Contents

CDS

Sears CDS 'torpedo' attempt

Credit event manipulation casts new shadow on instrument

After filing for bankruptcy earlier this year, Sears is now at the centre of a high-profile saga in relation to credit event manipulation affecting its associated CDS. Various tactics have now been employed by interested parties to prevent the firm’s liquidation, which could reduce any pay out on the CDS, raising further questions about the instrument’s viability.

Brian Guiney, of counsel at Patterson Belknap, comments that the Sears CDS saga began on 9 November when, in the days leading up to its bankruptcy, Sears publically sought permission to auction certain medium-term notes (MTNs) issued by Sears Roebuck Acceptance Corp (SRAC).  On 14 November, Cyrus Capital objected to this, claiming it would be increasing the pool of defaulted securities for which sellers of credit protection, like Cyrus, would have to cover when the loss percentage is determined at auction which, they argue, isn’t in the best interest of the SRAC bankruptcy estate.

The motion by Sears to auction the MTNs was, however, approved, despite the “troubling implications of allowing the subject of credit protection to openly attempt to manipulate the CDS market in which it is not itself a direct participant,” says Guiney.

Guiney notes, however, that the approval order also states that the MTNs are not being sold free and clear of any liens or claims of SRAC and that nothing in the order will impair or prejudice any rights, claims or defences that SRAC or its estate may have in connection with the MTNs. He suggests that this therefore constitutes a “partial victory” for Cyrus, because it preserves any defence to payment of the MTNs that SRAC or its estate/creditors might wish to assert in future.

Assia Damianova, special counsel, at Cadwalader, Wickersham & Taft suggests that Cyrus Capital is under most scrutiny in terms of credit event manipulation: “In deploying such strategies,” she says, “Cyrus has been accused by other market participants of trying to torpedo the CDS auction, by making the Sears notes issued by the CDS reference entity undeliverable.”

Damianova adds that it appears to be an opportunistic approach from Cyrus, done with the hope of either stopping the notes of the reference entity from coming to market, or changing the terms to make them undeliverable in a CDS auction. The issue with such an approach, she adds, is that it may hinder the functioning of an otherwise useful instrument for both buyers and sellers of protection.

As a result, this is another instance that shows that buyers of CDS need to be very wary about the influence particular, significant investors in the reference entity can have, if such investors also have CDS positions. In this instance, adds Damianova, Cyrus is an investor and a reported seller of protection so it would have a vested interest in enticing Sears to make the notes in question unavailable for the CDS auction.

Additionally, she notes: “Cases like this question the viability of single-name CDS and investors will certainly look at this and ask what the value of paying for protection under a CDS is, when investors feel they won’t receive a pay out at the end anyway.”

However, while such tactics erode confidence in the product, there may be limited options available to prevent similar, future occurrences, although Damianova suggests that “regulation may be a way forward”. She says, however, that the moves by firms to influence CDS outcomes aren’t illegal, unless there is a basis to say that certain firms are manipulating the market and influencing the price of some listed securities, which “doesn’t seem to be the case” with Sears.

Regardless, the impact on the sector isn’t positive. She concludes: “if you end up with an unrealistic price of deliverables in this way, it does distort the wider CDS market. It creates a great deal of uncertainty around the outcome for the particular credit event and the resulting auction and more broadly for the efficacy of single-name CDS.”

In the latest update, the credit derivatives determinations committee (DC) has resolved to select Andy Brindle and Charles Whitehead as external reviewers. In addition, the DC Secretary randomly selected Jeffrey Golden as an external reviewer, and Don Thompson and Athanassios Diplas as first and second alternates respectively, in accordance with the DC rules.

Richard Budden

CLOs

Reaching capacity

New CLO managers continue flocking to Europe

Seven new CLO managers are warehousing assets, with European CLO platforms ready to issue in 1Q19. Most of the new entrants are US managers expanding into Europe, but the increasing number of managers has sparked concerns that the European market may be reaching capacity.

This year in Europe, five new CLO managers have priced deals, adding to the 35 existing European managers. In 1Q19 that number is set to rise to 47, as another batch of new managers enter the market - not including an additional six that have previously issued deals but did not print in 2018. The total number of the European CLO managers therefore has the potential to rise above 50 in 2019.

Five out of the seven managers waiting in the wings are US asset managers that have either set up a platform from scratch or have built out a natural extension from a pre-existing European team. “I think a lot of it stems from the fact that money was obviously raised for risk retention, which then subsequently wasn’t needed in the US anymore, so they had some spare capacity to put to work,” says Marcus White, senior investment analyst at Prytania Asset Management. “It does tend to be a natural extension for a lot of these guys, who have feet on the ground already and do loan/bond investing in Europe, as well as the US.”

Of the five new managers that entered the market this year, four of them fit this description, whereas the final manager is a European platform with a US CLO unit as well. White says: “The other category of CLO managers in Europe are somewhat similar to us in that they are an investor in CLOs, which, over time, decide to launch their own CLO platform.”

A part of the reason that CLO managers are holding off until 1Q19 to enter the market is because of the widening in spreads, particularly in the last quarter of the year (SCI passim). “Loan and bond spreads through to November 2018 were not widening aggressively, while CLO liabilities were. First-loss CLO warehouse investors were therefore forced to sit on their warehouses, with the thought that if they did need to liquidate them, they would be liquidating them above where they were initially purchased,” White suggests.

The fourth quarter has so far been a difficult time to print CLOs and many investors may have already reached capacity on certain CLO managers.

The STS due-diligence regulations are also influencing the decision to delay issuance. “They do not want to be the first one out the gate in 2019,” says White. “They want to wait for a few of the bigger guys to go first to see what they have to abide by and how enforced the regulations will be.”

Natixis, Brigade Capital Management and HPS Investment Partners were new-entry managers in Europe in 2017. This year brought Permira Advisers, Voya Investment Management, Anchorage Capital Investment Management, King Street Capital Management and Invesco into the European CLO fold. Among the seven waiting on the sidelines are Insight Investment, CIFC Asset Management, Fair Oaks Capital, Napier Park Global Capital, Sound Point Capital Management and Credit Value Partners.

“I would think we are getting close to capacity, but at the same time variation is a positive,” White notes. “Another question is: are these managers going to be able to find enough collateral to put into the CLOs themselves? That is why we have not had the same explosion of CLO issuance that the US has seen. It could be the case that some of the bigger firms doing three CLOs per year are now only able to do two, whereas everyone else can only do one.”

He adds: “It is not really the number of managers which drives CLO volume, it is the underlying collateral. And if that is not there, then there will simply be more managers scrambling around for the same collateral.”

White suggests that this dynamic could reduce the arbitrage, if collateral is purchased at tighter and tighter spreads.

Meanwhile, tiering is notable between managers - although not yet as significant as in the US. “Bear in mind, there have been no defaults in Europe, so it is a little harder to differentiate performance. If we start seeing more defaults moving forward, then the differences and subsequently tiering will become more apparent,” White observes.

Newer managers are printing wider than more popular managers. The likes of Invesco and King Street printed their triple-As at 102bp and 103bp respectively, whereas bigger managers such as PGIM and Oakhill printed in the mid-95bp this year.

White says his firm will certainly consider the offerings of the new managers, while noting that it has always been “extremely selective”. “We do not write them off before they have a deal or two under their belts. It depends on what is driving the new platform forward and how their incentives are aligned. If they have experience managing a CLO structure through a credit cycle, then we are interested.”

He adds: “We also try to get a feel for their trading activity and their knowledge around individual credits - there are a huge variety of aspects we score them on. It is particularly important for these managers to understand the different market dynamics in Europe versus that of the US, especially if it is a US manager opening a European CLO platform.”

Prytania is waiting for spreads to widen in European CLOs, hoping that the market catches up to US spreads before investing further. “Double-Bs are in the mid-600s right now, whereas we have been investing in US double-Bs at the low- to mid-700s,” says White. “That is largely the same story across the stack.”

In terms of the percentage difference in the stack from where they were in Q1, double-A and single-A spreads have moved the most because they had tightened so much in Q1. Prytania has been sheltering from recent spread widening in selective triple-A CLO investments. However, the increasing relative value moving down the stack - particularly in double-As and single-As - is beginning to capture its attention.

Looking ahead, the expectation is for similar levels of European CLO issuance in 2019 to this year. White concludes: “Our base case is that we do not see the European credit cycle ending in 2019. The interesting part will be to see what happens in Q1, considering certain macroeconomic factors pushing market sentiment weaker versus the buyer base having fresh capacity or appetite to put to work. Perhaps we could stay in a similar spread range to where we are now. I think it would be more the case of the status quo.”

Tom Brown

Structured Finance

Activity upsurge

European ABS market update

The European primary and secondary ABS markets are seeing a surge in activity, due to uncertainty over the next quarter.

“After the high volatility last month, I was expecting a slow-down,” says one trader, surprised by the activity.

He suggests that market ambiguity around the next quarter is driving it. “The consensus is that things will only get choppy from here on out.”

Six to seven BWICs have hit the market, with one ABS/MBS list boasting over 80 line items. “Most of the bonds seem small and scrappy, so they might not do too well,” says the trader. “We have been trying to pick up cheap bonds where we can and moving them around, but we are not taking big risks at this stage.”

In the primary market, the trader comments that the CLO pipeline seems “never ending.”

Away from CLOs, the trader provides some insight into the performance of the government’s second student loan ABS. “The deal has done well and is oversubscribed across all tranches,” he explains. “It was a good deal from a pricing perspective and the collateral is a lot cleaner compared with the first Income Contingent transaction the government issued.”

Finally, Bank of America Merrill Lynch has announced a €475m two-loan CMBS secured by German real estate called TAURUS 2018-3 DEU, with pricing targeted for the week commencing 10 December. One of the loans is backed by the office and hotel component of the Squaire, located at Frankfurt airport.

Tom Brown

Structured Finance

Bid scarcity

European ABS market update

A major UK bank is focusing efforts of European NPLs in the coming weeks, as spreads continue to widen in the CLO and ABS primary markets.

“We are running a few private processes, which are keeping us busy, and we will hopefully conclude them over the next couple of days,” says a trader.

The trader comments that STS regulation will almost certainly cause a gap in CLO issuance in 1Q19, but remains positive for the overall sector. “That said,” says the trader, “we are ending the year in some pretty horrendous spread territories, so the arbitrage does not look great at the moment.”

Nevertheless, CLO issuance is set to be busy in the first two quarters of 2019. “Spreads have only gone one way since January this year – wider,” the trader continues. “Let’s hope it’s a different picture next year.”

Activity in the European secondary market has been on the slow side, with most traders looking forward to the new year. “No-one is really putting any active bids out there because they don’t want to add risk. But if a client wants to ask for bids, people are happy to work with them. If anything, I think people want to run inventory-light right now,” the trader concludes.

Tom Brown

CLOs

Print and sprint

US CLO market update

US CLO BWIC activity is booming ahead of tomorrow’s market holiday in honour of former president George H.W. Bush.

Bid-lists have mainly been triple-A oriented, whereas demand for triple-B bonds has faded. Double-B bond prices are 1.5 points worse off.

“People are re-evaluating double-B bonds based on market value (MVOC) and are focusing on high quality,” says one trader.

In the primary market, meanwhile, CLO issuance has been pushed back due to the current market climate. “We are kind of in the reverse to Europe,” says the trader, referring to a recent surge in European CLO new issues.

“Arbitrage is pretty weak. Secondary loans are trading at their lowest levels in two years,” the trader explains.

He continues: “That means managers are now able to set up portfolios very quickly compared with regular CLOs. They are bringing ‘print and sprint’ deals, which are very opportunistic.”

This opportunity could persist into 1Q19 if prices remain wide. “If they sell off too much, the market will just shut down,” says the trader. “That is possible, but unlikely. With that and the leveraged loan sell-off, people are likely to pay more attention to the end of the credit cycle.”

Three deals issued last week pushed issuance over record volumes for CLOs, leaving the market “a little on the soft side.” The trader concludes: “The market is in price discovery mode right now. People are picking their spot and trying to stay up in quality.”

Tom Brown

CLOs

Cheaper deals

European CLO market update

The European CLO market seems stronger than it was last week, but still relatively volatile.

“I suppose good managers get deals done; I think that’s the bottom line,” says a trader. “For managers that are perceived to be worse, it is harder now.”

He continues: “November was an expensive month to price new deals in Europe. We saw some opportunities due to that, meaning cheaper deals.”

A notable gap has opened up between triple-A and other tranches, particularly relative to double- and single-As. Triple-As currently have a lower spread and a higher price.

This trend is expected to continue into 1Q19. “As far as I know, no-one is predicting a large snapback next quarter for spreads,” says the trader. “The macroeconomics are just less certain than they were this time last year.”

He concludes: “The European market is a little scratchier than the US market. Some deals are still pricing reasonable strongly, but we have seen the occasional cheap transaction, which is an indication that certain managers are struggling a bit more in Europe.”

Tom Brown

CLOs

Deals pulled?

US CLO market update

Several US CLO deals are believed to have been pulled from the pipeline and pushed back to 2019, amid growing concerns over market conditions.

“What we are trying to do right now is to gauge customer demand,” says one trader. “We are trying to find out what our customers want and at the moment we are not getting much information from them.”

Price discovery has been difficult over the past few weeks, as the trading schedule has been broken up by market breaks. Volatility in the stock market also appears to be trickling down into the securitisation market.

CLO spreads are significantly wider in the secondary market. Covers on triple-A tranches are in the high-120bp to mid-130bp. Single-As are as wide as 170bp, whereas lower tranches have been seen at 230bp.

Tom Brown

Structured Finance

SCI Start the Week - 3 December

A review of securitisation activity over the past seven days

Market commentary
European ABS activity remained subdued last week, with spreads drifting wider, due to concentration of supply (SCI 29 November).

“Investors are using their leverage to dictate terms and push deals as wide as possible. That’s one of the reasons why the pipeline has been brought forward,” said one trader.

He added: “If a deal is struggling, an investor can offer to push it over the edge. If a deal is oversubscribed in the primary market, they can make it price wide.”

In terms of newly-announced deals, the A$750m-equivalent Pepper Residential Securities Trust No. 22 RMBS was in focus due to its euro- and Aussie dollar-denominated tranches designated as green bonds. IPTs stood at 140bp-145bp for the green and non-green Aussie dollar triple-A tranches and 90bp-95bp for the green euro triple-A tranches.

“It will be interesting to see if there is any pricing difference between the Aussie green and non-green tranches,” said another trader. “Green bonds are still a bit of a novelty.”

Away from Aussie paper, the two-year senior notes of Compass Banca’s €900m Quarzo Series 2018 consumer ABS were talked at three-month Euribor plus 95bp (SCI 28 November). However, the transaction is not considered to be well-timed.

“The deal is attractive, but not compared with the yield on Italian government paper,” the trader noted. “It makes no sense to buy Italian ABS now, when you can purchase government bonds, which pay a no-risk 85bp spread. Compared with that, auto loan ABS looks very cheap at the moment.”

On the secondary market, large lists of auto ABS and RMBS bonds were out for the bid last week, including a chunky £34.25m slice of the WARW 2 A tranche (SCI 27 November).

“The question is where the appetite is going to come from,” said a different trader. “I can’t see an individual dealer writing tickets for such a large volume.”

More BWICs were due to hit the market, but many people remained on the sidelines. “Dealers are full-up,” the trader continued.

Meanwhile, US CMBS new issues appeared to be struggling, following market volatility at the beginning of the week (SCI 28 November).

One trader noted: “It seems like the new issue pipeline is struggling to get off the ground and many dealers are having to give concessions in the mezz area in order to get deals done.”

Transaction of the week
Credit Suisse has completed a Swiss corporate and SME significant risk transfer trade from its Elvetia programme, dubbed Elvetia Finance Series 2018-6 (SCI 30 November). The trade printed at tighter levels compared to previous Elvetia corporate and SME deals, due to wide syndication. The transaction was completed under the new securitisation framework, which stipulates thicker tranches and was consequently also a driver of the tighter pricing.

The Sfr156m eight-year CLN references a Sfr2.6bn portfolio and pays Libor plus 7.75%. The weighted average life of the reference portfolio is approximately 1.7 years. Further features include a three-year replenishment period and a three-year non-call period.

The transaction follows a mortgage deal from the same programme in March (see SCI’s capital relief trades database). The mortgage deal, dubbed Elvetia Finance Series 2018-2, was priced slightly lower at Libor plus 7% and was also widely syndicated.

Switzerland implemented the new securitisation framework in January 2018. The lower returns resulting from thicker tranches have previously led Credit Suisse to slice the junior tranches of transactions into thinner ones that offer higher returns.

Other deal-related news

• The collateral management agreements for the Alesco Preferred Funding X to XVII Trups CDOs have been assigned to Hildene Collateral Management Company (HCMC), an affiliate of Hildene Capital Management (SCI 29 November). Under the terms of the assignments, HCMC agrees to assume all the responsibilities, duties and obligations of the current collateral manager (ATP Management) under the agreements and under the applicable terms of the indentures. For more CDO manager transfers, see SCI’s database.
• The West Ridge Mall & Plaza loan (securitised in COMM 2014-CR16) has transferred to special servicing (LNR Partners), due to imminent monetary default. Reports emerged in October that Washington Prime Group was planning to turn over the deed to the property. For more on CMBS restructurings, see SCI’s CMBS loan events database.

Regulatory round-up

• The UK PRA’s latest significant risk transfer guidance is putting UK capital relief trade issuers at a disadvantage compared to their European peers, mainly due to the regulation’s provisions on excess spread and the capital treatment of standardised portfolio transactions (SCI 30 November). The regulation is broadly in line with a consultation from May that sparked a market backlash (SCI 22 June).
• The Bank of Greece has unveiled a securitisation scheme backed by its deferred tax credits (DTCs) that aims to reduce the country’s large non-performing loan stockpile (SCI 27 November). The plan is seen as a positive development, with any move to introduce a government guarantee on the senior tranches expected to raise the prospects of its success.
• Regulatory changes coming into effect next year will have a major impact on the way European banks calculate risk weighted assets (RWAs), resulting in a greater incentive for some banks to utilise risk transfer mechanisms (SCI 29 November). However, it is expected that a nuanced picture will emerge, with regulatory changes impacting banks’ RWA calculations differently depending on a range of factors, such as asset class and the calculation model used.
• The Bank of Canada has expanded the assets it acquires outright to include the purchase of Canadian dollar federal government-guaranteed debt securities issued by federal Crown corporations (SCI 27 November). Under these changes, the bank plans to allocate “a small portion” of its balance sheet for purchasing mortgage bonds on the primary market on a non-competitive basis, commencing in late 2018 or 1H19.

Data

Pipeline composition by jurisdiction (as of 30 November)

Pricings
There was a distinct international flavour to last week’s pricings. US primary issuance activity has been muted following the Thanksgiving holiday.

ABS prints included the €605m A-Best 16, €958m Alba 10 SPV, €140m Citizen Irish Auto Receivables Trust 2018, €84m Guincho (Hefesto STC), A$293m Metro Finance 2018-2 Trust and €900m Quarzo Series 2018 transactions. A trio of RMBS also priced: €338m EDML 2018-2, €1.3bn Glenbeigh Securities 2018-1 and A$350m Sapphire XX 2018-3 Trust. Finally, among the CLO new issues was the refinanced US$620.5m Carlyle Global Market Strategies CLO 2012-3.

BWIC volume

Source: SCI PriceABS

Podcast
SCI’s latest podcast is now ready for download. Click here to listen to the team discuss divergence in the Australian RMBS market and a new SME ABS with a Spanish flavour.

Structured Finance

Proportional approach

ESAs tackle delay in transparency requirements

The joint European Supervisory Authorities (ESAs) - which consist of the EBA, ESMA and the European Insurance and Occupational Pensions Authority - have published a letter reiterating market concerns over ESMA’s disclosure requirements (SCI 5 October) and Article 14 (SCI 9 July) of the CRR. The authorities have also called on EU national regulators to apply a “proportionate and risk-based” regulatory approach when the Securitisation Regulation comes into force next year (SCI 3 December).

The Securitisation Regulation (Regulation (EU) 2017/2402) enters into force on 1 January 2019 and contains a set of high-level transparency requirements under Article 7 of the CRR. The details and standardised templates to be used to fulfil these requirements will be further specified by the European Commission, using as a basis a set of draft regulatory and implementing technical standards developed by ESMA.

The ESMA disclosure requirements, which were published in September, caused a market backlash due to the tight implementation timeframe and the application to private deals. ESMA and the Commission are currently considering how to address market concerns raised over some aspects of the ESMA disclosure templates. Hence, “the templates are unlikely to be adopted by 1 January 2019 and, as a result, the Securitisation Regulation transitional provisions will apply” says the letter.

However, the transitional provisions further complicate matters because they require the application of the Credit Rating Agencies Regulation (CRA). These are detailed disclosure requirements that have never been brought into effect, but resemble ECB asset reporting systems that are not familiar to unlisted deals and will now have to apply to private deals. These issues raise severe operational challenges in terms of compliance, especially for those reporting entities that have never provided information according to the CRA templates.

Given these challenges the ESAs suggest the adoption of a more proportional regulatory approach. This wouldn’t mean not complying with the CRA regulation, but if banks don’t have the data and systems to comply, regulators will have to think how reasonable and feasible it is to comply.

Jo Goulbourne Ranero, consultant at Allen & Overy, notes: “Leaving it to national competent authorities to deal with the issue on a discretionary basis, institution by institution, is an unsatisfactory outcome in terms of cost and certainty - a number of Member States are, in any case, unlikely to have appointed NCAs by 1 January 2019. No visibility is provided in the ESAs’ statement as to the direction of travel in relation to aspects of the ESMA templates widely regarded as problematic: their application to private deals, and the use of no data fields.”

She continues: “The statement therefore does not explicitly assist in situations where information may be available, but its disclosure would be out of line with market practice. Much remains unclear about the application of the Article 8(b) transitional in this context - for example, in relation to private deals (whose templates were not designed for use in this context), transactions for which no CRA template exists and the use of no data fields.”

Goulbourne Ranero hopes that a helpful interpretative consensus can be reached in this respect, though this is likely to be influenced by the Commission’s evolving stance. “The statement’s focus on the supervision of reporting entities means that it does not explicitly address the position of investors complying with due diligence obligations in respect of the disclosure regime, or the STS implications of the regime,” she observes.

The same approach applies to Article 14 of the CRR, although the letter is more specific about its application. Article 14 raises compliance challenges for the securitisation activities of the non-EU subsidiaries of EU banks, since it requires them to comply with a broad scope of obligations, most notably those relating to risk retention and due diligence.

According to the letter, the proportional approach in this case means that national regulators can take into account the proposed changes to the scope of Article 14 of the CRR, based on a recent Trilogue Agreement. This agreement reduces the scope of compliance only to the due diligence requirements under Article 5 of the CRR.

Stelios Papadopoulos

Structured Finance

Enforcement uncertainty

Set-back for STS-eligible issuance

The recent statement issued by the Joint Committee of the ESAs (SCI 4 December) is unlikely to be sufficient to assuage securitisation market concerns on its own. Such regulatory uncertainty is expected to further delay the emergence of STS-eligible securitisations in the pipeline.

“The statement by the Joint Committee of the ESAs acknowledges the concerns about the draft reporting templates, with respect to the disclosure requirements under the Securitisation Regulation,” says Merryn Craske, counsel at Mayer Brown. “However, this statement on its own may not be sufficient for market participants, who will want comfort on how their national regulators intend to enforce the new rules.”

She continues: “In addition, the extent to which the various issues that have been raised will be resolved and the timing of the finalisation and adoption of the technical standards remain unclear. The market needs workable solutions, clarity and certainty.”

Such uncertainty is expected to further delay the emergence of STS securitisations in the pipeline. JPMorgan European ABS analysts anticipate an STS market to develop over the course of 2019 - led initially by large, programmatic issuers – as institutions “seek to demonstrate a commitment to the spirit of the legislation”.

However, they believe that institutions intending to launch STS transactions will prioritise achieving the correct process over speed of execution. Against this backdrop, the analysts project a total of €35bn-€40bn of distributed STS securitisation issuance in full-year 2019, representing just over half of their full-year expectation for total European ABS issuance (assuming UK issuance will be eligible as STS).

“In our view, one potential downside risk to STS supply is the significant liability involved - even if only in the event of negligence - which may deter some issuers from seeking to issue STS deals,” the JPMorgan analysts note.

From a pricing perspective, they suggest that tiering will emerge between STS and non-STS transactions within the same asset class. “Amidst what we believe will be a more challenging issuing environment in 2019, we are interested to observe whether, on balance, STS transactions can price tighter than current levels, or whether pricing levels on non-STS transactions will have to widen more significantly from here. The preferential capital treatment (and LCR HQLA Level 2b eligibility) that STS positions will offer banks going forward – with the revised securitisation risk weights under the CRR applying from 31 December 2019 – means that bank investors should be willing to pay up for this benefit, contributing to tighter pricing relative to non-STS deals.”

A transaction can only be STS-eligible if the originator, sponsor and SSPE (securitisation special purpose entity) are established in the EU. “It also seems quite unlikely that ABCP programme sponsors will seek to make their programmes STS. I would certainly expect that there will continue to be a market for non-STS transactions,” concludes Craske.

Tom Brown

Capital Relief Trades

Colonnade issuance continues

Barclays completes corporate capital relief trade

Barclays has completed Colonnade Global 2018-2, a US$110m financial guarantee that references a US$1.33bn portfolio of mostly US corporate loans (see SCI's capital relief trades database). The transaction is typical of Colonnade Global risk transfer deals in the sense that the credit protection covers both principal and accrued interest.

Rated by DBRS, the transaction consists of US$1.1bn triple-A rated class A notes, US$21.19m double-A rated class B notes, US$6.39m double-A rated class C notes, US$7.33m double-A rated class D notes, US$20.5m single-A rated class E notes, US$3.59m single-A rated class F notes, US$10.9m single-A rated class G notes, US$20.26m triple-B rated class H notes, US$3.99m triple-B rated class I notes, US$6.66m triple-B rated class J notes and US$19.67m double-B rated class K notes. The weighted average life of the portfolio is equal to six years and the tranches amortise sequentially, as per PRA requirements.

Full pricing could not be disclosed, although the coupon does not exceed 10%, according to market sources other than DBRS.

Despite the prevalence of US loans, the deal references a multitude of loans from various jurisdictions and in different currencies. The latter does not necessarily introduce currency risk in the transaction.

Carlos Silva, svp at DBRS, explains: “We’ve paid attention to the interest rate exposure since the loans can be drawn in various currencies. Nevertheless, the protection is in US dollars, so the investor is not exposed to currency risk, although the bank is exposed to it.”

Interest rate risk exists, however, because different currencies have different benchmarks. The benchmark rate and the spread and length of arrears for the defaulted loan will determine how much additional loss the interest coverage component will drain from the guarantee.

Silva continues: “We assume all loans will be drawn in the currency with the highest spot benchmark rate (currently US Libor out of the eight eligible currencies) and apply our interest stresses based on that benchmark. The transaction also allows up to 2% of the portfolio to be drawn in any currency in the world and equivalent benchmark.”

For this 2% of the portfolio, DBRS assumes a stressed interest rate of up to 46.4% at the triple-A stress level to ensure its analysis considered the majority of high-risk countries.

Another typical feature of Colonnade transactions are rules-based replenishment criteria, which are designed to minimise the introduction of riskier loans by selecting loans with similar borrower and industry characteristics.

The last Colonnade Global capital relief trades were inked in June. Barclays printed two Colonnade Global deals at the time, although both of them were derived from the same portfolio (SCI 2 July).

The latest transaction follows the release of 3Q18 results in October, when Barclays disclosed a 13.2% CET1 ratio up 20bp during the quarter - although the bank’s fully loaded ratio was 12.8%, taking into account the full impact of IFRS 9.

Stelios Papadopoulos

CLOs

Sustainable growth?

Prospects for green CLOs examined

Green CLOs are expected to play an increasing role in the private sector’s involvement in the sustainable finance market. As such, S&P has created a hypothetical rating scenario to compare the credit quality of green CLOs with a typical European CLO 2.0 deal.

CLOs

Multi-jurisdiction exposure

Cashflow trade finance CLO prepped

Standard Chartered is in the market with its first global cashflow CLO backed by US$1bn of trade finance exposures (TFEs), with collateral from across multiple jurisdictions. The senior tranche of the deal – dubbed Prunelli Issuer I (compartment 2018-1) – represents 75% of the assets, with overcollateralisation accounting for the remainder.

The pool, which has a revolving period closing on 25 October 2019, consists of 3,547 TFEs from 343 obligors. The assets have a maximum WAL covenant of 91 days.

The obligors are corporate and financial institutions from different jurisdictions, with an initial 44% concentration in the banking industry. Replenishment conditions allow the portfolio to have up to 48% aggregate exposure in the banking, finance, insurance and real estate industries.

Asian obligors comprise 65.74% of the portfolio, Indian Subcontinent obligors 17.61%, European obligors 5.34%, Middle East and North African obligors 4.90% and Sub-Saharan African obligors 2.61%. Moody’s highlights the fact that many obligors in the portfolio are domiciled in emerging market jurisdictions as a credit challenge, although there are portfolio concentration limits on jurisdictions based on its foreign currency country ceilings.

A single class of notes, sized at US$750m and carrying a preliminary rating of triple-A by Moody’s, will be issued under the transaction. The transaction features an overcollateralisation test requiring the portfolio after replenishment to have an amount of at least US$937.5m, providing US$187.5m overcollateralisation to the US$750m notes.

An interest rate mismatch exists between the notes - which are linked to US dollar one-month Libor - and the underlying assets, which are mostly fixed rate. A further credit challenge highlighted by Moody’s is the legal complexity of asset transfer, given the multi-jurisdiction nature of the portfolio.

The transaction has used a two-tier structure, whereby the note issuer will use the proceeds to subscribe to the Series 2018-1 AFC funding notes to be issued by the asset funding companies (AFCs). The AFCs will, in turn, use the subscription amounts to purchase the TFEs from the originators, which are also the servicers of the TFEs under the transaction. Each AFC will only purchase TFEs from originators that are within the same jurisdiction as it.

Moody’s notes that there is cross-collateralisation between the AFCs, where each AFC will provide cross-guarantee in favour of the note issuer on the payment of Series 2018-1 AFC funding notes by other AFCs, in accordance with the payment waterfall.

The AFCs will transfer amounts they receive from the servicers and originators to the note issuer, which will repay the notes. During the revolving period, an AFC may purchase additional TFEs from an originator by paying a further purchase price.

The AFCs are Prunelli United Kingdom Asset Purchaser, Prunelli Hong Kong Asset Purchaser and Prunelli Singapore Asset Purchaser, which are orphan SPVs established in the UK, Hong Kong and Singapore respectively.

Proceeds from the notes will be used to acquire interest in the TFEs from the originators, either as the sellers or in their capacity as the trustee of the AFCs. The transaction declares trust over any TFEs that cannot be transferred by equitable assignment because of restrictions in contracts.

Otherwise, the TFEs are transferred to AFCs using equitable assignment. For both the assignable and trust TFEs, the obligors are not notified of the transfer to the AFC until the occurrence of notification events, which include the originator no longer being rated Ba2 or above, insolvency of the originator, and termination and resignation of the servicer. The originators also grant powers of attorney to the AFCs.

Following the end of the revolving period, the transaction will use interest and principal collections from the portfolio to repay the notes on a full-turbo basis.

Tom Brown

NPLs

Split-mortgages securitised

PTSB completes second NPL transaction

Permanent TSB last week completed its second major transaction to reduce its non-performing loan ratio. The bank disposed of Irish mortgage loans with a €1.31bn GBV (€910m NBV) linked to 6,272 borrowing relationships via the Glenbeigh Securities 2018-1 RMBS.

The majority of the borrowing relationships are secured by private dwelling home loans, with 133 secured by buy-to-let loans. The portfolio has been restructured over the last few years, with the aim of helping borrowers rehabilitate to a healthy payment rate on a sustainable basis.

Of the loans, 32.4% were originally being repaid on a capital-plus-interest basis, but now pay on a part-capital-and-interest (PCI) basis. Meanwhile, 67.1% are split loans, one portion of which is considered performing (PL) and the other portion is considered to be warehoused (WL).

The proportion of the split between the PL and the WL varies and is determined by an assessment of the borrower’s affordability status at the time of restructuring. The WL proportion comprises 34.5% of the Glenbeigh mortgage portfolio, while the PL comprises 32.6%, according to DBRS.

Borrowers that are currently in negative equity status account for 39.6% of the mortgage portfolio.

Rated by DBRS and Moody’s, the deal comprises €435m 4.53-year AAA/Aaa rated class A notes (which priced at three-month Euribor plus 80bp), as well as six-year €161m AA/Aa2 rated class Bs (plus 130bp), €130m A (high)/Baa2 class Cs (plus 175bp), €93m A (low)/B2 class Ds (plus 225bp) and €62m BB (high)/Ca class Es (plus 275bp). There are also €60m class F and €360m class Z unrated notes.

Approximately 30% of the loans pay interest linked to a standard variable rate set by PTSB. Of the loans in the mortgage portfolio, 36.5% pay interest linked to the ECB rate and the remaining 33.7% do not pay any interest during the life of the loans (WLs).

In comparison, the interest paid on the notes is linked to three-month Euribor. The consequent basis risk on the notes is mitigated by a SVR floor rate of three-month Euribor plus 3.25%, effective six months after closing.

The interest margin on the notes will step up in November 2024. On or after this date, part of or the entire mortgage portfolio can be sold.

The master servicer for the mortgage portfolio will be Pepper, with the servicing in the first six months from closing delegated to PTSB. The legal title of the loans currently with PTSB is expected to be transferred to Pepper within three months of closing.

DBRS notes that the cashflow analysis of the split loan portfolio applied the PD and LGD for the PL and WL separately, given the nature of the restructuring and repayment conditions. While the 10-year front- and back-ended default timing curve was applied to the PL sub-pool, the WL sub-pool was assumed to default only at the end of the loan term (weighted-average remaining term of 22 years).

If a borrower defaults on the PL, this would imply default for the WL too and trigger the recovery process of both the PL and the WL outstanding. The recovery of the WL in such a case would be much earlier than simulated in the agency’s analysis, hence the timing of defaults for a WL is a relatively conservative treatment.

Another conservative element of its analysis was the assumption of zero prepayments on the WL sub-pool in comparison with the terms and conditions of the split loan, which allow prepayments to be applied to the WL in preference over the PL portion. Any prepayments of the WL sub-pool will reduce the negative carry where no interest payments are made by the borrower on the WL, but the issuer will have to pay interest on the same proportion of notes outstanding.

The deal is expected to increase PTSB’s CET 1 ratio by 30bp on a transitional basis, subject to regulatory approval. Together with Project Glas (SCI 7 August), it is expected to reduce the bank’s NPL ratio from 26% at 1 January 2018 to less than 10%.

Citi is arranger and lead manager for the Glenbeigh transaction.

Corinne Smith

Structured Finance

ESAs suggest 'proportion'

Sector developments and company hires

Aussie securitisation fund

The Australian government has introduced a A$2bn Australian Business Securitisation Fund, which will provide significant additional funding to smaller banks and non-bank lenders to on-lend to small businesses on more competitive terms. The fund will be administered by the Australian Office of Financial Management (AOFM), consistent with its prior involvement in the RMBS market in 2008.

Call for NPL body

A new European Commission Staff Working Document calls for an “industry body” to be established to issue and enforce “proper” operating and governance rules for European non-performing loan platforms, as well as to oversee their compliance. The paper also recommends that EU institutions and member states should discuss whether further/stronger incentives may be needed to spur seller participation in a European NPL platform. Overall, the Commission believes that there is no clear-cut case for public ownership/operation of a European NPL platform and that it appears preferable to further build on existing private initiatives. However, it recognises that these initiatives offer “limited geographic scope”, while the loan data used is not standardised across the market.

‘Proportionate’ supervision encouraged

European Supervisory Authorities (ESAs) have issued a statement encouraging competent authorities (CAs) to apply their supervisory powers in their enforcement of the Securitisation Regulation in a “proportionate and risk-based” manner. The ESAs say they have been made aware of severe operational challenges for reporting entities in complying with the legislation’s transitional provisions, which require that the CRA3 templates be used. Accordingly, when examining reporting entities’ compliance with the disclosure requirements of the Securitisation Regulation, CAs can take into account the type and extent of information already being disclosed by them on a case-by-case basis. The standardised templates to be used to fulfil transparency requirements under Article 7 of the regulation will be further specified in a European Commission Delegated Regulation, based on a set of draft regulatory and implementing technical standards developed by ESMA (SCI 5 October). ESMA and the Commission are currently considering how to address market concerns raised about some aspects of the ESMA disclosure templates, which are therefore unlikely to be adopted by 1 January 2019 and, as a result, transitional provisions will apply. Separately, the ESAs have also been made aware of challenges that EU banking entities are facing regarding complying with specific provisions of the CRR Amending Regulation relating to the scope of the Chapter 2 (due-diligence) requirements in the Securitisation Regulation; in particular, for subsidiaries engaging in local securitisation activities in third countries. In these cases, CAs can take into account the proposed changes to Article 14 of the CRR, whereby - based on the latest Trilogue Agreement - its scope is expected to be reduced.

Structured Finance

BDC merger announced

Sector developments and company hires

BDC merger

Golub Capital BDC (GBDC) has merged with Golub Capital Investment Corporation (GCIC), with GBDC as the surviving company, subject to certain stockholder approvals and customary closing conditions. The combined company will remain externally managed by GC Advisors and all current GBDC officers and directors will remain in their current roles. The transaction is expected to close 1H19 and, following the merger, GBDC is expected to be the fourth-largest externally managed, publicly traded business development company by assets, with US$3.5bn of assets at fair value and investments in 203 portfolio companies as of 30 September 2018. The boards of directors of both GBDC and GCIC have approved the transaction with the participation throughout by, and the unanimous support of, their respective independent directors.

P2P approval

Zopa has officially received a banking licence making the platform the world’s first combined P2P lender and digital bank, according to the firm. The company states that when it fully launches, it will offer FSCS-protected savings accounts and credit cards, alongside its personal loans and P2P investment products, including its IFISA.

US

Hitachi Capital America has hired Todd Glickstern as director of originations within the structured finance department. Prior to this he was at GE Capital for 33 years working within equipment financing.

Nomura Securities has hired Florian Bita as md and head of CLO origination and syndication, based in New York. Prior to joining Nomura, Bita was head of CLO trading at RBC.

Walker & Dunlop has hired Nicole Brickhouse as vp in its debt and structured finance group, working out of the firm’s Bethesda office. Prior to joining Walker & Dunlop, Brickhouse was director at HFF.

Structured Finance

BTL securitisation planned

Sector developments and company hires

Europe

Accunia has promoted Mads Romild as head of Accunia’s CLO platform. Romild will continue as cio and head all Accunia investment strategies. Andres Garcia Bartolome and Rajiv Thaker are also promoted to senior portfolio managers and will be responsible for the portfolio management of the three existing and all new Accunia CLOs. Romild previously held a position as chief portfolio manager before his promotion. Bartolome was previous a portfolio manager at Accunia whereas Thaker held a position in European leveraged loans and high yield.

LendInvest has expanded its capital markets and treasury team with a batch of new hires, as the firm looks to open a securitisation programme next year for its buy-to-let product. Allister Keller has joined from Charter Court Financial Services as a member of the treasury team, with responsibilities for portfolio reporting and analysis and hedging. Keller worked at Deloitte UK as an assistant manager in securitisation, analytics, modelling and valuation. Taher Miah has joined from Deloitte, where he worked on analytics and the modelling of securitisation transactions. Robin Parker has joined as associate director from Orbit Housing, where he worked on the largest single-tranche bond issue seen in the sector. Victor Pichon has joined from fintech lender Prodigy Finance and Jonathan Gomez has been promoted to the role of treasurer from his previous role as director.

PCS has hired Max Bronzwaer as investor liaison after leaving a role as advisor to the ceo and management board at Obvion.

Pinsent Masons has hired Ian Falconer as a senior consultant. He leaves his position as partner at Freshfields, where he headed the firm’s structured finance business in London.

US

Starwood Capital Group has hired Armin Rothauser who will join the firm in January 2019. Rothauser will lead Starwood’s transportation, infrastructure and energy lending business. He will also join the investment committee of Starwood Property Trust. Prior to joining Starwood, Rothauser was md at Deutsche Bank, where he ran its transportation, infrastructure, energy lending group.

Churchill Asset Management has hired Marissa Short and Robert Lin as members of Churchill’s finance and operations team, with appointments effective immediately. Short joins Churchill as vp of finance. Prior to Churchill, she was a senior manager in the wealth and asset management practice at Ernst and Young, responsible for the planning, implementation and completion of financial statement audits for top tier SEC and non-SEC clients. Lin joins Churchill as vp of operations, having worked most recently at Ivy Hill, where he was responsible for surveillance, analytics and financial modeling of CLOs, leveraged facilities and a public business development company.

Structured Finance

Corporate finance partner hired

Sector developments and company hires

CDO manager transfer

Dock Street Capital Management has replaced Deerfield Capital Management as collateral manager for the Buckingham CDO II and III ABS CDOs. Under the terms of the appointment, Dock Street agrees to assume all the responsibilities, duties and obligations of the collateral manager under the indenture. Moody's has confirmed that the move will not result in the withdrawal or reduction of any ratings on the notes. For more CDO manager transfers, see SCI’s database.

Funding secured

Funding Circle has secured a £1bn funding line from Waterfall Asset Management to help finance more loans to SMEs in the UK, Germany and the Netherlands. The investment will be over two years and part financed by Deutsche Bank.

UK

Deloitte has hired Jonathan Gold as a partner in its UK advisory corporate finance practice. Gold will focus on building client relationships in the banking, capital markets and insurance sectors across Deloitte’s North West Europe business. Gold worked most recently at Deutsche Bank, where he was co-head of the EMEA financial institutions group financing and solutions business. He will be based at Deloitte’s head office in London.