a bank’s entire balance sheet and transmit market risk and operational risk to investors. In contrast, CRTs specifically target the credit risk of pre-identified portfolios of assets, ensuring that investors are not impacted by other risks, including counterparty risk.
In terms of what the industry can do to attract more pension consultants, Redmond suggests that the impact of the Carillion default could represent a catalyst for more transparency around blind pools and replenishment criteria. “Carillion has created some market stress. We’d welcome better disclosure around the impact of defaults and stresses on portfolios – although there may be instances where this isn’t possible. This may help end investors gain a sense of the resilience of the market to isolated default.”
Dutch pension fund PGGM is unique in that about 11 years ago it decided to hire its own CRT team and systematically allocate around 2.5% directly to risk-sharing transactions. Meanwhile, Arrowpoint Partners, Axa, Chorus Capital, Christofferson Robb and Orchard Global Asset Management are among the few managers that are understood to have received large-ticket investments directly from pension funds.
The biggest consultants in the UK are said to represent around US$1.6trn of pension fund capital. In contrast, specialist CRT investment managers are believed to represent around US$25bn of AUM.
CS
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News Analysis
Capital Relief Trades
Synthetic NPLs gain traction
The ECB’s latest non-performing loan provisioning guidelines are expected to trigger increased synthetic NPL securitisation issuance. Nevertheless, defining a credit event for a portfolio of loans that are already non-performing remains a significant challenge.
The ECB guidelines prescribe full provisioning for unsecured NPLs after two years and seven years for secured NPLs. “This could potentially incentivise banks to offload the provisioning increase through synthetic structures,” says Gordon Kerr, head of European structured finance research at DBRS.
The guidelines apply to significant institutions directly supervised by the ECB and cover all exposures classified as non-performing, as of 1 April 2018. Banks are required to inform the central bank of any differences between their practices and the prudential provisioning expectations from early 2021 onwards (for year-end 2020).
Full provisioning for secured loans will be phased out over a longer period, the goal being to allow banks to explore other options for resolving their NPLs. Furthermore, any partial write-offs made since the most recent NPE classification can be considered as provisioning and contribute to the coverage ratio of the bank.
Currently, synthetic NPL securitisations are executed for capital relief purposes and typically reference mixed and re-performing portfolios of corporates and SMEs. Italian transactions, in particular, tend to reference secured and unsecured SME loans. The asset class is gaining investor interest in Greece and Portugal too.
“SME NPLs are the hardest to sell, as they have features of both retail and corporate NPLs,” says Tom McAleese, md at Alvarez and Marsal. “SME NPLs require a volume solution like retail, but they are also ‘live’ trading businesses, requiring data analysis like corporates. Investors have shied away to date from SMEs, primarily for servicing and granular analysis reasons.”
He continues: “Synthetics, on the other hand, can remove the servicing challenge, with the bank maintaining the customer relationships and individual underwriting.”
Although driven by different motives, synthetic NPLs feature similarities with cash deals and outrights sales. Cashflow modelling, for instance, does not differ in any substantive way from outright sales.
“It depends very much on the jurisdiction, but we typically look at the bankruptcy framework and the quality of the servicer,” observes Kanav Kalia, director at Oxane Partners.
However, the main impediment to future issuance is defining a credit event for a portfolio of loans that are already non-performing. Credit event definitions would vary from deal to deal; however, market sources have seen a number of transactions based on NPL recovery thresholds and restructuring credit events.
Although using recovery thresholds is understandable, the case for restructuring credit events seems less so. “Restructuring credit events don’t make sense, since loans would have already been worked out for years, so there is basically no further restructuring,” states Alessio Pignataro, svp at DBRS.
He continues: “The idea is to remove it from bank balance sheets, not to keep it - especially if the portfolio has been written down to zero - so it would make sense to sell it. There might be a residual pick-up if they are kept on balance sheet, but recoveries might fail.”
Another challenge for banks is justifying such actions to regulators. Carlos Silva, svp at DBRS, adds: “Banks and regulators have a framework in terms of looking at PDs and risk weights and the benefit they get from a risk exposure, but this applies only to performing assets. They would have to justify this to regulators. Nothing has been calibrated for defaulted exposures.”
However, he suggests that the situation is different if banks can justify significant risk transfer. “It will all depend on the regulatory capital relief they can get.”
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News Analysis
NPLs
Indian NPL investment increasing
India’s bankruptcy framework is facilitating more investment activity in the nation’s non-performing loan market. Clearwater Capital is one of the latest investors to allocate more capital into Indian NPLs.
According to Subhashree Dutta, md at Clearwater Capital: “The new Insolvency and Bankruptcy Code brings US-style Chapter 7-11 bankruptcies to India, enabling the resolution of insolvencies in a time-bound manner, with a clear waterfall mechanism prescribed for debt and operational dues.”
She adds: “One of the great things about the framework is that it forces a time-bound resolution process. Creditors, working together with the resolution professional, have 270 days to come up with and accept a satisfactory plan within the timeframe or else the company is automatically pushed into liquidation. The destruction of value in liquidation is pretty obvious to all and so interested parties are incentivised to compromise to preserve value.”
Under the bankruptcy framework, if no resolution plan is approved by the court within 270 days, the debtor is liquidated. Furthermore, smaller loans of less than R50m must be reported on a monthly basis and there is a weekly reporting requirement for anything above R50m (SCI 23 February).
The Indian banking system is undergoing a major overhaul – with about 15%-20% of total loans being non-performing or stressed, amounting to US$150-US$200bn of stressed assets. For Clearwater, the scale of the opportunity is considerable, with a good portion of the supply coming out of corporates that have sound assets but are affected by sectoral issues, regulatory uncertainties or simply poor capital allocation decision-making.
The fund has been actively investing in this market since 2005, with “on-the-ground experience, a large track record of realised returns in India and the know-how to manage investments, not just put out money,” observes Dutta.
Clearwater is specifically focused on credit opportunities at the top of the capital structure. Dutta explains: “In India, we are excited about and are evaluating opportunities where we can buy debt at attractive entry points and where there is a real need for alternative capital providers when the current banking system cannot support the pace of Indian economic growth. For example, we are tapping into this opportunity through our NBFC in India, Altico Capital Private, which is focused on primary senior-secured lending to Indian corporates.”
Driven by the National Company Law Tribunal, a quasi-judicial body in India that adjudicates issues relating to Indian companies, specific activities could include buying assets out of bankruptcy or providing acquisition finance for asset purchasing out of bankruptcy. The firm is also interested in privately sourced situations that often come with a full collateral package and offer control.
Nevertheless, challenges remain. The real test of the bankruptcy code will be when the deadline to resolve these large cases approaches, with no resolution in sight, and when these companies have to be liquidated. Liquidation would result in significant value erosion for creditors and other stakeholders alike.
However, Dutta remains optimistic: “India continues to be one of the fastest growing economies in the world and one that has significant scale. There is considerable amount of spending from the government’s side on infrastructure.”
She concludes: “There are good assets or debt backed by good assets that can be acquired in the market. Clearly there are multiple issues with banks, but…India continues to be a growth story and we are seeing multiple opportunities right now and should continue to see in the future.”
SP
SCIWire
Secondary markets
Euro ABS/MBS busy
European ABS/MBS secondary market activity has picked up this week.
“It’s been a busy week this week after a quiet week last week,” says one trader. “Overall, March has been busy and month-on-month secondary spreads are a little wider, but not by much.”
The trader continues: “Everything is trading well, mainly at good levels with a generally strong tone. There’s not been much primary of late and with broader market volatility some offers have come a bit cheaper, so dealers are now getting plenty of enquiries to buy in secondary.”
However, month- and quarter-end ahead of the long holiday weekend mean that volumes are likely to drop today. There are currently no BWICs on the European ABS/MBS schedule.
SCIWire
Secondary markets
Euro CLOs soften
Pricing levels in the European CLO secondary market have softened this month.
“CLOs have come off quite a bit with triple-As and double-Bs the most notable movers in secondary,” says one trader. “Unusually, it’s been driven by stock market moves rather than anything in the high yield market – high yield levels are little changed, but CLOs have moved wider in sympathy with share prices.”
Nevertheless, the market has been busy, the trader reports. “Dealers were quite long in inventory so over the past three weeks we’ve seen a steady supply of BWICs as they adjust holdings to quarter-end requirements. That supply has been focused around triple-As as they have the lowest price moves and the drop in BWIC activity today tells me those requirements have now been met.”
Double-Bs have been the next most active sector over the month and have seen significant price moves – bonds that were around 250DM to first call are now at 350-400. The trader adds: “Elsewhere in the stack there have also been moves wider, but the picture is less clear – for example, there aren’t a lot of offers circulating on double- and single-As so we’re relying on primary to gauge movements there.”
As noted above, there are currently no European CLO BWICs on today’s schedule.
SCIWire
Secondary markets
US CLOs switch focus
Focus is being drawn away from the US CLO secondary market, but it remains active.
“The momentum is really with new issues, resets and refis at the moment,” says one trader. “Secondary has been relatively busy this month, but primary is the main focus.”
The trader continues: “It’s still a premium market with lower bids still generating DNTs, but there is softness especially around double- and single-As. At the same time, people aren’t paying up in shorter duration paper because they are picking up spread in longer duration and new issue and so the curve has flattened.”
The trader highlights a single-A BWIC on Tuesday as the chief talking point of the week. “It saw prints in the mid to low 200s to the call, which is even wider than new issue. That said, the list did involve some lumpy deals and not the most favoured managers."
Overall, March's BWIC activity has been up on recent months, the trader notes. “We’re seeing rotation into new issue, but there’s been macro vol too, so some people are taking chips off the table as well. Sellers are coming from a handful of different profiles – not just hedge funds but also insurers, money managers and so on.”
Thanks to month-end and the market’s close tomorrow, there is currently only one BWIC on today’s US CLO calendar. Due at 11:30 New York time it amounts to $10.21m of original face over 20 line items – 18 triple-As and two double-As.
The auction comprises: APID 2013-16A A1R; BLUEM 2013-1A A1R; BLUEM 2015-3A A1; CRNPT 2013-2A A1LR; HLA 2012-1X A2; HLA 2014-1A A1R; HLA 2015-2A A; JTWN 2016-9A A1A; LCM 16A AR; MDPK 2013-11A AR; OCP 2014-5A A1R; OCP 2016-12A A1; OCTLF 2014-1A A1R; SHACK 2016-9A A; SYMP 2007-5A A2; SYMP 2012-8A AR; TPCLO 2013-1A A1; VENTR 2007-8A; VENTR 2014-17A AR; and VOYA 2014-4A A1R.
Six of the bonds have covered with a price on PriceABS in the past three months: CRNPT 2013-2A A1LR at 100.015 on 06 February; HLA 2015-2A A at L100H on 22 February; MDPK 2013-11A AR at 100.21 on 21 February; OCP 2016-12A A1 at 100.4 on 12 March; SHACK 2016-9A A at 100.612 on 22 March; and VENTR 2014-17A AR at 100.04 on 21 February.
News
Structured Finance
SCI Start the Week - 26 March
A look at the major activity in structured finance over the past seven days
Pipeline
An even mix of ABS, CMBS and RMBS remained in the pipeline at the end of last week. Another CRE CLO was also announced.
The ABS comprise A$699m Driver Australia Five Trust, Sfr335m Swiss Car ABS 2018-1 and the US$3.22bn Tobacco Settlement Financing Corp 2018A and B notes. The CMBS consist of US$500m American Tower Trust I Series 2018-1, US$952.9m CSAIL 2018-CX11 and €531m FROSN 2018, while the CRE CLO is US$610m BSPRT 2018-FL3. Finally, the US$866m JPMMT 2018-3, C$247.5m MCAP RMBS Series 2018-1 and US$327m OBX 2018-1 transactions account for the RMBS.
Pricings
ABS made up the majority of pricings last week, across auto and consumer assets. In addition, a handful of RMBS were issued, as well as a few CLOs and CMBS.
The auto ABS prints were US$1.04bn 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 and RMB4bn Huitong 2018-1 Retail Auto Mortgage Loan Securitization Trust. The A$523.56m Latitude Australia Credit Card Loan Note Trust Series 2018-1, US$995.76m Navient Student Loan Trust 2018-2, US$615.12m Prosper Marketplace Issuance Trust Series 2018-1 and €550m Quarzo CQS 2018 accounted for the consumer ABS issuances.
The CLO prints included €408m Aurium CLO IV, €413.5m BlackRock European CLO V and US$511m Cedar Funding IX, while the CMBS prints were US$1.325bn BBCMS 2018-TALL and US$1.2bn FREMF 2018-K74. Rounding out last week’s issuance were the €356m European Residential Loan Securitisation 2018-1, US$771.3m-equivalent Pepper Residential Securities No. 20, US$360.75m Radnor Re 2018-1, US$985m STACR 2018-HQA1 and US$139.95m STACR 2018-SPI1 RMBS.
Editor's picks
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…
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…
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…
Marketplace lending now 'mainstream': The US consumer economy’s long recovery has now become well established and access to credit has developed markedly over the last few years. Marketplace lending ABS has become similarly well established in this environment and is set to continue its development, although there are fears that the market is now teetering towards a bubble…
Deal news
- 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.
- 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.
Regulatory update
- 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.
News
Capital Relief Trades
Innovative Dutch SRT completed
Rabobank has completed an innovative Dutch significant risk transfer (SRT) deal with the EIF. The €128m financial guarantee is the lender’s only transaction where the second-loss risk has been fully transferred, as well as its first transaction under the CRD 4 in the SME space.
The transaction will be guaranteed by the European Fund for Strategic Investments (EFSI). As such, the EIF will take on the mezzanine risk of the synthetic securitisation, while the EIB provides a back-to-back guarantee to the EIF that fully mirrors the fund's obligations under the guarantee (SCI 26 April 2017).
Wiebe Draijer, chairman of Rabobank’s managing board, observes: “This transaction underlines Rabobank’s ongoing commitment to its SME clients. As a result of the risk transfer, risk-weighted assets will decrease by €1.2bn. Rabobank will use the freed-up capital to grant new loans to Dutch SMEs.”
He adds: “Just like EIF and EIB, we intend to stimulate lending to SMEs. We will transfer the discount granted to us by the EIF and the EIB to our customers.”
Rabobank will issue €768m of newly originated SME loans, although it will take two months before the loans are actually originated.
The deal references 3000 Dutch SME loans originated by Rabobank for a total of €2bn. It features a two-year replenishment period that extends the average life of the deal and, for the first time for a Rabobank capital relief trade, a five-year time call and excess spread for the first loss position. The tranches will amortise on a pro-rata basis, with triggers to sequential that have in mind the EBA’s discussion paper on SRT (SCI 28 September 2017).
The transaction follows Rabobank’s capital relief trade in November with Dutch pension fund Pensioenfonds Zorg en Welzijn (PFZW) (SCI November 3 2017) and the disposal of a €600m mortgage portfolio to La Banque Postale in October (SCI 27 October). All three deals form part of the lender’s capital management strategy, as stated in its strategic framework, where it aims to maintain its CET1 ratio at a minimum of 14% and to achieve a total capital ratio of at least 25% by end-2020.
One factor that the bank takes into account when setting these targets is the expected impact of new regulations. For instance, when referring to the fully loaded CET1 ratio, it means the CET1 ratio that would apply if the CRR/CRD 4 were already fully phased in.
Looking ahead, Jorgen De Vries, head of structured asset distribution at Rabobank, notes: “We want to establish a platform for SMEs, so we may consider other deals in the future. But it will depend on balance sheet developments; in particular, CET1 ratio levels.”
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News
CLOs
CLO portfolio turnover gauged
Average US CLO manager portfolio turnover rate stood at 37.4% in 2017, ranging from 12% to 82%, according to a new JPMorgan analysis. The study further suggests that CLO managers have generally been able to sell loans at higher prices than the overall loan market.
The CLO manager portfolio turnover rate used in the study is calculated by dividing total sales volume in 2017 by the collateral balance at the beginning of the year to indicate the percentage of turnover for each CLO portfolio, adjusting for the size of each pool. By volume in 2017, the managers in the JPMorgan sample sold US$57bn assets from 314 CLOs with a total collateral portfolio balance of US$158bn.
Overall, US CLOs reported US$219bn asset purchases (with a trade count of 211,119) and US$117bn asset sales (152,874) last year. Excluding ramp‑related activity after the reinvestment period, JPMorgan CLO analysts estimate that US CLO portfolios experienced an average turnover of 30% in 2017 based on ‘sales’ data and an average turnover of 57% based on ‘purchase’ data.
In contrast, from 2011 to 2017, 878 US CLOs reported US$580bn in asset purchases and US$335bn in asset sales. The trade count is 535,732 purchases and 417,552 sales.
In terms of the prices CLO managers received for loans sold in 2017, the majority (65%) of sale volume was in the price range of US$99.75-US$102, with 32% in the US$100-US$100.5 price range. The analysis shows that only 2% of sale volume was at distressed prices of less than US$80.
The analysis also considers the ‘management option’ in terms of whether trading activity generates alpha. Average 2017 prices for sales was US$98.66 compared to the average 2017 price of US$98.37 for the loan index, and the average monthly difference in CLO sale prices versus loan prices was 30 cents.
Meanwhile, the majority (67%) of purchase volume was in the US$99.5‑US$100.5 price range. The JPMorgan analysts note that this makes sense, given that most new issue loans are offered at or near par.
The average 2017 purchase price was US$99.44 compared to the average price of US$98.37 for the loan index, and the average monthly difference in CLO purchase prices versus loan prices was US$1.07.
CS
News
RMBS
LoanDepot RMBS debuts
The first RMBS entirely backed by loans underwritten by marketplace lender loanDepot.com has hit the market. Mello Mortgage Capital Acceptance 2018-MTG1 is backed by a US$299.83m pool of 453 primarily 30-year fixed-rate QM loans.
The securitisation comprises 226 prime jumbo loans underwritten to loanDepot's underwriting guidelines (representing 59.3% of the pool by loan balance) and 227 high balance GSE-eligible loans underwritten to Freddie Mac or Fannie Mae guidelines with loanDepot overlays (40.7%). All of the loans are designated as qualified mortgages either under the QM safe harbour or the GSE temporary exemption under the ability-to-repay rules.
Approximately 58.3% of the loans were originated through the retail channel, 41.3% were originated through the broker channel and the remainder were originated through the correspondent channel. Moody’s notes that loans originated through a broker or correspondent channel typically do not perform as well as loans originated through a retail channel, albeit performance varies by originator.
The borrowers have strong credit profiles demonstrated by high credit scores and sizeable equity in their properties, according to the agency. The weighted-average primary borrower original FICO score and original LTV ratio of the pool is 772 and 72.2% respectively. The WA DTI for the pool is 33.3%, while the loans have a low seasoning of approximately 2 months.
All of the mortgage loans are secured by first liens on one-to-four family residential properties, condominiums and planned unit developments. Approximately 78.2% of the properties are located in five states – California, Massachusetts, Washington, Colorado and New Jersey – and 49.8% are in California. The top five MSAs by loan balance are Los Angeles (18.5%), San Francisco (12.7%), Boston (9%), Seattle (7.2%) and New York City (7%).
Self-employed borrowers constitute 16.3% (by loan balance) of the pool, while borrowers with two or more mortgages represent 30.3%. The largest 20 loans make up approximately 10.1% of the total balance, exposing the transaction to the risk of losses when few loans remain near the end of its life.
Nevertheless, the transaction has a shifting interest structure, with a five-year lockout period that benefits from a senior subordination floor and a subordinate floor to mitigate tail risk. When the total senior subordination is less than 1.85% of the original pool balance, all principal is paid to the senior bonds. In addition, if the subordinate percentage drops below 6.25% of current pool balance, the senior distribution amount will include all principal collections and the subordinate principal.
Among the other credit challenges highlighted by Moody’s is the fact that both the R&W provider and the guarantor are loanDepot entities, which may not have the financial wherewithal to purchase defective loans. Moreover, unlike other prime jumbo transactions it has rated, the R&W framework does not include a mechanism whereby loans that experience an early payment default are repurchased.
In terms of capital structure, the majority of the class A notes are rated Aaa by Moody’s. The class B1 to B5 notes are rated Aa3 through B2, while the class B6 notes are unrated.
The US$26.24m class A9 senior support non-accelerating senior (NAS) certificates – which will only receive their pro-rata share of scheduled principal payments for five years – are rated Aa1. After year five, the NAS bond will receive an increasing share of prepayments in accordance with the shifting percentage schedule.
Meanwhile, on the accretion termination date, the US$38.23m class A19 accretion-directed certificate will be entitled to receive as monthly principal distribution the accrued interest that would otherwise be distributable to the US$12.74m class A20 accrual certificate.
Bank of America Merrill Lynch and Credit Suisse are underwriters on the deal. Cenlar FSB is servicer, while loanDepot will be the servicing administrator responsible for servicer advances. Wells Fargo, as master servicer, will step in if loanDepot cannot fulfil its obligation to advance scheduled principal and interest.
LoanDepot has previously contributed loans to repo RMBS issued by the Station Place shelf (SCI passim).
CS
Market Moves
Structured Finance
Market moves - 29 March
Europe
Man Group has hired Simon Finch as cio of credit at Man GLG, its discretionary investment management engine. In this newly created role, Finch will be responsible for Man GLG’s credit business and will have oversight of the credit portfolio management teams. He will report to Teun Johnston, ceo of Man GLG, and work closely with Man GLG’s cio, Pierre-Henri Flamand and Man Group’s cio, Sandy Rattray. He will join Man Group’s executive committee and Man GLG’s management team. Finch joins Man GLG from CQS, where he was cio and ran the firm’s multi-asset credit fund.
Funds advised by Triton have hired Gordon Watters to the Triton Debt Opportunities team as an investment advisory committee member. The committee advises the board of the fund manager for the Triton Debt Opportunities Fund I on fund investment decisions. Before joining Triton, he acted as the chief risk officer and senior advisor to LCM Partners.
North America
Angel Oak has hired Namit Sinha as head of mortgage strategies. Namit will focus on non-QM investments for Angel Oak strategies as well as opportunities in other areas such as prime jumbo mortgages, RPL strategies and mortgage servicing rights. Prior to Angel Oak he was svp at Canyon Capital.
Peter Mullen is set to re-join Artex as ceo-elect and will begin his position in March 2019, once he has fulfilled his contractual obligations to Aon Captive & Insurance Management, where he has been ceo for the last seven years. He helped found Artex in 1997 and was a member of its executive team until his departure for Aon. David McManus will continue to lead Artex as president and ceo until 1 July 2019, at which time Mullen will assume those executive responsibilities, while McManus moves into the role of chairman.
Hart Advisors has named Tamara Hundley and Tim Looney co-leads of its CMBS loan assumptions business development team. The pair become directors at the firm and previously worked at Swearingen Realty Group and 1st Service Solutions respectively.
KBRA has strengthened its structured credit capabilities with a pair of new hires. Ex-S&P senior director Eric Hudson has been appointed md and will run the rating agency’s structured credit area, reporting to coo Ira Powell. Additionally, Jason Lilien will join from Goldman Sachs – where he was vp, client relationship management - to focus on business development for the structured credit/CLO team.
Monroe Capital has recruited Ryan Flanders as vp in its New York office, serving on the firm’s investor relations and marketing team. He was previously head of private debt products at Preqin, where he established the firm’s coverage of the private debt asset class globally. During his seven years at Preqin, Flanders also served in client services and business sales roles.
Acquisitions
Blackstone’s Strategic Capital Holdings Fund has acquired a passive minority stake in Asia-focused alternative investment firm PAG. The firm has over US$20bn in capital under management in private equity, absolute return and real estate strategies. Terms of the deal were not disclosed.
Euronext has completed its acquisition of the Irish Stock Exchange, after receiving regulatory approvals. It will now operate under the business name Euronext Dublin, led by Deirdre Somers as ceo and a member of the managing board of Euronext. Among her group-level responsibilities is to develop a centre of excellence in listings of debt & funds and ETFs, including the launch of Euronext Synapse, a new platform to improve corporate bonds liquidity.
RMAC tender amended
Clifden IOM No. 1 has extended the early tender deadline in respect of five RMAC Securities RMBS (SCI passim) to 6 April and has increased the early tender premium to 102 for notes validly tendered before the previous early tender deadline of 23 March. For notes tendered between 26 March and the extended early tender deadline, the premium is 101.5. Clifden has also disclosed its rationale for the tender offers: given that the rate of interest payable on the notes is significantly lower than the rate of interest payable on equivalent newly issued MBS of comparable credit quality, it believes that it would be beneficial for noteholders to have an additional right of optional redemption - exercisable by the offeror or the series servicer - introduced into the terms and conditions of each transaction. The firm states that if it exercises its rights under such a provision, this may result in payment to noteholders to compensate them for the loss of their right to exercise an optional redemption in the normal course – although it adds that its ability to introduce the provision depends on the level of notes tendered for purchase.
Manager transfer
Columbia Management Investment Advisers intends to assign the collateral management agreement in respect of Cent CLO 17 to Carlyle CLO Management, effective on the pricing date of the deal’s refinancing. If the pricing and assignment occurs, the name of the issuer will change to Carlyle C17 CLO.
UMBS start date set
The US FHFA has announced that Fannie Mae and Freddie Mac will start issuing the Uniform Mortgage-Backed Security (UMBS) through the Common Securitization Platform (CSP) on 3 June 2019, in place of their current offerings of TBA-eligible RMBS (SCI passim). The announcement follows the achievement of three critical milestones: completion of key application development for UMBS issuance via the CSP; completion of system-to-system testing; and initiation of end-to-end (pre-parallel) testing. The CSP has processed about 1,000 securities each month since November 2016 and performed monthly bond administration functions related to 260,000 single-class securities backed by approximately 9.8 million loans. With the launch of the UMBS, CSP operational capabilities will expand to include the administration of multi-class securities and commingled enterprise UMBS and the production of UMBS disclosures. It will then be performing bond administration functions for about 900,000 securities backed by nearly 26 million loans.
Settlements
Barclays has agreed to pay the United States US$2bn to settle a civil action lawsuit filed in 2016, relating to alleged misconduct in the underwriting and issuance of RMBS between 2005 and 2007. The complaint alleged that Barclays caused billions of dollars in losses to investors by engaging in a fraudulent scheme to sell 36 RMBS deals, and that it misled investors about the quality of the mortgage loans backing those deals. It alleged violations of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), based on mail fraud, wire fraud, bank fraud, and other misconduct. Agreement has also been reached with the two former Barclays executives who were named as defendants in the suit: Paul Menefee who served as Barclays’ head banker on its subprime RMBS securitizations, and John Carroll who served as Barclays’ head trader for subprime loan acquisitions. In exchange for dismissal of the claims against them, Menefee and Carroll agree to pay the United States the combined sum of US$2m in civil penalties. The scheme alleged in the complaint involved 36 RMBS deals in which over US$31bn worth of subprime and Alt-A mortgage loans were securitised, more than half of which loans defaulted. The complaint alleged that in publicly filed offering documents and in direct communications with investors and rating agencies, Barclays systematically and intentionally misrepresented key characteristics of the loans it included in these RMBS deals. In general, the borrowers whose loans backed these deals were significantly less creditworthy than Barclays represented, and these loans defaulted at exceptionally high rates early in the life of the deals. In addition, as alleged in the complaint, the mortgaged properties were systematically worth less than what Barclays represented to investors. These are allegations only, which the defendants dispute, and there has been no trial or adjudication or judicial finding of any issue of fact or law.
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