Contents

ABS

Chinese MPL ABS prepped

Online lender brings debut rated deal

Beijing Jingdong Century Trade Co is marketing a consumer ABS under the asset-backed notes (ABN) with a special purpose trust scheme in the Chinese interbank bond market. Dubbed Beijing Jingdong Century Trade Co 2018 Asset-Backed Notes Series 1 (JD ABN 2018-1), the CNY1bn deal marks Fitch’s first ratings assignment for a securitisation of unsecured consumer receivables generated via an online platform in China.

The notes will be backed by a pool of over 2.4 million unsecured consumer credit receivables (Baitiao), which provide online consumers with the option to ‘buy now, pay later’. The customer is given an account with a specific limit (on average about CNY6,000) and monthly bill cut-off and payment dates (nine days after the bill cut-off date). The interest-free period varies from 10 to 40 days, depending on the purchase date. 

Fees are charged based on the number of monthly instalments – three, six, 12 or 24 – over which the customer chooses to repay the outstanding balance. The fees range from 0.5% to 1% of the outstanding balance, multiplied by the numbers of instalments.

In relation to its Baitiao product, Jingdong Century has previously accessed securitisation markets with the unrated JD ABN 2017-1 deal from February 2017 and through the asset-backed specific plan (ABSP) scheme on a further 20 occasions. The firm is headquartered in Beijing and is ultimately owned by JD.com.

It operates China’s largest one-stop direct sales e-commerce platform, JD Mall. As of December 2017, the platform had over 292.5 million active customer accounts.

The receivables are revolving lines of consumer credit for use on the JD Mall e-commerce platform. Fitch notes that the assets share similar characteristics to retail store credit card products, hence it has used its global credit card ABS rating criteria to analyse the transaction.

The Baitiao product has had an annual average 91-120 days past due rate of 3.9% in the past 3.5 years ending June 2018, with the full-year 2017 annual average standing at 3.1%. In rating the deal, Fitch – which is the only international rating agency with the assignment – has assumed a steady state default rate of 4.9%.

The overall monthly payment rate (MPR) has remained stable, while annualised yield for the Baitiao portfolio has been on an increasing trend. Fitch has assumed a steady state MPR of 36.2% and a steady state yield of 3.6%.

The agency says that asset performance is underpinned by strong consumption demand in China, steady income growth of consumers and low interest rates.

The capital structure comprises CNY750m single-A plus rated class A notes, as well as unrated CNY150m class B, CNY50m mezzanine and CNY50m subordinated notes. The transaction features a 12-month revolving period, followed by a six-month pass-through amortisation period and a 12-month tail period to the legal final maturity date in February 2021.

A single-A category rating cap was assigned to reflect the short performance history, which is limited to a benign economic environment, the untested operational platform and the lack of a back-up servicer. The rating cap also reflects the fact that pure internet online credit sales is an emerging asset class, as well as the relatively new credit-scoring methodology that relies less on traditional credit indicators and more on behaviour-based data sources. 

Fitch notes that the lack of a back-up servicer and the potential disruption to servicing is a weakness of the transaction – although it benefits from a cash reserve funded at closing, which covers 2.6 months of class A note interest, senior expenses and servicer costs based on the agency’s stressed assumptions. Further, rating triggers to replace the account bank are in line with its criteria.

Bank of China is lead underwriter on the deal and HSBC acted as financial advisor. The servicer is JD Finance, an in-house finance unit of Jingdong Century.

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Structured Finance

Market moves - 3 August

Company developments and new hires in the structured finance sector

Acquisitions
Savills Investment Management is set to acquire a 25% interest in DRC Capital. In addition, the partners of DRC have granted Savills Investment Management a call option to acquire the remaining 75% interest in DRC on the third anniversary of the completion of the initial transaction. Dale Lattanzio, ceo and managing partner of DRC, will join the board of Savills Investment Management on completion. The consideration will be funded from Savills’ existing cash and banking facilities. Subject to regulatory approvals, the transaction is expected to close in 3Q18.

EMEA
Independent Growth Finance has appointed Neil Kindness as asset-based lending director, responsible for developing the firm’s presence in Scotland. Most recently, he was an invoice finance and asset-based lending specialist at Santander for over four years. Prior to this, Kindness also held senior positions at GMAC, GE Commercial Finance and Landsbanki.

François Delattre is set to join Tangency Capital as its new head of analytics. Delattre was formerly an ILS actuary at Hiscox, which he joined in 2014, and before that was an ILS quant analyst at SCOR in Luxembourg.

Fintech report released
The US Treasury Department has released its long-awaited report identifying improvements to the regulatory landscape that are designed to better support non-bank financial institutions, embrace financial technology and foster innovation. The report puts forward over 80 recommendations across the spheres of digitisation, consumer financial data, cloud technologies, artificial intelligence, debt collection, credit models, infrastructure, marketplace lending, payments and regulation. In particular, it notes that estimates for cumulative marketplace lending volumes originated since 2014 total almost US$100bn, about half of which is accounted for by unsecured consumer lending. It adds that the marketplace lending securitisation market has remained robust, having addressed concerns about the fragility of the funding model and the potential for conflicts of interest. Following the release of the report, the OCC announced it will begin accepting applications for special purpose national bank charters from fintech companies engaged in the business of banking.

North America
Churchill Asset Management has recruited Amit Bhatia, Jeff Rabaut and Tarek Srouji as principals and members of its sponsor coverage team, reporting to Randy Schwimmer, senior md and head of origination and capital markets. Bhatia previously worked at Solar Capital Partners, where he was a principal. Rabaut joins Churchill’s Chicago office from Sumitomo Mitsui Banking Corporation, where he was a director in its sponsor origination team. Srouji most recently worked at BNP Paribas, where he served as a director in its merchant banking and loan syndication groups. 

Crayhill Capital Management has appointed Sloan Sutta as md, responsible for helping to source, underwrite, structure, execute and manage asset-based investment opportunities. He brings to Crayhill additional expertise in underwriting cash-flowing assets, structuring asset-based credit facilities and proactive sourcing initiatives. Sutta was previously an md at Och-Ziff Capital Management, where he had responsibility for the private structured credit business within its US structured credit team.

Global Debt Registry has hired Evan Psaropoulos, formerly of Credit Suisse, as cfo and Patrick Dietz, formerly of BNY Mellon, as product director. This follows Charlie Moore assuming the role of ceo, in addition to president of the firm.

Partnership inked
AllianceBernstein has partnered with iCapital Network to provide a white label platform that will enable high net-worth investors at registered investment advisory firms and multi-family offices to access its alternative investments platform. iCapital technology will be used to help the firm simplify access to its alternative investments, streamline the subscription processes and performance reporting, and improve the overall advisor and investor experience for its clients.

Retention RTS issued
The EBA has published its final draft regulatory technical standards (RTS) specifying the requirements for originators, sponsors and original lenders related to risk retention as laid down in the new EU securitisation framework. The rules replace the current Commission Delegated Regulation on risk retention and – as well as specifying that originators retain at least 5% of material net economic interest in their securitisations – include various new provisions, in particular a more principles-based approach to whether an entity has been established for the sole purpose of securitising exposures, clarification that retained exposures may be used for secured funding purposes (providing the credit risk is not transferred to a third party), circumstances under which the retainer should be changed and adverse selection of assets. However, certain provisions from the existing Delegated Regulation were not included, including those relating to due diligence requirements, policies for credit granting and disclosure of materially relevant data. The EBA has also released its final draft RTS setting out conditions for securitisation to be deemed homogeneous, specifying that such exposures need to be underwritten and serviced according to similar standards and procedures, as well as reference at least one homogeneity factor, such as type of obligor, ranking of security rights, jurisdiction or type of immovable property. 

RMBS settlement agreed
Wells Fargo has agreed to pay a civil penalty of US$2.09bn under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), based on its alleged origination and sale of residential mortgage loans that it knew contained misstated income information and did not meet the quality that Wells Fargo represented. The US Justice Department alleges that in 2005 Wells Fargo began an initiative to double its production of subprime and Alt-A loans, including by loosening its requirements for originating stated income loans. It further alleges that, despite the bank’s knowledge that a substantial portion of its stated income loans contained misstated income, Wells Fargo failed to disclose this information and instead reported to investors false debt-to-income ratios in connection with the loans it sold. The claims resolved by this settlement are allegations only and there has been no admission of liability. 

SOFR deal first
Fannie Mae has issued the market's first-ever Secured Overnight Financing Rate (SOFR) securities. The three-tranche US$6bn SOFR debt transaction settled on 30 July. The floating rate notes were offered in three maturities and comprise a six-month tranche totalling US$2.5bn (which priced at SOFR plus 8bp), a 12-month tranche totalling US$2bn (which priced at SOFR plus 12bp) and an 18-month tranche totalling US$1.5bn (which priced at SOFR plus 16bp).

Spanish RMBS boost
S&P comments that the maximum potential rating for Spanish RMBS transactions under its criteria is now triple-A, following the sovereign’s upgrade. The agency has also placed on credit watch positive 217 tranches in 83 Spanish RMBS. Additionally, it upgraded 164 tranches (77.4%), with 34 upgraded to triple-A (six notches above the rating on the sovereign) and five to double-A plus because of counterparty rating limitations. A further 31 tranches were upgraded to double-A because they were not the most senior tranches in their capital structures and their maximum potential ratings were constrained by the application of ratings above the sovereign criteria.

Structured Finance

SCI Start the Week - 30 July

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

A fairly broad range of transactions are in the pipeline although new issuance is leaning towards the light side – not unexpected with the onset of summer.

The only new auto ABS in the pipeline is US$186m United Auto Credit Securitisation 2018-2. Of the non-auto variety there is US$546m SoFi Consumer Loan Program 2018-3.

CLOs saw a light offering too with only one from Europe: €412.05m Ares European CLO X, US$456.4m Cadogan Square CLO XII, $406.3m Steele Creek 2018-2.

Only one new CRE CLO appeared in the pipeline: US$420m BDS 2018-FL2.

In RMBS, only US based deals hit the pipeline: US$248.847m CMLTI 2018-RP3, US$475.342 Homeward Opportunities Fund Trust 2018-1, US$383.45m OBX 2018-EXP1.

Two CMBS also featured: US$333.2m JPMCC 2018-PHH, US$1.2bn BHMS 2018-ATLS.

Pricings

While the pipeline might be light, a number of deals have priced in the past week.

In the auto ABS space, several deals priced with an unusual Greek auto ABS in the form of €101.123m AutoWheel Securitisation. The rest were more familiar: US$1bn Enterprise Fleet Financing 2018-2, US$300m Volvo Financial Equipment 2018-B, US$1bn World Omni Auto Receivables 2018-C.

In non-auto ABS, several deals also priced, including a PACE deal in the form of US$103.57m Cleanfund Commercial PACE 2018-1.  The rest are a mix of credit card, consumer and student loan ABS: US$266.65m CommonBond Student Loan Trust 2018-B-GS, US$900m Discover Card Master Trust 2018-A4, US$750mn Evergreen Credit Card Trust Series 2018-2, US$402.31m Marlette Funding Trust 2018-3. The last is an SME-backed European ABS: €217.4m Valconca SPV.

The CLO universe saw a number of deals also price: US$459.42m Assurant CLO III, US$412.2m Bayfront Infrastructure Capital, US$428m CFIP CLO 2018-1, £335.86m Dryden 63 GBP CLO.  One CRE CLO also priced: US$329.74m M360 2018-CRE1.

A fairly large number of CMBS priced too, all from the US: US$944mn BANK 2018-BNK13,  US$400m BBCMS 2018-CHRS, US$1.04bn Benchmark 2018-B5, US$310m GSMS 2018-RIVR, US$212.5m GSMS 2018-TWR, US$110m NCMS 2018-SOX, US$177mn NCMS 2018-850T.

Finally, several RMBS priced, with one from the UK: US$982.7m CAS 2018-C05, A$505.25m Pepper Residential Securities Trust No. 21, US$379.14m Progress 2018-SFR², £393.1m Towd Point Mortgage Funding 2018 - Auburn 12.

Editor’s picks

Cypriot NPL portfolio markets:  Bank of Cyprus is currently marketing a €5bn, by gross book value, mixed NPL portfolio of secured and unsecured loans, dubbed Project Helix…

Ireland still ‘favoured’ securitisation destination: 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…

Deal news

• Banca Nazionale del Lavoro has closed Juno 1, a €136m securitisation of unsecured and secured NPLs referencing a gross book value of €959.5m. DBRS has assigned definitive ratings of triple-B. The receivables are currently serviced and will continue to be serviced by Prelios Credit Servicing. A back-up servicer, Securitisation Services, has also been appointed and will act as a servicer in case of termination of the appointment of Prelios.

CMBS

ARAs on the rise

Increased stress emerging in CMBS 2.0?

The volume of appraisal reduction amounts (ARAs) in the US CMBS 2.0 universe is on the rise, effecting 111 loans. A significant amount of the exposure is concentrated in North Dakota and Texas, reflecting the stress in the energy sector.

Of the US$3.6bn of CMBS 2.0 specially serviced loans outstanding, US$1.5bn have ARAs. US$229m were initiated in 1H18, compared to US$135m during full-year 2017, according to KBRA figures. Consequently, ARAs as a percentage of outstanding principal loan balance increased to 35% in 1H18 from 28% during full-year 2017.

Based upon the agency’s calculations, the ARA percentage may also be understated, as about 50% of the loans with ARAs in 1H18 appear to have received an ‘automatic’ 25% ARA – which are generally applied if an updated appraisal is not received within a specified time period after an appraisal reduction event. If these automatic ARAs are excluded from the calculation, it estimates that the ARA percentage would increase to 40%.

KBRA suggests that the rapid rise in ARAs may be a harbinger of increased stress working its way into the CMBS 2.0 sector. “As we get further along in the commercial real estate credit cycle, rents and prices have shown signs of slowing and, in some markets, have even declined. While properties were able to take advantage of the rising tide, some are getting caught in the undertow, as a result of additional supply, store closures and other tenant issues,” it observes.

Of the 111 loans with ARAs, more than half (60) have principal balances of US$10m or less. Within this cohort, lodging has the highest count with 42 loans.

However, the average loan balance subjected to an ARA is increasing, standing at US$21.8m through 1H18 - more than double that of the comparable amount for full-year 2017 (US$10.5m). The loan with the highest ARA percentage – which is equal to the loan’s principal balance - is 40 Hart Street, securitised in GSMS 2012-GJ9. The loan became REO in March 2016, following a special servicing transfer in June 2015, and the servicer stopped advancing on the property after making a non-recoverable determination in August 2017.

By property type, lodging accounts for the largest percentage of ARAs at 37%. The Hammons Hotel Portfolio has the largest outstanding ARA of US$60.6m across the CMBS 2.0 universe. The loan was transferred to special servicing when the revocable trust of John Q. Hammons and its affiliates filed for bankruptcy protection.

By state, North Dakota and Texas have the two largest amounts of ARAs outstanding at US$105.3m and US$78.6m respectively. In North Dakota the largest ARA percentage (86%) belongs to Williston Meadows Apartments in WFRBS 2014-C24, while the Holiday Inn Express Snyder in COMM 2014-LC15 has the largest ARA percentage in Texas at 87%.

By vintage, 2014 has the most loans with ARAs (40) and more than 50% of them came from the oil-related regions of North Dakota and Texas. In North Dakota nine of the 13 loans with ARAs are collateralised by multifamily properties, while in Texas six of the nine loans with ARAs have office or lodging collateral.

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