News Analysis
Capital Relief Trades
Standardised bank issuance picking up
Standardised bank issuance of capital relief trades is picking up, despite the market having long been the purview of larger internal rating based (IRB) banks. This is driven by rating agencies offering more flexible benchmarking and the Juncker plan, which allows the EIF to guarantee both the senior and mezzanine risk.
However, the shift is slow because of the smaller size of these banks and because they are less familiar with the technology compared to IRB banks. Robert Bradbury, md at Stormharbour, comments: “Standardised banks are often smaller, non-systemic banks with lower overall capital needs and simpler business models.”
He continues: “In many cases it is more straightforward for them to raise equity than execute a risk transfer transaction. The larger banks with larger capital needs are more likely to use risk transfer transactions as part of their toolbox, alongside Tier one and two, MREL.”
Banks using the standardised approach for calculating capital requirements typically need a rating to determine their risk weights in securitisations. This is as opposed to banks using the internal rating based approach, where they model their portfolios with statistical metrics such probability of default (PD) and loss given default (LGD).
On the downside, rating agency risk weights can be less efficient. However, newer rating agencies in the risk transfer space, such as Scope and ARC, have tried to take a different approach.
Bradbury continues: “They provide a valuable alternative to the larger agencies in investigating the relevant types of structures and assets involved in risk transfer transactions and are often able to move relatively quickly.”
These agencies have rated less standardised asset classes such as project finance and commercial real estate, which require more analytical work. In particular, there is a need to understand the correlation structure or the likelihood of loan exposures experiencing losses at the same time.
The EIF’s ability to guarantee the senior and mezzanine risk partly explains why a significant number of the transactions have been with the EIF and why the deals have often referenced SME portfolios.
Bradbury suggests, however, that more deals with private investors could emerge in the medium term: “The trend is picking up and factors including the revised securitisation framework serve to raise awareness that this technology exists.”
Standardised bank CRT deals tend to be vanilla due to the first-time nature of the transactions, lack of existing infrastructure and the desire for simplicity. Also, the assets may be specific to a particular business line such as that of a subsidiary, perhaps outside the home country.
Maximising execution certainty under these circumstances for first-time issuers renders this structural option a one-way street. Such structures, though, would not necessarily exclude a range of features being explored.
Banks and investors, however, have to deal with a few challenges. Bradbury explains: “Standardised banks don’t necessarily have the internal systems that would allow them to recognise tranche protection and the benefit of that protection through RWA reduction. In many cases the only risk mitigation they have done previously is through the provision of collateral.”
Georgi Stoev, structured finance manager at the EIF, concurs: “Internal systems are an issue with examples including frequent data inaccuracies, an inability to handle certain transaction features such as excess spread, and actual loss allocation.”
He continues: “When it comes to loss allocation in particular, an originator has to determine a loss estimate and the exposure has to be worked out whereby the estimated recovery rate would change from time to time. However, because of issues with internal systems, many standardised banks can only handle an initial loss estimate and a final loss estimate. It just demonstrates a lack of coordination and synchronisation between the various departments of the originator.”
However, these shortcomings do not apply to all banks; one notable transaction where these issues were addressed was the EIF’s CRT with Austrian bank Hypo Vorarlberg in December last year (see SCI’s capital relief trades database). Following on from this deal, Stoev says that interest from standardised banks picked up.
The trend is expected to continue, potentially because banks may want to achieve capital relief under the EU’s current capital requirements regulation (CRR), before revisions to the current regime are introduced next year. The revisions stipulate a single framework for both IRB banks and standardised banks that could help with convergence on pricing.
The new ratings-based approach is more granular and standardised banks will have a greater number of risk weight bands on a rating category than before. Consequently, a bank can potentially optimise a capital structure more efficiently, resulting in more granular tranches, although risk weights will largely increase for tranches with longer tenors.
SP
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News Analysis
RMBS
RMBS double follows UKAR disposal
Barclays is prepping two RMBS - dubbed Durham 1 and 2 - of Bradford & Bingley legacy mortgage loans, after acquiring the remaining £5.3bn portfolio from UKAR (SCI 27 April), although they're likely to be preplaced. The asset sale and securitisation pay off the remainder of the FSCS loan, which was partially repaid by the previous sale of legacy mortgages to Blackrock and Prudential last year (SCI 4 April 2017).
Rob Scott, head of asset finance, asset finance solutions at Barclays, outlines the shape of the transaction: "Overall, the size will be £5.3bn, but there will be two securitisations. These will very roughly be a 50/50 split between the owner-occupied residential loans and buy-to-let pools."
Barclays will hold an economic interest in the duration of the deal in the form of the 5% vertical risk retention piece and the deals are expected to close before the end of May.
Cecile Hillary, head of asset finance solutions at Barclays, says that the bank was drawn to the transaction partly because of the collateral. She adds that a particularly attractive aspect was the long seasoning and performance history on the loans, which the bank has a lot of experience and ability in assessing.
Mark Wouldhave, asset sales director at UKAR, comments: "The deal was the second in a programme of asset sales by Bradford & Bingley, which began in 2017 with the sale and subsequent securitisation of £11.8bn of legacy B&B mortgages and part repayment of the FSCS loan. The first deal paid back a large portion of the FSCS loan and the Project Durham transaction enables us to complete the repayment. In both transactions, we were able to provide a staple finance securitisation package, with the six largest FSCS banks acting as underwriters."
Wouldhave adds that the securitisation follows in the footsteps of the previous Ripon and Harben deals, which provided the stable platform needed for the asset buyers to more easily access the transaction. As a result, it helped maximise competition and deliver tax payer value.
An additional boon to the transaction was the pre-baked structure that UKAR put in place. Wouldhave comments: "This was certainly helpful to us as an asset seller and it was something that we knew the consortium of banks would be willing to work with. We were able to provide a strong skeleton for the securitisation, although ultimately it fell to Barclays as the asset buyer to negotiate and finalise its structure."
He continues: "This skeleton provided a foundation for asset buyers to access the transaction and provided increased certainty - for them and us - that they would be able to fund it, particularly given the sizeable nature of the transaction. While the decision to use the securitisation structure was ultimately at the buyer's discretion, it ultimately prevailed as their preferred option."
Hillary agrees that having the structure already largely in place was a great benefit. She adds that it especially worked well for such a large pool, as it ensured strong competition, without bidders being obliged to arrange their own funding.
Additionally, Hillary points out that it helped "expedite" the process and bring the completion date to the end of May - although she stresses that it has still taken a number of months to execute, with the last two to three weeks being the final stages of a larger process. She says too that they had to "deploy a lot of resources" to ensure things were done correctly, but the deal had only a level of difficulty that they were expecting.
Looking to further deals, Hillary says her team has "a wide and ambitious scope for other similar transactions". The asset finance business is a global initiative and aims to be involved in the US, Europe and Asia and provide asset finance support for originators and portfolio buyers across a range of asset classes, with securitisation being an important component of this process. As such, the team is actively seeking to partner with a range of investors in financing these transactions.
Wouldhave stresses that Project Durham isn't necessarily a blueprint for further transactions and adds that this deal, along with Ripon, is driven by the objective of paying back the FSCS loan with support from the consortium of banks. Because that objective has been achieved, he says, the incentive for those banks to offer a staple finance package has also now fallen away.
Despite this, he adds that UKAR's objective remains, which is to maximise value for the taxpayer and to reduce its balance sheet. Consequently, future transactions are likely.
Wouldhave concludes that UKAR is "now in the process of a potential sale of around 7,000 equity release loans, and we continually look at other options that would allow us to complete our objective."
RB
News
CMBS
UK CMBS signals sector surge
Goldman Sachs is acting as arranger and lender on a £449.8m UK CMBS dubbed Ribbon Finance 2018. The transaction is a further sign of a resurgence in CMBS activity across Europe, with 2018 on target to surpass the last post-crisis bumper year in 2015.
Ribbon Finance 2018 has been provisionally rated by DBRS and S&P as AAA/AAA on the £153.90m class A notes, AA(low)/AA on the £48.07m class B notes, A/AA- on the £27.93m class C notes, BBB(high)/A on the £49.02m class D notes, BBB(low)/BBB- on the £81.70m class E notes, BB(high)/BB on the £54.82m class F notes and BB/BB- on the £11.88m class G notes. The expected maturity of the loan is 13 April 2023 and the transaction is expected to price in the week of 21 May.
The transaction securitises a £449.8m loan to Ribbon Bidco to provide partial acquisition financing for the Dayan family, acting as sponsor, to acquire Lapithus Hotels Management UK and 20 hotels. As well as being initial lender and arranger, Goldman Sachs advanced a mezzanine loan of £69.2m to Ribbon Mezzco, which was later sold to Apollo Global Management.
Of the 20 hotels, three operate under the Crowne Plaza brand and 17 are flagged by Holiday Inn, with the majority based in the southeast of England. S&P notes that the portfolio benefits from the hotels being well-located across major UK cities, with four in London, five near key airports and the rest in other key areas. Additionally, the agency notes that the portfolio has generally been stable throughout the credit cycle and that the hotels are internationally recognised brands.
S&P suggests that potential challenges might arise because hotel performance is vulnerable to an economic downturn and the portfolio is vulnerable to an aviation industry downturn. The agency also comments that the loan suffers from high concentration in terms of property type, although this is somewhat mitigated by geographical diversity.
Meanwhile, Bank of America Merrill Lynch recently priced a €341m CMBS dubbed Taurus 2018-1, comprising three loans secured by Italian real estate. It has ratings from DBRS and Fitch of AA (low)/A+ on the €224.3m class A notes (which priced at three-month Euribor plus 100bp), A/A- on the €29.54m class B notes (plus 125bp), BBB/BBB- on the €37.69m class Cs (plus 210bp), BB (high)/BB- on the €32.5m class Ds (plus 335bp) and BB (low)/B- on the €17.63m class E notes (plus 450bp).
Investor demand was high for the transaction, with accounts coming largely from the UK and Europe, but over 10% coming from other jurisdictions. Additionally, while the major investor group was asset managers, a significant portion was hedge funds and banks.
DBRS comments on a wider trend towards growth of the European CMBS market, which has “seen a steady flow of issuance and a pipeline continuing to build”. This was after an 18-month hiatus was broken at the end of last year by the Taurus 2017-2 UK transaction (SCI 24 November 2017).
RB
News
NPLs
BMPS deal taps ReoCo
Banca Monte dei Paschi di Siena (BMPS) has completed its much-anticipated non-performing loan securitisation (SCI passim). Dubbed Siena NPL 2018, the €4.33bn transaction securitises exposures equivalent to a gross book value of around €24.07bn and envisages the involvement of a real estate operating company (ReoCo).
Rated by DBRS, Moody’s and Scope, the deal comprises €2.92bn BBB/A3/BBB+ rated class A notes (which priced at three-month Euribor plus 150bp), as well as unrated €847.6m class B (plus 800bp) and €565m class J notes. The transaction securitises the majority of the NPL exposures held by BMPS, as well as its MPS Capital Services and MPS Leasing & Factoring subsidiaries, as of the 30 September 2017 cut-off date.
Most of the loans in the portfolio defaulted between 2000 and 2017 and are in various stages of resolution. For example, around 35.2% of the secured loans are in the auction phase and 6.7% are in the distribution phase.
In terms of portfolio composition, unsecured loans account for 55% of the GBV and secured loans for the remainder. The majority (81% of GBV) are loans to companies, while the remainder are loans to individuals. Residential properties represent around 37.5% of the total real estate valuation amount.
Scope notes that the portfolio is very granular, with the top 10 and top 100 borrowers respectively accounting for only 2.1% and 9.5% of GBV. The loans are well distributed geographically, with 36% (in terms of GBV) located in the north, 36% in the centre and 28% in the south of Italy.
The portfolio will be serviced by four special servicers, each responsible for a pre-assigned portion of the pool: Credito Fondiario will service around 6.2% of the pool, Italfondiario will service 31.2%, Prelios Credit Servicing will service 4.5% and Juliet will service the remaining 58.1%. Quaestio Cerved Credit Management will acquire Juliet, a new legal entity incorporated by BMPS for the purpose of carrying out special servicing activities in Italy. Credito Fondiario will also act as master servicer.
Each special servicer may propose the ReoCo's intervention at auction, if it determines that the reserve price at auction is lower than the real estate prospective price in the open market. The ReoCo will acquire the ownership of the property and pay the agreed purchase price at auction to the SPV when it sells the real estate asset in the open market.
Financing provided by the mezzanine noteholders (Quaestio) – by subscribing to the ReoCo’s minibond issuance - will fund the auction deposit and the ReoCo operating costs. The ReoCo can at any time own properties for an amount not higher than €100m of equivalent real estate value.
Moody’s notes that compared to other Italian NPL transactions, the business plan used to track the special servicers' performance has been prepared on the basis of statistical assumptions, rather than on the assessment of individual NPL positions.
The deal was arranged by Credit Suisse, Deutsche Bank, HSBC, JPMorgan, Mediobanca-Banca di Credito Finanziario and MPS Capital Services.
CS
Market Moves
Structured Finance
Market moves - 11 May
Acquisitions
Blackstone is set to acquire all outstanding common shares of Gramercy Property Trust for US$27.50 per share in an all-cash transaction valued at US$7.6bn. The transaction represents a premium of 23% over the 30-day volume-weighted average share price ending 4 May 2018 and a premium of 15% over the closing stock price on that date. Completion of the acquisition - which is currently expected to occur in 2H18 - is contingent upon customary closing conditions, including the approval of Gramercy's shareholders, who will vote on the transaction at a special meeting on a date to be announced.
Two Harbors and CYS Investments have entered into a definitive merger under which Two Harbors will acquire CYS. Upon the closing of the merger, CYS stockholders will exchange their shares of CYS common stock for newly issued shares of Two Harbors common stock as well as aggregate cash consideration of US$15m payable to CYS stockholders on a pro rata basis.
CDS alternative offered
DelphX Capital Markets has unveiled a new alternative trading system (ATS) and new securities products through its subsidiaries DelphX Services Corp and Quantem Capital Corp, which are designed to provide a securities-based alternative to the single-name CDS market. Subject to FINRA approval and SEC filings, the DelphX ATS will enable qualified institutional buyers to negotiate, purchase and trade via a distributed ledger new forms of securities that will be linked to referenced credit default risk and provide credit protection for underlying US dollar-denominated corporate, municipal and sovereign debt securities. Meanwhile, the new Quantem securities comprise: covered put option securities that provide secured default protection for US dollar-denominated corporate, municipal and sovereign securities; and covered reference note securities that allow investors to take exposure to the default risk of a single underlying security or to participate in a pool that broadly diffuses the risk impact of credit events among all participants.
CRT index launched
Mark Fontanilla & Co has launched the CRTx Credit Risk Transfer Return Tracking Index, the first-ever fixed income index that tracks the total return performance of agency credit risk transfer securities issued by Fannie Mae and Freddie Mac. Rebalanced monthly, the CRTx has over 170 active constituent securities representing US$45bn in market value and referencing over US$1trn in underlying mortgages. The index suite includes an aggregate index and a series of sub-indexes – the CRTx Upper Mezzanine, Lower Mezzanine and Subordinate indices – that will be additionally segmented by issuance year vintages, starting with 2013/2014 onwards. CRTx security updates, database technology and auxiliary calculations are powered by MBS Data.
Europe
Angelo, Gordon has hired Steven Paget as md and portfolio manager, European performing credit. Paget will lead the growth of Angelo, Gordon’s European performing credit business with a focus on developing the firm’s European CLO platform and investing in the debt and equity tranches of third party CLO managers. He will be based in London and report to Dan Pound, head of Europe, and Maureen D’Alleva, head of non-investment grade corporate credit. Paget was most recently a portfolio manager on the European leveraged finance team at PGIM fixed income.
Hermes Investment Management is expanding its fixed income team with two new hires in London. Andrew Lennox has been hired asset backed securities portfolio manager making investment recommendations within the European ABS universe, reporting to Vincent Nobel, head of asset based lending. Lennox joins from Blackrock where he was a senior portfolio manager in the European asset backed securities team. Stephane Michel has also been appointed as senior portfolio manager, working on asset based lending and multi-asset credit. Michel was previously consulting on the credit space, ranging from regulatory capital trades to the development of a CLO and direct-lending platform and has also previously spent five years at UBS.
Ground rent notes cut
Moody's has downgraded the rating of the €62m secured instruments class issued by German Ground Lease Finance from A2 to Baa1, reflecting the negative impact to the term and refinance risk from higher transaction costs. The agency notes that a renegotiated increase in fees paid to the servicer – Immofori - and continuously high transaction costs mean no further amortisation is expected, while the reduced coverage means the term default probability has increased. The deal represents the securitisation of four real estate funding notes that are, in turn, secured by the rental income derived from hereditary building rights in relation to a portfolio of more than 4,100 residential units located in various German cities.
MBS fraud charge
The US SEC has charged Premium Point Investments with inflating the value of private funds it advised by hundreds of millions of dollars. The SEC has also charged Premium Point’s ceo and cio Anilesh Ahuja, as well as Amin Majidi (a former partner and portfolio manager at the firm) and Jeremy Shor (a former trader). According to the SEC’s complaint, the scheme ran from at least September 2015 through March 2016 and relied on a secret deal whereby in exchange for sending trades to a broker-dealer, Premium Point received inflated broker quotes for MBS. In addition, the defendants allegedly used ‘imputed’ mid-point valuations, which were applied in a manner that further inflated the value of securities. This practice allegedly boosted the value of many of Premium Point’s MBS holdings and further exaggerated returns, in order to conceal poor fund performance and attract and retain investors. The complaint seeks permanent injunctions, return of allegedly ill-gotten gains with interest, and civil penalties.
North America
Echelon Investment Partners has appointed Kevin Mallon to serve as its director of marketing in a newly-created role. Based in the firm's main office in New Jersey, Mallon will be responsible for implementing and managing investor relations and business development efforts. He most recently served as director of marketing for Old Hill Partners, an investment adviser specialising in customised asset-backed lending transactions with middle-market companies.
Flat Rock Global has hired Shiloh Bates to the position of md. He was previously md at Benefit Street Partners where he worked on corporate acquisitions and prior to that was head of structured products at BDCA Adviser overseeing investments in CLOs amongst other duties.
RMBS criteria released
KBRA has released its methodology for rating European RMBS and the related UK Addendum, which addresses analytical considerations specific to prime, buy-to-let and non-conforming mortgages in the UK. The publication outlines several determinants used in formulating KBRA ratings, including: review and analysis of key transaction participants; review of agreed-upon procedure report(s); loan credit analysis and RMBS modelling; assessment of the securitisation framework from a structural and legal perspective; and ongoing surveillance of the transaction. The move follows the issuance last month of KBRA’s first published European structured finance ratings, which were in respect of Funding Circle’s £206.6m Small Business Origination Loan Trust 2018-1.
Settlements
RBS has reached a civil settlement in principle with the US Department of Justice to resolve its investigation into the bank’s issuance and underwriting of US RMBS between 2005 and 2007. Under the terms of the proposed settlement, RBS will pay a civil monetary cash penalty of US$4.9bn, of which US$3.46bn will be covered by existing provisions made by the bank, with an incremental charge of US$1.44bn in 2Q18 (booked in NatWest Markets on a consolidated basis). The proposed settlement is subject to the DOJ and RBS entering into a legally-binding agreement. As at 31 March, RBS held provisions of US$800m for other legacy RMBS matters.
Zohar CDO 2003-1, Zohar II 2005-1, Zohar III, Lynn Tilton, MBIA Insurance Corp and the Zohar III controlling class of noteholders have mutually resolved the motions pending in the Delaware federal bankruptcy court relating to the Zohar funds (SCI passim) and have agreed to a deal that will include a 15-month stay of all pending litigation between the parties. This agreement is intended to facilitate the refinancing and monetisation of assets of the Zohar funds to the benefit of all stakeholders, with the parties agreeing to work in a mutually cooperative process in support it. As part of the agreement, an independent director will be appointed to govern the Zohar funds, along with a chief restructuring officer (Marc Kirschner of Goldin Associates), who - together with Tilton as director and manager of each portfolio company - will jointly implement the refinancing and monetisation process. During the process, Tilton will remain in her current roles at the portfolio companies and the bankruptcy cases will proceed without the appointment of a trustee. Judge Kevin Gross acted as mediator to facilitate the settlement.
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