Contents

CLOs

Perfect ingredients

Liquidity boosts Euro CLO pipeline

Increased liquidity and strong demand suggest that the European CLO pipeline will continue to be busy for the rest of the year. Nevertheless, changes in the credit cycle and macro backdrop remain keenly observed.

European CLO market technicals are moving closer towards the US model in terms of providing a greater level of loan market liquidity, according to Sandeep Chana, director, structured credit and CLOs at S&P. “Increased liquidity and strong demand for CLO paper are perfect ingredients for US managers or existing European credit funds to set up European CLO shops. As such, the pipeline for the remainder of the year is anticipated to be busy,” he notes.

Stuart Chapman, director of investment research and analytics at Serone Capital Management, points out that Europe lags the US in terms of credit cycle and macro backdrop. As such, there is a possibility that widening in US loan spreads could flow into technically- rather than fundamentally-driven widening of European loan spreads, which could present opportunities for CLO equity investors. He believes that the trajectory of losses is unlikely to be as severe as in the last crisis, which may give CLO structures breathing room to self-cure over time.

“Cov-lite loans could be downgraded and the downgrades could persist for longer. Should borrowers default, there is likely to be greater variability in LGDs, with some sponsors having extracted value from the business prior to default,” Chapman observes.

He continues: “Double-B and above rated loans are reasonable par assets. For single-Bs with around 7% attachment and thin tranches, if losses are worse than expected and in quicker succession, an impairment wave could hit the market. But diversification and portfolio manager flexibility should insulate CLOs to an extent.”

At present, the interests of European CLO debt and equity investors are currently reasonably well balanced, according to Dushy Puvan, head of Europe CLO origination and structuring at BNP Paribas. “The first quarter of 2018 saw increased supply, followed by a push-back in Q2 and Q3 to tighten up the documentation,” he explains.

He adds: “Deals in Q1 were typically structured with more equity-friendly features, such as par flushing of trading gains, the extension of WAL tests and increased flexibility post-reinvestment period. During Q2 and Q3, debt investors focused on minimising excess cash leaving the deal, which meant that the dynamic parred back to more of a balance.”

Similarly, investor participation has evolved over the course of the year. The first quarter was characterised by tight triple-A spreads, due to robust demand from Asian accounts. Spreads then began to widen, following a macro correction and increased supply, which attracted a broader range of investors.

Chapman suggests that the investor base for senior tranches of European CLOs has bifurcated. “European buyers tend to focus on value versus other non-ECB eligible assets, whereas non-European buyers look at the cross-currency basis, which has weakened since the beginning of the year. Consequently, European buyers are likely to benefit from the recent spread compression.”

Serone Capital Management figures show that 45 managers have so far issued European CLO 2.0 deals, with the top five managers accounting for around a third of the issuance and the top 10 accounting for just over 50%.

Corinne Smith

Capital Relief Trades

Compliance costs

Private securitisations caught by disclosure requirements

ESMA’s regulatory technical standards (RTS) regarding securitisation disclosures (SCI 6 September) are expected to boost compliance costs for private deals, given the tight implementation timeframe of the Securitisation Regulation. Market consensus points to a transition period as one potential fix, but that option is fraught with its own challenges.   

The RTS notes that all securitisations must include items listed in Article 7 of the Securitisation Regulation, including loan level data, investor templates provided in a prescribed format and so-called significant event reports, detailing changes in deals that aren’t included in quarterly reports. Regarding capital relief trades, this could refer to changes in CLN deposit agreements or other relevant documents. The investor template, on the other hand, contains information on portfolio features and the cashflow waterfall.

Bank issuers of private securitisations would have to make this information available to national supervisors besides investors. However, this wouldn’t necessarily involve disclosing information via a securitisation repository. Yet it remains unclear how the information would be made available.

According to ESMA, the RTS details what information should be disclosed and not how it will be disclosed, as the latter will be determined by the Securitisation Regulation. “Private securitisations would require an interpretation of the Securitisation Regulation, of which ESMA cannot provide an authoritative answer. We would recommend the European Commission instead,” it says in a statement.

The EU regulator, however, is more straightforward about public securitisations. “The second sub-paragraph of Article 7(2) stipulates that securitisations where a prospectus has been drawn up - meaning public securitisations - should make the required information available by means of a securitisation repository,” adds ESMA.

The rules caught the market by surprise, since previous legislation did not hint at anything similar. Diligence obligations state that due diligence should be carried out according to Chapter 5 of the Securitisation Regulation, which provides for a generic principles-based approach.

Even more specific disclosure requirements, such as those under the Credit Rating Agency (CRA) regulation, only apply to public deals. All of this changed when ESMA decided that, legally, there is no distinction between public and private deals because the CRA regulation is being replaced by the new Securitisation Regulation.

“This is going to be a big issue because it can make certain information on capital relief trades public to a competitor, such as loan-by-loan data,” says a credit portfolio manager at a large European bank.

Nevertheless, from a compliance perspective, other issuers don’t expect much disruption for synthetic securitisations. “If we are talking about capital relief trades, loan level data are already provided to investors. The only difference now is that there is a mandatory requirement to disclose them to competent authorities,” observes Steve Gandy, md and structurer at Santander Corporate and Investment Banking. However, market sources qualify that the compliance costs do raise the entry barriers for first-time CRT issuers.

Compliance costs remain the most pressing challenge for private securitisations more generally, since there is not enough time to render internal systems consistent with ESMA requirements. Markus Schaber, managing partner at Integer Advisors, notes: “The requirements can be a cost for banks when it comes to conforming existing internal systems with the templates. They would have to adjust IT and reporting systems, which is challenging from a back office perspective, if internal systems cannot conform to the new definitions in the ESMA template.”

Indeed, “this will be especially challenging for legacy deals, since data may not have been collected or if it has, it may not have been uploaded into systems. Furthermore, there is a real question of whether 18 months would be enough to change systems for new deals,” says Salim Nathoo, partner at Allen and Overy.

Similarly, Gandy notes: “If you consider ABCP conduits, we are asked to collect information from our corporate clients that cannot be provided. For example, unlike banks, corporates don’t necessarily collect information on credit impaired borrowers according to the typical banking definition. This raises the risk that we won’t be able to provide financing to our clients, since we would be, theoretically, breaching requirements, if we continue to provide financing without all the required data fields.” 

He adds: “Furthermore, in the case of public ABS deals, it remains unclear how we are supposed to post the information. We understand that the ECB will not adopt the ESMA templates, at least for quite some time. This means we have to incur the cost of complying with two sets of loan data templates by ESMA and the ECB respectively.”

At the moment, market consensus unequivocally points to a transition period as the only visible solution that would grant enough time to adapt to the new rules. “We had a transition period for the CRA regulation, so there’s no reason not to have one for this regulation,” observes George Gooderham, counsel at Linklaters.

The Commission also has the power to propose a transition period, although the process will take time, which means that the RTS won’t be ready by January 2019. According to the ESMA founding regulation (Regulation (EU) No 1095/2010), the Commission has to decide whether to endorse the RTS within three months of the 22 August submission date.

As soon as the Commission adopts the technical standards, the text will be sent to the European Parliament and the Council for an objection period. The objection period typically lasts three months and can be extended by another three months.

A fall-back solution to address this issue can be found in Article 43(8) of the Securitisation Regulation, but it is not the most helpful one. The article stipulates that if an RTS is not ready in time (i.e. by January 2019), market participants must use existing templates as set out in another set of regulatory technical standards relating to the CRA regulation.

Gooderham explains: “This is not a very helpful fall-back because the current templates only need to be completed for public securitisations, whereas ESMA is saying that the new reporting requirements apply to private securitisations as well. Additionally, the current templates only cover certain asset classes, whereas the new reporting requirements apply to securitisations of all asset classes. So how will reporting for those other asset classes work during the interim fall-back period?”

Complicating matters even further is the European Parliament elections next year. Market sources note that the corresponding change in the Commission’s term is troubling because it suggests that there won’t be much impetus to resolve matters.

Stelios Papadopoulos

Structured Finance

ABS lull

European ABS primary market update

The European ABS primary market is seeing a lull in activity, which is leaving some traders uncertain as to what the final quarter of the year will bring.

“I’m seeing a little bit of primary market activity, mostly dealer to dealer or seller to dealer,” says one trader. “It’s pretty quiet; I’m not really sure why.”

The trader mentions that Atom Bank’s UK RMBS deal is turning heads after the challenger bank used a mobile app to originate the loans. “The CLO market seems to keep crunching along,” he continues. “There is also a German auto ABS transaction in the pipeline, although it does not have a size yet and it has not been announced.”

Named PBD Germany Auto 2018, the transaction is arranged by NatWest and Credit Agricole.

Tom Brown

Structured Finance

Heavy supply?

European primary ABS market update

A new RMAC UK non-conforming RMBS has been announced, while the BPCE Home Loans 2018 deal is expected to be sized at almost €1bn. Ford’s latest German Globaldrive auto deal is also attracting some attention in the European primary ABS market.

“The RMAC 2 deal will set the tone for the European ABS market going forward,” says one trader. “There may be a few more RMBS announcements spilling over into next week as well.”

European ABS supply is anticipated to be heavy during October, with a focus on CLO refinancings and resets. “The market has been relatively stable and we have seen little volatility so far,” the trader adds. “We are trading in a tighter range.”

In the secondary market, a few BWICs are out for the bid today.

Tom Brown

CLOs

Double counting

US CLO primary market update

Up to 30 US CLO transactions are being prepped in the primary market this week, with four or five seen in the European market.

“In the US you might have maybe 15 transactions at a time and a couple in Europe,” says one trader. “Twice that number in both markets at this time of year is going to distract investors from anything else.”

China has a holiday this week, which the trader believes has contributed to a recent lull in the fixed income market. However, investors in the US are reported to have a heavy calendar.

“After ABS East, we have seen a better tone to the market,” the trader continues. “Everyone knows we need to get through the current backlog. When you get this amount of new issues coming, there will always be people sitting on the sidelines.”

“The problem is that there is so much to look at that they are not focused on any secondary activity,” the trader concludes.

Tom Brown

Structured Finance

SCI Start the Week - 1 October

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

Conference
SCI’s 4^th Annual Capital Relief Trades Seminar is taking place on 16 October at One Bishops Square, London. Hosted by Allen & Overy, the event will explore how regulatory change is being reflected in deal structures, as well as examine issuance trends and how the market could expand further in the future. For more information on the seminar, or to register, click here.

Pipeline
ABS dominated the pipeline last week across auto and non-auto asset classes. A handful of RMBS and CMBS were also announced.

The auto ABS remaining in the pipeline by the end of the week comprised Canadian Pacer Auto Receivables Trust 2018-2, US$288.22m GLS Auto Receivables Issuer Trust 2018-3, US$1.25bn GM Financial Consumer Automobile Receivables Trust 2018-4 and PBD Germany Auto 2018. The non-auto deals were US$209.5m Elm 2018-2 Trust, US$293.6m JG Wentworth XLII Series 2018-2, US$1.23bn Verizon Owner Trust 2018-A and US$336.6m Zephyrus Capital Aviation Partners 2018-1.

The £572m Elvet Mortgages 2018-1, A$600m-equivalent Pepper I-Prime 2018-2 Trust and US$454.43m Sequoia Mortgage Trust 2018-8 accounted for the newly-announced RMBS, while the US$157.5m BBCMS 2018-BXH and US$576.2m BX 2018-EXCL represented the CMBS. Finally, €410.7m Oak Hill European Credit Partners VII also began marketing.

Pricings
New issue activity was relatively subdued last week, due to the ABS East conference. A handful of deals priced across the ABS, RMBS and CLO sectors.

Among last week’s ABS prints was €640m Purple Master Credit Cards Notes Series 2018-1, while A$750m-equivalent Liberty Series 2018-3 and €2.9bn Roundstone Securities No. 1 accounted for the RMBS. The CLO pricings included €328.57m Adagio V CLO (refinancing), €411.5m Man GLG Euro CLO V and US$604.8m Palmer Square Loan Funding 2018-4.

Editor’s picks
US CMBS 'not fixed': 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…

Deal news

• 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.
• 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. Astra alleges that Goldman made US$70m in gains through breaking the established eligibility criteria on the CDO, as far back as 2006.
• Together has increased its Charles Street Conduit Asset Backed Securitisation 1 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.

Capital Relief Trades

Risk transfer round-up - 5 October

CRT sector developments and deal news

BNP Paribas is rumoured to be readying a replacement trade for a risk transfer transaction that it completed in 2016. Dubbed Resonance II, it references a €5bn portfolio of corporate loans (see SCI’s capital relief trades database).

Dutch pension fund PGGM made a second loss investment in the 2016 deal. The new transaction is expected to close in 4Q18.

RMBS

Automated validation

Mobile app streamlines RMBS underwriting

Atom Bank is readying its debut UK prime RMBS. Dubbed Elvet Mortgages 2018-1, the £571.58m transaction is believed to be the first to securitise loans originated via a mobile phone app interface.

Atom Bank developed the app to streamline the underwriting process by automating validation, allowing it to compete against more traditional lenders. “Atom’s app is not used as a direct origination tool, as applicants cannot apply in this way,” says Duncan Paxman, director of European structured finance at Fitch. “Instead mortgages are all originated via an intermediary, which is a common channel for the UK market. The app is used for managing the lending process after application; it is unique – we do not rate any other transactions where an issuer uses the same technology.”

The decisioning system directly interfaces with fraud databases and credit reference agencies, such that it immediately performs some of the underwriting checks upon the intermediary inputting a new case into Atom Bank's underwriting system. This allows the bank to have quick turnaround times on decisions and reduces its need for significant numbers of case underwriters, according to Moody’s.

Customers can view the status of their case as it progresses through underwriting via the app, as well as view their payment history and receive alerts post-origination. Delinquent customers are contacted via more traditional means, as well as via the app.

Fitch and Moody’s have assigned preliminary triple-A ratings to the class A notes, which are being talked at three-month Libor plus 75bp area. There is also an unrated class Z tranche.

The loans are secured by first-ranking prime residential mortgages - extended to 3,186 borrowers - and the 1.85% WA interest rate is lower than average, even after resetting. Of the fixed-rate portion of the portfolio, 38.59% of the loans will switch to a floating rate in 2020.

The WA LTV of the pool is 71.50%, while 37.20% of the pool has a current LTV between 80% and 90%. WA seasoning is 3.98 months, with 73.40% of the pool originated in 2018.

The majority of the loans are concentrated in the South East region, with 11.1% of the pool concentrated in the London region, which is lower than the average RMBS.

“The underwriting process is fairly similar to traditional mortgage lenders,” explains Paxman, “which is what our ratings are based on. What Atom is trying to do here is have a focus on automation.”

He continues: “[The lender is] able to automate some of the verification process, which frees it from operational constraints and costs. It would be difficult to integrate this approach fully into the whole mortgage application process; so far it is not at that stage.”

Paxman notes that fintech has grown substantially in recent years across multiple sectors, so to see it move into retail mortgages is not unexpected. He adds that increased efficiency gains through fintech will be the focus of every market in the near future.

“How far that change goes remains to be seen. As to whether the app is a one-off: if it proves successful with users, then there’s always the possibility that it will be replicated,” he suggests.

 Atom entered the market in April 2016 and has no branches or physical presence, apart from its headquarters in Durham and a satellite office in London. The lender offers prime residential mortgages and re-mortgaging products to borrowers who are UK residents through two distributors that provide it with a panel of selected intermediary firms (totalling 2,703, as of June 2018).

“Utilising this technology is possible because of its size, but it is not a major market participant, such as Lloyds, Nationwide or Santander; the scale there is not the same,” Paxman observes. “If this technology starts giving online lenders an edge, however, competitors are likely to pay attention.”

BNP Paribas and Lloyds are arrangers on the deal, which is expected to price tomorrow (3 October).

TB

Structured Finance

Market moves - 5 October

New hires and company developments in the structured finance sector

Europe

Apollo Global Management has named Brigitte Posch md, head of emerging markets in London. She was previously global head of emerging markets corporate credit at Barings Asset Management.

Reed Smith has hired Kevin-Paul Deveau as a partner to its financial industry group in London. Deveau joins from Dechert and will focus on advising lenders, general partners, and fund managers on capital call.

ILS

Lutece Investment Management has hired Robert Jardin as head of portfolio analytics, working out of the firm’s Bermuda base. He was previously senior P&C actuarial analyst at Willis Towers Watson. It has also hired Cornell Fox as head of investor relations after having previously been at AlphaCat in corporate development. Fox will join BTG Pactual Asset Management and will continue to be based in Bermuda.

Lending Club founder fraud charge

The US SEC has charged LendingClub Asset Management (formerly Lending Club Advisors, LCA) and its former president, Renauld Leplanche, with fraud for improperly using fund money to benefit LendingClub Corporation, LCA’s parent company that Laplanche founded and for which he served as ceo.  LCA and Laplanche, along with Carrie Dolan, LCA’s former cfo, also were charged with improperly adjusting fund returns. All three have agreed to settle the agency’s charges against them and will pay more than US$4.2m in combined penalties.  The SEC also barred Laplanche from the securities industry. 

Partnerships

IFC and Demica have announced a partnership to unlock as much as US$9.8bn in annual financing for suppliers and distributors in emerging markets, particularly to SMEs. IFC also invested in Demica’s US$25m second round financing, alongside new investor Wyelands Capital and existing investors, JRJ Group, TOMS Capital, and 76 West Holdings.

US

Scott Eichel has joined Barclays as head of securitised products for the markets business. Prior to joining Barclays, Eichel was global co-head of MBS, CMBS and ABS trading and head of US flow credit trading at Natwest.

Cantor Commercial Real Estate has hired Darrel Wheeler as md of CMBS strategy. Before joining Cantor, Wheeler worked as md and head of structured finance research at S&P.

CIFC is expanding its distressed debt capabilities with the addition of four senior executives from Logen Asset Management, including Steven Gendal who will become head of distressed credit funds, having previously been a principal at Whippoorwill Associates. Ian Greenhaus and Abhishek Patwardhan also join CIFC as vps after working at Logen as senior analyst and vp, respectively. Finally, Nick Verma joins the firm as md of business development, after working as md and head of business development at Logen.

EquiFi Corporation has appointed Fred Matera as evp and cio. Matera will oversee EquiFi's capital markets development, securitisation, portfolio construction, and management services, and will be reporting to David Shapiro, EquiFi's founder and ceo. Matera was coo and cio at LendUS/RPM where he co-headed bank operations and was responsible for loan manufacturing processes and external capital raising.

Shrewsbury River Capital has hired Dan Voloshin as md to its investment team. He was previously head of the CMBS secondary trading desk at Deutsche Bank.

Gunther Stein has stepped down as cio and ceo of Symphony Asset Management, although he will stay on at Symphony as chairman until the end of 2018. His investment roles have been assumed by Scott Caraher, head of loans, James Kim, head of research, Jenny Rhee, head of high yield, and Himani Trivedi, head of structured credit. The four are now co-heads of investments and will report to Nuveen cio and head of global investments Jose Minaya.

CMBS approach updated

DBRS has updated its European CMBS rating and surveillance methodology, following the conclusion of its request for comment period. The changes reflect the reclassification of the agency’s large loan sizing hurdles from a predictive model to an analytical tool, the outputs of which will ultimately be used as a component to support the broader analysis conducted to determine a rating.

Investment firm fined

The US SEC has entered an order finding that former Putnam Investment Management portfolio manager Zachary Harrison prearranged with broker-dealers to temporarily sell RMBS and repurchase them at a small mark-up, usually the next business day. By executing the trades at the securities’ bid price instead of the midpoint between the bid and the ask price, as required by SEC rules, his trading had the effect of benefitting the client who purchased the crossed bond to the detriment of the client selling the bond. The SEC order also found that Putnam’s training and monitoring procedures related to cross-trading were inadequate and that it failed reasonably to supervise Harrison. Without admitting or denying the findings, Putnam agreed to reimburse approximately US$1.1m to its harmed clients and to pay a US$1m penalty, while Harrison agreed to pay a US$50,000 penalty and to a nine-month suspension from the securities industry.

Portfolio acquisitions

La Banque Postale has purchased a second loan portfolio comprising 4,600 Dutch mortgages worth around €780m from Rabobank. The loans were originated by Rabobank, which remains the client servicer, and all benefit from an NHG guarantee. The transaction enables La Banque Postale to invest its excess liquidity in an attractive guaranteed loan portfolio, originated by a leading counterpart.

UK Asset Resolution (UKAR) has concluded a competitive sales process for an £860m portfolio of approximately 6,200 UK equity release loans from the legacy books of NRAM, Bradford & Bingley and Mortgage Express to Rothesay Life. UKAR says the overall price achieved for the portfolio is at the “upper end” of the likely valuation range and the mortgages were sold for a price above their book value. No negative-equity guarantee (NNEG) protection is estimated to have adversely impacted the sale price by around £200m, but UKAR still expects to repay approximately £1bn of the government loan. Completion of the sale is expected within the next few weeks, at which point the interest rate swaps held against the mortgages will be terminated, the cost of which is anticipated to exceed the profit on the sale of the loans. The mortgages will continue to be administered by the same company (Computershare Loan Services), providing continuity of service.

Royal Commission interim report

The Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry last week released its interim report, detailing numerous findings from its first six rounds of inquiries. Rather than setting out policy recommendations, the report outlines the circumstances that it believes enabled conduct and governance failures within the financial services industry. Moody’s expects residential mortgage lending underwriting practices will tighten further as a result, which could in turn constrain the availability of credit. The agency also anticipates that regulatory and compliance supervision will become more interventionist and more litigious, resulting in higher penalties than in the past, including significant penalties being recommended in the final report.

SPPI classification service

Moody’s Analytics has partnered with Thomson Reuters Financial and Risk business to offer a classification solution for conducting the solely for payment of principal and interest (SPPI) tests required under the IFRS 9 accounting standard (SCI 15 June). The solution allows fixed income investors to automate SPPI tests for securities in their portfolios by providing data on over 1.2 million corporate, government and structured securities globally. The SPPI data feed is delivered with an open API and can be integrated into an existing client system or accessed via a web portal.

UAE

Intertrust has opened a new office in Abu Dhabi, marking the firm’s second office in the UAE, with another based in Dubai. The new office is led by Patricia 't Hart-van Rooijen, md, UAE and will enable the firm to provide its clients with independent regulatory frameworks and a variety of legal structures including its special purpose vehicle (SPV).