Contents

Insurance-linked securities

Concerns ignited

Wildfire peril pricing questioned

ILS market participants are re-evaluating whether the pricing of wildfire risk in catastrophe bonds is adequate, after the 8 November US wildfires caused between US$9bn-US$13bn worth of damage. However, the picture is likely to only become clear over 2019 as the claims are counted and the full scale of loss across multiple perils is measured.

“It has generally been understood that wildfires can impact bonds in aggregate,” says Conor Meenan, senior consultant at Risk Management Solutions (RMS). “The question now is whether they could also pose a significant risk to the bond market on an occurrent basis.”

The Tubbs, Atlas and Thomas fires of 2017 caused a comparable scale of loss to this year’s wildfires. When combined with the losses from Harvey and Irma, the fires tipped the balance for some multi-peril aggregate bonds.

“The general perception of wildfire risk has moved from status quo, to ‘new normal’, to ‘new abnormal’ in the space of two years,” continues Meenan. “This rightfully questions whether our present pricing of the risk is adequate. In order to better understand and price this risk, it is important now to gain better insight into the drivers of wildfire risk and, in particular, the factors that affect the probability of extreme losses.”

The advantages of multi-peril bonds have traditionally included reduced frictional costs, diversification and broader coverage, and a simple and efficient process more similar to traditional insurance.

US hurricane and earthquake perils were partnered in cat bonds for decades. In the mid-2000s, convective storms, winter storms and wildfires began to be included, followed by international perils like European windstorm and Japanese earthquake risk.

Investor appetite for risk diversification drove spreads down to the point where even volcanic eruption and meteorite impacts were included. This may now need to change.

Aggregate annual structures are particularly sensitive to attritional losses from frequent perils, such as tornados. As a result, transactions tend to have a minimum event severity to mitigate the impact of small events. However, hidden risk posses a threat if perils are not well-quantified.

RMS is building a new model in order to quantify these risks more effectively. “To understand complex risk like this requires comprehensive and high-resolution modeling solutions,” says Meenan. “The upcoming RMS North America Wildfire HD Model aims to provide this extra insight to build confidence in the understanding of wildfire risk.”

The summer of 2018 saw the first wildfire-only cat bonds. One of these, Cal Phoenix Re - which provides coverage to Pacific Gas & Electric - is at risk if the Camp fire is attributed to PG&E infrastructure. The official cause of the fire is still ‘Under Investigation’ by CAL FIRE. The bond will pay out US$200m if PG&E is found to be liable.

In terms of how bonds have been specifically impacted, the picture is less clear for multi-peril aggregate bonds, where the additional perils can include hurricane, convective storm and winter storm. “We know which bonds are exposed and can use modeling to quantify the potential aggregate impacts,” explains Meenan. “This can provide an initial view of the potential effects of the wildfires. However, the full story is likely only to play out over 2019 as the claims are counted and the full scale of loss across multiple perils is measured.”

In terms of current appetite for single-peril bonds, Meenan notes: “It is difficult to say – single-peril transactions tend to come to the market less frequently and there is no clear bias in the pricing one way or another. It’s probably fair to say that there is appetite for any transaction where there is investor confidence that the drivers of risk have been well modeled and fairly priced.”

He concludes: “It can be simpler for investors to identify and assess the drivers of risk within a single-peril bond, but the bundling of multiple perils does act to reduce some of the volatility in potential losses. Aggregate multi-peril bonds are likely to be viewed with more caution now, given the wildfires. Time will tell if we see a marked change in how this type of risk is priced in the capital markets.”

Tom Brown

NPLs

JV trend continues

Landmark NPL transactions agreed

Banco BPM announced this week a non-performing loan securitisation with Elliott International and Credito Fondiario for a nominal value of €7bn-€7.8bn, while Intesa Sanpaolo and Intrum completed a similar transaction last week. The agreements involve the sale and co-ownership of servicing platforms, which is part of a broader trend in Italian NPL disposals.

According to Massimo Famularo, board member at Frontis NPL: “The sale and co-ownership of servicing platforms offer many benefits to both sellers and buyers. The buyer gets a first-look advantage, since they can service loans over a long period, while the seller benefits from third-party servicing expertise.”

The Banco BPM transaction, in particular, could pave the way for M&A activity among Italian mid-sized banks, since reducing NPLs makes it easier to assess the enterprise value of banks. Supervisors have long called for consolidation in the Italian banking sector as part of a push to boost the industry’s low profitability (SCI 12 February).

The Banco BPM deal stipulates the possibility for the creation of an SPV that will issue senior notes under the GACS guarantee or alternatively structure the transaction as a bilateral deal, where Banco BPM will subscribe to the senior notes. Elliott, on the other hand, will buy the junior and mezzanine tranches.

“Securitisation allows BBPM to achieve a higher transfer price, given the leverage that is associated with the retention of the senior tranche,” notes Famularo.

However, before a rating can be offered on the senior tranche, the parties to the transaction have to determine the final size of the portfolio - which is still pending. Knowledge of portfolio size allows the rating agency, in turn, to assess the portion of the NPL portfolio that is investment grade.

The agreement envisages the creation of a servicing platform co-owned by Credito Fondiario and Banco BPM that will manage the securitised NPLs, as well as 80% of the bank’s new NPL flows over the next 10 years. The platform is valued at €143m. The transfer price of the NPLs to the SPV is not known, although CreditSights estimates it at a maximum of 22% of the securitised portfolio.

Paola Biraschi, senior analyst at CreditSights, explains: “The NPL sale and the creation of the servicing platform will have an overall negative impact on the CET1 ratio equal to minus 80bp. Both are positive capital drivers and imply a transfer price that will be below book value. We have estimated €800m potential losses from the sale, assuming, for simplicity, no gain from the sale of the servicing platform.”

Nevertheless, Italian banks are subject to IFRS 9 transitional provisions that allow them to add back capital so, in principle, the transfer price can match the book value, suggests Famularo.

On the broader significance of the Banco BPM deal, Biraschi states: “The securitisation shows that Italian banks attempting a deconsolidation of this size often need to book NPL losses.”

Banco BPM will complete the NPL securitisation in 2Q19, following regulatory authorisations. Following the completion of the transaction, the gross NPE ratio is expected to decrease from 15.9% to a pro forma of between 10.6%-11.3%, depending on the size of the final portfolio.

The Intesa and Intrum joint venture involves a servicing platform that is majority owned by Intrum, with Intesa Sanpaolo retaining a 49% minority equity stake. Along with the establishment of the platform, Intesa Sanpaolo divested a €10bn NPL portfolio of mostly secured SME exposures. Intrum has taken a 41% minority equity stake in the portfolio, which it will also service.

“It’s a landmark deal for Intrum, since it puts us in the top three players in the Italian market, while also being the first large-scale joint venture,” says Alberto Marone, head of investments at Intrum Italy.

The agreement stipulates a securitisation of Intesa’s NPL portfolio. Intrum used limited recourse senior financing for the SPV, which in turn bought the loans.

The senior notes have been subscribed to by the lenders - HSBC, Credit Suisse and Banca IMI. Investors purchased the mezzanine and junior notes and ReoCos will be utilised to maximise real estate recoveries.

The last two years saw record NPL sales in the Italian NPL market, with the latest PwC data pointing to €68bn for this year, closely approximating last year’s record volumes of €69bn. However, Biraschi concludes: “Going forward, we believe that a weakened economic outlook will contribute to a slower reduction of NPLs compared to what we have seen in the last two years.”

Stelios Papadopoulos

NPLs

Restructuring milestone

Greek NPL transaction arranged

Pillarstone has arranged a €174m restructuring in Greece for Famar, one of Europe’s largest providers of contract manufacturing and development services to the pharmaceutical and health and beauty industries. The agreement is considered a landmark, given that restructurings are an exceptional occurrence in the Greek non-performing loan market.

According John Davison, ceo at Pillarstone: “Famar has made substantial progress over the last 18 months, has strong growth potential and we are pleased to support the company’s restructuring in one of our most significant investments to date. We are working in Greece to identify NPLs to companies with long-term growth potential and help those companies stabilise and grow for the benefit of all stakeholders. This approach will deliver wider economic benefits that are much needed in the Greek market.”

Famar has secured the restructuring with a €116m debt reduction, in exchange for some equity holding and consequent potential equity upside for Greek systemic banks. The agreement sees Famar's existing debt reduced from €234m to €118m, with maturities on all substantial facilities extended by six years. Pillarstone has also underwritten a super senior facility of up to €57.6m to fund the implementation of Famar's long-term development plan and working capital requirements.

Restructurings have been attempted with the involvement of super senior financing for distressed assets, but were not successful in most cases. According to 2Q18 official data, liquidations and collections are the second most prevalent recovery strategies following sales and write-offs. The same data also shows a pick-up in liquidations in the second quarter due to the introduction of e-auctions, although these are distinguished by their focus on real estate assets.

Greek market sources note that the latest agreement is the outcome of two-year negotiations that involved the exploration of all options, including liquidations. Banks tend to prefer liquidations, given the short-term capital boost that they provide.

The same sources point to a perception among Greek banks that the super-senior financing involved in restructurings can take away their collateral. Nevertheless, the banks were convinced in this case of the viability of the business plan, especially given the fact that Famar was recognised to have a funding gap and not a solvency issue.

Earlier this year, Pillarstone agreed a similar deal with another large Greek corporate, retailer Notos Com Holdings, which operates a number of department stores representing international brands.

KKR founded Pillarstone in 2015 and also funds it. The firm helps European banks manage their non-core assets, with long-term finance and operational expertise. Pillarstone is licensed and regulated by the Bank of Greece as a credit servicing firm.   

Real progress has been achieved this year in reducing Greek NPLs, in line with targets agreed in 2017. According to Deloitte, a record €11bn has been traded in 2018 so far, with a pipeline of nearly €5bn already in the market and due to be concluded before year-end. Deal volumes are expected to rise higher in 2019, as Greek banks remain under intense pressure from the Bank of Greece and the ECB to reduce their NPL exposures.

Deloitte concludes that the targets agreed with individual banks to reach this imply NPL reductions of €34bn in just over 12 months, a level of activity which could place Greece as the third largest European NPL market of the year, after Italy and Spain.

Stelios Papadopoulos

CLOs

Selling spike

US CLO market update

There has been a spike in selling of investment grade paper on the US CLO secondary market, coming mostly from the insurance sector. In past cycles, insurance companies have been more likely to hold on to their assets, but currently seem willing to sell.

“We are not sure if it is year-end cleansing or if this is more of a market call,” says one trader. “It is good to be a buyer right now.”

Double-B paper is down 5bp as the CLO market continues to price wider. “Secondary spreads are wider than new issue spreads in some cases, which is worrying,” continues the trader. “There have been a lot of comparisons with the year ends of 2015 and 2016.”

The trader points out that macroeconomic forces are driving the market wider and they do not appear to be discriminating between asset classes.

Meanwhile, regarding the primary market, the trader says: “It is easier to print the mezz tranches a bit wider, if you need to get deals done quickly. Sourcing loans is easier at the moment.”

Nevertheless, there is not much time for deals to be finalised before the end of the year. The trader confirms that a handful of US CLOs have been postponed to 2019.

“It would not surprise me to see a few more follow before the year ends,” he concludes.

Tom Brown

CLOs

Running dry

Euro CLO secondary market update

The European CLO primary pipeline is running dry. Traders are increasingly looking at BWIC activity instead.

Several CLO BWICs are out for the bid today. “Yesterday saw a bit of a turn-around in terms of BWIC activity,” says one trader, “though the market is still a little weak and cautious.”

CLO bonds are pricing significantly wider compared with other asset classes, as a result of recent uncertainty around STS and Brexit. The trader remains optimistic, however, and challenges comparisons with the market slowdown of a couple of years ago.

The trader concludes: “Spreads are sliding wider each day. We have not seen any panic selling just yet and there have not been any big waves like we saw in 2015/2016. In my opinion, it is not quite as bad as it was then.”

Tom Brown

CMBS

Prepayment offer

European CMBS market update

European CMBS BWIC activity has swelled after the Taurus 2018-3 DEU deal priced today. Unusually, noteholders have been offered an early prepayment on 14 December as an incentive to price the transaction before the end of the year.

The market remains soft as conditions refuse to buck the widening spread trend. Several European dealers have decided to wait out the remaining few weeks until the end of the year.

“If you are not focused, there is no way to put in a good bid,” says one trader. “There is very little engagement, which is not common to see. It is surprising that people are unwilling to look at paper right now and instead are waiting until STS regulations are enforced.”

Heavily discounted premium is being ignored as the year comes to its conclusion. “Even if we show bonds at very cheap levels, nobody is interested,” says the trader. “In the past, when spreads were similar, you still had buyers and sellers balancing each other. Now it is a one-way market.”

Tom Brown

Structured Finance

SCI Start the Week - 10 December

A review of securitisation activity over the past seven days

Market commentary
US CLO BWIC activity last week boomed ahead of the market holiday in honour of former president George H.W. Bush (SCI 4 December). Bid-lists were mainly triple-A oriented, whereas demand for triple-B bonds faded and double-B bond prices were 1.5 points worse off.

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

Meanwhile, several US CLO deals are believed to have been pulled from the pipeline and pushed back to 2019, amid growing concerns over market conditions (SCI 6 December). “What we are trying to do right now is to gauge customer demand,” observed another 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, with the trading schedule broken up by market breaks.

Away from the US, the European primary and secondary ABS markets saw a surge in activity, due to uncertainty over the next quarter (SCI 4 December). “After the high volatility last month, I was expecting a slow-down,” a trader noted, surprised by the activity.

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

High volumes of European BWICs hit the market last week, 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,” the trader said. “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 UK government’s second student loan ABS was oversubscribed across all tranches. The trader 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.”

The European CLO market seemed stronger than it was the previous week, but still relatively volatile (SCI 5 December). “I suppose good managers get deals done; I think that’s the bottom line,” another trader remarked. “For managers that are perceived to be worse, it is harder now.”

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

A notable gap 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.

Transaction of the week
Permanent TSB has 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 (SCI 5 December).

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.

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.

Other deal-related news

• 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 (SCI 7 December).
• Deutsche Bank has refinanced its TRAFIN 2015-1 deal with the issuance of a new trade finance capital relief trade dubbed TRAFIN 2018-1. The US$216.125m five-year CLN references a US$3.5bn trade finance portfolio (SCI 5 December).
• Standard Chartered is in the market with its first global cashflow CLO backed by US$1bn of trade finance exposures, 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 (SCI 3 December).
• Barclays has completed Colonnade Global 2018-2, a US$110m financial guarantee that references a US$1.33bn portfolio of mostly US corporate loans. The transaction is typical of Colonnade Global risk transfer deals in the sense that the credit protection covers both principal and accrued interest (SCI 5 December).
• The US$58.6m Matrix Corporate Center loan, securitised in MSBAM 2013-C11, has been liquidated with a US$46.1m loss. This was the second largest CMBS loss last month. For more, see SCI’s CMBS loan events database.
• Dock Street Capital Management has replaced Deerfield Capital Management as collateral manager for the Buckingham CDO II and III ABS CDOs (SCI 7 December). Under the terms of the appointment, Dock Street agrees to assume all the responsibilities, duties and obligations of the collateral manager under the indenture. For more CDO manager transfers, see SCI’s database.

Regulatory round-up

• 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 (SCI 4 December). 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).
• 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 (SCI 6 December). 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.
• 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 (SCI 3 December).

Data

Pipeline composition by jurisdiction (as of 7 December)

Pricings
Auto ABS dominated last week’s pricings, pushing US issuance across the asset class to just shy of US$100bn for the year. It was also a strong week for student loan securitisations, with a trio of deals printing.

Last week’s auto ABS issuance consisted of: US$233.07m American Credit Acceptance Receivables Trust 2018-4, £2.85bn Cardiff Auto Receivables Securitisation 2018-1, US$400m Chesapeake Funding II Series 2018-3, US$701m Hyundai Auto Receivables Trust 2018-B, A$250m Liberty Series 2018-1 Auto Trust and US$1bn Nissan Auto Receivables 2018-C Owner Trust. The other ABS pricings were: US$366.45m CommonBond Student Loan Trust 2018-C-GS, US$258.78m Consumer Loan Underlying Bond Credit Trust 2018-P3, £3.9bn Income Contingent Student Loans 2 (2007-2009), US$511.5m Nelnet Student Loan Trust 2018-5 and US$100m Rosy Blue Carat. Among the other prints last week were the US$892m BBCMS 2018-C2 CMBS and the US$406.1m Marble Point CLO XIV transaction.

BWIC volume

Source: SCI PriceABS

CMBS

UK CMBS markets

Transaction marks first for rating agency

A Brookfield Asset Management entity, BSREP International II (A), is the sponsor of a new £367.5m UK single-asset single-borrower (SASB) CMBS, dubbed Salus (European Loan Conduit No.33). The transaction comprises a first-lien interest-only mortgage loan originated by Morgan Stanley and backed by the landmark City of London property, Citypoint.

The mortgage loan comprises a senior loan which will be securitised in the transaction and makes up the class A, B, C and D notes, totalling £349.1m, while a VRR loan, retained by Morgan Stanley for risk retention purposes, equates to £18.4m, and makes up 5% of the whole loan balance. The floating rate loan has an initial three-year term with two, one-year extension options and requires quarterly interest-only payments based on three-month LIBOR plus a spread of 2.15%.

Proceeds from this £367.5m mortgage loan, along with £91.9m of mezzanine debt, were used to refinance £436m of existing mortgage debt. It also funded £16.9m of capital expenditures, leasing commissions, letting agent costs, tenant incentives and pay closing costs.

The total debt of £459.4m includes a £16.9m capex facility, which was funded into the capex reserve account at closing. The facility comprises a £13.5m portion that is pari-passu to the senior loan and a £3.4m portion that is pari-passu to the mezzanine loan.

The prior financing of £436m was originated by Morgan Stanley to facilitate the sponsor’s acquisition of the property in 2016. Prior to that, the sponsor purchased a £106m junior loan associated with the property from Mount Kellett Capital Management in 2014.

The junior loan was associated with a £429m senior loan that was originated by Morgan Stanley in 2007 and securitised in the Ulysses (European Loan Conduit No. 27) transaction. The senior loan was transferred to special servicing in February 2012 due to a payment default but was paid off in full in January 2017, following the sale of the property to the sponsor, with no principal losses to the bondholders.

The transaction also marks the first European CMBS rated by KBRA, which has assigned provisional ratings, alongside DBRS, of triple-A/triple-A on the £211.3m class-A notes, double-A/double-A on the £66.29m class Bs, single-A minus/single-A (low) on the £52.4m class Cs and triple-B plus/triple-B on the £19.135m class D notes. There is also an unrated £100,000 class X note which collects excess interest from the transaction.

KBRA notes that a transaction risk is the concentrated tenant mix, with the top five tenants representing 55.2% of the total contracted rent. Within this, the tenants are concentrated in legal, at 57.7%, and coworking industries at 18.4%, representing 76.1% of total contracted rent.

Mitigating this risk is the fact that two of the top five tenants, Simmons & Simmons, 22.1%, and Mimecast Services, 4.3%, are headquartered at the building and no other tenant aside from Regus, 15.5%, account for more than 8.4% of the total contracted rent. Additionally, KBRA notes that four of the top five tenants are paying below market rents, but adds that two tenants – including the second largest tenant, Regus – operate shared workspaces, which are more vulnerable in an economic downturn.

Another risk is that tenants with leases accounting for 46.7% of the total contracted rent have lease breaks or expiring leases during the five-year fully-extended loan term, including three of the largest tenants. KBRA suggests that the rollover risk is relatively evenly distributed, however, and that over a 10-year period the largest concentration occurs in 2025 when four leases expire.

Furthermore, during the loan term the largest rollover concentration is in 2019, when five leases, accounting for 11.9% of the property’s contracted rent, expire. The rating agency suggests the rollover risk in each year is mitigated, however, by below market rents.

Richard Budden

Derivatives

Risks remain

Termination risks persist for SF transactions in no-deal scenario

Contingency plans being implemented by financial institutions will help to avoid many derivatives risks associated with a no-deal Brexit, according to a report from Fitch. However, termination risks still persist for structured finance transactions, should issues around uncleared derivatives not be mitigated.

As it stands, a no-deal Brexit would result in a lapse of EU authorisation for UK financial services, meaning the banking and capital market sectors would lose permission to enter into regulated cross-border activities with EU27 clients. This would impair legacy contractual obligations and it would also affect UK counterparties in insurance contracts.

Analysts at Fitch note, however, that recently announced fall-back proposals help to provide some solution for EU27 counterparties in accessing UK trading venues, and to help some states to provide UK financial firms with temporary authorisation under a no-deal Brexit.  This reduces the risk that issuers may not be able to perform on some insurance claims and derivatives contracts.

In terms of cleared derivatives, a temporary solution has been formulated in the European Commission’s pledge to provide UK central counterparties with temporary conditional authorisation. It also buys time for UK CCPs to secure permanent EU authorisation, or for EU27 counterparties to close out and rebook contracts to EU27 venues.

Uncleared derivatives are more complex, however, and while most existing transactions should continue unhindered, there are some “life-cycle” events arising from legacy deals that may be seen as new transactions by EU regulatory authorities. UK financial firms may, however, be able to fall back on authorisation being granted by individual EU member states under local laws, and a one-year exemption for some legacy uncleared derivatives from EU clearing and margining obligations, could provide derivative counterparties with some flexibility to remain on more bespoke contracts.

For structured finance transactions, there is some termination risk where the impact of uncleared derivatives from a loss of authorisation is not mitigated – as such, early termination could occur as a result of a life-cycle event. This could also lead to a scenario where issuing vehicles could owe termination payments, depending on whether the issuer was out of money at the time of termination.

Fitch analysts state that in an event of substantial liquidity stress for issuers in the absence of novation, these termination payments would be due senior in a transaction waterfall without a new incoming counterparty to cover termination payment. As such, this could result in a default of the structured finance notes if mark-to-market payments are large, and the risk of large mark-to-market payments is higher for currency than interest rate swaps.

While UK financial firms act as counterparties to EU27 structured finance transactions with respect to a range of services, it is as derivatives counterparties the greatest risk is posed. The agency adds that of the 860 UK and EU27 transactions it rates, 131 are EU27 issuers with UK swap counterparties and, of these, about 45% are currency swaps.

Fitch adds that non-performance of derivative contracts could affect structured finance transactions but, with the various solutions outlined and with issuers looking to mitigate actions to novate swaps to EU27 counterparties, the agency doesn’t expect any ratings issues for most structured finance transactions.

Finally, some residual risks remain for UK insurers although Fitch analysts state that all rated UK insurers have progressed contingency plans to allow for ongoing claim payments after Brexit. Furthermore, new business licenses are being acquired where needed and EU27 cross-border portfolios are either being transferred to EU27 subsidiaries, or disposed of.

Richard Budden

Structured Finance

Libor consultation launched

Sector developments and company hires

ILS

Peak Reinsurance Company has launched Asia’s first sidecar transaction via a new Bermuda-domiciled special purpose insurer, Lion Rock, to provide collateralised retrocession for part of Peak Re’s global property reinsurance risk portfolio. The establishment of this special financial structure, referred to as a “reinsurance sidecar”, allows investors to take on the risk and benefit from specific books of an insurance or reinsurance company. As part of the deal, Lion Rock Re has entered into an exclusive quota share agreement with Peak Re to reinsure part of Peak Re’s global property reinsurance risk portfolio. Lion Rock Re has successfully secured commitments of US$75m from a panel of third-party investors globally. The transaction is expected to close in mid-December 2018. Aon Securities is the structuring and placement agent of the transaction.

Legacy RMBS settlement reached

Attorney General Lisa Madigan has announced a US$17.25m settlement with Wells Fargo as a result of the bank’s misconduct in its marketing and sale of risky RMBS leading up to the 2008 economic collapse. The settlement with Wells Fargo resolves an investigation by Madigan’s office over the bank’s failure to disclose the true risk of RMBS investments. Under the settlement, Wells Fargo will pay $17.25m to the state that will be distributed among the teachers retirement system of the state of Illinois, the state universities retirement system of Illinois, and the Illinois state board of investment, which oversees the state employees’ retirement system.

RFC on fallback language

The Alternative Reference Rates Committee (ARRC) has issued a public consultation on US dollar Libor fallback contract language for securitisations, which outlines draft language for new contracts that reference Libor to ensure these contracts continue to be effective in the event that Libor is no longer usable. The consultation proposes one specific hardwired approach regarding triggering events and the waterfall for rate determination, and addresses the challenges presented by securitisation asset and liability components. The effort is part of the ARRC’s mandate to help in addressing risks in contracts referencing Libor and builds on its work developing the Paced Transition Plan, which includes steps for an effective shift to the ARRC’s recommended alternative reference rate, the Secured Overnight Financing Rate (SOFR). Comments should be sent to the ARRC Secretariat by 5 February 2019. Following the 60-day comment period, the ARRC will issue final contract language recommendations for securitisations, for voluntary use in future Libor contracts.

Structured Finance

Global leader appointed

Sector developments and company hires

Amended complaint filed

The state of Colorado has filed a Second Amended Complaint relating to state court actions against Avant and Marlette, alleging that the platforms have violated its Uniform Consumer Credit Code (SCI 12 May 2017). According to a Chapman and Cutler client memo, in addition to making the same claims against the platforms, the state is suing trustees for the trusts into which Colorado loans made through the platforms had been securitised and the SPEs used to transfer the loans into the securitisation trusts. While the state recognises in its filing that “banks may, pursuant to federal law, lawfully lend in Colorado and other states at rates that exceed the interest and other finance charge limits imposed by state law”, it claims that non-banks cannot enforce a bank’s federal interest rate exportation rights when they purchase loans from banks “because banks cannot validly assign such rights to non-banks” under the Madden vs Midland Funding case.

Clearing platform planned

Societe Generale is opening a clearing capability in Paris at the end of the year, which will service clients on listed derivatives and OTC products and it is further boosting prime services sales teams in continental Europe.

FDIC initiative announced

The FDIC last week announced multiple initiatives and resources related to the deposit insurance application process for organisers of new banks and to promote a more streamlined process for all applications submitted to the agency. One such initiative is the option to request feedback on a draft deposit insurance proposal before filing a formal application, thereby providing an early opportunity for both the FDIC and organisers to identify potential challenges with respect to statutory criteria and areas that may require further detail or support. The agency also wants to streamline its application process and is seeking comments on how that can be achieved. The move has been welcomed as the final step towards enabling fintechs to compete with traditional banks.

ILS head appointed

Aon has promoted Anup Seth to the new role of global leader of underwriting solutions. In addition to his current role as md of Bermuda operations, Seth will lead the newly created underwriting solutions line that includes global commercial re/insurance, White Rock and ILS management businesses.

Sears CDS development

Following the latest discussions in relation to the Sears CDS saga among the external review administrative meeting, the determinations committee (DC) has agreed to extend the deadline to hold the oral argument until 19 December, 2018 and to extend the external review decision deadline until 21 December. The DC will reconvene following publication of the external review decision to finalise the auction date but it is not expected to be held before 7 January 2019.

Structured Finance

STS guidelines published

Sector developments and company hires

P2P head hired

Dynamic Credit has hired Giles Andrews as chairman of its supervisory board. The board will have three members and serves to strengthen the corporate governance of Dynamic Credit Group (DCG), which comprises of the asset manager and direct lender Dynamic Credit and the investor servicing platform LoanClear. Andrews is co-founder of Zopa and, in addition to his new role, also acts as chairman at MarketInvoice and non-executive chairman of Bethnal Green Ventures.

Infra director appointed

JCRA has hired Dawn Kravitz as director in the firm’s project finance and infrastructure team. Dawn will be based in London and report to Rishin Patel who is responsible for JCRA’s project finance, infrastructure and PPP business across EMEA, Asia and Australasia. Dawn joins JCRA from MUFG Securities, where she spent 11 years working in the firm’s derivatives solution team, of which she was an initial member.

STS guidelines published

The EBA has published its final guidelines regarding a harmonised interpretation of the criteria for securitisations to be STS-eligible on a cross-sectoral basis throughout the EU. The guidelines – developed for both ABS and ABCP – will provide a single point of consistent interpretation of the STS criteria for all entities involved in STS securitisation, including originators, sponsors, investors, competent authorities and third-party STS verifiers. They will apply from 15 May 2019, although in order to support a consistent interpretation of the STS framework across the EU, it is expected that competent authorities will generally apply them from the application date of the EU securitisation framework on 1 January 2019.

Structured Finance

ABSPP plans published

Sector developments and company hires

APP reinvestment set

The ECB has outlined the technical parameters for the reinvestment of the principal payments from maturing securities purchased under its asset purchase programmes after net asset purchases cease at end-December 2018. It expects to reinvest ABSPP redemptions back into the ABS market and CBPP3 redemptions back into the covered bond market. The bank says it will aim to maintain the size of its cumulative net purchases under each constituent programme at their respective levels, as at end-December 2018, although limited temporary deviations in the overall size and composition of the APP may occur during the reinvestment for operational reasons. ABSPP redemptions stand at €7.4bn over the next 12 months, representing approximately 26.2% of the portfolio, according to Rabobank figures.

DBRS registered

ESMA has registered DBRS as an additional ratings agency within the European Union. Following the ESMA registration, Frankfurt-based DRBS is now fully operational and authorised to issue credit ratings for use in the EU and through its Nationally Recognised Statistical Ratings Organisation (NRSRO) and Designated Ratings Organisation (DRO) affiliate designations in all North American markets. With its London-based sister company, DBRS will serve all European markets before and after the withdrawal of the United Kingdom from the EU.