Contents

NPLs

Retention questioned

Call for NPL regulatory differentiation

Questions are emerging over the relevance of risk retention in the context of European non-performing loan securitisations. Given its utility in transferring risk on capital-intensive portfolios, securitisation could play a greater role in resolving Europe’s troubled loan burden if there was regulatory differentiation for such assets.

Vertical risk retention may make sense in terms of originating banks being required to sell the junior and mezzanine tranches of an NPL securitisation in order for the NPL portfolio to qualify for derecognition. However, the realignment of interest achieved through retention that is meant to address agency risk is not applicable under the GACS guarantee scheme, for example.

Alexander Batchvarov, an analyst at BofA Merrill Lynch Global Research, notes that given an originator of a GACS NPL securitisation must transfer the entire NPL portfolio and its servicing, the senior notes are government-guaranteed and the mezzanine and junior tranches are sold, there is no longer any agency risk associated with the transaction from the perspective of the original lender. Nevertheless, the originating bank is still forced to retain a vertical tranche on a pool it has no influence over, representing an additional burden for the bank without tangible benefits to investors. The triple-counting involved in obtaining a GACS guarantee renders the retention requirement nonsensical.

“It’s completely artificial to force banks to retain in these circumstances,” Batchvarov says. “NPL securitisation originators have already recognised losses and incurred significant provisioning penalties on the assets, plus they don’t really securitise the notional value but rather the expected recovery of the portfolio. This is a completely different scenario to regular securitisations.”

Although the GACS guarantee supports NPL securitisation execution, the majority of senior notes in NPL deals are retained. Such GACS tranches are not eligible for repo with the ECB, but can be subject to a bilateral repo with a potentially steep haircut.

With the GACS programme due to expire in September, its extension by six months is widely expected. However, GACS guarantees so far have been designed for NPL portfolios and may not be quite appropriate for UTP loan portfolios, which represent a larger share on banks’ balance sheets.

“UTPs are a different animal to NPLs because they could begin performing again, if restructured. It’s virtually too late to start structuring UTP securitisations under the current GACS scheme and a six-month extension to it in September is unlikely to provide the requisite scope. A new UTP GACS programme would be the best solution,” Batchvarov observes.

The distinction between NPLs and UTPs isn’t fully clear yet to either the market or regulators. Conceptually though, it makes sense to talk about commensurate risk transfer for UTPs - rather than significant risk transfer - and about the relevance of retention.

Batchvarov argues: “As the assets still have upside and the relationship with the borrower matters, they need not be 100% transferred and the originating bank could potentially service them and therefore some agency risk would remain.”

Overall, Batchvarov believes that the current version of CRR is unlikely to be amended to accommodate NPL deals. “Risk retention differentiation should be made for these securitisations, depending on whether the originating bank is the servicer or not, and whether the transaction is backed by NPLs or UTP loans. Unfortunately, the relevant EBA discussion paper on SRT and NPLs came late in the process of the securitisation regulations currently being finalised. So, I don’t expect them to reconsider the regulation of NPL securitisations any time soon.”

He adds: “That’s a missed opportunity, and it is not the only one. Recently, policymakers also missed an opportunity to grandfather the currently LCR-eligible securitisations post 1/1/19 when STS comes into force, and to move STS assets from Level 2B to Level 2A under the recently finalised LCR rules.”

The LCR Delegated Act was finalised last month, without addressing several key industry concerns, including the fact that ABS remain in the Level 2B category, that ABS will only be eligible as Level 2B assets if they meet all of the STS criteria and that ABCP still does not qualify as a liquid asset. The regulation is due to take effect in mid-2020, unless otherwise amended or postponed.

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Structured Finance

SCI Start the Week - 6 August

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

Pipeline
The pipeline was once again dominated by ABS deals last week. A handful of CMBS and RMBS were also announced.

The US$333.33m Ally Master Owner Trust Series 2018-3, US$333.33m Ally Master Owner Trust Series 2018-4, US$1.28bn AmeriCredit Automobile Receivables Trust 2018-2 and US$600m Chesapeake Funding II Series 2018-2 transactions accounted for the auto ABS entering the pipeline. The non-auto ABS were CNY1bn Beijing Jingdong Century Trade Co 2018 Series 1, A$350m CNH Industrial Capital Australia Receivables Trust Series 2018-1, US$300m Insurance Administration Fee Series 2018-1, US$647.7m SoFi Professional Loan Program 2018-C and US$287.33m VSE 2018-A VOI Mortgage.

The newly announced RMBS comprised US$329.69m Sequoia Mortgage Trust 2018-7, US$378.1m Starwood Mortgage Residential Trust 2018-IMC1 and US$786m Towd Point Mortgage Trust 2018-4, while the CMBS consisted of US$672.66m CSAIL 2018-CX12, US$350m GSMS 2018-HULA and US$804.9m UBS 2018-C12. Finally, the US$225.3m HUNT 2018-FL2 CRE CLO also began marketing.

Pricings
Pricing activity appeared relatively subdued last week, as the summer holidays got underway. A mixed bag of ABS, CLOs and RMBS printed.

The ABS new issues comprised: US$375m Citibank Credit Card Issuance Trust 2018-5, US$70.93m New York City Tax Lien 2018-A, €1.47bn Quadrivio SME 2018, US$518.7m SoFi Consumer Loan Program 2018-3, US$259.1m Textainer Marine Containers VII Series 2018-1, US$186m United Auto Credit Securitisation 2018-2 and US$187.62m Upstart Securitization Trust 2018-2. The CLO prints included: US$445m ALM XVIII (refinancing), US$507.2m Benefit Street Partners CLO XV, €509m Cadogan Square XII CLO, US$611.55m Carlyle US CLO 2018-2, €166.3m FT PYMES Magdalena 2 and US$455m Greywolf CLO VII.

The €5bn BPCE Master Home Loans 2018-02, US$466m Homeward Opportunities Fund Trust 2018-1 and A$1.25bn SMHL Series Securitisation Fund 2018-2 RMBS and US$717mn CD 2018-CD7 CMBS rounded last week’s issuance out.

Editor’s picks
Tender saga moves to High Court: The Clifden IOM No.1 tender for the Fairhold Securitisation CMBS (SCI passim) recently entered a new phase when an announcement was posted to the London Stock Exchange stating that Fairhold had gone into administration, with two joint administrators appointed to the task, on 12 July. This was quickly retracted and Fairhold is now seeking a declaration of invalidity in court regarding the appointment of the administrators, with the hearing to start on 8 August…

Deal news

• Beijing Jingdong Century Trade Co is marketing a consumer ABS under the asset-backed notes 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.

Structured Finance

Market moves - 10 August

Company developments and new hires in the structured finance sector

CDOs transferred
Dock Street Capital Management has replaced Deerfield Capital Management as collateral manager of the Knollwood CDO and Mid Ocean CBO 2001-1 transactions. Moody’s has confirmed that the move will not impact its ratings on any of the notes issued by the issuers. For more CDO manager transfers, see SCI’s database.

Effective 2 August, Highland Capital Management has been replaced by Brigade Capital Management and Cortland Capital Markets Services under the sub-advisory and shared services agreements for the ACIS CLO 2013-1, 2014-3, 2014-4, 2014-5 and 2015-6 deals (SCI 22 June). Separately, the deadline for filing, objecting to and voting on the Chapter 11 trustee's plan for Acis Capital Management is 13 August and a hearing to confirm the plan will commence on 21 August. The trustee has filed proofs of claim on behalf of the secured parties. However, unless otherwise instructed and directed in accordance with the indenture, it does not intend to vote, object or submit pleadings with respect to the plan.

EMEA
Structured finance partner Rachel Kelly and counsel Kerry Pettigrew have joined McDermott Will & Emery’s corporate and transactional practice group in London. Kelly was previously a partner at Bryan Cave Leighton Paisner (BCLP) and has particular expertise in commercial and residential real estate, infrastructure and warehouse financing, as well as CLOs, CDOs, credit funds and other structured products. Pettigrew was previously a senior associate at BCLP and has particular expertise in whole business securitisations, structured utility bonds and derivatives.

The Lloyd's Board has given in principle approval to Nephila Capital's plan to form its own managing agency. As such, Nephila Syndicate Management (NSM) will submit an application to the UK PRA to assume the management of Syndicate 2357 in mid-2019. Adam Beatty, currently the active underwriter of Syndicate 2357, will assume the role of ceo of NSM. NSM has also recruited several key new senior hires: Gina Butterworth, who was previously director of underwriting at ERS, will succeed Beatty as active underwriter of the syndicate; Irfan Haq will join in October as director of finance and operations from Occam Underwriting, where he was cfo; Charity Bare has joined as director of risk and compliance, having previously been head of risk at Talbot Underwriting; Sam Drysdale will join in September as head of claims, having recently held the same role at Fidelis; and Salil Parkash will transfer from Nephila's technology team to take on the role of head of IT.

Jan-Peter Hülbert has been named md of True Sale International in Frankfurt. Before that, he was head of asset-based finance - corporates at Raiffeisen Bank International, responsible for consumer assets and trade receivables.

Foreclosure actions overturned
Foreign statutory trusts that acquire delinquent residential mortgage loans are not required to be licensed under the Maryland Collection Agency Licensing Act, based on a recent opinion by the Maryland Court of Appeals, which reverses lower court rulings that called for such licensing. A Mayer Brown client memo notes that according to the opinion, the Act’s plain language is ambiguous as to whether the Maryland General Assembly intended foreign statutory trusts - acting as SPVs in the mortgage industry - to obtain a license as a collection agency. Finding that the original impetus for licensing was to address abuses in the debt collection industry, the court held that the General Assembly did not intend for foreign statutory trusts to obtain a collection agency license under the Act before their substitute trustees filed foreclosure actions in various circuit courts. As a result, the court held that the lower courts improperly dismissed foreclosure actions.

Minority stake sold
Golub Capital has sold a passive, non-voting minority stake in its management companies to Dyal Capital Partners. Golub Capital plans to use Dyal's investment as permanent capital to expand its capabilities to deliver financing solutions to its private equity sponsors and attractive, consistent returns for investors in its funds. All proceeds from the transaction will remain invested in the firm and there will be no change in its strategy, management team, investment team, investment process or day-to-day operations as a result of the investment.

North America
Victor Levy has joined Clifford Chance’s private funds group as a corporate partner in New York. Levy started his career at Clifford Chance, focusing on private funds and structured credit vehicles, and was with the firm for nearly nine years. He rejoins from DLA Piper, where he was made partner in 2015. Levy has extensive experience representing fund sponsors in establishing private equity funds focused on a variety of alternative investment strategies, including performing and distressed debt and loan origination.

Thomas Draper has joined Foley Hoag as a partner in its business department and co-chair of the debt finance practice, based in the firm’s Boston office. Draper represents companies and private equity sponsors in a range of acquisition financing and debt transactions, including asset-based credits and large syndicated term loans. He was previously a partner in the Boston office of Ropes & Gray, where he was the long-time head of its finance group. 

Agnes Xing Chang has been named investment associate, ILS at Ontario Teachers' Pension Plan. She was previously investment associate, alternative investments at the institution and has also worked at CPP Investment Board and the Canadian State Administration of Foreign Exchange.

NPL sale mooted
Banco BPM’s €3.5bn non-performing loan portfolio has attracted interest from DoBank, Fortress, Spaxs Elliott, Christofferson Robb, Davidson Kempner and Prelios. A sale of the assets would bring to an end the Italian lender’s NPL reduction plan. However, in order to speed up its de-risking plan, the bank will consider selling a higher amount of loans and possibly, depending on the amount of sold loans, the servicing platform. The time needed to complete the transaction will depend on due diligence, which typically takes two to three months. 

RMBS settlements agreed
HSBC has reached a settlement-in-principle to resolve the US Department of Justice’s civil claims relating to its investigation of the firm’s legacy RMBS origination and securitisation activities from 2005 to 2007. Under the terms of the settlement, HSBC will pay a civil money penalty of US$765m. Separately, the firm has also resolved the Massachusetts Attorney General’s civil investigation of its legacy RMBS origination and securitisation activities from 2005 to 2007. The firm notes that these resolutions do not preclude litigation brought by other parties and HSBC may be subject to additional claims, litigation and governmental or regulatory scrutiny relating to its participation in the US mortgage securitisation market.

Capital Relief Trades

Second Magdalena deal priced

Santander SME portfolio attracts further investor interest

Santander has completed its second FT Pymes Magdalena risk transfer transaction. The €166.3m CLN references a €2.5bn Spanish SME portfolio and pays three-month Euribor plus 8.85%.

The portfolio comprises a diversified and granular portfolio of Spanish SMEs -including self-employed borrowers - a market where Santander holds a dominant position. Protection has been bought on 95% of the reference portfolio.

The transaction features a 7% tranche thickness and a 1% retained first-loss tranche. It has a 2.5-year weighted average life, one-year replenishment period, a 10% clean-up call and a regulatory call. However, there are no time calls, since the cost of the protection remains stable over the life of the deal thanks to pro-rata amortisation.

The inaugural Magdalena deal, dubbed FT Pymes Magdalena, was a €66.5m CLN referencing a €1bn Spanish SME portfolio that payed 10.4% (see SCI’s capital relief trades database). The tighter pricing and larger portfolio size of FT Pymes Magdalena 2 reflect increased investor interest compared to the first transaction. The strong performance of Spanish SMEs in ABS deals was one driver of investor interest.

The first transaction broke new ground, however, as it was the first synthetic securitisation to be registered on the Mercado Alternativo de Renta Fija (MARF), following amendments to Spanish Securitisation law (SCI 1 June 2017). The amendments allow Spanish securitisation funds to securitise loans and credit rights via derivative instruments.

Following Santander’s acquisition of Banco Popular last year, the lender ended up dominating 25% of the Spanish SME market. Popular’s SME franchise has long been viewed as the strongest in Spain.

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Capital Relief Trades

Risk transfer round-up - 10 August

CRT sector developments and deal news

Banco Comercial Portugues is believed to be prepping a significant risk transfer deal for 4Q18. According to SCI’s capital relief trades database, the Portuguese lender’s last deals were Caravela SME No. 4 and Caravela SME No. 3 in May 2014 and June 2013 respectively.

Barclays is also rumoured to be working on another Colonnade deal for 4Q18, referencing UK corporate loans. The British bank’s last Colonnade deals - Colonnade Global 2018-1 and Colonnade Global 2018-3 - were inked in late June (SCI 2 July).

NPLs

CEE foothold extended

AnaCap acquires its first Slovenian NPL pool

AnaCap has acquired a corporate debt portfolio of performing and non-performing first-lien loans from Nova KBM, Slovenia’s second-largest bank. The acquisition was made via its AnaCap Credit Opportunities III fund, which targets performing, semi-performing or non-performing credit assets across Europe.

This is the firm’s first Slovenian acquisition and further extends its foothold in the CEE region. Private equity funds typically avoid investing in CEE countries - compared to the large markets of Italy and Spain - given limited pipelines and small deal sizes.

Yet, according to an AnaCap source: “Although a low pipeline and deal sizes mean less execution certainty and pricing uncertainty, we don’t need to deploy €500m in a single jurisdiction for deals to be interesting.”

He continues: “We’re also looking for rational pricing. In the more mature markets, such as Italy, you see many investors coming in and pricing deals that cannot be justified by our proprietary data and experience. Often the winning price ends up being one where we will not even be able to break even.”

Denise Hamer, partner at Trace Capital Advisors, observes: “CEE has become interesting to historically West-focused investors because in the market there is a lot of cash chasing yield. Slovenia is particularly interesting because it offers Western-style transparency and legal structure, with CEE-level returns.”

The Slovenian market is dominated by single corporate names, which may further explain the choice of corporate assets. “We prefer credit that doesn’t rely on a full turnaround of the business, so do we opt for collateral,” says the AnaCap source.

Corporates also account for the bulk of the CEE market more broadly, standing at €3.5bn in 2016-2017, according to Deloitte figures.

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NPLs

Project Glas completed

PTSB disposal raises prospects for private dwelling house transactions

Permanent TSB has completed the sale of Project Glas - a €2.1bn (GBV) portfolio of Irish buy-to-let properties and private dwelling houses (PDHs) - to Lone Star subsidiary Start Mortgages. The transaction is seen as a test case for further Irish non-performing loan disposals, due to its size and its inclusion of PDHs (SCI 16 February). Investors have typically avoided the latter assets, due to the lengthy recovery periods involved.

According to Tom McAleese, md at Alvarez and Marsal: “Buy-to-let mortgages are an easier asset class to manage and tend to be quicker to resolve, taking six months to a year on average, using a fixed asset receiver in a non-consensual scenario. PDHs, on the other hand, can take up to seven years in a non-consensual situation.”

A lengthy recovery horizon is an issue for private equity funds, which typically have a three- to five-year investment horizon. The main obstacle to lower recovery periods is the regulatory Code of Conduct on Mortgage Arrears (CCMA), which lays out the requirements for banks dealing with borrowers that have outstanding payments on their mortgages.

The Project Glas portfolio amounts to €1.3bn in NBV terms and comprises 10,700 properties, made up of 3,300 BTL properties and 7,400 PDHs. Average arrears time of loans in the portfolio is 3.5 years (days past due), average arrears value is €28,800 and the average value of a loan is approximately €175,000.

Project Glas was initially unveiled in February with a portfolio size of approximately €4bn. The portfolio, however, was later reduced to €2.1bn after PTSB pulled €900m of split mortgages in May (SCI 18 May).

On Lone Star’s plan, McAleese notes: “It would be interesting to see its strategy. It has bought the properties at a lower base price and so should have more options to resolve these loans. I would also expect it to use a variety of strategies, including consensual restructuring, selected loan sales, legal enforcement (where required), mortgage to rent and maybe securitisation.”

The sale will reduce the overall NPL ratio at PTSB from 25% to 16% and increase the CET 1 ratio by 200bp. The Irish bank has reduced its NPLs by 70% (including the Glas portfolio) since 2013.

Start Mortgages will become the servicer of the loans when the transaction completes later this year.

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