News Analysis
Capital Relief Trades
Return to form?
More traditional synthetic CRE deals emerging
A number of issuers are working on CRE capital relief trades, including some UK banks that issued CRE deals in 4Q17 (see SCI’s CRT database), with a view to closing before year-end. However, some of these transactions suggest that the asset class may potentially be returning to more traditional significant risk transfer structures and investors.
David Wainer, partner at Allen & Overy, confirms that the pipeline of synthetic CRE securitisations is “decent”. However, he notes that execution can be cumbersome, given the steep learning curve for CRE loan investors to get comfortable with and understand the nuances in synthetic products. For this reason, many of the 2018 CRE deals could be expected to bear more resemblance to more traditional SRT transactions than those seen at the end of last year.
In the first wave of synthetic CRE deals in 4Q17, new investors entered the synthetic space who were already investors in commercial real estate, Wainer explains. “These investors are seeking exposure to real estate assets, as it's an asset class they understand. Due to a dearth of opportunities in the loan market, they were keen to diversify into synthetic CRE deals instead. At the same time, the synthetic market welcomed these investors because the CRE asset class isn’t necessarily of interest to, or understood by, traditional credit investors in the synthetic risk transfer space,” he says.
In the deals that were executed at the end of last year, the CRE portfolios tended to be lumpier than corporate or SME portfolios, which requires significant diligence on the individual properties. In contrast, investors in large granular synthetic portfolios typically focus on lending criteria, rather than the underlying assets.
Further, Wainer notes that traditional CRE investors have different priorities to investors in granular non-CRE synthetic portfolios and that protections that are present in the funded CRE market have been sought by these investors to be incorporated into the first wave of synthetic CRE deals in terms of providing similar rights and protections as loan investors would typically receive. “For example, many of the investors in the first wave of synthetic CRE investors wanted greater control over servicing and workouts and even the ability to buy underlying assets that have suffered credit events. Creditor rights at the underlying CRE level don’t extend to investors in a synthetic deal; only the lender of record has such rights. But they might seek the right to be consulted on and potentially even direct the originator in terms of servicing the assets, including workouts.”
As well as having a role in servicing and post-default scenarios, these new synthetic CRE investors might want there to be limitations around portfolio replenishment. “These investors aren’t necessarily comfortable giving banks too much freedom over replenishment and want to know more about the specific assets going into a deal than would be typical or necessary for granular portfolios. If the originator really needs this flexibility to replenish, it will be more palatable to them if they can at least have a say, or ideally approve asset substitutions,” Wainer observes.
He adds that the extent an originator is willing to compromise over these requirements will generally be simply a matter for negotiation. “Banks have a duty to service assets referenced in a synthetic capital relief trade consistently with other assets in their portfolios and have to manage the client relationship with their borrowers. But if another party is assuming the credit risk and has certain preferences regarding workouts, there can be some tension. Although some may be, not all of these compromises will be baked into the documentation – there might be a softer understanding to try and permit the opportunity to bid on a defaulted asset under certain circumstances, for instance, rather than there being direct contractual rights to do so.”
One other area that synthetic CRE investors are focused on is amortisation triggers. Amortisation might be triggered off the value of actual losses relative to the value of a portfolio and if a larger loan – like ones often seen in synthetic CRE portfolios from last year’s deals – suffers a credit event, it can cause the structure to flip into sequential amortisation quite quickly. Wainer suggests that different triggers – or at least, triggers with broader definitions – might be needed, especially given that the EBA’s 2017 paper on SRT supports the use of multiple forward- and backward-looking triggers to avoid a switch to sequential amortisation being too easily reached.
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News Analysis
NPLs
Multi-originator GACS deal debuts
Iccrea Banca completes landmark NPL securitisation
Iccrea Banca, the cooperative group owned by multiple Italian mutual banks, has issued a €1bn NPL securitisation of primarily secured loans. Dubbed BCC NPLs 2018, the deal is the first multi-originator GACS securitisation, as smaller Italian banks group together to offload the risk of larger NPL portfolios (SCI 29 June).
Rated by Moody’s and Scope, the capital structure comprises €282m Baa3/BBB- class A notes and €31.4m Caa2/B+ class B notes. There are two banks belonging to the Iccrea group and 21 local cooperative banks acting as originators. Prelios Credit Servicing is master servicer and special servicer on the deal.
The pool comprises both secured (70%) and unsecured (30%) loans extended to companies (85.7%) and individuals (14.3%). Secured loans are backed by residential (39.3% of indexed property valuations) and non-residential (60.7%) properties that are highly concentrated in the non-metropolitan areas of Italy’s north (70.5%) and centre (15.7%).
NPL recoveries on the underlying loans are driven by a number of factors, including the historical data received by Prelios, which shows the historical recovery rates and timing of the collections for the secured and unsecured loans. Another factor is the high granularity of the portfolio, with borrowers below €5m GBV representing 87% of the total portfolio.
The third major driver is the legal stage at which the loans are in the foreclosure process. A major challenge in this respect is that almost 63% of the portfolio’s GBV corresponds to loans either in bankruptcy or with no ongoing proceedings.
Compared with non-bankruptcy proceedings, bankruptcies typically result in lower recoveries and take longer to be resolved. This explains the 7.8-year weighted average life of the notes, which is relatively high compared to other transactions rated by Scope.
However, the portfolio benefits from a high share of first-lien secured loans, which benefit from higher average recovery rates. The portfolio is also concentrated in the areas of Italy that benefit from the most dynamic economic conditions in the country and, in general, the most efficient tribunals.
Barbara Rismondo, svp at Moody’s, notes that the transaction’s most salient structural features are its liquidity and performance triggers. “There’s a cash reserve that provides liquidity to the class A notes, but not the class B notes. Moreover, interest on the class B notes is postponed to a more junior position in the waterfall, if cumulative recoveries are lower than 90% of the expected cumulative recoveries in the servicer’s business plan.”
On the asset side, due to the non-performing nature of the securitised portfolio, the issuer will not receive regular cashflows and the collections will not be linked to any defined interest rate. On the liability side, the issuer will pay a floating coupon on the notes, defined as six-month Euribor plus a 0.4% fixed margin on the class A notes and a six-month Euribor plus a 6% fixed margin on class B notes.
Consequently, two interest rate caps (each for class A and class B) with progressively increasing strike prices partially mitigate the risk of increased liabilities on the notes due to a rise in Euribor.
As of end-December 2017, the NPL ratio of the Iccrea group totalled 15.6%, which is slightly above the average NPL ratio for Italian banks (15.2%). According to Iccrea, its latest NPL securitisation is expected to reduce the group’s NPL ratio by 3%.
SP
News
Structured Finance
SCI Start the Week - 9 July
A look at the major activity in structured finance over the past seven days
Pipeline
With 4 July having a typically big impact on the issuance calendar, the pipeline was light last week. A smattering of US ABS came in at the tail end, along with one European transaction. A fairly small number of, mainly US, CLOs also appeared.
The ABS entrants to the pipeline were US$230.275m CPS Auto Receivables Trust 2018-C, US$350m Sierra Timeshare 2018-2 Receivables Funding, US$1.251bn GM Financial Consumer Automobile Receivable Trust 2018-3 and a sole European auto ABS in the form of €807m Silver Arrow, Compartment 9.
The rest of the newcomers to the pipeline are from the CLO world and comprise $399.587m Annisa CLO, $405.35m Race Point X CLO, $412.370 TICP CLO V 2016-1 (reset), US$457.15m Assurant CLO III, US$510.20m Alinea CLO and US$651.35m Sound Point CLO V (refinancing).
Pricings
Pricings were dominated by CLOs last week, with most of these being refis. Otherwise, pricing was unsurprisingly Europe heavy, particularly on the auto side.
The ABS that priced consisted of £347m Azure Finance No. 1, €396m Bavarian Sky UK $1.3bn Volkswagen Auto Loan Enhanced 2018-1 and £1.36bn NewDay Funding 2018-1.
A fairly large number of CLOs priced, although these were mainly refis and resets. They consisted of $369.334m Cedar Funding 2016-5 (refinancing), $373.3m Galaxy XXII CLO 2016-22 (refinancing), $382.25m Battalion CLO VII Ltd 2014-7 (refinancing), $402.9m Carlyle Global Market Strategies CLO
2016-1 (refinancing), €430.69 Dryden Leveraged Loan CDO 2015-44 (refinancing), $470m Octagon Investment Partners 2016-27 (refinancing), $474.75m Apollo Credit Funding 2015-4 (refinancing), €484.417m ALME Loan Funding 2016-5 (refinancing), $505.24m Anchorage Capital CLO LTD 2016-8 (refinancing), $505m Shackleton CLO 2014-6 (refinancing), $563.8m ALM CLO 2015-17 (refinancing), $636.775m OZLM VII 2014-7 (refinancing) and €642.99m Richmond Park 2013-1 (refinancing).
A smaller number of new issue CLOs also priced in the form of $376.979m Marathon 2018-FL1, $404m, PPM CLO 2018-1, $408.6m MidOcean Credit CLO 2018-9, $424.88m Elevation CLO 2018-9, $460.725m LCM XXVII 2018-27, €482.198m North Westerly CLO 2018-5, $500m ZAIS CLO 3, $511.6m Ares XLIX CLO 2018-49, $602.1m Regatta XIII Funding 2018-2 and $657m One Eleven Funding II Loan/Bond CLO
2018-2.
Three CMBS also priced in the form of €247.8m Kantoor Finance, €282.5m Libra (European Loan Conduit No. 31) and $370.2m NCMS 2018-FL1. Finally, a couple of RMBS priced: $236.78m CoreVest American Finance 2018-1 and €7.959bn Leone Arancio RMBS.
Editor’s picks
European CMBS surge continues: European CMBS is experiencing a bumper year and new deals continue to hit the market, making 2018 the strongest year for traditional, floating-rate CMBS since 2015. While investors are unlikely to lose any sleep just yet, many of these new transactions feature structural nuances that draw comparisons with transactions seen before the financial crisis.
Landmark UTP deal completed: Bain Capital Credit has acquired a portfolio of unlikely-to-pay (UTP) loans, dubbed Project Valery, from the Italian arm of Credit Agricole. The portfolio has a total book value of €450m and is the first large-scale, pure UTP transaction in Italy.
Barclays engineers comeback: Barclays has returned to the risk transfer market with Colonnade Global 2018-1, a £34.2m cash-collateralised eight-year financial guarantee. As with previous Colonnade transactions, the credit protection covers both principal and accrued interest.
News
Structured Finance
Article 14 negotiations begin
Amendment to reduce securitisation compliance requirements
Trilogue discussions between the European Parliament, the European Commission and the European Council have begun on a compromise package that includes an amendment to Article 14 of the CRR. If ratified, the amendment would preclude non-EU subsidiaries of European banks from complying with all the requirements in Chapter Two of the new securitisation regulation.
The current requirement under Article 14 of the CRR stipulates that European banks must ensure that their non-EU subsidiaries comply with the due diligence and risk retention requirements currently outlined in Part Five of the CRR and which will move to Chapter Two of the new securitisation regulation next year. However, amendments to Article 14 of the CRR that were made at the end of last year - but which do not apply until 1 January 2019 - will extend that compliance requirement to other provisions in Chapter Two, including transparency requirements, a ban on resecuritisation and rules relating to a bank’s credit granting processes.
According to George Gooderham, structured finance counsel at Linklaters: “The problem with Article 14 is that it references Chapter Two of the new securitisation regulation, which includes the risk retention and due diligence requirements (as intended), but also contains other requirements. This could significantly add to the compliance burden of EU banks’ non-EU subsidiaries.”
The amendment was initiated by the European Commission, following the closing of the talks on the new securitisation regulation in December 2017 (SCI passim), and was subsequently picked up by MEPs, who drafted the compromise package. While the securitisation regulation will apply from 1 January 2019, the amendment to Article 14 needs to be adopted and become effective prior to that date.
Robert Cannon, special counsel at Cadwalader, notes: “The Council of Ministers is expected to approve the amendment to Article 14, based on the fact that the European Parliament has adopted it and it is being supported by the European Commission. As far as we are aware, no EU member state has expressed any opposition to the amendment and some have been approached by EU banks on this issue.”
If the legislation is adopted by both the European Parliament and the Council but has not yet become effective by 1 January 2019, the EBA could issue a statement that would give EU banks a waiver from having their non-EU subsidiaries comply with all the Chapter Two requirements, from 1 January 2019 until the date on which the Article 14 amendment becomes effective.
“EU institutions and regulators tend to act pragmatically in such cases,” concludes Cannon.
SP
News
NPLs
NPL SPV established
Barclays financing portfolio acquisition
Barclays, Varde Partners and Guber Banca have acquired a €1.4bn non-performing loan portfolio originated by 53 cooperative, rural and popolari banks spread throughout Italy. The pool was purchased at 10%-13% of GBV and transferred to a securitisation vehicle dubbed Futura SPV. The transaction is believed to be the first to utilise digital due diligence.
The portfolio comprises more than 9,000 positions, with 39% of the assets being secured and the remaining 61% unsecured. The loans were originated mainly in the North East and North West of Italy.
Futura SPV has issued a single tranche of notes, the majority of which were underwritten by a company that is majority owned by Varde and financed by Barclays Bank. A minority of the notes will be held by Guber Banca, who will also act as servicer and sub-servicer of the portfolio. The notes are expected to be re-offered to the wider market over the next three to four months.
According to sources, Guber used tax codes to acquire information on the underlying borrowers’ bankruptcy information, the state of the profit and loss statement, enforcement status, change in company headquarters to gauge geographical concentration and the type of collateral. This information was then fed and analysed through an IT system.
In contrast, the traditional due diligence approach tends to be costlier and more time consuming. It firstly involves a division of the portfolio into categories, such as secured and unsecured; samples are then chosen that are tied to those categories and this is then followed by a due diligence on each borrower. The due diligence involves retrieving files on, for instance, the identity of the guarantor and the enforcement status.
Centrale Credit & Real Estate Solutions acted as advisor on the transaction, coordinating the sale process.
SP
Provider Profile
RMBS
Lender looks to bolster defences
Private transactions may 'resemble securitisations'
With a change in the credit cycle anticipated, some UK real estate lenders are adopting a more cautious strategy. One such firm is Octopus Property, which also recently created a head of structuring role (SCI 22 June) to help broaden its investor base, while employing securitisation-like funding methods.
Mario Berti, ceo of Octopus Property, comments that the firm has scaled up by utilising a range of funding methods and has now provided more than £3.3bn in total lending since inception. Having become established as a bridging lender, the firm now spans the commercial, residential, buy-to-let and development sectors and lends around £60-80m a month.
Berti stresses that while the firm is not a bank and does not utilise bank funding lines, this is an area that it is looking at “closely” following the appointment of Matthew Pritchard to head of structuring. He adds that the company has typically utilised a “broad range of discretionary capital” that enables them to lend “quickly and confidently”, which banks are not able to do, mainly due to their size.
The firm is now looking to push forward with this growth, but by utilising a slightly different funding approach, particularly as the wider macroeconomic outlook becomes less stable.
Pritchard comments: “We’re arguably in the late stages of the credit cycle, so we’re preparing by deploying capital into more defensive markets. This means providing lower leveraged, but larger, loans, which may therefore be of lower cost to borrowers.”
“We have typically” he continues “provided smaller, higher interest rate loans to smaller developers and we want to increase our portfolio weighting to more defensive loans.”
As such, the firm is now looking to lend to larger, more institutional residential developers and homebuilders. Pritchard adds: “A part of this too will involve a different borrower mix, for example targeting more borrowers in the regions with good economic growth prospects and high local employment rates.”
In line with this, the company is hoping to broaden its investor base and so reduce the cost of its funding sources. A part of Pritchard’s new role, he says, will therefore involve engaging with new investors, particularly those not as familiar with Octopus Property, and to find, he says, “mutually beneficial opportunities to co-invest.”
In terms of what these investors may look like, Pritchard says that the firm will target the “full range of investors from asset managers, credit funds, non-banks and insurers”.
He comments that while traditional securitisation is not on the table right now, it might be something they will look to utilise in future. In the meantime, however, Pritchard will oversee the execution of private deals that will share similarities with securitisations.
“We are interested”, illustrates Pritchard, “in exploring bespoke private transactions done on a bilateral basis and, while these may not be rated or traded, they could be heavily structured and resemble securitisations.”
He continues: “These deals can offer illiquidity and structuring premia as investors’ ability to trade them is more limited, due to some complexity as they are secured exposures with additional structural protections from covenants,” he explains.
While issuing a public securitisation has its benefits, Pritchard says that there are a number of drawbacks, including the time and expense involved in the process. Additionally he says that the firm does not yet need to tap the ABS market, as they have competitively priced funding from a variety of sources.
While Pritchard also concedes that appetite for ABS might be strong, he has seen equally growing appetite for private debt and real asset transaction. He concludes that this appetite is being seen across a range of institutional investors - including credit funds, asset managers and insurers - that see the benefits of lending to UK borrowers, secured by real assets.
RB
Market Moves
Structured Finance
Market moves - 13 July
A weekly breakdown of recent hires and company developments in the structured finance industry.
Acquisitions and investments
Alantra has acquired KPMG UK’s portfolio solutions group business, which specialises in advising financial institutions in relation to non-performing and non-core banking assets globally. The team – which comprises around 70 professionals – will be renamed Alantra Corporate Portfolio Advisory and will be led by managing partners Joel Grau, Andrew Jenke and Nick Colman. Closing of the transaction is expected in early August.
HPS Investment Partners has sold a passive, non-voting minority equity stake to Dyal Capital Partners, with the aim of providing the firm with additional resources to pursue strategic initiatives. The investment will have no impact on the day-to-day management or operations of HPS and the firm's investment and decision-making processes will also remain unchanged. Evercore acted as financial advisor to HPS.
ORIX Corp has signed an agreement to acquire all the outstanding shares of NXT Capital. The acquisition is expected to be completed “in the near future”, pending regulatory approval. In addition to enhancing the competitiveness of ORIX in the US middle market loan sector, the move is expected to strengthen its asset management business through expanded earnings.
Europe
The Carlyle Group has hired Taj Sidhu as md to lead the credit opportunities team in Europe. He is based in London reporting into Alexander Popov and he was previously an md and head of European private credit at Oz Management. The credit opportunities team has also hired Philip Moore as md to the London office. He was previously an md at HPS Investment Partners overseeing European real estate investments.
CVC Credit Partners has hired Mike Anderson as head of investor relations. He was previously in the same role at Pemberton Asset Management Group.
East Lodge Capital has hired Kerry Duffain as head of European distribution, responsible for the oversight and management of investor relationships in the European region and helping cultivate the firm's investor relationships in Australia. Duffain was previously head of distribution for Markham Rae, covering both liquid and illiquid strategies. Before this, she worked at Bluecrest Capital Management, Pioneer Investments, Citigroup Asset Management, JPMorgan Asset Management and State Street Global Advisors. East Lodge is planning to launch a long-only fund focusing on opportunities higher in the capital structure.
ILS
Alan Ball is joining Texel Finance as of next month. He is currently a senior underwriter at Liberty Syndicates.
BTG Pactual Asset Management has hired the team from Lutece Investment Management, including the founders of Lutece, Erik Manning and Angus Ayliffe. The new reinsurance team will be based in Bermuda and will manage the retro opportunities strategy, which invests in the high-yielding retrocessional segment and opens up avenues for possible entry to the ILS market. The acquisition is subject to customary closing conditions and regulatory approval.
Horseshoe Group has hired Jean-Bernard Crozet to the firm as senior vp, advisory services and head of the London office. He was most recently London head of underwriting modelling at MS Amlin.
MBS settlement agreed
RBS has agreed a US$20m settlement with Illinois Attorney General Lisa Madigan in connection with the bank’s misconduct in its marketing and sale of pre-crisis RMBS. The settlement resolves an investigation over the bank’s failure to disclose the true risk of RMBS investments and proceeds will be distributed among the Teachers Retirement System of the State of Illinois, the State Universities Retirement System of Illinois and the Illinois State Board of Investment, which oversees the State Employees’ Retirement System. The settlement is Illinois’ eighth to address the sale of MBS during the lead-up to the 2008 economic collapse.
MSR sale
HomeStreet Bank has executed a definitive agreement to sell the rights to service approximately US$4.9bn in total unpaid principal balance of single-family mortgage loans serviced for both Fannie Mae and Freddie Mac, representing approximately 20% of its total single-family mortgage loans serviced for others, as of 31 March 2018. In conjunction with the transaction, the firm also expects to transfer an estimated US$27.2m of related deposit balances to the purchaser, who is believed to be Matrix Financial Services Corp. The physical transfer of servicing is scheduled to be completed by 16 August 2018 and is subject to customary conditions.
North America
CKK Law has hired eleven new attorneys to its New York office. Among these is Justine Clark who focuses on structured finance (including leasing and securitisation), banking and financial instruments, derivatives and international banking and trade finance, representing banks, investment advisors, leasing companies and multinational corporations.
Santander Bank has appointed Brian Schwinn as head of asset-based lending and restructuring finance in its commercial banking division. He is based in Boston and New York, reporting to Robert Rubino, Santander's co-president and head of commercial banking. Schwinn joined the firm as commercial banking's chief credit officer in November 2016, having previously spent 18 years at GE Capital.
NPL supervisory approach updated
The European Central Bank (ECB) is taking further steps in its supervisory approach for addressing the stock of non-performing loans (NPLs) in the euro area. It creates a consistent framework to address the stock of NPLs as part of the supervisory dialogue through bank-specific supervisory expectations aimed at achieving adequate provisioning of legacy NPLs thereby contributing to the resilience of the euro area banking system as a whole. Under this approach ECB Banking Supervision will further engage with each bank to define its supervisory expectations. The bank-specific supervisory expectations are based on a benchmarking of comparable banks and guided by individual banks’ current NPL ratio and main financial features. The aim is to ensure continued progress to reduce legacy risks in the euro area and achieve the same coverage of the stock and flow of NPLs over the medium term.
RMAC tender extended
Clifden IOM No. 1 has further extended its tender offer for RMAC Securities No. 1 RMBS bonds (SCI passim) to 10 August. The settlement date is now scheduled for 15 August.
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