News Analysis
Structured Finance
Testing time
European ABS succumbs to widening pressures
Poor new issue execution has seen the European securitisation market finally succumb to widening pressure, in line with other credit markets. A number of short-term and long-term factors are at play, but the true test of the sector will be when participants begin putting cash to work after the summer.
Cartesian 3 and Sunrise SPV 40 were among the headline deals impacted by the widening pressure, with their class A notes respectively printing at three-month Euribor plus 35bp and one-month Euribor plus 45bp versus plus 27bp and plus 40bp last year. Separately, Barclays withdrew its sterling Gracechurch 2018-2 credit card deal after it was able to upsize the US dollar Gracechurch 2018-1 at an attractive rate.
Mark Hale, ceo and cio at Prytania Investment Advisors, confirms that both shorter-term and longer-term influences have contributed to spread widening across the European ABS market. Shorter-term influences include the usual seasonal impact on market activity and liquidity, plus a degree of ‘risk-off’ sentiment in global markets. Some recent concerns – such as the political situation in Spain and Italy – now appear to have faded away, while others have persisted and even worsened, such as potential trade wars and Brexit.
There has also been a fair amount of primary and secondary supply, which has caused some indigestion among investors. Anecdotally, a repeated series of BWICs from the same European investor – which is reportedly being hit by redemptions – has put additional pressure on spreads.
Meanwhile, among the longer-term influences on European ABS spreads is the anticipation of further interest rate increases in the US (the US Fed, for example, is expected to tighten at least twice more this year and continue tightening next year) and the UK, with the ECB also likely to hike rates next year. “Globally, we’re seeing tightening of monetary conditions and the unwinding of the extreme liquidity that had allowed the risk of many assets to be mispriced for so long, and the securitisation market isn’t immune to these forces,” Hale explains.
He says it is difficult to pinpoint which sectors have been most affected by spread widening as the picture has been continuously evolving, although UK RMBS is an obvious one, given the supply resulting from the ending of the FLS. European CMBS also seems to have been impacted by a small cluster of transactions pricing recently, with the BAMS CMBS 2018-1 deal initially shown in the plus 70bp area and then at plus 95bp-100bp, for example. Similarly, a marked widening in CLO spreads is primarily a reaction to the heavy pipeline and, to some degree, price concessions for new managers entering the market.
“Not every European sector is widening, but a number of areas are under pressure, despite often strong fundamentals and ongoing accommodative monetary policy,” Hale observes. “It’s important to distinguish between long- and short-term influences. The true test of the recent market trends will be when participants return from their summer holidays and need to begin putting cash to work.”
Prytania, for one, had been expecting spread widening to emerge for some time and has consequently shortened the WAL of its portfolio, raised some cash, sold higher beta assets and moved up the credit curve to higher weightings in triple-A tranches. “Now that spreads have widened, we are seeking to deploy liquidity in primary and secondary deals where we will be properly rewarded for the risk. We’re looking for strong originators and managers, and ideally more conservatively structured deals. The aim is to maintain a cautious stance, while hoping that the combination of circumstances means we can buy more paper at wider spreads,” Hale says.
The firm took profits in its peripheral exposures a few months ago. However, more recently there has been material widening in Portuguese bonds and it is considering re-entering that sector while remaining cautious on sectors that aren’t seeing enough widening relative to the risk, such as in Italy and Greece.
Other opportunities include esoteric paper that usually offers “persistent alpha”, such as European SME deals. “In this case, we’re more optimistic that a relatively unusual collateral issue will generate outsized returns,” Hale continues.
Additionally, Prytania recently bought the class A and B notes of the Azure Finance auto deal, which benefited from wide spreads and strong structural enhancements because the sponsor – Blue Motor Finance – is a new entrant to the market. “A combination of reluctance to engage with new names, together with negative sentiment from some corners of the market make investing in such transactions a rewarding process. It helps if you know the deals are coming and you can do your homework before they’re announced,” Hale adds.
As for future spread trends, relative costs in the European ABS market versus access to other sources of finance should be considered, according to Hale. “At what point does the supply get choked off if ABS spreads keep widening?” he asks. “How does securitisation execution weigh up against execution of covered bonds or straight bonds? To the extent that alternative pools of capital are available, it may reduce some of the recent influences that drove new issuers to enter the market.”
Hale points to the growing disparity between the European and US regulatory environments, including the recent roll-back of some sections of the Dodd-Frank Act. “European policymakers could help to facilitate a broader base of demand for European ABS, but the regulatory and reporting burdens are set to only get worse. They significantly constrain the growth of the market,” he concludes.
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News
Structured Finance
SCI Start the Week - 23 July
A look at the major activity in structured finance over the past seven days
Pipeline
The pipeline returned to full flow last week. Unusually, CMBS accounted for the majority of newly-announced deals, with a pair of esoteric CDOs also in the mix.
The CMBS were: US$944.19m BANK 2018-BNK13, US$400m BBCMS 2018-CHRS, US$310m GSMS 2018-RIVR, US$212.5m GSMS 2018-TWR, US$1.11bn JPMCC 2018-WPT, US$459.9m MSC 2018-MP, US$356.63m MSC 2018-SUN, US$177.22m NCMS 2018-850T and US$110m NCMS 2018-SOX. A couple of CRE CLOs - US$415.1m SGCP 2018-FL1 and US$415.13m Shelter Growth CRE 2018-FL1 – were also marketing.
The US$700.2m Enterprise Fleet Financing 2018-2, US$300m Volvo Financial Equipment Master Owner Trust Series 2018-A and US$799.93m World Omni Auto Receivables Trust 2018-C represented the newly announced auto ABS transactions. The US$402.31m Marlette Funding Trust 2018-3 rounded out the ABS entrants.
Additionally, a handful of RMBS were marketing: US$316.49m Nationstar HECM Loan Trust 2018-2, US$568.45m NRZ 2018-FNT2, A$589m-equivalent Pepper Residential Securities Trust No. 21 and A$500m SMHL Series Securitisation Fund 2018-2. Among the CLO entering the pipeline last week were US$507.2m Benefit Street Partners CLO XV and US$508m Wellfleet CLO 2018-2, while US$412.2m Bayfront Infrastructure Capital and US$271.99m Credit Suisse ABS Repackaging Trust 2018-PS1 accounted for the esoteric CDOs.
Pricings
Pricings also ticked up last week. ABS and CLOs made up the majority of the issuance.
The auto ABS prints comprised: US$1.4bn CarMax Auto Owner Trust 2018-3, US$1.36bn Drive Auto Receivables Trust 2018-3, US$550m Exeter Automobile Receivables Trust 2018-3, US$1.19bn Ford Credit Auto Owner Trust 2018-REV2, US$1.38bn Mercedes-Benz Auto Receivables Trust 2018-1, US$1bn Nissan Auto Receivables 2018-B, US$900m OneMain Direct Auto Receivables Trust 2018-1, US$440.8m Oscar US 2018-2 and US$505m Wheels SPV 2 Series 2018-1. The remaining ABS pricings were: US$1.18bn American Express Credit Account Master Trust Series 2018-6, US$544.61m American Express Credit Account Master Trust Series 2018-7, US$861.46m John Deere Owner Trust 2018-B, US$201.65m Marlin Receivables 2018-1, US$631.9m Navient Private Educational Refi Loan Trust 2018-C, US$1bn Nelnet Student Loan Trust 2018-3, US$1.2bn Planet Fitness Master Issuer Series 2018-1 and US$450m Thunderbolt II Aircraft Lease.
Meanwhile, last week’s new issue CLOs included: US$809mn Atrium XIV CLO, US$475.1m BlueMountain CLO 2018-1, US$575m Brightwood Fund III Static 2018-1, US$407.2m Dryden 60 CLO, US$1bn Golub Capital Partners CLO 38(M), €411.8m Tikehau CLO IV and US$406mn Woodmont 2018-5 Trust. CLO refinancings consisted of: €468.6m Avoca XVI CLO, US$369.88m Benefit Street Partners CLO IX, US$540.5m Carlyle Global Market Strategies CLO 2015-3, US$582.09m Fortress Credit BSL VI (formerly Hildene CLO IV), US$460.7m KKR 14 CLO, US$245.25m NewStar Exeter Fund CLO and US$415.7m TIAA CLO I.
Finally, the £214.9m Gemgarto 2018-1, US$264.55m Oaktown Re II and US$489.57m Verus Securitization Trust 2018-2 RMBS rounded out the issuance.
Editor’s picks
Fit for purpose?: 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…
CLO investor breaks into US: 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…
Deal news
- Allegations of embezzlement and a fight for control of Harley Marine Services (HMS) have emerged less than two months after the firm closed its first whole business securitisation, Harley Marine Financing Series 2018-1 (see SCI’s primary issuance database). The legal battle has sparked concern that should a manager termination event occur, the US$455m transaction will enter rapid amortisation.
- 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.
News
Capital Relief Trades
Risk transfer round-up - 27 July
CRT sector developments and deal news.
Mitsubishi UFJ is rumoured to be prepping its first transaction referencing European loans. The bilateral deal is expected to close in 4Q18.
The Japanese issuer’s last and inaugural capital relief trade, dubbed Battersea and placed in January 2017, is believed to be a US$100m five-year bilateral deal referencing a US$1bn Asian oil and gas portfolio.
News
CLOs
Ireland still 'favoured' securitisation destination
Irish CLOs may see post-Brexit boost
The Central Bank of Ireland recently published figures stating that the total value of assets in Irish special purpose entities (SPEs) has fallen €58.9bn this year. While a striking number, this has little relation to the use of SPEs for securitisation and nor has it affected ongoing activity involving the acquisition and securitisation of portfolios of Irish non-performing loans.
Conor Houlihan, partner and head of banking and capital markets at Dillon Eustace, comments that while the headline €58.9bn figure is “quite startling” it is only in relation to a small number of entities. He adds that the number of Irish-domiciled SPEs has “actually increased” with over 70 new vehicles launched in 1Q18.
Houlihan adds that the value of assets in financial vehicle corporations, which are typically used for securitisation in Ireland, has also increased. He comments that this is a better indicator of the health of the structured finance industry in Ireland which, he suggests, is anything but in decline.
While the government introduced changes to tax law, Houlihan doesn’t think this has much to do with the movement of funds out of Irish SPEs. Instead, he suggests external factors played more of a role, such as foreign tax changes and, similarly, the Central Bank of Ireland reports a decline in Russian-sponsored SPEs in Ireland, particularly as a result of Russian sanctions.
Houlihan adds: “I would say that the reduction in the total asset value of Irish SPEs has little or nothing to do with last year’s changes to Section 110 of the Taxes Consolidation Act 1997, which were a response (and limited in effect) to so-called ‘vulture funds’ using section 110 structures to acquire/hold portfolios of Irish real estate loans while paying little tax in Ireland.”
He continues: “It is important not to confuse this issue or allow it to detract from the very proactive and positive approach that Ireland has taken in response to wider international tax developments such as BEPS.”
In fact, he suggests that Ireland’s ability to develop and update its tax regime helps to provide a competitive edge for the country in securitisation. This is demonstrated by the increase in the value of assets held in Irish securitisation SPEs and further shows that Irish SPEs continue to stand as an “attractive and compelling option for such transactions,” says Houlihan.
As well as being an often favoured destination for European securitisation more broadly, Ireland is regularly selected above others for CLOs, suggests Houlihan: “Ireland also leads the way as the top EU jurisdiction for the issuance of CLOs and, of course, Euronext Dublin (formerly the Irish Stock Exchange) remains as the key listing venue for US and European CLOs (and other structured debt issuance).”
There are two options that, for example, a US CLO manager can take if it wants to issue a CLO in Europe. One is to rely on a third country passport regime to manage Irish/EU CLO issuers on a cross-border basis and the other option is to set-up a new regulated entity in the EU to do so.
Houlihan accepts that many US managers have opted to establish in the UK, instead of Ireland, although he points out that several large firms have established in Ireland, including KKR and Blackstone. He adds that Irish MiFID II regulations have a safe harbour for non-EU investment firms providing services on a cross-border basis to Irish per se professional clients under certain conditions.
He says that Brexit may, therefore, result in an increase in the number of CLO managers operating from Ireland or a boost to the number of Irish CLO issuers managed by UK managers on a cross-border basis.
Houlihan concludes that, despite the high value of movements of funds as reported by the Central Bank of Ireland, “…Ireland remains the largest securitisation destination in the Eurozone, continues to see more SPVs established here and securitisation activity continues to rise across a range of asset classes, with no indication of that slowing down.”
RB
News
NPLs
Cypriot NPL portfolio markets
Bank of Cyprus transaction attracts global investor interest
Bank of Cyprus is currently marketing a €5bn, by gross-book value (GBV), mixed NPL portfolio of secured and unsecured loans, dubbed Project Helix. Apollo Global Management, PIMCO, and Lone Star are looking to invest, while B2Holding is looking at co-investment and servicing opportunities.
Sources close to the transaction note that it is among the first batch of non-performing loans (NPLs) that are expected to be sold given steadily increasing real estate prices, a growing economy and the recent foreclosure bill. The foreclosure bill was enacted earlier this month and removes obstacles that would allow debtors to disrupt the foreclosure process through injunctions and court applications.
It is understood that the portfolio was reduced from €7bn, because approximately €2bn of the portfolio comprises real estate loans that have been earmarked for sale to future bad bank Estia.
Despite having the highest NPL ratio in Europe, and a banking sector that holds €22.8bn of NPLs, Cyprus has remained an untested market. Cypriot banks have, however, been concentrating their efforts on improving distressed asset management.
Bank of Cyprus comments that non-performing exposures (NPEs) reduction would come through both “organic and inorganic activity”, and that it continues to “actively explore certain structured solutions to further accelerate this reduction.” Accordingly, Bank of Cyprus’ NPEs stand at €8.3bn as of 1Q18, having seen a 44% reduction since December 2014.
SP
Market Moves
Structured Finance
Market moves - 27 July
Company developments and new hires in the structured finance sector.
Acquisitions
American Mortgage Consultants (AMC), has announced the acquisition of certain personnel and the operations center of Des Moines, Iowa-based The Barrent Group. This transaction will establish a market presence for AMC in the Midwest and adds more than 50 residential mortgage professionals to its platform, further enhancing the firm’s client service capabilities. AMC plans to hire up to 150 additional mortgage professionals within the next year to join its new office in Des Moines. These individuals will support a variety of roles including securitisation underwriting for a variety of loan types. The office will also add to AMC’s capacity for the review of seasoned reperforming, non-performing, and performing assets.
CDO transferred
Dock Street Capital Management is set to assume collateral management obligations and responsibilities for Mid Ocean CBO 2000-1, a Deerfield Capital Management ABS CDO. Moody’s confirms that the assignment won’t result in the reduction or withdrawal of any of its ratings on the notes at this time. For other recent CDO manager transfers, see SCI’s database.
EMEA
JPMorgan has promoted Oldrich Masek to head of EMEA Structured Products Group, following David Lefkowitz's relocation from London to New York. Ben Peletier will succeed Masek as head of EMEA ABS origination in addition to his role of head of EMEA CLO and will report to both Masek and Lefkowitz.
North America
Mill Hill has hired Nick Pepe as head of business development and investor relations, starting September 2018. He will be replacing David Modiano who is leaving the company after two years. Pepe was previously at Citigroup as a senior member of global securitised markets.
Organisation structure update
Crestline Investors has established a new organisational structure for Crestline Denali Capital, a unit of Crestline that specialises in the syndicated leveraged loan market. The new structure was released as a result of the 1 July retirement of David Killion, who had previously served as CEO of Crestline Denali Capital with over two decades of work in the syndicated loan and CLO markets. Greg Cooper and John Thacker, both senior managing directors at Crestline Denali Capital and co-founders in 2001 of its predecessor, Denali Capital, will now serve as group co-heads and share overall executive and operational management and new fund execution responsibilities. Cooper will focus principally on investor relations and product development, while Thacker will focus principally on portfolio management. Kelli Marti, managing director, is being promoted to the position of chief credit officer, with responsibility for overseeing the firm's credit underwriting, research and credit administration activities. Cooper, Thacker and Marti will collectively comprise the investment committee for Crestline Denali Capital. David Tanny, managing director, has assumed primary responsibility for the firm's asset side counter-party relationships, and he also oversees the firm's trade execution activity.
Partnerships.
FS/KKR Advisor, a partnership between FS Investments and KKR Credit Advisors have announced that FS Investment Corporation and Corporate Capital Trust have entered into a definitive agreement under which FSIC and CCT will be merged. The combined company will have on a pro-forma basis over US$8bn in assets invested in 221 portfolio companies across 23 industries as of 31 March 2018. The boards of directors of both FSIC and CCT have approved the transaction, with the participation throughout by, and the unanimous support of, their respective independent directors. The transaction is subject to approval by FSIC and CCT shareholders and other customary closing conditions. FSIC and CCT expect to close the transaction in the 4Q18.
RFC on NPL approach
Scope is requesting comments on its non-performing loan ABS rating methodology, which consists of a flexible framework that can be implemented across different jurisdictions and applies to securitisations backed by portfolios of secured and unsecured NPLs. The agency considers loans classified as defaulted, impaired loans as defined by the applicable accounting framework and loans not classified as defaulted but for which full repayment seems unlikely to be non-performing. For unsecured loans, the analysis of recoveries takes into account loan ageing, while the analysis of secured loans considers the benefits of real estate security and any other sources of available security. Comments on the proposed methodology are invited by 24 August.
Sabadell NPL sale
Banco Sabadell has sold almost all of its real estate exposure to a Cerberus Capital Management affiliate. The transaction has been structured through the transfer of two real estate portfolios – with a combined GBV of circa €8.1bn and a net book value of circa €3.9bn – commercially identified as ‘Challenger’ and ‘Coliseum’ to newly incorporated companies (NewCos), the share capital of which will be contributed so that Cerberus owns an 80% interest in the NewCos’s share capital and Banco Sabadell the remaining 20% interest. Banco Sabadell and Cerberus will enter into a shareholders’ agreement to set forth their contractual relationships as partners of the NewCos. Solvia Servicios Inmobiliarios will remain wholly owned by Banco Sabadell and will continue to service on an exclusive basis the real estate assets included to the transaction. The agreement will create a positive impact of around 13bp on Banco Sabadell’s capital ratio of Common Equity Tier 1 (fully loaded).
SF sector forum
IMN has set up a new forum for institutional investors in the structured finance space, dubbed the Fixed Income Investor Network (FIIN). The group will provide a voice for buy-side investors and will include representatives from some of the largest institutional asset allocators to ABS, including: Charles Schwab, Eaton Vance, Grantham Mayo, Loomis, Sayles & Co., Napier Park Global Capital and PGIM Investments. FIIN will meet four times per year, with the inaugural meeting to be hosted at ABS East.
UK SLABS scrutinized
A recent UK National Audit Office report states that a £900m accounting loss was recorded in the Department of Education’s accounts resulting from the UK government’s Income Contingent Student Loans 1 securitisation, while the net loss of future receipts from student loan repayments as a result of the sale is estimated to be £604m. The face value of loans before taking account of impairments was £3.5bn and the securitisation raised £1.7bn, equating to the government receiving 48p for every £1 of loans sold – albeit the sale price was broadly in line with UK Government Investment’s estimate of market value. The report notes that UKGI prepared well for the sale, creating a structure that “encouraged investor interest and maintained competitive tension” during the process and “achieved value for money”. Regarding future sales of student loans, the NAO expects the Department of Education and UKGI to: provide transparency on the plans and their impact; reassess disposal options for every sale; and refine the value-for-money framework applied to calculate the valuations as new data on the asset class emerges.
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