Contents

Capital Relief Trades

Creative approach

Definition of CRT criteria evolving

As the drivers for banks to pursue risk transfer transactions have broadened over the last few years, lending criteria for the underlying assets have in turn become increasingly complex. Consequently, for structured or esoteric portfolios, capital relief trade issuers and investors are adopting a more creative approach to defining eligibility criteria and replenishment conditions.

A standard capital relief trade has two sets of criteria - eligibility criteria and replenishment conditions. Eligibility criteria govern what type of assets may be included in the pool, such as the type of credit exposures, the seniority of the exposures and the minimum credit rating. Replenishment conditions usually aim at maintaining portfolio diversity, including industry and country concentration limits, as well as rating grade buckets.

These criteria can be defined fairly easily, depending on the relevant product type and the originating bank’s ongoing business, according to James Parsons, portfolio manager at PAG. “The process of agreeing these criteria is well established and involves finding common ground between the bank and the investor. Where it becomes more complicated is when the underlying asset is more structured and is subject to lending criteria that are more complex than a counterparty credit rating, such as project finance loans.”

He continues: “The process is trickier because such loans are non-homogeneous and depend on the quality of the contract, who the off-taker is and so on. The variables are typically interdependent and it is therefore harder to come up with stand-alone parameters that define a satisfactory exposure. As such, both parties have to be more creative.”

In this case, it is necessary to understand how a bank underwrites the risk and then try to encapsulate it as simply as possible in the eligibility criteria and replenishment conditions. Parsons suggests that most banks are comfortable if around 90% of a business line can be captured within the definitions.

“The aim is to maintain a portfolio that is comparable to the initial portfolio within bounds that are agreed between the parties and clear. The bank typically assesses its comfort with replenishment risk – where the conditions are too tight to allow more assets to be added to the pool,” he observes.

He adds: “The challenge for banks is that they have to find an intersection between the requirements of at least three parties – what the bank seeks to achieve, what the investor requires and what the regulator permits. Regulations are reasonably well established for each jurisdiction, so the dialogue between investors and the bank needs to be optimised.”

PAG, for one, prefers replenishment because it enables a deal to have a longer life, which it believes is in the interest of both banks and investors. However, if it’s too complex to establish criteria or if the bank is less confident with replenishment, then the pool can be static.

Sometimes static deals are more appropriate for esoteric assets, especially if they have a decent life before they begin amortising. “We’ve seen a more diverse range of assets come to the market over the last five years, as the drivers for banks to pursue risk transfer have broadened,” Parsons notes. “Before then, most business was for high risk-weight assets – such as SME or emerging market pools - where banks were focused on achieving the greatest risk-weight reduction. These days the drivers are increasingly about return on capital – hence the emergence of project finance and CRE assets.”

Looking ahead, replenishment could present investors with the risk of weaker loans coming into the pool if there is a downturn in the business cycle. However, Parsons notes: “We spend time to understand the bank’s loan underwriting process and how it will respond through the cycle. Also, the Chinese wall between a bank’s credit portfolio management activities and the business origination and credit approval units is key to those units managing the bank’s loan exposure consistently without consideration of the hedge. Generally, it’s not too much of an issue to get comfortable, as we find the banks we work with to be appropriately conservative and highly professional.”

Corinne Smith

Capital Relief Trades

Control rights

Synthetic CRE investors gain comfort

Investors in risk transfer transactions referencing commercial real estate loans have become more comfortable with fewer control rights, following the inclusion of replenishment in the second wave of CRE capital relief trades last year. However, demand for greater control over such portfolios may arise if banks bring lumpier assets to market.

According to David Wainer, partner at Allen & Overy: “During the first CRE CRT wave back in 2017, some private equity funds came in and wanted to be more hands-on with work-outs and replenishments, given the smaller and lumpier portfolios of the first wave.”

He continues: “The second wave last year was more business as usual. Banks shifted to more granular portfolios and more standard replenishment provisions became a staple of second wave deals. There was more of a focus on the lending and underwriting standards of the banks, rather than detailed due diligence and control rights for each individual loan in the initial portfolio.”

Rendering the lumpier portfolios static is preferable for some investors, since they can further target their due diligence for specific exposures. However, replenishment offers other benefits, such as a longer life for the deals (SCI 7 March).   

The first post-crisis synthetic CRE wave began in December 2017 with the issuance of three transactions by Barclays, Santander and Lloyds. The second wave ensued with another trio of CRE deals by Santander, Lloyds and NatWest in December last year (see SCI’s capital relief trades database).

All six transactions reference UK portfolios, with total tranche notional sizes remaining broadly stable between 2017 and 2018. In 2017 CRE CRT total tranche notional reached £385.2m before dropping slightly to £356m in 2018.    

Capital relief trades referencing commercial real estate loans can feature an element of investor control while supporting business as usual for the bank. Under these ‘control-lite’ structures, the investor and bank agree a protocol that is designed to grant sufficient flexibility for the bank while providing protection for the first loss investor.

Control decisions tend to cover the addition of new loans into the portfolio, changes to loan maturities and leverage, and recovery strategy implementation. The difference between control-lite deals and CMBS transactions is one of degree. CMBS transactions, for example, could require investor consent for a one day extension to loan maturities as opposed to years for control-lite synthetic CRE deals. 

“Banks that opt for ‘control-lite’ structures are in a position to tap a pool of competitively priced capital that can move in size and speed. Key is choosing the right partner to risk-share with. We look beyond any immediate trade towards building a long-term relationship, which is going to endure through the cycle,” says Daniel Peart, principal at Blackstone.

Blackstone’s US$112.9bn total dry powder partly explains the private equity firm’s ability to work through the cycle. However, the dearth of opportunities in European CMBS has been the primary driver behind the shift to capital relief trades.

“Opportunities in European CMBS have been scarce and remain so; you just have to compare the US$105bn US CMBS market with Europe’s US$5bn one and there’s still the post-2008 stigma with CRE securitisation,” notes Peart.

He continues: “It’s easy to see the appeal of CRT trades compared to traditional European CMBS. It preserves the client relationship, cedes comparatively little control to the investor and avoids any third-party servicing costs.”

Nevertheless, control-lite structures remain restricted to more traditional CMBS investors, who do seek relatively more control - at least when compared to long-time CRT investors. “For us, a CRE CRT transaction is first and foremost a CRT transaction. This means that the bank should have full control rights over the eligible portfolio and our participation as investor will never be disclosed to the underlying borrowers. We see both facts as key principles of a synthetic securitisation, for all loan types, including commercial real estate,” says James Parsons, portfolio manager at PAG.

PAG has remained consistent in its approach, despite changes in control rights over the last two CRE CRT waves. Nevertheless, questions remain as to whether the more recent CRT and traditional CMBS investors will adhere to control-lite structures, should there be a re-emergence of first wave conditions.

Wainer explains: “Control rights have been significantly diluted in the second wave and this likely reflects the banks’ preferences, as well as the nature of larger and more granular portfolios. However, if new CRE CRT deals emerge again with less granular portfolios, then PE investors returning to the market are likely to seek more control.”

Whatever the future of control rights, Blackstone notes that it is here for the long term. Peart concludes: “Basel 4 should see CRE CRT issuance extend into continental Europe and we are well-placed to offer solutions to new entrants. Looking at medium-term head winds, we expect CRE CRT portfolios to weather the cycle well - given the relative strength of portfolios and structures, coupled with the underwriting and the servicing platforms of the banks we have paired with.”

Stelios Papadopoulos

Structured Finance

Isolation issues

DLT legal, operational challenges highlighted

A number of legal and operational issues still need to be resolved before blockchain securitisations are likely to be publicly rated. How distributed ledger technology will isolate securitised assets is one major challenge.

Of the five key rating factors that make up S&P’s analytical framework, for example, the agency highlights legal/regulatory and operational/administrative risks as the areas most affected by the application of DLT to the securitisation process.

The issue of how DLT will effectively isolate securitised assets from bankruptcy or insolvency of other transaction participants is the main challenge from a legal and regulatory perspective, according to Matthew Mitchell, director, structured finance ratings, S&P. He notes that to date, no clear legal framework for potential approaches to regulatory oversight of cryptoassets and DLT has been established in any jurisdiction.

Nevertheless, some regulators have begun to float proposals addressing these issues. For example, a recent UK FCA consultation paper proposes to define cryptoassets as being one of three types of tokens: exchange tokens (used as tools to buy and sell goods); security tokens (investments, including debt instruments); and utility tokens (which grant the holder access to services offered by the token issuer).

Similarly, certain US states have passed or proposed legislation governing some aspects of blockchain. For instance, several blockchain and fintech-related bills are making their way through the Wyoming legislature, including provision for a regulatory sandbox and a bill relating to digital assets.

Mitchell suggests that the ability to gain comfort from a ratings perspective will likely depend on the extent to which DLT is being used; in other words, whether the tokens are being held by an SPV or whether the securitisation incorporates smart contracts. If it is the latter – essentially pure code – it remains unclear whether it is enforceable.

“There are two different models that blockchain securitisations could adopt: the internal model, which is simply the underlying code; or the external model, which uses natural language contracts replicated with code, but with all the safeguards of the standard securitisation documentation in place. The industry is likely to follow the external model,” he indicates.

In terms of the operational and administrative risks represented by blockchain securitisations, a control framework is expected to be an important mitigant. One area that Mitchell cites as more challenging in the context of DLT is finding replacement administrators.

“We’re not sure how deep the market is for replacement technology providers or what the fees may be. Regarding the cashflow waterfall, if a securitisation is based on a smart contract, the waterfall may be disrupted – for example, if the code isn't executed or executed with fault – and the deal could default,” he observes.

One approach may be to rate to the likelihood of the insolvency of the party that is backing the cryptoasset. “We would have to assess each operator on a case-by-case basis, as there are so many different DLT permutations. But the assumption would be that the blockchain operator is formed under a trustee or is in a partnership to ensure its continuity,” says Thomas Zakrzewski, head of S&P’s blockchain task force.

Mitchell adds that currently S&P is focused on identifying the risks presented by blockchain and how they may be mitigated. “However, to the extent that asset performance could be impacted by a key blockchain party, we may cap the rating or decline to rate the deal,” he notes.

Notwithstanding these challenges, blockchain holds the promise of cost savings, operational efficiencies and improved transparency and accuracy across the securitisation market (SCI 7 September 2018). Among the potential advantages of DLT that S&P cites, for example, is the ability to create a set of smart contract templates that will enable quick establishment of a securitisation trust. Another is that data sets are provided in a structured format, enabling easy programmable reconciliation, more accurate cashflow reporting and the elimination of reporting errors or potential misrepresentation.

Corinne Smith

Structured Finance

Stronger tone

European ABS spreads tighten but supply muted

There is a stronger tone in the European ABS market overall and there has been spread tightening across the board, from RMBS to CLOs. Supply is still low, however, especially in ABS.

A trader says that a number of issuers in Europe are "ready to go", but they are still holding back as they await clarification around STS. The trader notes, however, that the market has been buoyed by the news of the authorisation of STS Verification International, a branch of True Sale International, as a third-party verification agent to provide the STS label on European securitisations.

The trader notes that “investors are not willing to sell paper as they are waiting for new issuance to come alive.” A problem for investors, the trader adds, is “that they don’t want to buy paper that may or may not be verified as STS.”

The trader adds, however, that the tone in UK securitisation has been very positive with strong trading of the Finsbury Square 2019-1 deal, which was trading at 97bp on the seniors. In general, the deal has good quality collateral and the spreads are quite attractive, says the trader.

There is, overall, strong demand for UK paper which also suggests that “people aren’t particularly bothered about the uncertainty regarding Brexit”. Regarding the Swiss Auto Lease 2019-1 transaction, which priced on Wednesday, the trader says that it seems more like it’s been issued for the domestic market, given that it has issued in Swiss Francs.

It therefore “doesn’t seem like a benchmark deal for the European market” and the biggest drawback of the deal, concludes the trader, is that “any currency swap would mean losing any extra yield.”

Richard Budden

CLOs

Improved tone

European and US CLO market update

A better tone in the CLO market has emerged on both sides of the Atlantic post SFIG Vegas. Mezzanine tranches, in particular, have benefitted from a tightening trend.

The CLO market ended February roughly unchanged or, in some cases, a little softer versus the end of January, one trader notes. While CLO primary activity re-emerged over the course of last month, concern remained regarding the levels at which the triple-A rated tranches cleared.

“We were seeing a Norinchukin bid of around 130bp versus a non-Norinchukin bid of around 145bp, making it difficult for any spread tightening to occur. However, the market has returned from Vegas and we’re now starting to witness some tightening across the mezzanine part of the capital stack, driven by the recognition that CLOs offer relative value,” the trader observes.

For example, double-B rated tranches have tightened to around 650bp from the high-600s/low-700s in the US and to the high-500s/low-600s from 650bp-675bp in Europe, depending on spread duration and the manager. “CLOs have lagged the tightening seen in investment grade and high yield, with mezz paper offering around a 300bp pick-up on an OAS basis. Although dealers don’t have a whole lot of inventory on their books at present, there has been good demand for shorter spread-duration discount securities,” the trader explains.

CLO arbitrage is expected to remain constrained, however, until triple-A spreads begin tightening or loan supply increases.

Corinne Smith

Structured Finance

SCI Start the Week - 4 March

A review of securitisation activity over the past seven days

Transaction of the week
Ellington Residential Holdings Ireland is in the market with a €620m Irish re-performing RMBS dubbed Jepson Residential 2019-1 (SCI 26 February). The transaction is a refinancing of European Residential Loan Securitisation 2017-PL1, sponsored by Lone Star.

"The deal is expected to be called [this month], although the rationale for the move isn't clear," says one portfolio manager. "A lot of the underlying assets were restructured and the portfolio went from having zero arrears to some delinquencies. The bonds were originally issued at a discount to par and recently they were trading at close to par, so I think this is some sort of exit for Lone Star."

Indeed, restructured loans comprise 75.8% of the mortgage portfolio and the proportion of loans paying 100% or more of the scheduled payment has slightly improved to 86.7% from 85.5% in March 2017, indicating stable performance to date and sustainable terms for the majority of the restructured loans. However, as of 31 December 2018, 7.8% of the mortgage loans are three months plus in arrears.

Rated by DBRS and S&P, the transaction consists of as-yet unsized AAA/AAA rated class A notes, AA/AA rated class B notes, A/A+ rated class C notes, BBB/BBB+ rated class D notes, BB/BB rated class E notes, B/B rated class F notes and B/B- rated class G notes. The class Z1 and Z2 are not rated and will be retained by the seller.    

Proceeds from the issuance of the notes will be used to purchase the first charge performing and re-performing Irish residential mortgage loans that were previously securitised in European Residential Loan Securitisation 2017-PL1. The mortgages were originated by Bank of Scotland (Ireland) (accounting for 67.1% of the portfolio), Lone Star subsidiary Start Mortgages (29.2%) and NUA Mortgages (3.8%). Lone Star acquired the loans originated by BoSI and NUA in February 2015 and December 2014 respectively.

The origination vintages of the portfolio range between 2006 and 2008 (70.6%), with 13% of the borrowers having negative equity. The pool is primarily concentrated outside Dublin (59.7%), with the remaining 40.3% located in the Irish capital. Irish house prices in Dublin and outside the city have rebounded 102% and 79% respectively, following the peak-to-trough drop of 59.7% and 55.7% respectively.

Other deal-related news

• GC Securities has placed a pair of innovative catastrophe bonds. Insurance Australia Group's A$75m Orchard ILS transaction marks the first ILS issuance from Singapore, while Pool Re's £75m Baltic PCC deal is the first-ever cat bond to cover terrorism risk exclusively and only the second to be issued under the UK's new regulatory framework for ILS (SCI 27 February).
• A note EOD occurred in connection with the Delphine loan, securitised in the DECO 2014-GNDL CMBS, following the borrower's failure to repay principal in full at maturity. The loan subsequently transferred to special servicing, with a standstill until 10 March in order to evaluate the outcome of noteholder meetings due on 4 March. For more CRE-related news, see SCI's CMBS loan events database.
• S&P has lowered its ratings on TGIF Funding series 2017-1 notes to double-B plus from triple-B minus and removed them from credit watch with negative implications. Since the close of the transaction in March 2017, the number of stores within the securitisation has decreased by 28 units and TGI Fridays has demonstrated nine consecutive quarters of negative same-store sales . TGIF Funding's DSCR declined to 1.99x in December 2018 from 2.18x at close (SCI 26 February).
• Dock Street Capital Management has assumed all the responsibilities, duties and obligations of collateral manager for the Jupiter High-Grade CDO, II and III ABS CDO deals from Maxim Advisory (SCI 28 February). Moody's notes that the move will not impact its ratings on any of the notes issued by the transactions. For more CDO manager transfers, see SCI's database.
• Moody's has withdrawn its B1 underlying rating on the class A7 whole business securitisation notes issued by Punch Taverns Finance B. Due to an internal administrative error, the underlying rating on these notes was not withdrawn on 9 October 2014, following the release of the financial guarantee on the class A7 notes due to restructuring (SCI 28 February).

Regulatory round-up

• The EBA is expected to publish a report on STS synthetic securitisations by year-end, which will then be reviewed by the European Commission. The main challenges that the supervisor will be dealing with are the lack of performance data on synthetic securitisations and the creation of STS criteria for the sector (SCI 1 March).
• The US CFTC and the Bank of England have issued a joint statement aimed at reassuring market participants of the continuity of derivatives trading and clearing activities between the UK and US, after the UK's withdrawal from the EU. The measures that will be in place by end-March include: information-sharing and cooperation arrangements to support the effective cross-border oversight of derivatives markets and participants and to promote market orderliness, confidence and financial stability; and the extension of existing CFTC relief and comparability for the UK, as well as UK equivalence for the US (SCI 26 February).

Data

Pricings
Unusually, there was no primary ABS issuance last week, following the SFIG Vegas conference. However, a number of CLOs priced, from both Europe and the US.

Among last week's CLO prints were: US$507.5m Ares LII CLO, US$509.19m Golub Capital Partners CLO 34(M)-R (refinancing), US$259.3m JFIN Revolver CLO 2019, US$808.7m Octagon Investment Partners XXIV (refinancing), €452mn RRE 1 Loan Management and €410.1m St Paul's CLO X.

BWIC volume

SCI Magazine
The spring issue of SCI Magazine is now available to download. The latest edition includes articles on credit derivatives, fintech, Libor replacement, middle market CLOs and UK RMBS. It also features a wide-ranging interview with Tim Turner, chief risk officer at the African Development Bank.

Capital Relief Trades

Line-up finalised

CRT event to include two workshops

The line-up for SCI’s 3^rd Annual Risk Transfer & Synthetics Seminar on 12 March has been finalised. Hosted by Clifford Chance at 31 West 52 Street, New York, the event features for the first time two workshop sessions – one on creating structural common ground between capital relief trade investors and issuers; the other on how Basel 4 capital floors influence business models, pricing and profitability.

Another seminar highlight is a panel on mortgage risk transfer, which will seek to explain the differences in risk appetite between investors and reinsurers that are taking similar risk in GSE credit risk transfer and mortgage insurance-linked notes/excess of loss placements. Meanwhile, during the regulatory landscape panel, speakers will discuss how regulatory changes are driving a convergence of insurance and structured finance practices, as well as interest in significant risk transfer deals among banks that historically have not participated in the space.

The emerging trends panel is set to explore the expansion of SRT into exotic jurisdictions, focusing on the first SRT deal for an African development bank and the first SRT deal in Mexico. Other panels examine the CRT investment landscape and the US perspective, with a cocktail reception rounding off the day.

Mayer Brown is platinum sponsor of the event, while Arch Capital Group is gold sponsor, OSIS is silver sponsor and the bronze sponsors are Allen & Overy, Andrew Davidson & Co, ArrowMark Partners, Guy Carpenter, Linklaters, Mark Fontanilla & Co and Texel Finance. Speakers include representatives from Barclays, BMO, Chorus Capital, Citi, Credit Suisse, DE Shaw, IACPM, JPMorgan, KLS Diversified Asset Management, Mariner Investment Group, PwC and West Wheelock Capital.

For more information on the seminar or to register, click here.

Capital Relief Trades

Deleveraging deal

Bari SRT performance consistent with expectations

Scope has determined that the performance of Banca Popolare di Bari’s last significant risk transfer transaction with the EIF (SCI 17 August 2018) has remained within its expectations. The sequential deleveraging of the transaction offsets the loss potential from a growing delinquency pipeline for the rated tranche, according to the agency.

The financial guarantee provided by the EIF to BP Bari is an EU-sponsored risk transfer transaction of Italian SME credit rights (i.e. loans and mortgages), in the context of the EIB Group’s SME Initiative for Italy (see SCI’s capital relief trades database). The aim of the initiative is to boost SME lending in Southern Italy.   

The credit rights were originated and will be serviced by BP Bari.

Delinquent assets amount to 12.1% of the outstanding portfolio, as of 31 December 2018. Until now, BP Bari has not filed a loss claim to the EIF. However, 53% of all delinquent assets are more than 90 days in arrears, the default definition of the transaction.

“The WAL has a short 3.3-year life, which is good protection for the senior note - although the bank hasn’t filed any loss claims, which is surprising, given the level of delinquent assets,” says David Bergman, executive director at Scope.

He continues: “However, a 90-day default definition is short for Italian standards, so I think there was probably a misalignment of the transaction’s default definitions with their internal procedures. This is probably why they haven’t defined any recoveries.”

Most of the loans in the transaction are performing, although a portion of the portfolio turned delinquent following the transaction’s completion in August 2018. The rating agency anticipates the performance to remain within expectations, despite its negative view of the Italian economy.

Scope says its review considers the uncertainties related to the fragile macroeconomic situation in Italy and the generally weaker economic profile of obligors from the south of the country.

Stelios Papadopoulos

CLOs

REMIC route

Unusual CRE CLO prepped

Bancorp is in the market with an unusual static CRE CLO dubbed Bancorp 2019-CRE5. The US$518.3m transaction is structured as a REMIC trust, with no ramp-up or reinvestment provisions and a third-party investor acquiring the first-loss position.

The securitisation’s cashflow waterfall is similar to those in CMBS pass-through deals and does not employ interest coverage or overcollateralisation cash diversion tests. The holder of the horizontal risk retention piece is BIG CRE5, an affiliate of BIG Real Estate Fund I.

The transaction is collateralised by seven floating rate whole loans (accounting for 13.6% of the pool) and 54 pari passu participations (86.4%), secured by the fee simple interest in 75 properties. Of the participations, 38 (80.7%) have a related companion pari passu participation that represents an unfunded future advance obligation.

The aggregate unfunded amount of all future advance obligations is US$72.8m, which is held outside the trust by Bancorp. All of the loan documents contain provisions that permit, at the lender’s option, any remaining unfunded future advance amount to be funded into a reserve account on the last day of the loan’s future funding period. Bancorp has indemnified the issuer for any losses relating to its failure to fund future advances when required.

Further, 17 assets (6%) have a pari passu companion participation that is collateral for Bancorp 2017-CRE2, Bancorp 2018-CRE3 and Bancorp 2018-CRE4. One loan (4.1%) has existing mezzanine debt, while another four (2.5%) have preferred equity interests with debt-like provisions.  

More than two-thirds of the loans (68.2%) were originated in 2018, while the remaining loans were originated in 2019 (27.3%) and 2017 (4.5%). The assets have a three-year initial term and two 12-month extension options, with the initial maturity dates ranging from June 2020 to March 2022. 

KBRA notes that the pool is more diversified than many of its recent rated CRE CLO transactions: the deal’s loan Herfindahl Index (HERF) of 37 is the second highest of the 20 CRE CLO transactions rated by the agency over the past 12 months, which average 19.5. The largest, five largest and 10 largest assets comprise 6.4%, 25.2% and 39.3% of the initial mortgage pool balance respectively.

The collateral generally contains transitional and non-stabilised properties. The sponsors for each of the assets have plans to increase cashflow, which may include upgrading elements of the properties to attract tenants and/or re-lease space to attain higher rents.

The pool’s property types include multifamily (82.4%), office (5.8%), lodging (5.4%), retail (5.2%) and mixed-use (1.2%). The multifamily exposure consists of 55 properties located in 16 states - representing a mix of primary (39.2%), secondary (25.1%) and tertiary (14.1%) markets - with a large concentration in the Houston MSA (11 properties, or 20.4%).

Provisionally rated by KBRA and Moody's, the deal comprises US$265.63m AAA/Aaa rated class A notes, US$68.68m AAA/NR class AS notes, US$32.39m AA-/NR class Bs, US$33.04m A-/NR class Cs, US$37.58m BBB-/NR class Ds, US$21.38m BB-/NR class Es, US$10.37m B-/NR class Fs and US$18.14m unrated class Gs. The class HRR certificate is expected to be sized at US$31.1m.

Corinne Smith

NPLs

Servicing boost

Intrum augments Greek presence

Intrum is planning a purchase of a Greek debt servicing platform, which will act as a springboard for further non-performing loan transactions. However, it’s unclear whether the decision involves acquisition of a licensed debt servicing platform or setting one up from scratch.

“It could be either. If we can find the right platform to purchase that would be more effective, but we also want to leave open the possibility of a ‘green field’ option,” says Thomas Moss, director of group business control at Intrum.

The firm has referred to the absence of third-party debt servicing platforms as a major obstacle in the Greek NPL market. Greek servicing platforms are for the most part affiliated or fully integrated with the domestic banks. This contrasts with mature European NPL markets, where third-party servicing is a major feature and investors acquire the platforms for servicing purposes.   

However, Intrum notes that overall progress has been made in the Greek market, following for instance a recent agreement between the Greek government and the banks in relation to the Katseli law. The legislation provides a number of unnecessary protections to borrowers and the firm believes that this will help reduce operational problems and moral hazard. The Greek government is also working on a plan that involves the subsidisation of monthly payments for distressed mortgages (SCI 22 February).

Intrum has completed two NPL transactions in Greece: an unsecured consumer deal with Eurobank in 2017 and an unsecured retail and small business transaction with the National Bank of Greece last year. The firm is active in 24 European countries and its business model combines both debt collection and debt purchasing.

The complementary nature of the model provides a range of benefits, including preferred access to purchased portfolios and financial synergies, such as the ability to use earnings from credit management services for further portfolio investments. Historically, the firm has been present in unsecured consumer debt, although it has been expanding into SMEs and secured asset classes.

Looking ahead, Moss concludes: “Clearly the large volume of Greek NPLs is an opportunity, but the question is how this volume is managed.”

Stelios Papadopoulos

Structured Finance

ILS double

Company hires and sector developments

ILS hires

Tangency Capital has hired Jo Stanton to oversee finance and operations, starting 1 May 2019. She joins from AlphaCat, where she was cfo.

Twelve Capital has hired Raffaele Dell’Amore to the portfolio management team, with a focus on private ILS and he will be based in the Zurich office. He previously managed ILS portfolios at Schroders Investment Management.

Structured Finance

CRE investor bulks out

Company hires and sector developments

CDX-linked ETF launched

Tabula has launched a new ETF, dubbed Tabula European iTraxx Crossover Credit Short UCITS ETF (EUR), providing short exposure to high yield European corporate credit. It takes exposure via iTraxx Crossover five year which references 75 equally weighted, sub-investment grade entities.

Digital asset platform bulks out

GetLoci, the global platform offering non-custodial, self-minted assets backed by digital and traditional currencies, today announced three key executives, including Mike Diedrichs as coo. He goes to GetLoci from TP ICAP, where he was co-manager of the structured credit desk. 

Global markets head poached

Mizuho has hired Asif Godall as head of global markets EMEA. He was previously co-chief investment officer at Cairn Capital.

Investor boosts CRE capability

Sabal Capital Partners has recruited eight new staff, three of whom have joined its commercial real estate lending team - reporting to recently appointed department head Robert Restrick - following the launch of its CRE loan programme. The trio comprises: James Barry, md of CMBS (New York), who previously served as director at Dexia Credit Local in New York; Patrick McNulty, md of CMBS (Chicago), who previously served as md at Cantor Commercial Real Estate; and Christina Frey, director of CMBS (New York), who previously served as vp and head of underwriting at Bedrock Capital Associates. Sabal has also bolstered its agency lending platform, with the addition of: Matthew Nelson, production manager (New York), who previously served at Community Preservation Corp; John Sullivan, production manager (New York), who previously served as md with Viceroy Capital; Keith Kiecker, production manager (Los Angeles), who previously served as multifamily solutions director at PACE Equity, while also operating his own consulting practice; James Vestal, production manager (Florida), who was previously svp for Pinnacle Financial Partners; and Trent Tibbits, sales associate (New York), who was previously underwriter at The Community Preservation Corp.

TBA alignment

The FHFA has issued a final rule requiring Fannie Mae and Freddie Mac to align programmes, policies and practices of TBA-eligible MBS, with the aim of improving the predictability of cashflows to MBS investors ahead of the introduction of the Uniform MBS. The final rule addresses feedback expressed by the market on the Notice of Proposed Rulemaking by refining alignment requirements to assure market participants that the enterprises will maintain consistent cashflows and makes explicit the potential consequences to the enterprises for misalignment. The preamble to the final rule also notes that FHFA has instructed the GSEs to lower the maximum mortgage note rate eligible for inclusion in an MBS. These requirements apply to both the enterprises' current offerings of TBA-eligible MBS and to the new UMBS, which they will begin issuing in June 2019.

US

Sean Gibson has joined SMBC Nikko Securities America as executive director, based in New York. He was previously executive director at Mitsubishi UFJ Securities (USA), focusing on CLO trading, and has also worked at MF Global, Morgan Stanley and Bear Stearns.

Structured Finance

CDS reforms proposed

Company hires and sector developments

Australia

Mortgage House has hired Steven Mixter as head of securitisation and structured finance. He was previously head of funding at Latitude Financial Services, responsible for maintaining its securitisation funding programmes.

CDS reform proposal

An ISDA working group has been discussing proposals to amend the 2014 ISDA Credit Derivatives Definitions to address issues relating to narrowly tailored credit events (NTCEs). NTCEs are arrangements with corporations that cause a credit event leading to settlement of CDS contracts while minimising the impact on the corporation. The definition of the failure to pay credit event will be amended to add a requirement that the relevant payment failure result from or in a deterioration in creditworthiness or financial condition of the reference entity. This requirement would apply to corporate and financial reference entities but would not apply to sovereign reference entities. To provide additional clarity to apply the new test, a guidance memo will be published. The guidance memo will set out the purpose of this requirement and a non-exhaustive list of factors that should be taken into account in making a determination under the new test. ISDA is asking for responses to the proposals by Wednesday 27 March, 2019.

ILS

Hannover Re has named Silke Sehm as a member of its executive board, resulting in changes in the responsibilities for property and casualty reinsurance at the board level. Along with the areas of structured reinsurance and ILS, Sehm will take responsibility for French-speaking and Nordic markets in Europe, as well as Central and Eastern Europe and the firm’s catastrophe business.

US

Hitachi Capital America has appointed Christopher Norrito as director, structured credit and operations, reporting to Jim Giaimo, vp and chief credit officer, commercial finance. In his new role, Norrito is responsible for reviewing, underwriting and processing new asset-based lending and corporate finance transactions in the US$250,000-US$25m range. He will also assist in formulating and strengthening credit procedures and implementing additional underwriting and portfolio management policies. He previously held positions at HVB Capital Credit and as credit leader at EverBank.

Structured Finance

Merger opposed

Company hires and sector developments

Astra case development

Judge Jennifer Frisch of the Minnesota District Court, Second Judicial District, has denied Goldman Sachs’ motion to dismiss the claims asserted against it by Kasowitz Benson Torres, on behalf of its client, Astra Asset Management, seeking termination of the Abacus 2006-10 synthetic CDO. The case is proceeding with discovery, with trial scheduled for October 2019.

Europe

Kartesia has hired Giuseppe Mirante as head of credit opportunities for Germany, Austria and Switzerland (DACH), responsible for the origination, analysis and execution of credit opportunities in the region. He will initially be based in Frankfurt and open a second German office in Munich later in the year. Mirante was previously an md at HIG Bayside and, before that, head of distressed and loan research at BNP Paribas in London.

Merger opposed

Marathon Asset Management has submitted letters to the special committees of both Medley Capital Corp’s board and Sierra Income Corp’s board, opposing the proposed merger of the two firms, with SIC as the surviving entity. Marathon is encouraging stockholders of MCC and SIC to vote against the merger, due it not being “in the best interest” of shareholders. The firm has put forward an alternative transaction, whereby MCC and SIC remain independent companies and their investment advisory relationships with each other are terminated. Marathon instead suggests that MCC and SIC enter into new investment management contracts with itself, which it implies would deliver superior value to their shareholders.

US

Annaly Capital Management has elected Thomas Hamilton, former global head of securitised product trading and banking at Barclays, as an independent member of its board. Hamilton has served as the president, ceo and owner of Construction Forms since 2013.