Contents

NPLs

Split-mortgage securitisation mulled

Permanent TSB has pulled €900m of split mortgages from its Project Glas portfolio sale of approximately €4bn of distressed Irish mortgages. The need to maintain borrower relationships and regulatory challenges over the treatment of split mortgages raise the prospect of the securitisation route for these loans.

Following the withdrawal of the mortgages from the portfolio, Project Glas now consists of around €2.2bn of loans. Jeremy Masding, ceo of Permanent TSB, comments: “Since the launch of Project Glas, there have been some developments, including engagement with regulatory authorities on the treatment of split mortgages and the emergence of solutions which could enable us to maintain the day-to-day relationship with the account holders.”

He continues: “Therefore, we have decided to withdraw mortgages linked to about 4,300 homes (par value of approximately €900m) from the Project Glas sale process. We will continue our engagement on the regulatory classification of these mortgages and, at the same time, we will explore different options - including ones that enable us to maintain the day-to-day relationship with the account holders.”

The portfolio is understood to comprise a mix of buy-to-let and home loan assets and is being seen as a test case for further Irish non-performing loan issuance (SCI 16 February 2018). The split mortgages were oversized, due to a reduction in borrower income and property price, resulting in an inability to service the full mortgage amount on an annual basis.

Consequently, net income couldn’t cover all the debt, but it could be used to service a portion of it. This led to a splitting of the loan into a portion that is right-sized to the borrower’s sustainable cashflows and another portion that was warehoused. The warehoused portion can be dealt with by lenders at a later point in time through, for instance, settlement, restructuring and write-offs.

However, split mortgages face a number of regulatory obstacles. According to Tom McAleese, md at Alvarez and Marsal: “The idea behind split mortgages is to split the mortgages into a performing part (the amount which the borrower can safely service now) and an NPL part, which is parked and resolved in the future based on the borrower’s performance, future circumstances and behaviour. It was a good structure to try and create a long-term resolution for the borrower.”

He continues: “Yet there’s a legal and regulatory complexity in terms of separating the loan in two from a recognition and recourse perspective. Investors will typically look at the performing and non-performing portions differently, where a lot of the performing could be priced closer to par and the NPLs will be typically more heavily discounted.”

The rub here is that if the loans cannot be split, the performing piece could potentially be tainted. At this point, the prospect of other techniques - such as securitisation - seems more likely, given decent cashflows from the performing portion.

Iain Balkwill, partner at Reed Smith, concurs: “Securitisation seems a strong possibility at this point. It would allow the bank to derecognise the loans from their balance sheet, while allowing them to maintain a relationship with the borrowers.”

Yet it is questionable whether PTSB can achieve regulatory and legal separation from these non-performing assets. McAleese explains: “Any securitisation would be simply debt financing, since the assets remain on the balance sheet. Furthermore, the equity will typically be provided by the bank, rather than investors, as is the case with true sale deals. Investors will simply give the bank an advance level based on the cashflows from the loans.”

However, there is strong investor interest in the €2.2bn portfolio that can run down through restructurings, write-offs and outright sales. In these scenarios, the focus moves to issues around collateral enforcement and servicing.

The Irish lender confirms that it continues to progress with Project Glas and anticipates providing a market update at the upcoming interim results in 3Q18. It intends to complete the project in the current year.

The portfolio forms part of PTSB’s NPL reduction programme. The lender had reduced its non-performing loans by 2% to €5.2bn in Q1, primarily due to cures and reduced default flow.  

SP

NPLs

NPL servicing still needs strengthening

Inadequate servicing capability for non-performing loans - largely in Italy and Greece - is hampering securitisation activity and stemming investor inflows, according to panellists at SCI’s recent NPL securitisation event. Nevertheless, improvements are gradually being made to bolster servicing infrastructure, supported by regulatory changes and European Council proposals.

Zach Lewy, founder and co-cio at Arrow Global, suggested that servicing has progressed throughout Europe in a number of countries and has become more professionalised in certain jurisdictions. He adds that Italy, however, continues to lag behind as it hasn’t had the degree of consolidation activity seen in countries like the UK, which has made servicing and recoveries more manageable.

Without this consolidation activity in Italy, Lewy said that “generally servicing in Italy has a long way to go”, is yet to homogenise and remains decentralised. This has a tangible knock-on effect in hampering the sale of NPLs to investors, as they typically demand greater certainty on returns.

Lewy commented: “More predictable timeframes will help to bring in more investors in many jurisdictions, particularly Italy. In places like Portugal, where there is more predictability as to asset recoveries, there is greater investor activity.”

He adds that in order to assist with Italy’s NPL issue further, the GACS guarantee should “probably” be renewed.

Clarence Dixon, global head of loan servicing at CBRE, agreed that Italy has a number of unresolved servicing issues, along with Greece. As such, they would deter him from entering these jurisdictions.

A major issue for him is the lack of “light at the end of the tunnel” with regard to Greece and Italy. “Essentially, I need to know when I’ll get my money back and what I’ll get back, but I can’t guarantee either of those there, not in commercial real estate anyway,” he said.

Another panellist commented that while CBRE may not have the appetite for NPLs in Greece and Italy, there are several investment firms that have been willing to venture in to these jurisdictions. The panellist noted that the decision to become involved in the asset class ultimately comes down to an investor’s appetite for risk and it was noted that CRE, in which Dixon is involved, doesn’t make up a large volume of NPL exposures in either jurisdiction.

Another strong theme on the servicing side was that of a conflict of interest in Italy and Greece, often where individuals and firms involved in originations, or in relationship management, then move into recoveries. It was generally agreed that where this is the case, recoveries are unlikely to be successful, prompting the need for a third-party servicer.

Dixon added: “You can’t have one person originating the loan and the same person working out the loan, or indeed having a relationship guy then working out the loan. It doesn’t work. As such, third-party servicers are needed because they have no relationship conflicts. If I can’t step on a guy’s feet, I can’t do my job and get results.”

Servicing capabilities look set to be improved with a pan-EU authorisation and reporting framework for servicers, expected to be enacted by end-2019, with a two-year implementation period. The removal of domestic barriers could boost the European NPL market by enabling faster-paced resolutions and accelerating out-of-court settlements, according to Diane Roberts, partner at Reed Smith.

She also welcomes recent European Council proposals that aim to remove barriers to entry and improve servicing, including mandatory standardised reporting. Roberts concluded: “The proposals should facilitate the comparison of assets and the pricing of portfolios more efficiently by addressing information asymmetry between banks and non-banks.”

RB

Structured Finance

SCI Start the Week - 14 May

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

Pipeline

ABS accounted for the majority of the deals remaining in the pipeline at the end of last week. A handful of CMBS and RMBS were also announced.

The auto ABS in the pipeline comprise: US$1.13bn AmeriCredit Automobile Receivables Trust 2018-1, US$450m Credit Acceptance Auto Loan Trust 2018-2, US$1bn Drive Auto Receivables Trust 2018-2, US$225.9m Flagship Credit Auto Trust 2018-2, US$1.58bn Ford Credit Auto Owner Trust 2018-A and £405m Globaldrive UK 2018-A. US$774.88m CNH Equipment Trust 2018-A, US$200m Global SC Finance IV, US$154.9m HERO Funding 2018-1, US$305.49m Massachusetts Educational Financing Authority L series 2018, US$521m Navient Private Education Loan Trust 2018-B, SCF Equipment Leasing 2018-1 and SFS Asset Securitization Series 2018-1 make up the remaining ABS.

The newly-announced RMBS were US$645.93m NRZ 2018-FNT1, US$429.33m Pearl Street Mortgage Company 2018-2 Trust, A$500m Series 2018-1 REDS Trust and STACR 2018-HRP1, while the CMBS were US$901.17m BANK 2018-BNK12, £449.8m Ribbon Finance 2018 and US$750m 20 Times Square Trust 2018-20TS.

Pricings

Similarly, ABS made up most of last week’s pricings. Issuance was rounded out by a handful of CLOs.

The auto ABS prints were: US$154.13m FIAOT 2018-1, US$225m Mercedes-Benz Master Owner Trust Series 2018-A, US$525m Mercedes-Benz Master Owner Trust Series 2018-B, US$1.17bn Toyota Auto Receivables 2018-B and US$1bn Westlake Automobile Receivables Trust 2018-2. The US$1.2bn Bank of America Credit Card Trust 2018-2, US$600m Capital One Multi-Asset Execution Trust 2018-1, US$400m Capital One Multi-Asset Execution Trust 2018-2, US$276.84m Lendmark Funding Trust 2018-1 and €4.33bn Siena NPL 2018 also priced.

Finally, US$615.7m Apidos CLO XXIX, US$424m BlueMountain CLO 2016-1 (refinancing), US$512.25m CarVal CLO I, US$485.5m Halcyon Loan Advisors Funding 2018-1, US$499.75m Marathon CLO VI (refinancing) and US$389m Whitehorse X (refinancing) were issued.

Editor’s picks

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)…
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…
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)…

Deal news

• 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.

NPLs

Securitisation 'right tool' for NPL disposals

Participants at a recent SCI seminar on non-performing loan securitisation were optimistic about the role of ABS in facilitating disposals of troubled loans across Europe, with or without government guarantees. Concerns persist, however, that work still needs to be done in several jurisdictions in terms of professionalising servicing capabilities and standardising securitisation procedures.

Iain Balkwill, partner at Reed Smith, commented: “Generally, I think securitisation is a great way for banks to dispose of NPLs and is certainly an excellent way to expand the number of investors in the NPL asset class. The GACS programme gave the market the shot in the arm it needed and it was a great endorsement for the deployment of securitisation technology as a means of resolving the European NPL problem.”

He emphasised that one of the major benefits of securitising NPLs is that it helps broaden the universe of investors, by creating a range of yields to match investor needs. This broadening effect is maximised by building in credit enhancement and structural features that help protect investors and, with a large investor base, it is possible to offload a large number of NPLs in one go.

Securitisation can also act as a profit-sharing instrument, helping to resolve bid/ask issues, whereby banks sometimes don’t favour the price at which they may otherwise have to sell NPLs. Additionally, securitisation can help with the development of greater transparency in the NPL market, as well as increasing standardisation and the level of disclosure.

Francesco Di Costanzo, a structured finance analyst at Moody’s, commented that there are also several challenges in securitising NPLs, across jurisdictions. The major ones are typically irregular cashflows, alignment of interest between servicer and noteholder and the fact that data sets are often incomplete - which makes it difficult to complete a public securitisation.

It has therefore fallen to governments across Europe to help with NPL disposals, such as through guarantee schemes like GACS. Many panellists at the SCI seminar were supportive of such initiatives, with one saying that in Europe governments have played an important role in NPL disposals, particularly in Italy and Spain.

Another supporter of GACS is Gaetano Anselmo, head of risk control at Banca Carige, who originally favoured a whole loan sale to offload NPLs at his bank, but eventually utilised the GACS guarantee to issue the second NPL ABS with GACS in Italy and the first under the single supervisory mechanism (SSM). It appealed to him because it provides a government guarantee, at market prices, the bank keeps the senior note on the books and it has the equivalence of a government bond with a liquidity spread.

A downside of GACS, however, comments Anselmo, is that the process is an intensive one - requiring a lot of time, as the structure is more complex than a non-GACS ABS. In addition, there are further layers of documentation to prepare.

In terms of a post-GACS landscape, Anselmo suggests the environment will favour some market participants, but not others. “A life without GACS will be less benign for originators because they will not benefit from capital relief, while investors could feel more in charge of the transaction.”

Di Costanzo is also optimistic about a post-GACS world: “I think there will be life after GACS and I think investors will get more familiar with the asset class. I’d point out there have been deals done without government guarantees in place, such as the Evora trade and some Irish transactions too.”

The issue of unlikely-to-pay loans was also raised during the panel, as banks need to resolve large exposures of these assets on their balance sheets. One panellist stressed that specific management from banks and engagement with investors is needed to arrange financing, but was optimistic that a UTP-backed transaction could be on the horizon.

Also looking to the future, Gifford West, md at The Debt Exchange, said that while Spain and Italy have the largest volumes in terms of distressed assets - and therefore opportunity - yields have compressed as the market has matured. He suggested therefore that investors may need to look to other assets - or other jurisdictions – for yield, such as Ukraine (where his firm has been involved).

Similarly, Zach Lewy, founder and group cio, Arrow Global, said that he is optimistic about European NPL opportunities in several markets, including Italy and Ireland. He agreed with West, however, in that the assets still available may require “greater skill sets that generalist investors may lack and may be unable to therefore unlock.”

West adds that while it is often said that “pioneers get shot and settlers get rich”, some early firms “went in and made money”, including in Ireland and Spain. He posits that in Italy there needs to be a shift in terms of smaller banks executing smaller transactions, to “get things moving, as opposed to only structuring huge deals every 18 months.”

Not only would this be a tactical move, as it would help standardise the market, but it would also facilitate deal flow, suggests West. He concludes that securitisation works well when highly homogenous and statistically modelled pools of data exist, but he is sceptical that this will happen in Italy, with issues at the enforcement level remaining and no real certainty for investors on getting their money back.

RB

Structured Finance

Market moves - 18 May

Europe

CIFC has hired Joshua Hughes as head of European marketing, based out of London and reporting to co-ceo, Oliver Wriedt. Hughes was previously head of global distribution at Muzinich & Co. He will lead the firm’s fundraising efforts in the UK and throughout Europe as the firm establishes its European platform.

Simon Collingridge and Tony Ward of Home Funding Limited and Jaap van Raak and Michel van der Sluis of the Dutch Mortgage Consultants have formed a new joint venture called Fortrum. The firm, based in Utrecht and London, will specialise in European risk audit and due diligence for financial assets across Europe. 

ILS

John English has been named ceo of Aon’s captive and insurance management unit as 1 June 2018. English is currently coo and md of Aon captive and insurance management, EMEA. English has been with Aon for 10 years and has over three decades of global experience across insurance, reinsurance and alternative capital markets.

Mexican default

TMMCB 10, a Mexican securitisation of cash flows related to offshore vessels recently defaulted due to excessive sponsor risk and other structural issues. Fitch has also identified PLANFCB 14, 15 and 16 which shows signs of potential stress due to the risk of a weak sponsor in a revolving transaction with short-term assets and little third party oversight.

North America

Allianz Real Estate has appointed Peggy DaSilva as head of its loan and asset management group for the Americas. Based in the New York office, she will be responsible for actively managing a US$16bn US portfolio of commercial real estate debt and equity investments, including sales, loan modifications and restructurings. She was previously md at Canyon Partners Real Estate in New York, and before that worked at CBRE Global Investors, Rockefeller Group, Deutsche Bank, Citi, Chemical Bank and Bank of America.

Barclays has hired John Clements as head of CLO origination and syndication in the US. Clements, who will be based in New York, will report to Drew Mogavero, head of US credit flow trading at Barclays. He joins from Citi where he spent 15 years co-leading its primary CLO business and is set to start in July. Barclays is bolstering its CLO team, also hiring Mike Hopson and Lorraine Medvecky from Natixis to set up a new middle-market CLO platform and are also expected to join in July.

Kirkland & Ellis has recruited Ranesh Ramanathan as a corporate partner in its Boston office, focusing on debt finance, distressed/special situations, alternative investments and credit fund transactions. Ramanathan was previously deputy general counsel at Bain Capital and general counsel to Bain Capital’s credit and public equity businesses, having been promoted to managing director in 2015. Prior to that, he was the general counsel of Citi Private Equity and associate general counsel of Citi Alternative Investments.

MUFG has promoted John Lindenberg to head of investment banking for the Americas from his previous role as deputy head of investment banking and head of structured finance. Additionally, Shinichi Sato, currently deputy general manager of MUFG's investment banking credit division in EMEA, will relocate from London to New York to take over as deputy head of investment banking for the Americas and Erik Codrington, an md in the structured finance group, has been appointed head of structured finance. Sato has worked in a number of corporate and investment banking areas, and in several securities businesses including securitization, aviation, and debt research over the course of his 24-year career at MUFG while Codrington has more than 25 years of experience in financing large-scale energy and infrastructure projects throughout the Americas, including advisory, debt capital markets, and syndicated loans. Codrington joined MUFG in 2011 after working at Citigroup and JPMorgan.

Risk retention repealed

As of 10 May 2018, the last opportunity for the US government to file a petition for certiorari to the United States Supreme Court in its risk retention litigation with the LSTA expired, with the agencies choosing not to pursue further action. Thus ends a judicial process initiated by the LSTA on 10 November 10 2014 making final the ruling that managers of pure open market CLOs are exempt from risk retention.

STC criteria finalised

The Basel Committee and IOSCO have issued criteria for identifying simple, transparent and comparable (STC) short-term securitisations, which build on the STC principles published by the two organisations in July 2015 (SCI passim) and incorporate feedback collected during the public consultation conducted in July 2017. The new criteria take account of the characteristics of ABCP conduits, including the different types of programme structures and multiple forms of liquidity and credit support facilities. The changes include clarifying that the criteria do not automatically exclude equipment leases and auto loan and lease securitisations from the short-term STC framework. The Basel Committee has concurrently outlined how the short-term STC criteria could be incorporated into the regulatory capital framework for banks, in order to receive the same modest reduction in capital requirements as other STC term securitisations. A Chapman and Cutler briefing notes that the criteria no longer take the ‘all or nothing’ approach to qualifying for STC status and capital treatment that was proposed in the consultative documents. Bank exposures to individual transactions through ABCP conduits are eligible for more favourable treatment on a transaction-by-transaction basis if the transaction-level criteria are met, regardless of whether the conduit-wide criteria are met by the applicable ABCP conduit.

Syncora reinsurance approved

The New York State Department of Financial Services has approved a reinsurance transaction – totalling approximately US$14.5bn in net par – between Syncora Holdings and Assured Guaranty Corp, together with the related payment on the Syncora Guarantee Inc (SGI) long-term and short-term surplus notes held by third-party holders. Syncora has received the required level of consents from surplus note holders to the waiver of certain restrictions of its master transaction agreement to permit the reinsurance transaction, which is expected to close on 1 June, subject to customary closing conditions. The aim of the transaction is to cap the firm’s insured exposure, leaving SGI in a “more stable and significantly de-levered financial position”. Under the transaction, Assured will reinsure - generally on a 100% quota share basis - SGI-insured financial guaranty insurance policies and commute a book of business previously ceded to SGI by Assured Guaranty Municipal Corp. As consideration for the transaction, at closing, SGI will pay US$360m and assign instalment premiums estimated to total US$55m on a present value basis to Assured Guaranty. Included in these amounts are approximately US$100m of statutory loss reserves for RMBS transactions.