News Analysis
CMBS
US CMBS 'not fixed'
Wave of CMBS litigation may arise from systemic sector problems
US CMBS litigation is currently in the spotlight, with one of the largest ever US fraud investigations looking at a potential conspiracy by employees of Morgan Management (SCI 8 June) to fraudulently obtain US$167.5m of loans, some of which back a number of CMBS transactions. Unfortunately, cases such as these may only become more frequent, with a range of issues in both pre- and post-crisis transactions increasing the possibility of severe losses for borrowers and bondholders.
In May, a federal grand jury indicted four individuals linked to companies controlled by Robert Morgan with conspiracy to commit wire and bank fraud. Allegedly they induced mortgage lenders to issue loans when they otherwise would not have and of greater sizes than they would have, had they had not been misled.
The defendants have also been accused of conspiring to provide lenders with inaccurate information pertaining to the properties, such as false rent rolls and inflated occupancy and income figures. Most of these loans were then sold to Fannie Mae or Freddie Mac and securitised in CMBS transactions, including COMM 2013-CCRE9 and FREMF 2015-K44.
According to John Flynn who, as ceo of CRE Loan Advisers, supports borrowers and investors in CMBS disputes, says there are several other instances where banks/arrangers and servicers have acted inappropriately. He cites the case of the US$9.3m Park Place Student Housing loan, securitised through WFRBS Commercial Mortgage Trust 2011-C4, that's been in special servicing since 2014 as the collateral - a New York student housing property - has never performed as expected.
Flynn says, however, that when the loan was contributed to the trust, certain files were incomplete or missing. Had those deficiencies been spotted earlier - before New York's statute of limitations had expired - a representations and warranties claim could have been filed, potentially resolving the issue.
Another example is the US$20m piece of a US$22.5m loan, securitised through Wells Fargo Commercial Mortgage Trust 2015-C28 against the Flatiron Hotel in Manhattan, which transferred to special servicing last year because of a technical default. This involved the property's potential loss of its liquor license and the termination of a management agreement but, Flynn says, both issues were disclosed by the property's owner when the loan was originated, but weren't clearly disseminated.
Ann Hambly, founder and ceo of First Service Solutions, says a number of issues in CMBS, both before and after the crisis, increase the risk of litigation with a major issue being the conflict of interest between junior bondholders and the special servicers. Most junior bondholders choose the special servicer, giving them decision-making power over the loans, meaning special servicers often have little say or they risk losing their servicing rights.
A lack of proper oversight of the sector and no overarching regulator also means a lack of accountability for the major players, says Hambly. She adds that investors and borrowers often lack expertise in CMBS, don’t know “the right questions to ask” and so miss important details amid the extensive amount of reporting requirements and documentation.
While Hambly mainly deals with borrowers and investors in pre-crisis CMBS, Flynn comments that a number of factors are likely to see newer CMBS transactions suffer. He says that a greater number of CMBS are seeing stretched underwriting, such as increasingly large numbers of interest-only loans.
Furthermore, he feels the trend for CRE CDOs, in the guise of CRE CLOs, is a bad development for the sector, as it increases the credit risk of loans sold into CMBS trusts, which he feels will cause problems down the line.
On a related note, Flynn says that CMBS has fallen into “fewer and fewer hands” since the crisis, particularly with regard to servicers and bank issuers. A prime example, he says, is the acquisition of Wachovia by Wells Fargo in 2010 which it has used, in his view, “to enable bad behaviour.” The bank can do this, he says, because Wells Fargo can play up to about eight different roles in its trusts including roles that conflict with each other such as loan seller, master servicer and trustee.
In agreement with Hambly, Flynn thinks that CMBS lacks regulation, particularly in comparison with other asset classes, with commercial loans not subject to the same level of regulatory protections as found with consumer ABS debt, such as residential mortgages. Flynn says that this only exacerbates the problem of having a lack of overarching regulator and - in agreement with Hambly - a lack of accountability for lenders and servicers.
Additionally, he feels further litigation could arise because most loans are structured not to default during the most common 10-year terms, but defaults could occur when the full amount can’t be refinanced at maturity. He suggests that investors and borrowers in these transactions need to realise that “six-year statutes of limitation apply to loan sale contracts and their protections are weaker at maturity.”
Flynn goes as far to say that there could be higher defaults and losses in CMBS now, than in 2008, because of such “systemic bad behaviour.” He doesn’t think that losses will be a result of struggling sectors – like retail – but will come down to stretched underwriting and the continued unhelpful actions from various parties, “especially servicers” that “don’t care about the interests of bondholders or borrowers.”
A major bone of contention for Flynn, too, is the way servicers operate, which he thinks is rarely in the interest of borrowers or investors. “Under securitisation documents, codes and laws, the servicers must report mortgage sales with breached representations and warranties and defects, and they must report servicing events accurately of course. However, many fail to do so and instead collude with the loan seller (who take profits from loan sales) to hide defects,” he says.
According to Flynn, servicers misreport and hide loan sale defects to protect their options to charge borrowers large fees, pursue personal recourse and to eventually foreclose and take assets. He adds: “Fees paid to servicers under trust documents are paltry by comparison, and no one is watching, so the incentives to cheat are just too great.”
For Hambly, the main issue in CMBS is not so much surrounding the servicer, but the way banks and arrangers operate. “The key thing,” she says, “is that there are only two parties in CMBS transactions with any money at risk. However, the banks and arrangers are essentially playing a game where they give you one pound and get two back. They have no money at risk. The only parties with pounds at risk are the borrower and junior bondholders.”
She continues: “Borrowers are ultimately at the mercy of one asset manager, and some are rogue operators which may not be transparent with the borrower. The junior bondholders have a way to protect their investment because, at the end of the day, they are the ones calling the shots.”
Looking to the future, Hambly says that investors need to realise that an investment in CRE is not just a marketable bond and that they need to do more to understand the complexity of a transaction. She says that she has spoken to senior bondholders that think of CMBS as a bond like any other, which is a “real concern.”
Borrowers, she stresses, “need to know that it will never be a relationship business and they also need to be understand every word of the documentation. Many borrowers may not fully grasp the language involved in CMBS documentation. One word can have a drastic difference to the borrower.”
Hambly points out that problematic pre-crisis deals are starting to come to the fore because a number matured in 2015, 2016 and 2017 with the effects now being felt. She says that “a lot of losses have been passed through these pre-crisis pools and bondholders are seeing major losses, even higher up in the triple As in some instances. This will only continue and so will litigation.”
Hambly also does not think that CMBS has seen any improvements, despite the crisis. She comments: “Honestly I will go on record and say nothing has been fixed at all. Post-crisis CMBS transactions might be doing ok at the moment but there are still a number of issues indicating that the lessons of the past haven’t been learnt."
“A major issue,” Hambly concludes, “is that the banks and arrangers ultimately have all the control, with little to none of the risk, and profit handsomely.”
Richard Budden
26 September 2018 10:56:35
News Analysis
Structured Finance
UCITS constrained
Regulatory impact on mutual fund demand gauged
The impact of the new EU securitisation regulation on mutual funds domiciled in Europe has sparked concern among some US market participants in recent weeks. An estimated 15% of US ABS issued since the beginning of 2017 is believed to satisfy European risk retention requirements and the inclusion of UCITS funds, in particular, under the legislation could constrain demand for US new issues.
From 1 January 2019, the updated EU securitisation regulation will apply to UCITS, institutions for occupational retirement provision (IORPs) and non-EU AIFMs that market alternative investment funds (AIFs) in Europe – three categories of institutional investor that have not, until recently (SCI 3 August), been subject to any risk retention obligations. The regulation stipulates that institutional investors can only hold a securitisation exposure where the originator, sponsor or original lender retains 5% of that securitisation. They will also be required to undertake due-diligence assessments prior to holding a securitisation position and adopt compliance measures for the duration that they hold the position.
Paul Hastings notes in a recent client memo that while classic securitisations will be caught by the requirements, some structures – such as agency CMOs, some whole business securitisations, single-tranche SPV issuances and credit-linked notes - may not constitute ‘securitisations’ for the purposes of the securitisation regulation. The firm adds that significantly, and perhaps deliberately, ‘exposure’ is not defined.
“The lack of guidance to date, at an EU level, as to the meaning of ‘exposure’ in this context indicates that the authorities are unwilling to define how deep investors must drill when establishing whether their indirect holdings of securitisation positions are caught by risk retention requirements. This is not helpful to affected market participants, but may have been intentional as a way of allowing the regulators a certain amount of flexibility as to how they will seek to regulate those holding securitisation positions,” the memo observes.
The regulation stipulates that where UCITS are exposed to a securitisation that no longer meets the requirements, the funds shall “take corrective action”. Similarly, Paul Hastings does not believe that the regulation is prescriptive as to the corrective action a UCITS exposed to a non-compliant securitisation must take – which the firm suggests “creates ambiguity as to the level of action required by a UCITS fund in relation to its legacy non-compliant securitisation positions.” Indeed, it points out the contradiction in the apparent obligation to act (in other words, sell the non-compliant position), but also to act in the best interests of investors (whose interests may not be best served by a sale).
In Paul Hastings’ view, as at 1 January 2019, in practice UCITS should not be required to sell their non-compliant securitisation holdings and they should also be able to purchase non-compliant securitisations that were issued before that date. However, they cannot purchase non-compliant securitisations issued after 1 January 2019 and should a formerly compliant securitisation cease to be compliant after that date, UCITS will need to consider ‘corrective action’.
Meanwhile, as of 1 January 2019, existing AIFs that hold non-compliant ABS should cease any marketing into the EEA. Non-EEA managers seeking to launch AIFs that will hold non-compliant ABS should either not market their offerings into the EEA or consider structural solutions to ensure that their AIFs are compliant, according to Paul Hastings.
“However, as a result of the transitional provisions, it is our view that were a non-EU AIFM to market a non-EU AIF in the EU after 1 January 2019 that was committed to only purchasing securitisations issued before that date, then in theory such an AIFM would not be required to be compliant with the updated risk retention rules,” the firm comments.
The most obvious remedy for the challenges posed by these rules is for US securitisations to be EU risk retention-compliant, but most US ABS issuers typically do not attempt to comply with the requirements. According to JPMorgan ABS analysts, the exceptions include the major US credit card ABS trusts, the SDART and DRIVE auto loan programmes, and the Navient and Sallie Mae Bank private student loan deals.
The JPMorgan analysts identify over 900 UCITS, representing a total AUM of approximately US$725bn, that hold at least 1% ABS. Of these funds, about 50 – with a total AUM of around US$30bn – have a concentration in ABS of over 20%. Based on the distribution of ABS concentrations, the analysts assume about a 5% ABS exposure on average across all UCITS, which would put the total ABS exposure of the funds at roughly US$40bn.
“Depending on the magnitude of UCITS withdrawal - not just the amount, but impact on pricing, if any - from the US ABS market, sponsors may revisit EU risk retention compliance. We expect sponsors will have to consider not just the cost of risk retention itself, but also regulatory/reporting costs and overall pricing/liquidity for their ABS programmes,” they observe.
The analysts conclude: “Given current technical trends/sentiment, we believe that the very deep ABS investor base can readily absorb possible slack in demand caused by the new rules for UCITS and spread concessions for non-EU risk retention compliance, if any, could be the icing on the cake for most ABS investors.”
CS
27 September 2018 12:19:31
Market Reports
Structured Finance
Primary focus
European ABS and RMBS market update
Few BWICs were out for the bid in the European secondary ABS market this week, with light trading activity due to the high volume of selling seen during the summer.
“The Tower Bridge RMBS print moved the market a bit wider, but now spreads are tightening again,” says one trader. “The Tower Bridge senior notes priced at 120bp and are being traded in secondary at around 110bp. The deal has been trading as a bit of an aberration: the timing fell in the summer and the collateral is a little bit weaker than other deals.”
The trader adds that the main focus this week has been the primary market. A slew of non-conforming RMBS are in the pipeline, including a few originated by building societies.
“Investors have had to pay a significant premium because of the new issue spike, driving spreads in for the time being,” he notes.
TB
28 September 2018 12:19:25
Market Reports
CLOs
Weaker pools penalised
US CLO primary market update
The supply of US CLO deals coming off of 2016-vintage refinancings is expected to keep spreads ranging broadly upwards until year-end.
“However, a return of Japanese investors could cause triple-A spreads to tighten - although if and when this will happen is uncertain,” says one trader. “If spreads tighten materially from here, the arbitrage could be threatened and you could see new issue supply increasing.”
Nevertheless, pricing of deals in the primary CLO market appears to be becoming more volatile, as weaker collateral pools compel buyers to focus on top-tier managers. “People are being a little picky,” says the trader. “There is heavier punishment for weaker collateral pools at the moment. Cautious would be the way to describe the tone. I don’t think anyone saw any particular catalyst for change on the horizon.”
TB
27 September 2018 17:32:08
News
Structured Finance
SCI Start the Week - 24 September
A look at the major activity in structured finance over the past seven days
Pipeline
RMBS dominated the newly-announced deals remaining in the pipeline by the end of last week. A handful of CLOs and CMBS, as well as a single ABS also began marketing.
The RMBS comprised US$407.99m CIM Trust 2018-INV1, US$513.9m JP Morgan Mortgage Trust 2018-9, A$491.5m Liberty Series 2018-3, US$662.4m Progress Residential 2018-SFR3 and US$851.58m Towd Point Mortgage Trust 2018-5. US$375m GSMS 2018-3PCK, Key Commercial Mortgage Trust 2018-S1 and US$563m UBS 2018-C13 accounted for the newly-announced CMBS, while US$600m BlueMountain CLO 2018-3 and US$509.25m Oaktree CLO 2018-1 accounted for the CLOs. Finally, Penarth Master Issuer Series 2018-2 also began marketing last week.
Pricings
Appetite for new issue securitised product remained robust ahead of the ABS East conference. ABS and CLOs accounted for the majority of last week’s pricings.
The auto ABS prints consisted of: US$534m ARI Fleet Lease Trust 2018-B, US$1.06bn Ford Credit Auto Lease Trust 2018-B, US$1.25bn GM Financial Automobile Leasing Trust 2018-3, US$300m Navistar Financial Dealer Note Master Owner Trust II Series 2018-1 and US$407.83m Prestige Auto Receivables Trust 2018-1. A significant amount of credit card paper was also available: US$834.29m American Express Credit Account Master Trust Series 2018-8, US$518.68m American Express Credit Account Master Trust Series 2018-9, US$1bn Synchrony Card Issuance Trust 2018-A1 and US$322.3m World Financial Network Credit Card Master Note Trust series 2018-B. The US$809.93m CNH Equipment Trust 2018-B, US$256.79m Consumer Loan Underlying Bond Credit Trust 2018-P2, US$164.1m Massachusetts Education Funding Authority 2018-A, US$548.66m SoFi Professional Loan Program 2018-D and US$500m Trafigura Securitisation Finance Series 2018-1 rounded out last week’s ABS issuance.
The CLO refinancings consisted of: US$831m ALM VII (R)-2, US$568m CIFC Funding 2014-V, US$326.1m Elevation CLO 2016-5, US$673m Goldentree IX, US$368m Neuberger Berman CLO XXIII, US$376.15m THL Credit Wind River 2014-3 CLO, €372.95m Toro European CLO 2 and Zais CLO 1. Additionally, the CLO new issues were: US$556.93m Allegro CLO IX, US$408.25m Carlyle US CLO 2018-3, US$408m Catamaran CLO 2018-1, US$407.20m Crestline Denali XVII CLO, US$458.78m Eaton Vance CLO 2018-1, US$410m Golub Capital Partners CLO 39(B), US$600m Regatta XV Funding, US$509.35m Venture 34 CLO and US$608m Voya 2018-3.
Finally, the US$1.38bn BANK 2018-BNK14 and US$362.6m SLIDE 2018-FUN CMBS priced, together with the £365m Oak No. 2 and A$1.63bn Medallion Trust Series 2018-1 RMBS.
Editor’s picks
Inaugural infrastructure CRT launched: The African Development Bank, alongside Mariner Investment Group, the European Commission, Mizuho and Africa50, has issued a debut US$1bn capital relief trade backed by a pan-African portfolio of loans to infrastructure projects and financial institutions. The transaction, dubbed Room2Run, is not just a first for the AfDB, but also marks the first ever transaction of its kind between a multi-lateral development bank and private sector investors…
Revised NPL templates published: The EBA has published a revised version of its standardised non-performing loan data templates - first published in December (SCI 15 December 2017) - that aim to facilitate NPL sale transactions across the EU. The crux of the changes is a more dynamic and granular recording of insolvency proceedings in an attempt to capture their complex and varying nature…
GACS expansion?: The recent extension of the GACS guarantee scheme is expected to further fuel Italian non-performing loan securitisation issuance (SCI 5 September). However, the programme is unlikely to be expanded to cover unlikely-to-pay (UTP) loans, due to political constraints…
24 September 2018 12:22:08
News
Structured Finance
Funding options
Charles Street securitisation increased
Together has increased its Charles Street Conduit Asset Backed Securitisation 1 (CABS) to £1.25bn through refinancing and increasing the size of the facility. The maturity of the facility has also been extended from January 2021 to September 2023.
The maturity extension is designed to provide substantial depth to the group’s funding profile, increasing the weighted average maturity from 3.3 years to 4.2 years on amounts currently drawn, and up to 4.6 years on a fully drawn basis. Matt Blake, head of treasury at Together, says: “The company operates a strategy where we aim to have three- to five-years maturity in all of our funding lines, to provide certainty of funding as we go through economic cycles. In the last 12 months the company has raised or refinanced over £2.5bn of facilities, extending maturities and providing simplification to the funding structures by aligning facilities more closely to our diverse product offering.”
The company increased its 2024 senior secured notes programme by £150m and refinanced the £255m Lakeside facility in January. “The double-A rated Charles Street, or CABS, programme has been in place for over 10 years and has worked well for this business, demonstrated by its survival through the crisis,” adds Blake. “The execution of the Highfield ABS programme provided the opportunity to restructure the CABS facility and to more closely align it with the public RMBS programme, TOGET1 launched in September 2017.”
Together recently announced its full-year results up to 30 June 2018, showing a 40% growth in originations to £1.7bn - bringing its loan book to a new high of £3bn - and a record profit before tax of £121.7m. “The £525m Highfield ABS, or ‘HABS’, securitisation was launched in June to support the company’s small balance commercial real estate offering. The Delta ABS, or ‘DABS’, commercial bridging programme is another facility which we could potentially look to expand,” Blake continues.
A new senior lender has also been added to the CABS facility, increasing the number of senior lenders to six banks. This is the third senior lender to join in the last four years, demonstrating ongoing support for this long-established programme.
“We are always looking at our funding options to ensure we have the right mix to support the growth of the business. Investors tend to favour repeat RMBS issuers and, if we felt it was an appropriate time to access the RMBS market again, we would consider this. But it is a ‘nice to have’ rather than a must have for Together,” Blake observes.
Finally, the indirect parent company of Together issued £350m senior PIK toggle notes due 2023 at a coupon of 8⅞% cash interest and 10⅜% PIK interest as part of the refinancing of its £220m aggregate principal amount.
TB
28 September 2018 15:24:44
News
Capital Relief Trades
CRT line-up finalised
SCI seminar to assess regulatory threats and opportunities
The line-up for SCI’s 4th Annual Capital Relief Trades Seminar – taking place on 16 October at One Bishops Square, London – has been finalised. With Basel 4 impacting all approaches to the calculation of risk-weighted assets, credit institutions are being forced to optimise their portfolios once again. A major theme of the event is therefore how market participants intend to address both the resulting threats and opportunities.
Hosted by Allen & Overy, SCI’s Capital Relief Trades Seminar explores how regulatory change is being reflected in deal structures, highlighting both issuer and investor perspectives. The event also examines issuance trends, as well as how the market could expand further in the future.
For example, a regulatory overview panel will examine the economic results of four hypothetical transactions under the current Basel environment transitioning to Basel 4, full Basel 4 effective in 2027 using the EBA 2018 baseline, and adverse scenarios. During a panel on structuring considerations, speakers will discuss how the proposed EBA significant risk transfer guidelines will strengthen transaction structures and improve standardisation. The investor perspective panel, meanwhile, will cover the impact of expanding asset types, as well as increasing variation in structural attributes and forms of credit enhancement.
The programme begins with a workshop on credit insurance, focusing on its applications in the context of structured finance. The session includes case studies illustrating how the use of insurance as a financial guarantee in synthetic securitisations can be an attractive solution not only for banks, but also for investors.
Prior to a cocktail reception, the final session of the day presents a macro viewpoint on climate risk and portfolio management. Delegates will be introduced to new approaches for the integration of climate risk metrics into decisioning. The session will show that as data, models and regulatory capital requirements evolve, potential exists for climate risk-driven CRTs.
SCI’s Capital Relief Trades Seminar is sponsored by Arch, Arrowmark Partners, Cadwalader, Caplantic, Chorus Capital, Clifford Chance, Credit Agricole, DBRS, EIF, Fitch, Liberty Specialty Markets, Linklaters, Mayer Brown, Moody’s, Nomura, OSIS, SG, Standard Chartered, Texel and Walkers. Representatives from Barclays, Equilibrium, LibreMax Capital, Mizuho, PCS Secretariat, PwC, Santander and Willis Towers Watson will also be speaking on the panels.
According to attendee feedback, the seminar is “a unique opportunity to meet at once all active participants in the reg cap market.” The event is also “essential to discuss the most recent and relevant topics of the industry.”
For more information on the event, or to register, click here.
25 September 2018 09:07:32
News
Capital Relief Trades
Risk transfer return
Standard Chartered completes trade finance CRT
Standard Chartered has printed its first capital relief trade in three years, dubbed Trade Finance Transaction 2018-1. The bank’s last public trade was a US$135m corporate CLN called Baruntse, which was completed in 2015 (see SCI’s capital relief trades database). It also rolled the Shangren III (Trade Finance) into a new deal in June.
Rated by Moody’s, the latest transaction comprises a US$40m Aaa rated class A tranche, a US$200m A1 rated class B tranche and a US$100m class C tranche. The unfunded CDS aims to transfer the mezzanine risk (from 8.5% to 17%) of a US$4bn reference portfolio to the credit protection provider.
The initial portfolio comprises 17,020 trade finance loans to 1,456 corporate reference entities. Most of the loans are short-term senior unsecured.
Standard Chartered Bank (SCB) is the credit protection buyer, while Standard Chartered Bank Hong Kong is the credit protection provider. The credit protection buyer and provider do not intend to execute the CDS contract, which deems the transaction as non-enforceable.
Moody's notes the presence of a second unrated CDS (the junior CDS), which detaches at 8.5% and shares the same reference portfolio throughout the transaction term.
The deal features a weighted average life that does not exceed 91 days, a two-year replenishment period and a regulatory and 10% clean-up call. As stipulated by PRA requirements, the tranches amortise sequentially.
Unless an early termination event (which includes an early termination of the junior CDS) occurs, the CDS is scheduled to terminate in December 2020. If there are any outstanding unsettled credit events, the CDS maturity can be extended up to the final maturity date in December 2023.
An early termination of the junior CDS will be triggered if the aggregate loss in the reference portfolio exceeds its detachment point.
In terms of geographical diversification, approximately 57% of the initial portfolio is concentrated in Asia and the remainder is in the Indian Subcontinent (20%), Middle East and North Africa (12%), and several other regions. The top five locations are Hong Kong (17%), India (14%), China (10%), Singapore (9%) and United Arab Emirates (5%).
The top five industries in the initial reference portfolio are metals and mining (11%), beverages, food and tobacco (11%), banking (10%), high tech industries (10%) and chemicals, plastics and rubber (10%).
SP
27 September 2018 15:55:19
News
Capital Relief Trades
Risk transfer round-up - 28 September
CRT sector developments and deal news
Santander is believed to be the third capital relief trade issuer readying a commercial real estate transaction in 4Q18, along with Lloyds and RBS.
The lender’s last CRE risk transfer deal was issued in December 2017. Dubbed Red 1 Finance CLO 2017-1, the £87.1m financial guarantee referenced a £916.8m UK CRE portfolio.
The transaction printed alongside two other debut post-crisis UK CRE capital relief trades from Barclays and Lloyds (see SCI’s capital relief trades database).
28 September 2018 12:01:09
News
CDO
CDO misconduct alleged
Goldman Sachs in court over legacy CDO
Astra Asset Management is suing Goldman Sachs over allegations that the bank engaged in misconduct toward investors, including Astra, regarding the collateral securities that secured the notes issued by Abacus 2006-10, a synthetic CDO. Astra alleges that Goldman made US$70m in gains through breaking the established eligibility criteria on the CDO, as far back as 2006.
Astra Asset Management is being represented by Kasowitz Benson Torres and Uri Itkin, partner at the firm, comments: “Goldman Sachs exposed investors to riskier securities than permitted by the contract. If investors had known that Goldman Sachs had no intention of following the contract, then the transaction would not have closed, and certainly would not have closed on the existing terms.”
Astra asserts that Abacus 2006-10 did not comply with contractual eligibility criteria, allowing Goldman to conceal its violations and continue to collect protection payments from investors. Unclear criteria surrounding the eligibility of securities, allegedly allowed Goldman Sachs to take an aggressive reading of the agreements, leading to the dispute.
A preliminary hearing was held on 24 September with the trial set to start mid-2019. Both Astra and Goldman Sachs have appeared in Minnesota state court and submitted position statements.
Astra asserts that putting an ineligible security in place of an eligible one exposed it to risk it had not been compensated for. Goldman Sachs denies any violations and that lack of compensation does not equate to damages.
The bank immediately purchased the remaining collateral securities after the dispute was filed, suggesting that it was aware the supplemental collateral securities did not meet eligibility criteria. Because of the difficulty in examining other synthetic CDOs, it is unclear whether Goldman Sachs is the only bank operating in this manner or if this type of conduct is more widespread.
Astra, along with another investor affiliated with Deutsche Bank, had previously raised its concerns with Goldman Sachs. However, the bank refused to provide any data concerning the violations and informed Astra that it would cease all trading activities until resolving the matter.
TB
28 September 2018 16:45:18
Market Moves
Structured Finance
Market moves - 28 September
The latest hires and company developments in the structured finance market
Canadian pension partnership
Canada Pension Plan Investment Board (CPPIB) announced today that its wholly-owned subsidiary, CPPIB Credit Investments, is broadening its portfolio through new investments in equity tranches of CLOs alongside experienced CLO asset managers. CPPIB Credit’s initial partnership in CLO equity investing will be with Sound Point Capital Management based in New York. CPPIB Credit will invest US$285mn in a newly established investment vehicle used to purchase equity in Sound Point’s CLOs over the next several years.
EBA transparency exercise
The EBA has launched its fifth annual EU-wide transparency exercise which, together with the Risk Assessment Report (RAR) will culminate in December 2018 with the release of 900,000 data points on EU banks, covering capital positions, risk exposure amounts, sovereign exposures and asset quality as well as information on non-performing exposures and securitisation.
Europe
Cairn Capital has hired Chris Cottrell as a senior investment analyst, based in London. Chris will focus on specialty finance and risk transfer and report to portfolio manager, Brandon Kufrin. Prior to joining Cairn Capital, Chris was a vp at Direct Lending Investments. The firm has also has hired Mark Stieler as head of fundamental credit research. Stieler was previously an associate director at GE Capital. Additionally, Cairn Capital has hired Tina De Baere as head of ESG and macro strategy, hiring her from New Bond Street Asset where she was an ABS credit analyst.
Cromwell Property Group has promoted Gwendal Kalkofen to head of real estate finance in Europe. Previously, Kalkofen was capital markets manager at Valad Europe, part of Cromwell Property Group.
ILS
Blackstone has hired Tsana Nobles and Molly Sheinberg with Nobles becoming chief risk officer while Sheinberg will lead Blackstone Insurance Solutions (BIS). Nobles was previously head of global strategy investments at XL Catlin and Sheinberg was a former executive director at J.P. Morgan. Nobles will be responsible for assessing investment and insurance risk while Sheinberg is to lead BIS marketing efforts.
Hiscox has promoted Andrew Dolphin to coo and appointed him to the Hiscox Re & ILS executive team, after leading the whole of the Hiscox Re International teams in London, Paris and Bermuda. He will be based out of London and report to Mike Krefta, ceo of Hiscox Re & ILS.
Kinstellar has hired Denise Hamer to the firm as special counsel. Hamer will join with partners across the firm on the development of Kinstellar’s finance, private equity, NPLs and distressed assets, restructuring and related practices. Prior to joining Kinstellar, Hamer was finance partner with DLA Piper.
Leadenhall Capital Partners has hired Sam Maynard as a senior non-life ILS analyst who will join the firm from Markel International. Maynard has spent just over four years at Markel International, most recently working as an underwriter in the North American property treaty reinsurance team. He will report to Ben Adolph, head of non-life portfolio management at Leadenhall.
Italian NPLs sold
AnaCapFinancial Partners has acquired €225m of Italian non-performing loans across two separate portfolios. A €141m NPL secured portfolio was acquired from Volksbank, primarily comprising SME loans, the majority of which are backed by property in Northern Italy. The second €84m portfolio was acquired from Banca di Pisa e Fornacette Credito Cooperativo and also consists of predominantly secured SME loans, largely collateralised by real estate in Tuscany. Phoenix Asset Management will be appointed special servicer for both portfolios.
LLD reporting solution
European DataWarehouse (ED) has launched a new reporting solution that enables users to prepare and submit ABS loan-level data, investor report data and relevant documentation in compliance with the disclosure requirements of Article 7 of the Securitisation Regulation (EU) 2017/2402. The solution is integrated into EDitor, ED’s web application for the analysis and upload of loan-level data (LLD). The first release of the reporting solution – which supports auto ABS exposures – allows the creation of test deals and the uploading of test files in line with ESMA’s templates published on 22 August (SCI 24 August). Further templates will be rolled out once ESMA releases the final XML schemata.
NRSRO rule amended
The US SEC has proposed rule amendments to codify an existing temporary exemption to Rule 17g-5(a)(3) for credit rating agencies registered as NRSROs and clarify the exemption’s conditions. Rule 17g-5(a)(3) established a programme to provide information necessary to determine a structured finance product’s credit rating to NRSROs that were not hired by the issuer, sponsor or underwriter of the product. Prior to the compliance date for the rule, the Commission granted a temporary conditional exemption for certain structured finance products issued by non-US persons and offered and sold outside the US, and subsequently extended it. The public comment period will remain open for 30 days, following publication of the proposing release in the Federal Register.
US
Freddie Mac has promoted Robert Koontz to svp, overseeing the firm’s reorganised mulitifamily capital markets department, which has merged with multifamily investments and advisory and multifamily research and modeling. In his new role, Koontz will oversee these areas, while continuing his core responsibilities, including pricing, structuring, investor relations and sales, and securitisation. He has been with Freddie Mac since 2008, working within its first multifamily structured finance team.
Halcyon Capital Management has appointed Philip Raciti as head of US performing credit and portfolio manager. Raciti will be based in New York and report to cio Jason Dillow and head of credit Brian Yorke. Raciti will focus on the day-to-day management of the US senior loan portfolios for the firm across both CLOs and separately managed accounts. Previously, Raciti was a senior md and portfolio manager at CVC Credit Partners.
28 September 2018 16:01:59
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