Contents

Structured Finance

SCI Start the Week - 16 July

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

Pipeline
Marketing of new securitisations continued to gain momentum last week, following the Independence Day holiday. A broad mix of asset classes remained in the pipeline on Friday.

Auto ABS accounted for the majority of newly-announced deals, including: US$1.2bn CarMax Auto Owner Trust 2018-3, US$1.01bn Drive Auto Receivables Trust 2018-3, US$493m Exeter Automobile Receivables Trust 2018-3, US$811.81m Ford Credit Auto Owner Trust 2018-REV2, US$1.01bn Mercedes-Benz Auto Receivables Trust 2018-1, US$1bn Nissan Auto Receivables 2018-B, US$535.69m OneMain Direct Auto Receivables Trust 2018-1, US$451.8m Oscar US 2018-2, CNY3.83bn VINZ 2018-2 and US$522.9m Wheels SPV 2 Series 2018-1. The other ABS currently being marketed include: US$109.33m CLEAN 2018-1, Eagle Credit Card Trust Series 2018-1, US$861m John Deere Owner Trust 2018-B, US$201.07m Marlin Receivables 2018-1, US$631.9m Navient Private Educational Refi Loan Trust 2018-C, US$1bn Nelnet Student Loan Trust 2018-3, US$1.23bn Planet Fitness Master Issuer Series 2018-1 and US$450m Thunderbolt II Aircraft Lease.

Meanwhile, the US$217.3m BBCMS 2018-CBM, US$1.2bn BHMS 2018-ATLS, US$270m GPT 2018-GPP, US$810.71m GSMS 2018-GS10, C$351.79m REAL-T 2018-1 and US$330m WFCM 2018-AUS deals account for the CMBS remaining in the pipeline. The RMBS are £214.9m Gemgarto 2018-1, US$416.96m Sequoia Mortgage Trust 2018-CH3 and US$489.57m Verus Securitization Trust 2018-2.

US$460m BlueMountain CLO 2018-1, €350m BNPP AM Euro CLO 2018 and US$458.88m Romark CLO-II are among the CLOs in the pipeline, with the US$329.74m M360 2018-CRE1 CRE CLO also marketing.

Pricings
It was a quieter week for new issuance, however. A mix of ABS, CLOs and RMBS priced.

Last week’s auto ABS prints consisted of US$230mn CPS 2018-C, US$1.23bn GMCAR 2018-3 and €808m Silver Arrow Compartment 9, while US$650m Gracechurch Card Programme Funding Series 2018-1, US$500mn SRFC 2018-2 and €1.21bn Sunrise SPV 40 (re-offer) made up the consumer ABS prints. The US$523.25m-equivalent Triton Trust No. 8 Series 2018-1 and £307m Twin Bridges 2018-1 accounted for the RMBS pricings.

Among the CLO refinancings were: US$514.10m Apidos CLO XX, US$452.4m Canyon Capital CLO 2012-1R, US$624.78m Cent CLO 21, US$259.18m Mountain Hawk II CLO, US$405.35m Race Point X, US$653.10m Sound Point V-R and US$523.95m Voya CLO 2014-4. Finally, the €412.10m BlackRock European CLO VI rounded out last week’s issuance.

Editor’s picks
Return to form?: 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…
Article 14 negotiations begin: 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…
Multi-originator GACS deal debuts: Iccrea Banca, the cooperative group owned by multiple Italian mutual banks, has issued a €1bn NPL securitisation of primarily secured loans. 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)…

Deal news

• 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.

CLOs

Inaugural infrastructure CLO markets

Singapore-supported firm's first transaction backed by Asia, ME project finance loans

Clifford Capital is marketing an inaugural US$480m CLO. The transaction, dubbed Bayfront Infrastructure Capital, is backed by 37 bank-syndicated senior project finance and infrastructure loans to projects in Asia-Pacific and the Middle East.

Moody’s has assigned provisional ratings to the transaction of Aaa on the US$320.6m class A notes, Aa3 on the US$72.6m class B notes and Baa3 on the US$19m class C notes. The US$45.8m subordinated notes are unrated and the deal will be tied to six-month USD Libor, although it has yet to price.

This is the first CLO from Clifford Capital, a firm incorporated in Singapore and 40.5% indirectly owned by Temasek Holdings. It has a public policy mandate to support Singapore-based companies in their overseas ventures, specifically in infrastructure and offshore marine sectors.

While Clifford Capital has not previously managed a CLO, Moody’s notes that the firm is capable because of its experience in managing project finance and infrastructure loans in Asia-Pacific and the Middle East. The company has committed over US$2bn of loans and investment since its inception and also has a euro commercial paper programme, guaranteed by the Singapore government.

The portfolio is not expected to be actively traded during the life of the transaction, although the manager is able to direct the issuer to sell defaulted assets and certain credit-impaired assets. The transaction has a two year reinvestment period, during which time the manager may direct the issuer to use unscheduled principal collections and proceeds from the sale of assets to purchase new assets, subject to certain conditions.

The CLO also has high project concentration with only 37 loans relating to 30 projects and with high exposure to a few of them, with the largest and second-largest project exposures account for almost 9.7% and 7.5% of the target closing portfolio, respectively. The portfolio is also concentrated in oil, gas and commodities, totalling 39.5%, and power generation non-renewables, at 28.4%, so deterioration in a single sector may have a large impact on the CLO's performance.

Additionally, there is country risk in the portfolio with the majority of the projects in countries with, Moody’s states, a non-Aaa foreign-currency country ceiling assigned by the rating agency. The top three countries by portfolio concentration are Australia, at 19.5%, Indonesia, at 14.2%, and Vietnam, at 14%.

While this transaction utilises securitisation to fund infrastructure projects, structured finance analysts at Bank of America Merrill Lynch (BAML) suggest that similar examples in Europe are unlikely to follow, mainly as a result of the new securitisation regulation.

While the EU has helped to support infrastructure financing through the capital market, such as the development of the Capital Markets Union (CMU), further steps may be needed to ensure that the CMU plays an increasingly important role in infrastructure financing.  What might therefore be needed is the creation of an infrastructure bond and municipal (revenue-based) bond markets.

Alongside this, BAML’s analysts recommend a recalibration of regulatory capital for infrastructure and project finance under Solvency II. A further suggestion is a recalibration of capital requirements and amendments in the prudential regime for securitisation.

Additionally, allowing pooled based financing of infrastructure loans and the introduction of European Secured Notes for infrastructure could provide a boost, as could regulatory support for experimentation with different forms of financing. However, an ongoing issue is that regulatory capital levels do not correspond with the lower default and loss risk of infrastructure finance, as tracked by rating agencies.

BAML’s analysts conclude that, given that infrastructure securitisations are unlikely to qualify as STS, the very high capital charges on non-STS transactions would also likely prevent insurance companies and pension funds from investing.

RB

CLOs

CLO investor breaks into US

UK firm thinking long term, credit cycle in sights

Pearl Diver Capital recently opened its first US office and also closed two new CLO funds. While the loan and CLO markets still seem to be immune from macroeconomic disruption, the company is preparing for a potential change in the credit cycle.

Matthew Layton, partner at Pearl Diver Capital, comments that the firm recently closed Pearl Diver Capital (PDC) Fund 7, totalling US$250m and, in line with previous funds, it will invest in CLO majority equity positions. In the same week, the company also closed a CLO mezzanine fund which will be its first evergreen fund.

Later in the year, the company aims to market and launch PDC Fund 8, investing in majority equity positions across European and US CLOs.

Concurrently, Pearl Diver has opened its first base in the US, an office in New York, in order to engage with the larger size of the CLO market there and to capitalise on its majority US investor base. As part of this, Tim Carroll – having joined from Moneda Asset Management - will head its US business development and marketing programme, reporting to Neil Basu.

In terms of ongoing strategy, Layton says that Pearl Diver is taking a forward looking approach and is now preparing for a potential movement in the general macroeconomic landscape.

Layton says: “By nature CLO equity is long credit therefore portfolios have to be constructed and managed to be able to withstand a credit cycle. This is especially true now that re-sets of CLOs have become the norm and transformed the asset class into a longer term semi-permanent vehicle.”

In terms of their selection process, Pearl Diver takes a discerning approach to CLO managers. “We track and monitor over 70 CLO managers grading their trading behaviour, style and performance through different vintages and periods of the credit cycle. The results show that it is not true that the longer standing, bigger managers always provide the best performance,” says Layton.

He points out that his firm also takes a highly quantitative approach to manager selection, as well as extensive monitoring of loan manager trading patterns. Additionally, he says the firm takes an “an extremely active role in structuring the CLO and drafting the documentation. The aim is to invest in CLOs which combine the best credit portfolios run by the best managers with the best CLO structures and documentation. It is this detailed and rigorous approach which we have applied to equity investing which will be applied to mezzanine investing.”

Recent events have also benefited firms such as Pearl Diver, including the easing off of a long period of spread tightening in the underlying loans, which, Layton says, will allow loan managers to build up spread, benefiting CLO equity cashflows. He adds that CLO liabilities recently saw the reversal of a tightening trend seen since mid-2016 to 1Q18, but CLOs still remain at tights seen at the end of 2017.

In general, Layton thinks that the floating rate nature of CLO notes still provide an advantage over other asset classes and are especially useful as a natural hedge when compared to other fixed rate products.

In terms of the future, Layton comments that the potential for rising corporate defaults is “always a concern” as is the ongoing deterioration in loan documentation quality and rising leverage on loans. However, he adds that Libor probably “needs to exceed 4% before most companies’ cash flows are challenged by their cost of debt.”

Additionally, while the potential for a turn in the credit cycle is a concern, Layton isn’t immediately worried with - for example - US macroeconomic conditions still very positive in terms of GDP growth, employment prospects and wage growth, reflected in strong corporate earnings. Layton concludes that it’s hard to see anything in the near term that will have a huge impact and that, “even the trade war has so far had only a very limited - if at all measurable - impact on leveraged loans.” 

RB

Structured Finance

Fit for purpose?

Efficacy of STS label questioned

Once portrayed as the initiative to revitalise European securitisation, the STS label has been variously hailed as a game-changer or lamented as not fit for purpose. The truth, perhaps, may be somewhere in between.

Regulations (EU) 2017/2402 and 2017/2401 – which provide for the implementation of simple, transparent and standardised (STS) securitisations – will apply from 1 January 2019. They are the culmination of years of work, but during their long gestation the ABS market has picked itself up, raising questions as to the STS label’s necessity.

“STS is an irrelevance because the products which STS is supposed to help are already selling like hotcakes,” says David Shearer, partner, Norton Rose Fulbright.

He believes that the STS label “is an idea whose time never came”. While it has always been popular with regulators, it has held less appeal for the rest of the market. For that reason, its impact is expected to be limited.

“The STS regulation in itself will not particularly help with issuance, but nor will it make things significantly worse overall, as some people fear. There are a few technical points yet to be clarified, which may have a positive or negative effect – and we will find out when we get the RTS from ESMA and EBA,” says Markus Schaber, managing partner, Integer Advisors.

He notes that the CRR will technically change quite a lot more. Capital weightings are higher, for example.

Schaber adds: “The most significant parts of the STS regulation for all securitisations are Articles 5, 6 and 7, covering due diligence, risk retention and transparency. While the transparency regime will change quite a bit, due diligence and risk retention will not be substantially different in terms of overall requirements - albeit there are certainly some technical points which need to be clarified.”

Those due diligence requirements largely formalise processes that should already have been in place. CLOs will be particularly affected by the transparency changes, however, because certain transparency obligations appear to have been designed only with bank-originated deals in mind, not with non-bank actively managed ones considered.

Ian Bell, head of the PCS Secretariat, agrees that “STS is not a silver bullet, but it is helpful”. He does not believe regulation can ever really make a market, although it does have the potential to end one, which the STS rules should not do.

“The market’s success will rest fundamentally on banks’ needs. If banks need to issue securitisations and STS allows them to do that at an acceptable cost, then securitisation will succeed. Without STS, the new CRR and not-so-new Solvency 2 would have made it very difficult to find a price point that would work for everyone, so STS attenuates the harm of other regulations,” says Bell.

Receiving an STS label will not guarantee a transaction preferential capital treatment and not all investors will be able to benefit. “There is a very long list to fulfil, including some very specific points - such as homogeneity - which can be quite complex. The STS label is ultimately a quality label and issuers will have to check whether deals are compliant. It should have been fairly easy for prime auto ABS or prime RMBS, but it remains somewhat more complicated than many market participants had hoped it would be,” says Schaber.

A close reading of the STS regulation finds there are 101 queries for establishing STS compliance, says Bell. Those will not all apply to every deal, but for any given securitisation, around 80 would be relevant.

“Anybody who claims that the STS regulation is simple is mistaken. At PCS, we have broken down the regulation’s articles, paragraphs and sub-paragraphs into separate queries, each subject to a specific and singular answer. This helps to make measuring compliance a straightforward and binary process, but it also underlines its complexity,” says Bell.

Christopher Sullivan, knowledge of counsel, Norton Rose Fulbright, adds: “The hoops which you need to jump through for STS and preferential treatment are so high that I do not think people will meet them. Pools are required to be homogenous, so my belief is that pools which would qualify would have to be so small that there would never be the required economies of scale.”

The use of the STS label is voluntary and deals that are able to comply do not have to choose to do so. Despite this, Shearer worries that the new regime “represents the de-democratisation of the market”.

He says: “You have to prove a history of origination experience, which appears to be because the European Commission can only imagine a capital market where the originators are all banks. STS should be about making sure securitisation is opened up for more market participants, not creating a bottleneck where only a few can use it.”

Perhaps originators could finance through warehouse structures before going public, but this still presents a barrier to challenger financiers, denying them financing cost efficiencies that are available to others. The obligation for servicers to have a demonstrable servicing record in each relevant particular asset class means that there, too, new entrants are excluded.

“While implementing STS is expected to be challenging, we will not know quite how challenging until the EBA’s final guidelines in October. There are several points which the EBA could either make very simple or very problematic. Even one problematic issue makes life difficult because it is not good enough to satisfy 100 out of the 101 requirements for STS; it is all or nothing,” Bell notes.

The EBA is conducting a public consultation on its draft guidelines, which will provide a harmonised interpretation of the criteria for securitisations to be eligible as STS. The consultation was launched in April and will run until 20 July.

JL

A full discussion of the challenges and opportunities presented by the implementation of the STS label appears in the Summer 2018 issue of SCI’s print magazine. This is available to subscribers. A digital version can be downloaded here.

Structured Finance

Market moves - 20 July

A weekly breakdown of new hires and company developments in the global structured finance industry.

Acquisition agreed

Stone Point Capital’s Trident VII fund is set to acquire Sabal Capital Partners, with Sabal Investment Advisors, Sabal Investment Holdings and their managed funds also merged into the Sabal platform to create a vertically integrated lending, servicing and investment management platform focused on the small balance commercial real estate sector. Sabal will continue to be operated by its existing team, including founder and ceo Pat Jackson and other senior members of management, all of whom will be making significant investments in the company alongside Trident VII. The acquisition is expected to close in August, subject to customary closing conditions and regulatory approvals.

Auto Downgrade

S&P has revised its rating on Honor Automobile Trust Securitization 2016-1, downgrading the class C rating to triple-C plus, from double-B minus. The class A and B ratings are affirmed at single-A and triple-B, respectively. This follows a substantial decrease in overcollateralisation, leading to an upward revision in the agency’s expected cumulative net loss. The agency suggests that the class C notes are currently vulnerable to nonpayment. 

Europe

CBRE has hired Richard Day as senior director, central London investment properties, capital markets. He was previously a director at DWS Group, London.

European regulation

ESMA has issued a first set of technical standards under the Securitisation Regulation (SR) containing both draft regulatory and implementing standards (RTS/ITS). These TS contain detailed arrangements to implement the new European regulatory framework for securitisations, which is intended to promote simple, transparent and standardised (STS) securitisations. ESMA’s draft TS specify the information and format that the originators and sponsors of securitisation products are required to notify to ESMA should a securitisation transaction meet the STS requirements. The STS notification is a necessary step in order to apply for STS preferential capital treatment. The draft RTS specifies the information to be provided to the competent authorities in the application for the authorisation of a third party assessing the compliance of securitisations with the STS criteria. ESMA has submitted today for endorsement its final draft RTS/ITS to the European Commission. These RTS/ITS will contribute to delivering a regulatory rule-book for European securitisation markets.

Mortgage sale considered

Cerberus is considering whether to sell the entire mortgage portfolio backing its Auburn Securities 9 RMBS. The completion date for such a sale is expected to fall within the period immediately preceding the August IPD. If the portfolio sale is carried out by then, all notes outstanding will be redeemed at their principal amount outstanding.

North America

Jonathan Bock has joined Barings as an md in its global private finance unit, based in Charlotte and reporting to Eric Lloyd, head of global private finance. Bock is also set to serve as cfo of Barings BDC, following the consummation of the stock purchase and transaction agreement with Triangle Capital Corporation, through which Barings will become the external investment adviser to the TCAP BDC (SCI 6 April) and its renaming as Barings BDC. He was previously an md and senior equity analyst at Wells Fargo, where he specialised in BDCs.

Platinum Equity has hired Michael Fabiano to lead the formation of a credit investing division and will be based in New York with a global mandate as head of credit. Fabiano was most recently an md at GSO Capital Partners – the global credit investment platform of Blackstone, where he led credit investments in operationally and financially challenged situations.

Pretium Partners has hired Gil Tollinchi as md and senior portfolio manager in the firm’s credit management unit and will be responsible for bank loan portfolio management throughout Pretium’s CLOs and other bank loan focused vehicles. Tollinchi was previously md at Crescent Capital Group.

ILS

Brit has hired Richard Slater as underwriting director and Adam Champion as senior vp, portfolio manager and operations to its Sussex Capital unit. Slater was previously at XL Catlin as head of international property reinsurance and global property retro while Champion was previously at MS Amlin as head of analytics.

NPL portfolios acquired

IFIS NPL has acquired from four market participants four Italian distressed loan portfolios for a total of approximately €600m (nominal value), corresponding to more than 27,500 mainly unsecured positions. The most significant transaction involved a mixed banking portfolio of over 20,000 positions purchased from UniCredit, with a nominal value of €537m, comprising current accounts (42%), personal loans (30%) and other assets (28%). The other acquisitions involve Carrefour Banca, a major Italian consumer credit company and an Italian company that operates in the valuation of the purchase of pecuniary loans due from bankruptcy procedures. Following these purchases, the portfolio owned by IFIS NPL totals more than €13.4bn (nominal value), for a total of over 1.5 million positions.