Contents

Structured Finance

Tougher approach

KNF stance puts Polish securitisation on hold

The future of securitisation and closed-end securitisation funds in Poland remains uncertain, following the Polish financial supervisory authority’s (KNF) approximately PLN6.4m (€1.49m) fine against Raiffeisen Polska in September. KNF fined the Austrian bank over its alleged failure in safeguarding securitisation fund assets as a depository bank in securitisation transactions, citing an incomplete register and lack of awareness over the status of fund assets. The move broadens the scope of liability, which could in turn deter depository banks from undertaking future securitisations.

Although no official regulatory response has been issued, the reputational risk from the fine is expected to significantly reduce future Polish securitisation issuance, in terms of both performing and non-performing loan deals. The concern is the potential liability of involved parties.

Pawel Halwa, managing partner at Schoenherr, explains: “The argument put forward by KNF may imply that depo banks should now do their own investigations and not just rely on third-party valuations. If they don’t, they may be held liable if the value of the assets is overstated. This may make it difficult to find depo banks for securitisation funds.”

Most securitisations in the Polish market are executed through closed-end securitisation funds, due to their tax advantages and flexible investment policies. Securitisation funds, for instance, are exempt from corporate income tax.

The funds issue investment certificates in Polish-originated securitisation transactions in order to fund true sale securitisations, as well as acquire and manage loans. They are a highly regulated alternative to more traditional SPVs.

Closed-end securitisation funds represent merely 1.82% of the total asset value of Poland’s PLN284bn investment fund industry. However, securitisation fund assets have grown substantially over the last 12 years from PLN95.9m in 2005 to a peak of PLN5.95bn in 2016, according to the Chamber of Fund and Asset Management. Since 2016, however, securitisation fund assets have dropped to PLN4.78bn and KNF’s tougher approach is expected to exacerbate this downward trend.

Every securitisation fund is managed by a fund manager that is legally required to enter into an agreement with a depositary institution (custodian), which maintains a register of the fund's assets. The depositary must be a Polish bank or a Polish branch of an EU bank and is required to safeguard the assets and track their value.  

However, depository banks have traditionally relied on third-party servicers, such as GetBack, to perform these roles. Servicers invest funds in portfolios that have been initially bought by the securitisation funds and are responsible for loan collections.

GetBack was accused of and is being investigated for inflating loan values and misguiding investors on collections and recovery rates, by issuing bonds to retail investors and investing the proceeds in loan portfolios. The firm eventually was restructured, following its inability to service those bonds.

Raiffeisen is believed to have been fined for allegedly failing in its role as depositary bank for closed-end funds that cooperated with GetBack, although regulators are still investigating the role of market participants - including depository banks - in the GetBack case. The scrutiny extends to the securitisation funds themselves.

Halwa notes: “We see them paying attention to how managers handle portfolios going forward, along with the role of the depository banks.”

KNF is currently investigating closed-end funds, raising concerns in the market, given its track record of revoking fund licences. In 2017, for example, the supervisor revoked the licence of fund manager Fincrea and the same happened with Inventum in 2014.

“Market participants are considering whether managers will lose their license or get fined and the fear is that they will lose their licence,” says Tomasz Masiarz, managing partner at Dubinski Jelenski Masiarz.

The challenge extends to the servicing firms themselves. Until now, for instance, Polish fund managers were not required to establish a back-up servicer. However, they may be expected to do so now, raising the cost of doing business, but also simultaneously protecting investors by safeguarding them from servicer disruptions.

Costs will be particularly acute if regulators force fund managers to insource servicing functions. “KNF would most likely prefer this, but most managers lack the expertise, manpower and overall resources to conduct what they have outsourced to servicers,” says Masiarz.   

Looking ahead, Halwa notes: “The market may look for alternative structures to Polish closed-end funds, although this remains a structure that is safe for banks, due to clear regulations that allow you to treat the sale of loans to a securitisation fund in a tax-beneficial manner. Consequently, setting up funds outside Poland might be one option, although that remains to be seen.”

Stelios Papadopoulos

ABS

Classification clarity

Spanish SME ABS 'first' marketing

Be-Spoke Capital is marketing an unusual, inaugural securitisation, backed by a portfolio of loans to Spanish SMEs and expected to total around €300m, with pricing targeted for early December. Dubbed Alhambra SME Funding 2018-1, Natwest Markets is sole arranger on the transaction while the European Investment Bank is looking to invest €80m in the mezzanine tranche.

Miles Hunt, head of securitised products and alternatives syndicate, NatWest Markets, says that the transaction is a static securitisation of bilateral loans originated by Be-Spoke and made to Spanish SMEs and midcaps, the majority of which are family-owned companies. The maximum loan size is €10m and the businesses span a range of different sectors located across the whole of Spain, although there is some concentration in Catalonia and the Madrid area.

Since the transaction was announced in June, there has been some confusion amongst investors over its classification. Egbert Bronsema, senior portfolio manager at Aegon Asset Management, says he thinks it is “more like a CLO than an ABS as it isn’t a hugely granular portfolio, but it is lumpy with 60-80 loans.”

As a result, he says “there is a lack of granularity on the pool and therefore, unlike an ABS, you can’t look at traditional measures such as CPR and CDR to assess the credit risk - something that you can normally use on a typical ABS portfolio. This makes it difficult to assess the future performance of the portfolio and should therefore be considered as a riskier investment.”

While it has similarities to a CLO in terms of portfolio granularity, with less loans than a traditional Spanish SME ABS, the borrower profile – family owned Spanish SMEs and mid-caps – is not what would normally back a CLO. Additionally, split ratings are also expected on the deal, says Hunt: “Notes will be rated by Moody’s and DBRS. Interestingly, indicating that it is an SME ABS and not a CLO, ratings are expected to differ between agencies. With CLOs, these tend to be the same across agencies because they all use the same methodology, while for SME ABS methodologies are more varied.”

In terms of why the transaction has not yet closed, despite being announced in June, Hunt says it “was thought best to make an early announcement, when the portfolio was approximately 50% of final ramp-up value, given the deal is the first of its kind and Be-Spoke wanted investors to have an early sight of the transaction.  The intervening time has been used to underwrite SMEs and mid-caps which comply with Be-Spoke’s underwriting criteria.”

The time taken from pipeline to pricing is also not unexpected for an unfamiliar transaction and investor needs were taken into consideration. Hunt adds: “Investors wanted more visibility on the portfolio, particularly given the static nature of the transaction. We listened to this and so realised we needed to ramp up further prior to roadshowing.”

Investors are reported to be comfortable with the ratings they’ve seen so far and have taken comfort from the transparency on the transaction. To facilitate this, Be-Spoke has a data room where investors can access a detailed data tape of every loan, as well as anonymised reports from the Spanish credit rating agency, Axesor, which are updated annually.

The vanilla structure of the transaction is also aimed to assuage buyer concerns. “The transaction has been structured to be familiar to investors in SME ABS, so there should not be any issues with the assessment of the underlying credit of the borrowers.  The underlying notes are all based on a template, with the vast majority of loans charging interest at quarterly Euribor plus 690 bps,” says Hunt.

In terms of hurdles the deal faced, the majority of these were met by Be-Spoke Capital as the lending infrastructure is much less established in Spain, particularly compared to the UK and other jurisdictions which have experienced a better recovery since the financial crisis. Due to this lack of infrastructure, Be-Spoke put time into building up a network of relationships with family-owned businesses and developing a personalised approach to lending, as opposed to the anonymous approach taken by online lenders, for example.

By laying this groundwork, Be-Spoke is aiming for this to be one of many, similar transactions and the lender reportedly believes that the universe of potential borrowers is still expanding. With this deal, Be-Spoke has used securitisation as a way of facilitating further lending and it has already begun discussions about another warehousing facility for a second securitisation.  

In line with this, the firm has recently opened an office in London to service the Alhambra portfolio and to act as the hub for future operations, with a view to general expansion and further deals.

Richard Budden

Structured Finance

Financial frontier

UAE poised for securitisation growth

The United Arab Emirates continues to ameliorate investment concerns by introducing new legislation and addressing issues presented by Sharia finance. In an amendment released on 12 November, the government abolished limited liability companies in the Dubai International Financial Centre (DIFC) and introduced new categories of public and private companies as part of a broader initiative in line with international best practices, providing a suitable regulatory framework and creating greater certainty and flexibility for companies. 

“Increased corporate governance is ever present,” says Patricia 't Hart-van Rooyen, md at Intertrust in Dubai. “The UAE wants to be seen as a jurisdiction of choice.”

The recent implementation of the European GDPR and ultimate beneficial owner (UBO) laws has put the UAE on track for “a seat at the global table”, says ‘t Hart-van Rooyen. “The expectation is that this will continue and that a form of levy will be introduced mid-term to comply with international standards.”

Clients planning to do business within the UAE or the region can choose a ‘free zone’ that suits their planned activity. A free zone is a designated area where 100% foreign ownership is allowed and there is no customs duty for import and export of goods. There are over 40 free zones in the UAE, one of which is the Abu Dhabi Global Market (ADGM), the financial centre of the UAE.

Like the DIFC, a corporate service provider is required to be appointed to provide incorporation, a registered office and corporate secretarial services to clients seeking to establish an ADGM entity. Although they offer a similar range of services as the DIFC, the execution is different. For example, ADGM offers a holding company regime, whereas Dubai has an SPC regime.

The main two types of Islamic securitisation in Dubai are Al Taskik and Tawriq. Islamic securitisation is defined as a legal structure that satisfies the requirements of Islamic finance and replicates the economic purpose of a traditional ABS structure, says George SK at STA Law Firm, based in Dubai.

Sharia finance poses a challenge for new investors, but the UAE government has taken regulatory steps towards attracting foreign investment. “With Sharia-compliant law, you have the concept of profit and risk sharing, rather than interest bearing receivables – which is a unique facet in [Islamic] securitisation,” says Cliff Pearce, global head of capital markets at Intertrust.

The concept of a floating charge does not apply in the same way in the UAE and pledges are only enforceable when ‘fixed’. A practical solution to this is to establish an account in the name of the issuer in offshore jurisdictions where floating charges can apply, such as the UK, where a cash sweep from the local SPV structure will be to that account. “For example,” says Pearce, “in an RMBS the security would be documented under UK common law. This effectively adds another layer to the process.”

The securitisation landscape in the UAE boasts a mix of foreign and local investors. “It is not as big a market as Europe and the US, as some of the larger banks do not necessarily have the appetite to be involved in those types of regions,” admits Pearce. “That does, however, create an opportunity for niche banks to have freer range in a less-crowded market.”

He continues: “A lot of construction has taken place recently in the UAE in a short space of time, much of which has been done on short-term finance. Obviously, that will come up for refinancing relatively quickly, which creates opportunities in the market for longer-term securitisation solutions.”

Logistics, transport and energy – particularly renewables in Dubai – are other areas tipped to see securitisation activity in the UAE.

Tom Brown

ABS

Credit clutch

European ABS market update

The European ABS slow-down continues, with prices drifting wider and subdued credit growth across the board. In particular, an aversion to duration risk has emerged this week.

“Credit is headed for the worst year since 2008,” one trader explains. “ABS traders are not used to showing negative figures to their clients. People are reassessing the market.”

In the primary market, FCA Bank is road-showing its €622.46m A-Best 16 auto transaction, which is currently attracting the most attention among market participants. “Most of the year’s pipeline is done,” says the trader. “Deals are going to trickle out slowly as we start winding down to the end of the year. The market is a bit rubbish at the minute.”

Regarding the secondary market, the trader concludes: “Most people are holding on to what they have. They do not want to risk losing what they have made so far.”

Tom Brown

Structured Finance

Bloodbath blues

European ABS market update

The European ABS market has repriced, after taking a hit yesterday when the S&P 500 index plunged by 1.8%. The tone has improved this morning, as traders cautiously return to the market.

“We’re seeing the market repricing after the bloodbath that happened yesterday,” says one trader. “A lot of paper hit the shelf and nobody wanted to trade it; mezz CLO paper was 10bp or 20bp off. It feels more stable today, but not necessarily much better.”

There is currently approximately £100m worth of CLO BWICs out for the bid, which the trader states is likely to limit trading to that sector. Other asset classes are seeing little secondary activity.

In the primary market, Pepper’s Australian RMBS is set to price next week, while the UK government’s Income Contingent Student Loans 2 (2007-2009) deal is expected to price either at the end of the month or the start of December. “People are going to try and rush some deals through in the next few weeks,” concludes the trader. “That’s going to be interesting to watch. Any deals that are set to come will be coming very shortly.”

Tom Brown

CLOs

Hesitant appetite

US CLO market update

US CLO equity and double-B bonds were casualties of the drop in the S&P 500 index yesterday, with bids softening across the secondary market.

“A handful of CLO equity and double-B bonds were out for the bid yesterday and did not trade,” says a trader. “There was some clear hesitation in the market compared with a week ago. Other bids dropped a couple of points, which could be a good buying opportunity for those with cash in hand.”

The trader says that equity prices will need to decline to see a degree of risk appetite returning to the market. “We have started to see a crack in secondary trading finally, although there was a bit of a bounce this morning in tandem with other markets.”

The trader confirms that strong demand remains for new issues and predicts that the secondary market could tighten in the coming weeks if primary supply continues at its current pace. “The next few weeks are a little chopped-up because of the holiday and the conference, but we should see people getting back in their seats,” he says. “We are not done with the year yet.”

Tom Brown

CLOs

Softening activity

European CLO market update

The European CLO market is relatively quiet due to the Thanksgiving holiday in the US, but the pipeline is seeing plenty of supply.

“The market is responding to the amount of supply,” says a trader. “Everything is wider; new issues are also coming in wide. I guess to a small extent the seize-up in equities has affected the market and there has been at least one loan default.”

Secondary market activity has softened. “It is quite soggy,” says the trader. “We are not in an equity bull market anymore, which means that volatility has increased.”

Mezzanine paper is also being offloaded prior to the implementation of the new Basel 4 capital requirements. “The regulation increases the cap demands on mezz CLOs – most banks do not hold mezz CLO positions, but some of them do,” the trader explains. “It is just adding to the volatility. Because the market is weakened, it feeds on itself.”

The trader concludes: “My gut says the market will be soft until the end of the year. To get deals done now, managers will need to be willing to pay up.”

Tom Brown

CLOs

Buyer fatigue

US CLO secondary market update

The US stock market is 400 points down today (20 November) and is being described as an “ugly open”, with the sell-off beginning to unnerve traders. The effects are impacting the US CLO secondary market, as the fatigue of the past year catches up with investors.

“A lot of CLO managers are trying to get deals done, but investors are fatigued by the supply,” says a trader. “Double-B BWICs are down in credit: BWICs this morning traded at wider levels; late ones did not trade.”

He continues: “Many people are holding back after that. Mezz buyers are going to wait and see. Sellers yesterday decided they did not want to hit the bid; I think it will be the same today.”

Triple-A CLO spreads are widening, as well as double-B spreads, in spite of indications last week to the contrary. The trader puts the current market volatility down to “a combination of investment being full-on in terms of supply and high-prolife names moving into junk bond territory – including rumours about Ford.”

The trader suggests that credit is currently set to close the year at 2015/2016 levels, which were overshadowed by the commodities crash.

Tom Brown

Structured Finance

SCI Start the Week - 19 November

A review of securitisation activity over the past seven days

Market commentary
Pepper Group is prepping an Australian RMBS that is expected to include a short US dollar tranche and a euro-denominated pass-through tranche. Elsewhere in the European primary securitisation market, a pair of Dutch RMBS were in focus last week – NIBC Bank’s €476.2m Dutch MBS XIX and Elan Woninghypotheken’s €337m EDML 2018-2 (SCI 16 November).

Ever-increasing primary issuance meant that European secondary market activity remained slow, with some spread widening emerging in the RMBS sector. One trader said that ECB-eligible paper is being prioritised over other issuance (SCI 13 November).

“I do not see why there is not paper in the secondary market, considering the amount of new issue supply,” he commented. “My theory is non-ECB eligible paper is not picking up because people know that the ECB bid will disappear over the next few months.”

There is also concern about the lack of response to the implementation of the STS regime in January. The trader stated that he and many colleagues are “already worried about flows.”

Another trader noted that certain new issue European CLOs are being fast-tracked due to the regulations (SCI 15 November).

Meanwhile, the US CLO primary market saw robust activity – in contrast to the secondary market, which was “a little squishier” (SCI 15 November). A good bid was apparent for double-B CLO paper, whereas preference for triple-B and single-B paper varied from deal to deal.

“What you are seeing in the US is a general wind-down as we get towards the end of the year,” the trader said. “It is difficult to get trades done, unless spreads start to widen significantly.”

The US CMBS primary market also faced a heavy issuance calendar last week, overshadowing secondary market activity and causing risk aversion (SCI 14 November). “We have seen healthy issuance volumes over the past few weeks,” observed another trader. “As far as the markets are concerned, it does not feel as though there is an appetite for added risk.”

Risk aversion was a theme in the US CMBS secondary market as well, due to the volatility seen over the past few weeks (SCI 16 November). “I’m hearing that The Street went into this heavy on paper and they are feeling that quite a bit,” said a different trader. “It seems most buyers are aware of it too – anything behind triple-B is about 23bp back. There’s not much of a bid out there for CMBS 2.0 paper either; not a lot of liquidity in the market.”

Transaction of the week
Standard Chartered has completed a US$297.5m financial guarantee that references a US$3.5bn trade finance portfolio (SCI 14 November). Dubbed Sealane 4, the transaction is a replacement trade for Sealane 3 - which matures in December - and is structured as a dual mezzanine tranche to appeal to a broad base of investors and address the EU Securitisation Regulation’s higher capital requirements.

The junior mezzanine tranche (representing 0.5% to 6.5% of the capital structure) attracts the typical capital relief trade investor, such as hedge funds, whereas the senior mezzanine tranche (6.5% to 9%) targets real money investors. The remainder (0% to 0.5% first loss tranche) has been retained by the bank.

The deal features a weighted average life that does not exceed three months, a 3.25-year replenishment period and a 4.5% cumulative default trigger that brings replenishment to an end if the trigger is breached. Another feature is the early termination of the protection, which will be triggered if the aggregate loss in the portfolio has exceeded the detachment point of the sold tranche (9%).

Moody’s has rated a separate deal to Sealane 4 called Trade Finance Transaction 2018-2 that, however, shares the same portfolio with Sealane 4. The transaction is composed of three rated tranches, which have been retained on Standard Chartered’s balance sheet.

Other deal-related news

• The City of Chicago last month completed two issuances – Series 2018C and 2018D – totalling US$1.3bn through a first-of-its-kind securitisation programme named Sales Tax Securitization Corporation (SCI 13 November). The programme is intended to lower debt service costs without adding to the city’s risk profile.
• The Dutch RMBS market has seen a surge of activity with two new Dutch RMBS transactions marketing, both of which are backed by prime residential mortgages and touted as STS-compliant (SCI 16 November). NIBC is back on the scene after a five-year hiatus with the €476.2m Dutch MBS XIX deal, while also marketing is the Goldman Sachs-mandated €337m EDML 2018-2 transaction from its Elan shelf.
• Banco Santander Totta is in the market with Hefesto STC (Guincho), a €98m securitisation backed by a €481m GBV portfolio of Portuguese non-performing residential, commercial and unsecured loans (SCI 13 November). Most loans in the portfolio defaulted between 2014 and 2017 and are in various stages of resolution.
• Wells Fargo, along with a group of funds affiliated with BlackRock and PIMCO, has reached a settlement to resolve two class action lawsuits in federal and state court over its role as trustee for 271 RMBS trusts created between 2004 and 2008 (SCI 13 November). Under the terms of the agreement, Wells Fargo - which denies the claims in the litigation - will pay US$43m.
• The US Bankruptcy Court for the Southern District of New York last week dismissed an involuntary Chapter 11 bankruptcy petition against Trups CDO Taberna Preferred Funding IV, which Moody’s describes as credit positive because it upholds the basic tenets of non-recourse securitisations and bankruptcy remoteness (SCI 15 November). In June 2017, three investors in the Taberna IV class A1 and A2 notes filed the petition after several failed attempts to liquidate the collateral, but were opposed by the issuer, its collateral manager (Fortress), TP Management and five investors in notes junior to the senior notes.
• The borrower's reasons for appeal in connection with the Quartier 206 Shopping Centre loan (securitised in TITN 2006-5) include new assertions that it does not owe any legal costs. The deadline for written responses to the appeal is 17 December and the oral hearing is due on 26 February 2019. For more on CMBS restructurings, see SCI’s CMBS loan events database.

Regulatory round-up

• ESMA has issued a set of documents that aim to implement the new European regulatory framework for securitisations and help promote STS securitisations, including draft regulatory and implementing standards on the information to be provided as part of an application by a firm to register as a securitisation repository with ESMA, as well as the operational standards and access conditions for information collected and maintained by securitisation repositories (SCI 16 November). ESMA has also published its Final Technical Advice to the Commission on fees to be charged by ESMA for registering and supervising securitisation repositories, as well as further guidance to market participants on its arrangements for being notified of a securitisation’s STS status, such as reporting instructions and an interim STS notification template (pending the development of ESMA’s STS Register in the coming months).

Data

Pipeline composition by jurisdiction (as of 16 November)

Pricings
Last week saw another surge in issuance, with over US$4bn in auto ABS alone pricing on 15 November. Esoteric ABS, CLOs and RMBS added to the mix of prints.

The auto ABS prints comprised: US$1bn AmeriCredit Automobile Receivables Trust 2018-3, US$121.18m CarNow Auto Receivables Trust 2018-1, US$1.01bn Drive Auto Receivables Trust 2018-5, US$297m Flagship Credit Auto Trust 2018-4, US$1.1bn Honda Auto Receivables 2018-4 Owner Trust, US$1.03bn Mercedes-Benz Auto Lease Trust 2018-B, US$96.67m Tricolor Auto Securitization Trust 2018-2 and US$1bn Volkswagen Auto Loan Enhanced Trust 2018-2. The other ABS pricings included US$275m Delamare Cards MTN Issuer Series 2018-1, US$322m Sunrun Athena Issuer 2018-1, US$440m SunStrong 2018-1 and US$1.45bn Taco Bell Funding Series 2018-1.

Among the CLOs issued last week were US$402.5m Barings Middle Market CLO 2018-I, US$373m Crown Point CLO 6, US$716m Harbor Park CLO, US$458m TIAA CLO IV, US$407.5m Wellfleet CLO 2018-3 and US$410.3m ZAIS CLO 11. Finally, the A$750m La Trobe Financial Capital Markets Trust 2018-2 and US$1.3bn STACR Trust 2018-HRP2 RMBS rounded the issuance out.

BWIC volume

Source: SCI PriceABS

Capital Relief Trades

Risk transfer round-up - 23 November

CRT sector developments and deal news

Credit Suisse is believed to be pricing a risk transfer transaction from its Elvetia programme on Monday. The issuer’s last Elvetia transaction was a Sfr300m ticket referencing a Sfr5bn portfolio (see SCI’s capital relief trades database).

Further details have also emerged regarding the pricing of Standard Chartered’s trade finance transaction, Sealane 4 (SCI 14 November). The junior risk was sliced into a senior mezzanine tranche and a junior mezzanine tranche, which were priced at 3.75% and 9.63% respectively.

CMBS

Early warning?

Cov-lite Euro CMBS gaining traction

The influences of the leveraged loan market and non-traditional CMBS investors, along with the competitive pressure that lenders are under, is spurring the emergence of covenant-light loans in European CMBS. However, given the length of CRE loan terms, it will be another couple of years before the performance of cov-lite CMBS can be assessed versus regular CMBS.

Cov-lite loans have been a feature of US CMBS for some time. “This is something we have seen in the US already,” says Mathias Herzog, director at S&P. “There is a lot of liquidity in the market, which has increased the amount of cov-lite CMBS. The CMBS sector in the US is much more active and there is also more competition for loans.”

European real estate finance loans traditionally require the borrower to comply with interest coverage, LTV and DSCR covenants that protect the lender and provide an early warning if the loan is not performing. In situations where these covenants are breached, a cash trap event or EOD is typically triggered, allowing a servicer to take action before the property deteriorates.

Herzog notes: “Covenants were put in place to indicate when LTV had reached unacceptable levels; LTV goes up as property value decreases. These financial covenants were intended as an early warning mechanism to protect against that. However, at the end of the last credit cycle, they did not have the intended effect.”

S&P, for one, does not explicitly penalise loans with no financial covenants in its ratings analysis. However, it also recognises that the presence of these covenants supports prudent lending standards. As such, they represent more of a qualitative factor in its ratings analysis of a CMBS transaction's overall credit quality.

The agency highlights a CMBS that it rated in the summer, where the loan's EOD covenants are triggered if the LTV exceeds 75.8% in year one or if the ICR is less than 1.78x. Based on the agency’s sustainable cashflow and value, the day one ICR was 2.96x and the LTV was 86.3%. However, as it assumes in its methodology that all loans default due to the lack of diversity in transactions and exposure to event risk, the agency says these covenants “serve less of a purpose” from a ratings analysis perspective.

Indeed, S&P’s analysis of the underlying properties helps determine its view of net cashflow and capitalisation rates, which are used to derive a rating’s value. “As a result, financial covenants that are based on market values are less meaningful in the context of our methodology. This also applies to cashflow-based covenants, which are typically based on current and projected cashflow, whereas our methodology is based on our view of sustainable net cashflow,” the agency notes.

Whether the inclusion of cov-lite loans in European CMBS will continue depends in large part on the competition for loans, as well as other market variables. “Because loan terms are currently around 3-5 years or longer, we’ll have to wait another couple of years before we can assess how cov-lite CMBS performs versus regular CMBS. We would then have to do a recovery analysis to be sure of the effects,” says Dennis Sugrue, senior director at S&P.

Herzog concludes: “How cov-lite CMBS will perform will be put to the test at the end of this credit cycle.”

Tom Brown

Insurance-linked securities

Sweet spot

Multi-arrangement ILS vehicle debuts

Brit has launched Sussex Capital UK, the first vehicle to be given permission by the PRA under the UK’s new ILS regime to write general collateralised reinsurance for multiple cedants. The SPV’s multi-arrangement designation enables the vehicle to write a broad range of reinsurance contracts, each written by a different cell but using approved template documents and therefore only requiring post-transaction notification to the regulator.

Via Brit’s distribution network in the London market, the new multi-arrangement insurance SPV (mISPV) will initially focus on property catastrophe coverage, with capacity provided by Sussex Capital (Brit’s Bermuda-domiciled ILS fund platform). Mark Allan, cfo at Brit, comments: “The main challenge in complying with the new regime was the need to ensure that the application submitted to the PRA and FCA met the requirements of the Solvency 2 directive. Because the structure was the first of its kind in the UK, it was necessary to explain to both regulators how our proposal worked and to reassure them that the structure was sufficiently robust; for example, being fully funded in terms of Solvency 2.”

Allan explains that this challenge was met through a process of weekly conference calls and ongoing dialogue with the regulators over a period of several months, during which the PRA and FCA tested and questioned the vehicle application, including the surrounding governance and the pro-forma documentation. “Over time, we were able to get both regulators comfortable that our application met the requirements of Solvency 2 and their other requirements for (re)insurers.”

Initially, Brit plans to transact a small volume of collateralised reinsurance through the vehicle for selected buyers. There is no structural limit to the volume of business or cedants covered, which will be driven by demand as the UK ILS market evolves over time.

“We’re really pleased with the degree of flexibility the vehicle offers,” says Allan, who explains that the vehicle caters for the majority of deals Brit would like to source and execute, sitting in the “sweet spot” of collateralised deals trading through the market.

“It’s taken some intense engagement with a regulator that was collaboratively minded from the outset to get us to this stage,” he adds. “But it does require an investment in time and transparency on both sides.” 

The firm anticipates that further vehicles will emerge in the future. “We know the market has been watching these developments closely and is watching how the UK ILS regime evolves,” Allan continues. “This is a first and I’m sure won’t be the last vehicle – ILS is becoming an integral component of insurance carriers’ risk management strategy and a fantastic way for investors to access this asset class.”

He concludes: “For all the news surrounding ILS, most of the capital remains concentrated in US peak zone catastrophe perils. Market cycles aside, there’s tremendous scope to grow penetration of ILS across insurance lines and emerging risks – cyber being the most talked about. London’s expertise in this arena is particularly strong, so we certainly believe there’s a role for the UK market.”

Tom Brown

Structured Finance

Fixed income head hired

Company hires and sector developments in structured finance

Newmark Group has established an operating committee consisting of key senior managers following the spin-off from BGC announced on the 13 November. The operating committee members are as follows: Lou Alvarado, chief revenue officer, previously senior md at Cushman & Wakefield; Raj Bhatti, cio, previous partner at Kinetix Trading Solutions; Jeff Day, president and head of multifamily capital markets, who worked as ceo at Berkeley Point; Alison Lewis, chief administrative officer, joining from a role as consultant at Real Estate Consulting Services, and Michael Rispoli, cfo, previously evp and cfo at Grubb & Ellis. The operating committee will report to Barry Gosin, Newmark's ceo, and Jimmy Kuhn, president of Brokerage.

Jefferies has hired Fred Jallot as head of fixed income, Europe.  He will be based in the firm’s London office starting 2 January 2019 and will report to Fred Orlan, global head of fixed income at Jefferies. Jallot was recently global head of credit and ABS in Europe, the Middle East and Africa at Nomura.

Structured Finance

CRT tranche downgraded

Sector developments and company hires

Acquisitions

Spruce Finance has been acquired by HPS Investment Partners. Spruce will be headquartered in Houston and maintain its executive and M&A offices in San Francisco. Christian Fong has joined the company as president and ceo after holding a position as co-chairman of the board of directors since early 2017. The transaction took place through Spruce Holdings, a new corporate entity owned by HPS Investment Partners.

Credit event

Scope has lowered its rating on the €145m E tranche of Santander’s Renew Project Finance CLO 2017-1 from double-B plus to double-B, after a credit event resulted in the restructuring of one of the underlying projects. The rating agency affirmed its ratings on tranches A to D of the significant risk transfer transaction, reflecting what it says is a “comfortable” level of credit enhancement from subordination. The credit event resulted in losses of 12bp, which were in line with Scope’s expected severity for credit impairment events in the deal. Nevertheless, it notes that the credit event “signals the fundamental economic weakness of several projects in the reference portfolio, which might suffer similar restructurings over the life of the transaction - particularly if Spanish macroeconomic conditions deteriorated further due to political instability.”

Global hires

Mayer Brown has promoted 34 lawyers worldwide to partner including Merryn Craske who will advise banks, originators and others on numerous securitisation and structured finance transactions in a range of asset classes in the banking and finance practice after being promoted from the roll of counsel. Aaron Gavant was also promoted to restructuring, bankruptcy and insolvency partner in Chicago where he will focus on structured finance workout matters after working as associate at the firm.

Mayer Brown has also promoted 16 lawyers worldwide to counsel and will include: Jim Ancone, promoted to litigation and dispute counsel in Mayer Brown's New York office. Ancone previously worked as an attorney and has experience pertaining to the sale of RMBS, CDOs and other financial products. In the banking and finance department Maria Alevras-Chen, Neal Handa and Miller Smith have been appointed to counsel. Alevras succeeds her previous position as corporate finance attorney to focus on international and domestic financings, including bond and equity issuances, leveraged finance, project finance and structured finance. Handa will work in structured finance and securitisation after holding a position as senior associate. In Charlotte, Miller Smith focuses her practice on structured finance and real estate finance after holding a position as associate. All appointments are effective 1 January 2019.

ILS

AXA XL's reinsurance operation has completed the acquisition of all third party ownership interests in its majority-owned asset management affiliate New Ocean. New Ocean is now a wholly-owned subsidiary within AXA XL's alternative capital business following AXA XL’s reinsurance operation. The firm will now fall under the leadership of Daniel Brookman, AXA XL's head of alternative capital. Brookman joined AXA XL in 2016 as svp of alternative capital and was promoted to lead the team in 2017.

Subprime auto ABS downgraded

S&P has placed its triple-B rating on the class B notes of Honor Automobile Trust Securitization 2016-1 on credit watch with negative implications and lowered its rating on the class C notes to double-C. The agency reports that CNLs have risen to approximately 27.2%, overcollateralisation (as a percentage of the collateral balance) has declined to zero as of 31 October (from 13.4% as of 30 June) and US$1.4m was drawn from the reserve account on the November distribution date to pay down the class A notes so that overcollateralisation would not turn negative. Westlake took over servicing of the transaction from Honor on 1 September, at which time many additional accounts were rolling into default status. This, coupled with Westlake's more standard approach to extensions, has contributed to the acceleration in losses during September and October.

Structured Finance

UK SLABS slated

Sector developments and company hires

EMEA

Eurocastle Investment has appointed Hammad Khan to its board as a non-executive director, increasing its number of directors to six. Khan is a representative of Eurocastle’s largest shareholder, an affiliate of EJF Capital, where he is a senior md and a senior member of the EJF Investments Manager investment team. He joined EJF in March 2013 and is responsible for identifying investment opportunities in the European markets, with a focus on the banking, insurance and specialty finance sectors. He previously worked at Oak Circle Capital in New York as a credit analyst, analysing opportunities within the US RMBS and CMBS sectors.

Global promotions

Weil, Gotshal & Manges has elected 11 new partners and 10 new counsel to start their positions on 1 January 2019. The new partners and counsel are based in the firm’s Frankfurt, London, New York and Silicon Valley offices and include: Shawn Kodes, structured finance partner in New York and previous corporate finance attorney; and Alexander Martin, structured finance partner in London and previously associate at the firm.

Investment strategy launched

Investcorp has launched its strategic capital partners strategy which will focus on minority equity investments in mid-sized alternative asset managers. Anthony Maniscalco has been hired to lead the strategic capital partners business, former md and co-head of Credit Suisse's Anteil Capital Partners business. Investcorp's strategic capital partners business will acquire minority equity stakes in the general partners of established alternative asset managers, including private equity, private debt, real estate, venture capital and hedge fund managers.

Partnerships

Twelve Capital has partnered with Harrington Cooper to distribute its investment products within the UK and in French-speaking Europe. The partnership aims to bring specialised capabilities to a wider group of investors in the region.

SLABS sale knocked

A new UK House of Commons Committee of Public Accounts report finds that the government “received too little” in return for its sale in 2017 of student loans via the Income Contingent Student Loans 1 securitisation. The report notes that loans with a face value of £3.5bn were sold for £1.7bn, equating to a return of only 48p in the £1. While the committee states that it did not expect the government to recover the face value of the loans, as repayments rely on borrowers’ earnings, its own analysis shows that it could have expected to recoup the £1.7bn sale price in only eight years. It adds that the UK Treasury’s willingness to accept offers from investors if they exceed its theoretical opportunity cost of holding the assets “runs the risk of accepting too low a price” and that the government has not convinced the committee that its model of future cashflows provides a good basis for deciding at what price to sell student loans.

US

AE Industrial Partners has hired Marc Baliotti as senior md. Baliotti previously held a role as md at GSO capital partners, Blackstone.

Vista Equity Partners has expanded its credit platform, Vista Credit Partners (VCP), formerly Vista Credit Opportunities, with the appointment of David Flannery as president of VCP. Flannery will advance Vista’s growing credit strategy and extend its capabilities in the alternative corporate credit markets. Flannery joins VCP after having previously held a position as senior md of GSO Capital Partners.