Contents

Structured Finance

Stand-out performer

Systematic role for structured credit

Funds focused on structured credit were, as a whole, stand-out performers in 2018. Of the 50 US structured credit funds tracked by Gapstow Capital Partners, 88% had a positive year, implying that there continues to be a role for structured credit more systematically in diversified credit portfolios.

The Gapstow Credit Index finished 2018 up by 1.5%, with steady gains from the first three quarters partially offset by losses (-2.8%) in the fourth. The index outperformed a 50/50 blend of high yield bonds and leveraged loans by +2.3%, investment grade credit by 4% and equities by 5.9%. The top four performing peer groups in 2018 were focused on structured credit and all produced low- to mid-single digit positive returns.

“Last year was notable in that the structured credit market hung in fairly well. Returns weren’t stellar, but they were higher than those seen in equities, high yield and high-grade bonds,” observes Chris Acito, ceo and cio at Gapstow.

He continues: “In previous years, most multi-sector structured credit managers had CLO and MBS exposure, but 2018 was different as most portfolios were on the lighter side of CLOs and heavier in consumer and esoteric assets. They were also more active in direct lending and private loan markets – such as non-qualified residential mortgages and transitional commercial real estate loans - which did not see mark-to-market declines in line with the securities markets.”

The firm’s credit peer group report for 2018 shows that corporate structured credit, including CLO-focused funds, performed the least well of the structured credit sectors - albeit survived the sell-off seen at year-end - while US CMBS and RMBS performed the best. Further, Structured Credit: Multi-Sector, the top-performing peer group in the Gapstow study, outperformed the peer groups that contribute most of its underlying exposures (i.e. peer groups specialising in CMBS, RMBS and corporate structured credit).

The firm attributes this to the fact that most multi-sector managers’ largest exposures are to RMBS and CMBS, which held up better during the Q4 sell-off than corporate exposures, such as CLOs and synthetic credit. In addition, multi-sector managers undertake a greater degree of hedging relative to their specialist counterparts.

“It’s important to remember that there is no one singular credit cycle and that the borrowing needs of consumers and property owners continues. While most of the sell-off hit corporate credit, mortgages fared well due to positive fundamentals and a lack of technical pressure from the retail sector,” Acito explains.

Indeed, while the market has typically focused on the exposure of CMBS to retail, Acito believes the fact that the sector has proved not to be the next ‘big short’ is more significant. “Positive fundamentals meant that CRE prices and the ability of borrowers to pay bonds back were strong.”

Among the 14 peer groups tracked by Gapstow, dispersion among the peer groups between the top and bottom strategy was the lowest ever in 2018. However, dispersion within each peer group between the top and bottom funds remained elevated.

“In previous years, getting the strategy calls right was what drove returns. But in 2018, manager selection decisions may have had more bearing on performance than allocation decisions among credit strategies,” Acito notes.

Looking ahead, he suggests that the structured credit market stands in good stead. “There is no reason to believe that there will be a fall-off in 2019. In fact, we expect a reasonably healthy year, especially as January returns are coming in strong and we’re seeing a nice bounce back.”

He adds: “Within structured credit, at a high level, I don’t necessarily believe managers will pursue different strategies this year. Certainly, structured credit managers seem more positive about 2019 than long/short managers, albeit some caution remains among all managers. For CLO investors, we’re seeing tactical rather than wholesale changes in strategy, such as preferring to be active in secondary rather than primary because the arbitrage is challenging.”

The Gapstow study shows that structured credit peer groups have consistently outperformed, as each has generated a top-five performance in at least five of the past seven years. Moreover, each has underperformed the Gapstow Credit Index only once, highlighting the persistence of the opportunity in the structured credit markets.

Gapstow’s credit peer group report summarises the 2018 performance of 141 credit-oriented private funds organised into 14 peer groups, where ‘credit’ is defined as including all forms of below-investment grade rated debt. For inclusion in the peer groups, the firm selects only those funds that it believes are representative of a given strategy, of sufficient size to successfully implement the strategy and readily accept capital, and allow for periodic redemptions.

Corinne Smith

NPLs

Restructuring incentive

Greece unveils mortgage NPL boost

The Greek government is working on a plan that aims to meet ECB non-performing loan reduction targets and help improve the attractiveness of non-performing portfolios, in particular, distressed mortgages. The plan includes subsidising monthly payments and protects borrowers from foreclosures under certain conditions, although this could render it antithetical to EU state aid rules.

According to George Kofinakos, md at StormHarbour: “For years, mortgages have been a sensitive issue, due to legislation and others factors that made foreclosures a contentious issue. The latest scheme helps in this respect and can help boost mortgage NPL deals, both portfolio sales and securitisations.”

However, a question remains as to whether the scheme complies with state aid rules. This doesn’t mean that the EU will reject the plan, but it may seek reductions in the ceilings of the eligibility criteria.

Kofinakos continues: “The added benefit of the new scheme is that it can incentivise borrowers to engage in restructurings, due to subsidies and haircuts. Banks can expect €10bn of recoveries from the nearly €30bn mortgage NPLs over the next 10 years. It’s not much given the scale of the problem, but it is significant.”

The new scheme sets a number of eligibility criteria, such as a €250,000 and €130,000 ceiling on the commercial value of primary residences and outstanding loan balances respectively. Annual income criteria for foreclosure protection, consists of €12,500 for single borrowers and €36,000 for a family of five.

The Greek government will subsidise one-third of monthly payments and borrowers will also benefit from haircuts. However, if an eligible borrower doesn’t fulfil their monthly obligations for three months, they are automatically excluded from any foreclosure protection.

The scheme is a compromise between lenders and the government and it’s modelled after the Cypriot Estia programme. Given the benefits of the plan, it is unclear why it wasn’t agreed earlier. Market sources believe that the government waited for this May’s anticipated general election to market the scheme to the public and before foreclosures impact households.

Greece has witnessed a reduction in its NPL stock from a €107.2bn peak in March 2016 to €85bn in September 2018. Of this €85bn, nearly a third consists of mortgages. Greek banks have committed to a 60% reduction in their NPL stock by the end of 2021, so dealing with mortgages will be an important step going forward.

The new programme follows the announcement of other plans that are also in the works, such as the finance ministry’s (SCI 12 October 2018) and the Bank of Greece’s securitisation (SCI 27 November 2018) plans. The scheme is subject to Troika - the trio of Greece’s lenders, comprising the IMF, the European Commission and the ECB - approval.

Stelios Papadopoulos

Derivatives

Surging ahead

CDX grows while TRS is found wanting

CDX indexes have become an integral tool for many credit fund managers in Europe and the US, both for hedging and relative value. Total return swaps (TRS) however, and other more complex credit derivatives, are not favoured as highly due to liquidity and counterparty concerns.

Stephen Thariyan, co-head of developed markets at BlueBay, comments that his firm is a “heavy user of index CDS – particularly Crossover and Main” because it is “effective, economic and liquid”. He adds: “These provide a good way of getting exposure on areas of the credit market. They can be used not just for generating alpha but also for hedging.”

He comments that they can also be used as a useful barometer of the markets, particularly as volatility in various markets across the globe will usually lead CDX to widen out. In such instances CDX allows firms like BlueBay, says Thariyan, to take a long or short view on credit performance in a tradeable and effective manner.

Kevin Akioka, vp and senior portfolio manager at American Century Investments, says that credit derivatives have seen an uptick in usage among credit managers, with CDX leading the way. He says that a “game changer” for the instrument was in its evolution to an exchange traded product, making it more liquid, deeper and transparent, which boosted investor engagement.

His firm has come to use CDX indexes as a core part of its investment strategy. “We have focussed largely on HY and IG CDX and we like them as they are both liquid and transparent and they make sense for our firm to use as a tool, mainly in two ways” says Akioka.

He continues: “One is tactical usage:  For example, we may use them when we want exposure to the credit market and CDX allows us to do this in large volumes and very quickly. If we wanted to get exposure in credit with HY or IG cash bonds, the process would take far longer.”

Furthermore, Akioka says his firm uses them as part of a longer term strategy “where we might want to reduce our exposure to credit so we short the index and buy protection on a portion of the market,” he says. “We may then sell bonds in the open market and unwind our CDX short position.”

An example of this, he adds, was during a period of high volatility in December last year - the firm added exposure to HY/IG using CDX as the firm judged the market to be oversold. They were then able to capitalise on this situation, he says, when the market normalised in January.

He also agrees with Thariyan that CDX can be used as a barometer and says it “works fantastically in that regard.” He adds that the index makes it “very easy to gauge market sentiment and is a great indicator of where the market is heading as it quickly goes up or down in price.”

In terms of utilising other credit derivatives, Thariyan says that he avoids the more complex products for liquidity reasons but concedes they have their uses. With regard to TRS, he says his firm has “found that with TRS there is a limited number of counterparties involved and so there is naturally a lack of competitiveness in the product, which can mean that it isn’t always a cost-effective product. There is also a lack of transparency in terms of the product, particularly in terms of underlying costs.”

Akioka largely agrees: “We haven’t used TRS in our bond portfolios recently, primarily because you are generally confined to one counterparty for the life of the trade.  If it developed and it became seamless to trade TRS from dealer to dealer then it might appeal to us and others more broadly.” 

He continues: “TRS are good for getting exposure to a very specific part of the market, and some investors may want that, despite the lower level of liquidity.  We generally use credit derivatives to get quick and liquid exposure to the markets, and CDX is much better than TRS for that objective.”

Thariyan says, equally, that TRS could appeal to the firm in future, if the circumstances are right. He adds: “It can be a great tool in taking a view on a fixed income portfolio and if the market is able to mature and more participants enter, we would be happy to look at it more closely, but at the moment the complexity, lack of counterparties and cost effectiveness is a barrier.”

In the region of single-name CDS, Thariyan says that it is a very useful tool to gain exposure on single-names but says that it now has a number of drawbacks. “Notional trading volumes on single-name CDS has fallen drastically, liquidity has fallen and the amount of counterparties available to trade single name CDS has fallen from around 50 major ones to only around 5 now. As a result there can be a high entry cost and, especially, it can be hard to exit economically.”

Single-name CDS also isn’t a tool Akioka’s firm has engaged with recently, although has in the past. He says: “The main issue now is that liquidity has really dropped off. It is still, however, the best product available to hedge single names. I do think that it could see a rise in usage if volaitility increases.”

He continues: “If you’re on a rising tide, you don’t necessarily need or want tools to hedge individual names, but when volatility picks up, hedging individual names makes sense. Currently we still favour CDX as the most efficient hedge as it is much more liquid and transparent.”

Thariyan also agrees on the point that single-name CDS could grow with an increase in volatility, but says it depends on whether banks feel it is economical to trade the instrument and whether investors feel confident that they will be able to sell out of a position at an economic level. He says that if that happens he could see single-name CDS use increasing.

Index CDX is likely to lead the way in terms of any growth in credit derivatives, says Thariyan: “Index trading has grown in the last few years with an increasing perception of volatility and I think this will certainly continue. There seems to have been an increase in banks expanding their credit derivatives desks and I think this will continue to happen, albeit slowly”.

Looking to the US, Akioka takes a similar view and says that he can see continued growth of the CDX markets, but isn’t sure about innovation in the sector or the development of new products. He concludes: “Anything new would have to offer the same level of transparency and depth as CDX, to compete. We wouldn’t like to therefore get involved in anything without this.”

Richard Budden

Structured Finance

Tough stance

ESMA insists on private securitisation disclosures

On 31 January, ESMA published a document that amends its draft regulatory technical standards (RTS) on securitisation disclosures. The initial RTS covers both public and private securitisations and it was rejected by the European Commission, following a market backlash (SCI 5 October 2018).

The amendments take into account the Commission’s criticisms of the original RTS by expanding the scope of no data options. The market has welcomed the extension of the no data options, given the compliance challenges in completing templates where the relevant information isn’t available. However, private securitisations will still have to comply and uncertainty remains over the transition period, as well as how to collate information stored in different data systems.

David Saunders, structurer at Santander, explains: “The extension of no data fields is a positive development; however, there are fields where the data exists on paper but their collation is difficult. An example of this is the corporate template that requires information on swaps linked to loans.”

He continues: “The information on the swaps may be segregated from the loans because it’s recorded in different systems that don’t interface with each other. The issue is further complicated by the expectation that you will have to comply with the templates over time.”

Similarly, a credit portfolio manager at a large European bank notes: “The no data options are a welcome development. But private securitisations will still have to comply with the templates, raising the IT and compliance costs because, even if you can provide the information, it’s stored in different systems.”

ESMA has extended the availability of the no data options to a number of new fields. There are five different no data options in the templates: ND1-4, which concern situations where there are no available data; and ND5, where the field is not applicable.

ESMA’s primary focus has been on the ABCP underlying exposure template that attracted the most attention and reflects the Commission’s request. Specifically, a total of 33 additional fields across all ABCP templates now allow options ND1-4 and 45 additional fields allow ND5.

ESMA has also paid particular attention to corporate exposures, comprising the bulk of capital relief trades and are referenced in many other securitisations, including CLOs.

“Another change concerns significant events and inside information reporting. The amended RTS excludes private securitisations from the scope of the inside information and significant event templates. Private deals though will still have to comply with ESMA’s disclosure requirements, which remains a concern due to the steep compliance costs,” says Assia Damianova, special counsel at Cadwalader. 

The paper leaves other issues unaddressed, such as the application of the templates to non-EU deals. According to Amer Siddiqui, partner at Simmons & Simmons: “The rules don’t distinguish between EU and non-EU deals and it appears that both have to comply with Article 7. Non-EU originators and sponsors may not be subject to the supervision of EU national regulators and therefore may escape EU sanctions.”

He continues: “Yet there is a strong argument for them to follow the disclosure obligations, including the new templates, if they want to attract investors that might be subject to the EU securitisation regulations. The market has yet to reach a common view on this because of the way Article 5(1) (e) is worded. However, in the meantime, investors should take a cautious and pragmatic approach.”

The most important unaddressed issue is the transition period. The market has long called for a sensible transition period, given the challenging task of adapting to the new templates. The Commission has the power to propose one, but the executive’s term is coming to an end this spring, so the focus is on closing existing files, rather than proposing further changes.

The fact that the European Parliament’s term also comes to an end this spring further complicates the situation. It is therefore expected that the Commission won’t be sending any new texts for Parliamentary approval after mid-March. Typically, once the Commission adopts an RTS, the text has to be scrutinised over a three-month period by the Council and the Parliament.

In the meantime, the market will have to comply with the Credit Rating Agencies (CRA) Regulation, which incorporates detailed disclosure requirements that historically only applied to public securitisations, but will now apply to private deals as well. This raises severe compliance challenges; in particular, for those reporting entities that have never provided information according to the CRA templates. The EU’s supervisory authorities have published a statement calling for a proportionate approach to the implementation of the CRA regulation, although even this is fraught with its own issues (SCI 4 December 2018).  

Jo Goulbourne Ranero, consultant at Allen & Overy, states: “The market will continue complying with the CRA regulation with the limited comfort offered by the ESA’s joint statement. However, there is no special provision around migration from the CRA templates to the ESMA templates.” 

Looking ahead, Siddiqui concludes: “The EU national regulators I’ve encountered want to encourage a well-functioning securitisation market. I would therefore expect a significant degree of pragmatism as the market tries to adjust to the new requirements, especially in areas where the requirements are unclear or where compliance is not possible.”

Stelios Papadopoulos

Structured Finance

UK paper on the block

European secondary ABS market update

The European secondary ABS market has rallied since the beginning of the year. However, activity now appears to be on hold until after 28 February, when a large BWIC auction is due at 2pm London time.

“Secondary activity has dampened down in the run-up to the auction,” confirms one trader. “The BWIC has a good chance of trading well, despite the block sizes on offer. Although dealers don’t appear to have much appetite for the paper, the lack of primary issuance is playing into the seller’s hands in terms of investor demand.”

The 24-item bid-list comprises around £750m of UK risk, across mainly senior RMBS 2.0 bonds, with a handful of legacy names and three 2018-vintage CMBS bonds. Of note, £149.57m original face of the TPMF 2017-A11X A1 tranche and £144.13m of the WARW 1 A tranche are out for the bid. US$75m of PARGN 12A A2C and €41m of PARGN 22 A1 are also included on the list.

The trader notes that there is no discount for size. “The bonds are likely to trade at normal flow prices, depending on the name. It’s possible that some could price through talk.”

The seller is understood to be a UK real money account disposing of its positions. “It’s unclear whether this is simply a pricing exercise. But the seller has been very active recently and around 90% of the bonds they put out for bid have traded in the past,” the trader says.

However, the trader cautions that the bonds on this latest BWIC are very common, so many investors may already be full on the names.

Corinne Smith

Structured Finance

SCI Start the Week - 18 February

A review of securitisation activity over the past seven days

Market commentary
European ABS traders continued to focus on the secondary market last week, as the market waits for regulatory clarification (SCI 15 February).

"In European RMBS, we are focusing mainly on secondary paper," said one trader. "The transactions that appeal at the moment are those with a shorter WAL of one or two years, mainly in senior or mezz."

The trader added that any deals with a larger step-up in coupon are trading fast. "The most interesting ones in this regard are the Hawksmoor or TPMF deals."  

Notwithstanding light primary issuance volumes, another trader highlighted Lanark 2019-1 as a stand-out transaction, which displayed "very strong execution". He said: "The deal was a good return for UK prime RMBS, which has been in dismay after the long stream of UK non-conforming/buy-to-let transactions. The lack of any substantial new issuance in January - in terms of core paper - made for a thirsty real money community."

Meanwhile, away from RMBS, the Aurium CLO V also caught the market's attention, as it was the only deal recently without an anchor investor. The CLO pipeline "remains heavy", but other transactions are also awaited, including a rumoured Italian telecom CMBS.

Transaction of the week
Fintex Capital has completed a structured finance transaction within its UK real estate lending business, Fintex Confluence. The transaction involved the refinancing of a portfolio of property loans - warehoused by Fintex - with senior financing provided by Europa Capital Debt Investment (ECDI) and junior financing by Fintex, with additional monies invested by Europa and Fintex to finance a further expansion of the programme (SCI 14 February). The transaction is one of only a few privately placed tranched deals.

Robert Stafler, ceo at Fintex, explains: "It's similar to an RMBS because every portfolio loan is executed and documented in the same way. The significance of the transaction is that it's one of the few privately placed tranched deals and the returns are more attractive compared to comparable public deals."

He continues: "However, the investment is not illiquid because it's not long-term. Nevertheless, given the strong credit integrity of the portfolio, we are very comfortable with the lack of daily liquidity. Investors in public markets pay a large premium for liquidity, but often don't find much of it when they need it most. Consequently, we are willing to surrender this perception of liquidity to capture better risk-adjusted returns."

Brexit has been another driver behind the transaction. Stafler notes: "With so much Brexit uncertainty, it's not easy to do deals in the UK, which is why many investors currently remain on the side-lines. However, if you would like to put capital to good use, residential is safer than commercial property, and granular portfolios are safer than concentrated ones. This is why we opt to continue growing this structured asset-backed residential debt portfolio."

Technology plays a major role in the firm's strategy, since managing a large portfolio requires several legal documents and valuations; the proprietary technology tools ensure that everything is in place. "This creates a culture of lending discipline, which is very important, given our manager role for both the senior and first-loss piece of the deal," says Stafler.

The underlying portfolio consists exclusively of senior loans secured by UK residential properties. These residential assets were independently valued at between approximately £250,000 and £800,000 per property, with an average property value of approximately £500,000.

Other deal-related news

• The first ABS backed by oil and gas royalties could hit the US market this year. The diminished availability of traditional funding sources is leading to increased reliance on securitisations to supplement traditional reserve-based lending facilities (SCI 15 February).
• Banca Nazionale del Lavoro has completed a €968m (GBV) non-performing loan securitisation of both senior secured and unsecured loans. Dubbed Juno 2, the transaction has a short weighted average life for collections, compared to other NPL securitisations rated by Scope (SCI 11 February).
• Bank of Cyprus has signed an agreement for the sale of a retail unsecured non-performing loan portfolio with APS. Dubbed Project Velocity, the transaction is a test case that may further fuel future NPL transactions by the bank (SCI 15 February).
• Praetura Asset Finance Group has closed a £75m securitisation facility with NatWest Markets. The rated facility will allow PAF Group to expand its origination capacity, enabling growth in its loan book to provide up to £200m to SMEs across the UK (SCI 14 February).
• The LUXE 16 loan, securitised in the RCMF 2018-FL2 CRE CLO, turned 30-days delinquent last month. The sponsor has made some payments since then and intends to refinance the loan in mid-March. For more CRE-related news, see SCI's CMBS loan events database.
• US agency CMBS volume has risen at an average clip of 50% per year post-crisis, hitting a record US$107.9bn of issuance in 2017. A new Trepp study suggests that the sector's growth has come at the expense of private-label multifamily origination (SCI 13 February).
• Leopalace 21 Corp has disclosed that additional construction defects have been discovered in apartment buildings that it built (SCI 29 June 2018), which Moody's says are credit negative for the four ABS transactions it rates that are backed by apartment loans on properties built and managed by the firm. The agency warns that the defects could lead to lower rents or higher vacancy rates in the affected buildings (SCI 14 February).

Regulatory round-up

• The Italian Competition and Markets Authority (Autorità Garante delle Concorrenza e del Mercato) recently fined nine captive auto finance companies a total of over €678m for distorting the Italian auto finance market. DBRS believes the move should not materially affect Italian auto ABS, although the agency notes that prepayments could increase as borrowers seek to terminate early with improved competition (SCI 15 February).

Data

Pricings
A mixed bag of transactions priced last week, with ABS, RMBS and CLO issuance picking up. A retained RMBS and a CLO represented the only European prints.

Last week's auto ABS pricings consisted of: US$402.5m Credit Acceptance Auto Loan Trust 2019-1, US$1.25bn GM Financial Automobile Leasing Trust 2019-1, US$710.57m Hyundai Auto Lease Securitization Trust 2019-A, US$1.043bn Santander Drive Auto Receivables Trust 2019-1 and US$1bn Westlake Automobile Receivables Trust 2019-1. The non-auto ABS pricings were: US$647m Navient Private Education Refi Loan Trust 2019-A, US$553.6m SoFi Consumer Loan Program Trust 2019-1, US$185.87m Upgrade Receivables Trust 2019-1 and US$562.5m World Financial Network Credit Card Master Note Trust 2019-A.

The US$336m Deephaven Residential Mortgage Trust 2019-1, US$223m Galton Funding Mortgage Trust 2019-1, €3.5bn Home Loan Invest 2019 (retained), A$300m Medallion Trust Series 2014-1 (refinancing), US$222m Residential Mortgage Loan Trust 2019-1 and A$3bn Series 2019-1 WST Trust accounted for the RMBS prints. Among the CLOs to price last week were the US$350m ABCPI Direct Lending Fund CLO V, €447.75m Aurium CLO V, US$506m Barings CLO 2019-I, US$506.15m BlueMountain XXIV CLO, US$606m Octagon CLO 40, US$403m TCW Asset Management CLO 2019-1 AMR and US$398.7m Voya CLO 2019-1. Finally, the US$825m GPMT 2019-FL2 CRE CLO, as well as the US$276m BBCMS 2019-CLP and US$756m GSMS 2019-GC38 CMBS were issued.

BWIC volume

CLOs

AMR auction due

Caution over anchor investors, arrangers remains

The first US CLO applicable margin reset (AMR) auction on the KopenTech platform is likely to occur in February 2020, at the end of the respective deal’s non-call period and two years after the auction service provider’s launch (SCI 30 January). However, while many CLO managers recognise the value of including a low-cost, streamlined refinancing option in their deals, they remain cautious about concerns from anchor investors and arrangers.

An AMR auction protocol allows CLO debt – whether it be a single tranche or a number of tranches – to be refinanced via the secondary market, cutting the costs of refinancings by 70% and completing within 21 business days. The KopenTech platform is based on a Dutch auction system, which allocates bonds to the lowest margin bidders until all the bonds are placed. All new holders receive the highest margin that cleared the entire tranche, even though their bid may have been lower.

“A Dutch auction is a fairer allocation process because it provides transparency and allows smaller players to be involved via broker-dealers. It is efficient for CLO managers too: not only does it streamline the refinancing process and provide optionality, the extent of demand is also reflected in lower spread levels,” observes Anthony Schexnayder, head of business development at KopenTech.

The KopenTech auction involves three phases: initiation, auction and settlement. At the end of a CLO’s non-call period, the manager or equity holder can call for an AMR. The CLO’s trustee and broker-dealers are then contacted via the KopenTech website to notify noteholders and other accounts of the auction.

The auction is held between 8am-10am, with the allocations subsequently checked to ensure they are correct. Settlement follows, when a mandatory tender is issued to noteholders and the trustee distributes the redemption price and accrued interest via the DTC.

“AMR is the most efficient way of refinancing because it digitises the process and obviates the need for arrangers, rating agencies and law firms. The mechanism puts power in the hands of investors to execute an investment strategy based on their bid, as well as allowing managers to ride down the maturity curve,” Schexnayder notes.

He continues: “However, our biggest challenge is raising awareness of the protocol and changing the mindset of market participants. There is somewhat of a conservative attitude towards new technology and structural innovation.”

CLO refinancings are not expected to be as prevalent in 2019 as they have been in previous years. Yet Schexnayder believes that if a CLO is in-the-money, AMRs still make sense.

“An AMR can relieve the pressure on the arbitrage in the current asset-tightening environment. Plus, it’s usually in the manager’s interest to keep a deal going. AMR augments a transaction, rather than precluding traditional refi/resets,” he explains.

So far, three US CLOs have embedded AMR protocols and KopenTech has a pipeline of several more managers. The firm plans to release other applications this year.

“One other potential way of employing the AMR technology is to structure a portion of the triple-A notes to periodically conduct AMR auctions (i.e. every three months), allowing them to refinance at the short end of the curve, subject to there being enough demand for short paper,” Schexnayder notes.

The TCW CLO 2019-1 AMR transaction – which priced last week – is the latest CLO to include an AMR mechanism, with a non-call period that ends on 15 February 2020. The deal was arranged by MUFG, which has previously arranged a number of deals featuring AMRs, including the Crescent Capital-managed Atlas Senior Secured Loan Fund VIII that debuted the protocol with Sancus Capital as equity investor (SCI 27 June 2017).

Corinne Smith

CLOs

TruPS flurry

CLO activity expected to pick up post-conference

US CLO activity is relatively quiet after a long weekend but is expected to pick up after ABS Vegas. A flurry of TruPS CDO activity is keeping traders engaged.

A trader says the TruPS CDO market is currently "by appointment only" but highlights a portfolio of PRETSL  B tranches - totalling US$87m - out for the bid tomorrow (See SCI's BWIC Calendar). Investor appetite is, however, uncertain as “the market has been pickier recently in its choices” says the trader.

Another TruPS CDO is also expected to trade. The trader comments: “TPREF 3 came up today which will certainly be fully liquidated by end of business today. This is made up of 13 performing tranches totalling US$123m and three defaulted tranches totalling US$35.5m.”

The trader adds: “The buyer will likely be someone looking to re-securitise the notes and probably be someone that’s securitised in the last year or so. EJF Capital has recently priced a deal – they’d be a good candidate.”

Elsewhere, activity has been somewhat muted. “The CLO market has been quiet recently and we haven’t seen great volumes traded,” says a trader.  “We’re in something of an in-between phase this week after a long weekend and the conference at the end of the week.”

The trader adds that “we may see a post-conference rally” and suggests that “there seems to be a general push to clear the pipeline ahead of an expectation of new issuance”. In secondary, the trader says there is a “slight preference for shorter deals” and a general move towards trading conservatively and for relative value.

Consequently, the trader says the majority of trading is at the top of the capital structure in single-A and triple-B and there “isn’t a lot of equity for sale”. The trader concludes, however, that “BCC’s equity piece traded recently and a few DNTs were seen on Steel Creek’s equity. These are good examples of high cash flow deals with good arb. They have strong financing and the triple-A notes are set at good levels.”

Richard Budden

Capital Relief Trades

Maintaining flexibility

Fiona Walden, vp, credit and financial lines at RenaissanceRe, answers SCI's questions

Q: How and when did RenaissanceRe became involved in the securitisation market?
A: We were set up 25 years ago as a property catastrophe company. We have a long track record of credit reinsurance for our insurance company clients. More recently, we applied this knowledge and expertise to structured credit transactions - including significant risk transfer transactions - by providing unfunded guarantees on a first or second loss basis to banking clients.

Q: How do you differentiate yourself from your competitors?
A: Our key focus is building long-standing partnerships in order to provide meaningful and long-term support to our clients. Through extensive due diligence and our understanding of the bank’s internal systems, we can use our underwriting expertise and our ability to create and adapt risk models to deliver simple, swift and effective solutions for our clients. We are one of only two reinsurers or insurers to have executed unfunded guarantees in SRT trades.

We take the time to understand our counterparty and our exposures, similar to funded investors. Overall, we want to provide support to our clients through the cycle rather than opportunistic involvement. Our underwriting expertise and superior risk modelling enable us to be confident with the risk that we assume.

Q: In your opinion, what are the major opportunities in the risk transfer market going forward?
A: We have a broad appetite and we are flexible in terms of asset class, sector and jurisdiction, since our goal - and one of our key strengths - is to most efficiently match risk with capital. One development that we are watching closely is the spread of the dual tranche technique. Given our flexibility, we are in a position to assume a thicker second or first loss piece, or engage in transactions with funded investors.

As the protection we provide is unfunded, we don’t require a return on any collateral. This enables us to have more flexibility, which we emphasise as part of our efforts to increase awareness over the usage of unfunded guarantees in SRT transactions. 

Stelios Papadopoulos

Structured Finance

CLO firm restructure

Company hires and sector developments

Acis restructuring confirmed

The US bankruptcy court in Dallas has confirmed Acis Capital Management's Chapter 11 restructuring plan, following its conversion from an involuntary bankruptcy case initiated by former head of Highland Capital Management's structured products team and founder/former partner in Acis Joshua Terry (SCI 9 November 2018). Upon emergence from bankruptcy, Acis will be owned and operated by Terry, while retaining substantial litigation claims against Highland, its affiliates and principals James Dondero and Mark Okada. The plan of reorganisation proposes to pay creditors in full. Brigade Capital Management is currently acting as sub-adviser for the Acis CLOs.

DLT ABCP pilot

Weinberg Capital is set to issue and settle ABCP notes via a distributed ledger technology-based online electronic platform during a pilot phase. The platform will also record the ownership of the DLT ABCP notes, which will rank pari passu and benefit from the same security as other ABCP notes issued by Weinberg Capital, including full liquidity support and indemnity provided by the programme administrator LBBW. Moody's has determined that the pilot issuance will not result in the downgrade or withdrawal of the rating currently assigned to the notes previously issued by the programme.

Fund service repositioned

Intertrust has has repositioned its fund services team in the Channel Islands to ensure future growth and development. Two specialist service teams, private equity and real estate, have been defined within the fund service line in the Channel Islands. Michael Johnson, head of funds in the Channel Islands, now oversees both Intertrust’s private equity and real estate businesses. He will lead a team of more than 150 fund service specialists across Jersey and Guernsey, making Intertrust one of the largest fund administration businesses in the islands. Alex Di Santo, as head of private equity, will continue to lead a team of 65 industry specialists and grow Intertrust’s private equity business in Jersey. Di Santo has more than 15 years’ experience in the sector and a comprehensive knowledge of offshore and onshore fund structuring. Kees Jager, as head of funds Guernsey, will focus on growing the business in the island and strengthening the links between the Guernsey and Jersey teams. Jager has over 19 years' experience working in fund administration. Jane Stammers has been appointed head of real estate and has more than 20 years’ experience in offshore administration, specialising in providing strong offshore management and corporate governance. She has comprehensive technical and practical expertise of real estate structures, including acquisition, financial, structuring and disposals. 

Private assets head appointed

Schroders has hired Georg Wunderlin, most recently the ceo of HQ Capital, to the newly-created role of global head of private assets in May. He will focus on developing and executing Schroders’ private assets growth strategy across these specialist asset classes on a global scale and enabling the business to better deliver private assets-focused investment solutions for clients.  He will report to group chief executive Peter Harrison and join the Group Management Committee.

Structured Finance

Law firm nabs SF vet

Company hires and sector developments

Europe

Latham & Watkins has recruited Jeremiah Wagner as a partner in its finance department, based in London. Wagner’s practice focuses on advising banks, private equity funds, asset managers, insurance companies and pension funds on a variety of complex structured finance, securitisation and derivatives transactions. He joins the firm from Cadwalader’s London office, where he was a partner.

PACE appointment

Residential PACE financing provider Energy Efficient Equity (E3) has appointed Rasool Alizadeh as cfo. Alizadeh has more than 15 years of experience in providing and facilitating debt and equity liquidity planning to specialty finance platforms. Prior to joining E3, he was treasurer and head of capital markets at Ygrene Energy Fund, where he jumpstarted that company’s securitisation platform and managed all liquidity needs, raising over US$1.5bn in debt and equity. Prior to this, Alizadeh spent time at SMBC Nikko Securities, RBC Capital Markets and S&P, working in structured products across multiple asset classes and clients.  

USA

McGuireWoods has hired Margaret Seurynck, who brings more than 15 years of experience advising clients, including national and multinational banks and private equity firms, in complex financings. Seurynck, who joins the firm’s Chicago office, represents lenders and borrowers in transactions such as secured and unsecured loans, asset-based and cash flow loans, and single-bank and syndicated credit facilities. She also handles structured finance arrangements, including structured note tax credit finance transactions and commercial paper programs. She comes to McGuireWoods from Jones Day, following the January addition of highly regarded finance partner Chris Molen, who joined McGuireWoods in Atlanta.

Napier Park Global Capital has named Joseph Lane vice-chairman and a member of the firm’s management committee. Lane is currently an md in the firm’s real assets group, having joined Napier Park’s private equity group as an md in July 2015. He previously held a number of executive roles in the commercial finance sector and also co-founded Sinter Partners.

Structured Finance

CLO partnership launched

Sector developments and company hires

CDS trends discussed

Mayer Brown has commented on trends in single-name CDS credit event determinations. It notes that the Sears CDS case cited “numerous examples of commercial practice and legislative history in support of the decision [and] raises serious questions as to the degree to which the determination committees (DCs) are (and will in future determinations be) influenced by such factors.” It adds that this poses the question: “how will the DC reconcile the position where a conflict arises between the commercial purpose of the CDS market and the ordinary legal interpretation of the contract?”

Mayer Brown comments that, as with the Sears case, it seems “likely that commercial considerations played a part in the outcome of the Ziggo determination.” The firm adds that, some in the market might suggest the DC process should give more weight to the intended purpose of the product than a court might and try to avoid outcomes that may seem unfair or unusual. However, the law firm notes that “for lawyers trying to provide guidance to their clients on the interpretation of their contracts, weaving contract law with the emerging CDS lore presents a significant challenge.”

CLO partnership

HalseyPoint Asset Management has formed a partnership with A-CAP, a privately held company affiliated with multiple insurance and financial businesses, to support HalseyPoint's launch and ongoing operations. The founders of HalseyPoint, Lynn Hopton and Yvonne Stevens, will contribute to the company's working capital alongside A-CAP and certain of its affiliates, which will also provide significant equity and debt capital investments to anchor HalseyPoint's initial slate of CLOs. Additionally, A-CAP will extend additional services to HalseyPoint and ongoing support for the issuance of future CLOs. Hopton and Stevens will manage HalseyPoint's operations, as well as its investment process and credit committee. They are both 25-year veterans of the institutional leveraged loan and CLO markets, and previously served as co-heads and senior mds of Columbia Management’s leveraged debt group.

Fraud investigation

Law firm Pomerantz is investigating claims on behalf of investors in Domino's Pizza, concerning whether Domino's and certain of its officers and/or directors have engaged in securities fraud or other unlawful business practices. The move follows a recent report on the franchisee community website Blue MauMau that a whistleblower report filed with the US SEC details how Domino's allegedly forced and orchestrated an unapproved advertising and promotion increase to franchisees in order to pay a US$1.85bn securitisation transaction with a new partially funded US$1.67bn securitisation debt owed to securitisation entities. The report contends that in return, Domino's Pizza's ceo, board members, officers and employees “could enjoy higher stock prices and dividends through share repurchases and dividend payouts”. Following publication of the Blue MauMau report, Domino's stock price fell sharply during intraday trading yesterday (20 February).

RMBS discussions

The Finsbury Square 2016-1 RMBS issuer has disclosed discussions with the Northview Group in relation to the purchase of the loans in the underlying mortgage pool. Such discussions may lead to the redemption of the notes, although it states they are ongoing and preliminary in nature. If the deal is not called, the margin step-up for the senior tranche is x1.5.

Structured Finance

Law firm boosts derivatives capability

Company hires and sector developments

CLO firm promotions

Churchill has announced the promotion of Mat Linett, md, from deputy head of underwriting and portfolio management to head of underwriting and Eric Wieczorek to md, underwriting and portfolio management. Additionally, the firm announced several more promotions across the investment and finance teams, effective 1 March 2019.

Derivatives expansion

Dentons has expanded its derivatives practice with the hire of Yusuf Battiwala as partner in London. Battiwala was previously counsel at Allen & Overy and has extensive experience in advising on a wide range of OTC derivatives and structured finance transactions, as well as regulatory developments affecting these markets. He has particular experience in advising on conventional and Shari’a-compliant derivatives transactions in emerging market jurisdictions.

ILS hire

Hannover Re US has appointed Jeff Burt as president, responsible for the firm’s life and health reinsurance business in the US. Burt joined Hannover Re US in 2003 as vp, marketing and since 2009 he has led the financial solutions business unit, delivering capital-oriented solutions across the firm’s entire US portfolio, including capital relief, embedded value securitisations, structured insurance risk and reinsurance M&A. In 2014, he guided the establishment of Hannover Life Reassurance Company of America (Bermuda), where he continues to serve as president and ceo.

Mortgage platform boosts funding

BSI Financial Services, a mortgage servicing operations platform, has partnered with two institutional investors to purchase mortgage servicing rights (MSRs). This capability is funded by a capital raise in excess of US$140m, which was nearly three times the amount targeted. BSI Financial will source, perform due diligence and service MSR assets acquired in partnership with these investors.