Contents

NPLs

Landmark disposal completed

Project Helix sets optimistic tone for Cypriot NPLs

Bank of Cyprus has agreed to sell a landmark €2.7bn (GBV) real estate portfolio to Apollo dubbed Project Helix. The large size of the deal demonstrates the Cypriot market’s ability to attract large private equity funds and is expected to spur further non-performing loan transactions.

The portfolio will be transferred to a licensed Cypriot Credit Acquiring Company (CyCAC) of Bank of Cyprus. The shares of CyCAC will then be acquired by certain funds affiliated with Apollo.

The net book value of the portfolio stands at €1.5bn and it comprises 14,024 loans to corporate and SME borrowers, secured over 9,065 properties. Funds managed by Apollo will provide equity capital in relation to the financing of the purchase of the portfolio.

The completion of the transaction remains subject to regulatory approvals, including the ECB agreeing to a significant risk transfer (SRT) benefit for the deal and a €450m senior financing participation by Bank of Cyprus.

The portfolio was initially sized at €5bn (GBV), following a €2bn reduction (SCI 27 July). The transaction is the first NPL disposal by the bank and represents a significant milestone in its strategy of improving asset quality through the reduction of NPEs.

Following the completion of Project Helix, Bank of Cyprus’s gross NPEs will be 65% lower than its peak in 2014. Accordingly, the NPE ratio is expected to improve by approximately 10 percentage points and capital ratios by approximately 60bp.

Cypriot NPL issuance has remained subdued, mainly due to the ability of borrowers to disrupt the foreclosure process through injunctions and court applications. A foreclosure bill that was ratified by parliament in July is designed to address these concerns through various measures, most notably by reducing the period by which collateral can be realised from 12 to six months, following the first unsuccessful auction. However, the bill is yet to gain traction, with sources suggesting that the majority of NPL restructurings have been consensual.

The foreclosure law was accompanied by a securitisation law, which enacts additional legislative changes to insolvency procedures and foreclosure mechanisms to facilitate a well-functioning securitisation market. It removes a clause that enables borrowers to delay foreclosure proceedings, reduces the timeframe in which notices are sent out for immediate repayment of outstanding loans and introduces e-auctions as well as the ability of an originator to split mortgages and their underlying security into parts and register them accordingly. According to Moody’s, these changes will further support the predictability of timeliness and rate of recovery from these loans.

Despite having the highest NPL ratio in Europe and a banking sector that holds €22.8bn of NPLs, Cyprus has remained an untested market.

SP

Structured Finance

Market moves - 31 August

The latest hires and company developments in the structured finance market

Acquisition

Moody’s Corp is set to acquire all outstanding shares of Reis in an all-cash transaction valued at approximately US$278m. By combining Reis’s extensive data with Moody’s Analytics’ specialised capabilities, the firm aims to enhance analytical practices in the CRE market and contribute to the efficiency and liquidity of capital flows. Under the terms of the merger agreement, Moody’s will commence a tender offer to acquire all issued and outstanding shares of Reis common stock for US$23 per share in cash. The closing of the transaction is expected to take place in 4Q18.

Carador rollover opportunity

Following a strategic review, the board of Carador Income Fund has determined to offer shareholders the opportunity to vote on an orderly wind up of the company, alongside a rollover opportunity for those who wish to retain an investment in CLOs. After examining various options, the board believes that there is currently no structure available that can accommodate liquidity for non-listed CLO structures and that a further partial redemption opportunity may result in the company becoming sub-scale, with an increased total expense ratio and reduced liquidity. Consequently, shareholders will be able to elect to roll over their holding in Carador shares into Blackstone/GSO Loan Financing (BGLF), which would acquire part of the company's portfolio of CLO assets – subject to regulatory consent and approval from BGLF shareholders. The BGLF board recognises the benefits of such a move for its own shareholders and is liaising with advisers to determine the most practicable method of implementing it. In particular, it notes that the enlargement of the BGLF portfolio potentially increases the fund's asset diversification and spreads fixed costs over a larger pool of assets, thereby decreasing the total expense ratio.

CLOs transferred

PGIM has assumed the collateral management rights and obligations with respect to the TCI-Cent CLO 2016-1 and TCI-Cent CLO 2017-1 transactions, pursuant to an assignment and assumption agreement as of 31 August. Moody’s confirms that the move will not impact any current ratings on the affected notes. Under the terms of the assignment, PGIM will assume all the responsibilities of TCI Capital Management as previous collateral manager.

Europe

Jason Wolfe and Jamie Riley have joined Intertrust’s capital markets business development team. Wolfe has been hired as head of business development, capital markets in the UK, working out of the London office. His past experience includes roles at ABN AMRO Bank, RBS and Cohen & Company. Riley has been hired as associate director and previously worked at HSBC, BNY Mellon and Deutsche Bank.

Santander has hired Colm Corcoran to its corporate investment bank team starting in the first week of January 2019. Corcoran will be working in European ABS trading, focusing on the UK market. His previous role was head of European ABS trading at Société Générale and before that he was an ABS trader at Nordbank.

Exchange path prepped

Freddie Mac and Tradeweb Markets are developing a direct-to-Freddie Mac exchange path for institutional investors related to the single security initiative, which will allow approved institutions to exchange eligible Freddie Mac Gold PC and Giant PC 45-day securities for Freddie Mac 55-day To-Be-Announced (TBA) uniform MBS (UMBS) and 55-day non-TBA MBS when Freddie Mac commences its proposed exchange offer, currently expected in May 2019. In consultation with market participants, the two organisations plan to create a simple, standardised transaction entry point on the Tradeweb platform to submit valid MBS for exchange, accept float compensation and choose a settlement date. Investors would be able to request exchanges through their order management systems' integration with Tradeweb or enter them directly into Tradeweb. An alternative exchange path would be via dealers using Freddie Mac's Dealer Direct portal.

Hedonic default index

Coolabah Capital Investments has developed what is believed to be the first hedonic regression-based indices of Australian mortgage default risk that explicitly control for compositional biases. According to the firm, this is achieved through the models’ characteristic-based independent variables, which include the time since an RMBS transaction was consummated, the weighted average age of the loans and the weighted average LVR. It notes that other measures of mortgage default risk typically use simple averages across pools of assets and are consequently “afflicted by compositional biases that can lead to spurious inferences regarding the direction of default rates”. Sources of bias include changes in the proportion of transactions with higher LTV ratios and the introduction of less seasoned RMBS with a lower weighted-average loan age. Whereas simple average measures of default rates across securitised loan portfolios have declined in recent years, the hedonic mortgage default index implies that compositionally-adjusted default rates have increased sharply.

ILS

Carey Olsen Bermuda has recruited Gavin Woods to its corporate practice as a partner. Woods is currently a partner at Appleby and has over eight years' experience in the Bermuda market, prior to which he worked for Freshfields Bruckhaus Deringer in both London and New York. He specialises in alternative risk financing vehicles, including catastrophe bonds and ILS.

Hiscox Re & ILS has promoted Ross Nottingham to chair of North America, from 1 September 2018, and he will lead Hiscox Re's North American underwriting team and strategy, from London. Nottingham joined Hiscox Re & ILS team in Bermuda as an underwriter in 2012. Before Hiscox, Nottingham spent 12 years as a broker, including seven years at Aon Benfield.

North America

DBRS has promoted Chuck Weilamann to the role of cco. Weilamann previously served as md and head of the US ABS team for eight years at DBRS, working within the global structured finance group. Before joining the firm, Weilamann also served as partner at WoodLake Advisors and as vp at Credit Suisse Securities.

Maples and Calder has promoted Daniel Lee, Anthony Philip and James Reeve as partners in the firm’s Cayman Islands office while Callaghan Kennedy has been promoted to partner in the firm’s Dublin office. Lee joined the firm in 2012, advising on a range of matters including structured finance transactions, Philip has been with Maples and Calder since 2008 advising on CLO and structured product transactions, while Reeve has been with the firm since 2011 and works on structured finance transactions, particularly CLOs. Kennedy joined the firm in 2009 and advises on a range of structured finance transactions, including CLOs and ABS more broadly.

Morgan Lewis has hired Jeff Weinstein and Patrick Lampe as partners to its structured transactions practice. Both Weinstein and Lampe join from Sidley Austin where they were also partners. They will both work out of the Chicago office with partner Philip Russell, who is relocating from New York.

Ratings action settled

Moody’s has agreed to pay US$16.25m in penalties to settle the US SEC’s first enforcement action involving rating symbol deficiencies, without admitting or denying the charges. Moody’s will pay US$15m to settle charges of internal controls failures involving models it used in rating US RMBS and will retain an independent consultant to assess and improve its internal controls. The rating agency will separately pay US$1.25m and review its policies, procedures and internal controls regarding rating symbols. According to the SEC’s order in the internal controls proceeding, Moody’s failed to establish and document an effective internal control structure as to models that it had outsourced from a corporate affiliate and used in rating RMBS from 2010 through 2013. Ultimately, the rating agency corrected more than 650 RMBS ratings with a notional value exceeding US$49bn, due in part to errors in the models. Also, in 54 instances, Moody’s failed to document its rationale for issuing final RMBS ratings that deviated materially from model-implied ratings. In the SEC’s order relating to rating symbols, for 26 combo note securities with a total notional value of about US$2bn, it assigned ratings in a manner that was inconsistent with other types of securities that used the same rating symbols.  

STS-eligible deal marketing

Obvion’s latest Dutch prime RMBS – the €1.08bn Storm 2018-II (see SCI’s deal pipeline) – is expected to comply with the STS framework, with guidance provided around the origination and arrears processes, for example. Rabobank credit analysts note that the pool does not include any loans with an indexed LTV of over 100% and the weighted-average risk weight for the assets equals 36.2%. Notably, in line with recent mortgage origination, the share of NHG mortgages is only 9.6%. The deal is likely to launch next week.