Contents

Structured Finance

CLO market "prepared for Brexit"

Japanese risk retention rules provide 'wiggle room'

The CLO market is ‘well prepared’ regardless of the outcome of Brexit. This was according to panellists at IMN’s recent CLO conference in London, who also suggested that further clarification around the Japanese risk retention rules could provide some comfort to CLO managers and investors, particularly in Europe.

One of the first topics discussed centred around the issue of whether the CLO market presented systemic risks to the global economy, as suggested by certain high profile comments in recent months. One such statement came from the Bank of England’s Mark Carney who made a speech in February this year, comparing the leveraged loan and CLO market to the sub-prime mortgage market prior to the financial crisis in 2007.

Meredith Coffey, evp of research and analysis at the LSTA, commented that an important distinction needs to be made between credit risk and systemic risk, noting that credit risk has certainly increased in the US with an increase in leverage levels in CLOs, looser documentation and EBITDA adjustments. These factors all suggest that loss given defaults in CLOs will be higher but she added that there is no sign of defaults emerging right now.

Systemic risk is very different, said Coffey, commenting that the LSTA thinks it is actually much lower than it was in 2007. A major reason for this is that in 2007, banks were “stacking exposure” to subprime mortgages “that they couldn’t hold”, said Coffey, while banks today have much smaller and more manageable CLO holdings,

Speaking from the European perspective, Nicholas Voisey of the Loan Market Association said that it is “very superficial” to compare the CLO market with the subprime mortgage market, adding that the latter was very opaque and heavily concentrated in terms of asset class. The CLO sector, on the other hand, is far more transparent and CLO portfolios are multisector, providing diversity.

Additionally, said Voisey, while leverage multiples have increased in recent years and there has been weakening in documentation over the last 10-12 years leveraged loans have performed well and so CLOs, also, have performed well. He added that “recovery rates are about 75%” and, even if they “are expected to drop to about 60%, CLOs are able to withstand that.”

A major announcement for the CLO sector was the recent establishment of Japanese risk retention rules and Coffey suggested that, as it stands, the ruling hasn’t been entirely about risk retention. She said that the “foundation” of the legislation is to ask a question of Japanese investors as to whether they have the systems and ability to analyse securitisation investments – if the answer is no, investors can’t invest.

However, she added that a part of the risk retention rule is more “asset focussed” as it seeks to determine that the assets are “not inappropriately formed”. There is however a “lot of noise”, added Coffey, about what this means, although the ruling outlines several things such as loan criteria, adequacy of claim collections ability, due diligence, underwriting and so on.

Coffey says that the end result is that the ruling ultimately has “wiggle room” and she suggested that “ambiguity in the rule is deliberate.” Nick Shiren, partner at Cadwalader, said that in Europe “it’s a slightly different analysis” where the question is whether European deals, which already comply with European risk retention rules, will be compliant with the new Japanese rules.

As such, he said that there are a number of similarities between the Japanese and European risk retention rules. He adds that, while the rules match up in many respects, there are some areas that need clarification, such as the issue of who can retain the stipulated 5%.

As it stands, the Japanese rules stipulate that it must be the originator or another party “deeply involved in the organisation of the structured product” which, said Shiren, provides for some flexibility as it has yet to be fully defined. Furthermore, there is a lack of clarity over the amount of risk retention required because under the Japanese ruling it refers to fair market value, while European rules refer to 5% of the nominal amount of the deal.

Shiren said, however, that the market takes the view that the Japanese rules won’t result in an amount higher than European rules. Generally, he thinks that European CLOs will likely comply with Japanese risk retention rules but he suggested that the market could benefit from further clarity.

With regard to the recently finalised Securitisation Regulations, Shiren also commented that the CLO and securitisation sector is still getting to grips with rules around transparency and the provision of data necessary for a securitisation to be compliant. Shiren commented that he has spent a lot of time on deals to ensure they comply with the article 7 transparency requirements, but that there is still a lack of clarity about which entity is responsible for providing the information stipulated under article 7.

There are ongoing discussions about what happens in the event that an issuer, or related entity in a securitisation, is fined for lack of compliance with article 7 as, under the terms of the transaction, they would expect to receive indemnity. However, says Shiren, if the collateral manager suffers a loss due to the fine and it claims under the indemnity, it is “the investors who suffer” despite the fact that the rules are meant to protect investors.

Finally, panellists discussed how the CLO market is ready to withstand Brexit and Shiren commented that, at present, there are two major concerns with one being whether “UK collateral managers will be able to provide services to an Irish or Dutch SPV” after Brexit. The second issue at the moment is whether “collateral managers will continue as sponsor, or whether they will shift away from the sponsor structure to originator-manager structure”

Regardless, Shiren added that the CLO sector seems prepared regardless of the outcome of Brexit, although he does think some tweaks could simplify matters. He concluded: “Largely, collateral managers have worked out a Brexit strategy. However, expansion of the definition of sponsor under the Securitisation Regulation is very welcome...”

Richard Budden

ABS

Positive outlook

UTP securitisation prospects improve, despite challenges

Future issuance of unlikely-to-pay (UTP) securitisations depends on the resolution of two challenges - namely, information asymmetry and the lack of hybrid servicing models. However, ABS might prove a better solution for mixed portfolios, given the presence of alternatives for large corporate UTP loans.

According to Scope Ratings’s calculations, Italian banks could dispose of €13bn to €18bn of UTP loans in 2019, reflecting a cautious sales approach in the short to medium term. In 2018, UTP loan sales represented just 1% of the volume of Italian banks’ bad loan disposals, even though UTP stock represented 69% of bad loans in terms of gross book value.

The UTP market is at the beginning of its cycle, just as the market for bad loans was in the immediate post-crisis period. Scope expects that UTP true sale securitisations will emerge, if the market addresses information asymmetry and the lack of hybrid servicing models.

Paula Lichtensztein, analyst at Scope, notes: “The bad loan securitisation market has a history, as opposed to UTPs, so there is more public information available to investors. Furthermore, UTPs can shift from performing to non-performing, so you need useful data that permits investors to track that flow.”

Regarding the hybrid model, Rossella Ghidoni, analyst at Scope, explains: “UTPs need to be actively managed as a going concern, so servicers will likely need capital and liquidity for restructuring purposes.”

Just as with bad loans, UTP management requires robust recovery and legal skills. Yet, unlike NPLs, strong restructuring skills are fundamental - especially for large corporate exposures. These skills are usually found at private equity funds and in the M&A and restructuring departments of international banks.

However, at a technical level, these issues are expected to be resolved. “Information asymmetry was an issue for NPLs and the market addressed it. Yet it will take time and Scope can make a contribution to this process,” states Lichtensztein.

Reducing the information asymmetry could involve bank migration matrices that track the flow of exposures in and out of non-performing classifications, along with additional statistics deriving from banks’ NPL monitoring tools. Additionally, as with certain bad loans securitisations, historical recovery/performance curves can be applied to UTPs, improving investors’ ability to price and analyse securitisations.

Regarding hybrid model solutions, the establishment of partnerships between servicers and banks or funds might not be the only feasible strategy, however. Acquiring a banking license or adopting the business model of the challenger bank might allow market operators to offer specialty services, including the provision of new finance.

Meanwhile, the development of a true sale UTP securitisation market could benefit from recent amendments to Italian securitisation laws. Under the amendments, SPVs will no longer be prevented from advancing loans to micro enterprises, unless their balance sheets are lower than €2m.

Furthermore, the law clarifies that an SPV may both advance loans and purchase receivables. The amendment is important for UTP securitisations, given the active management approach that is required for these exposures.

The challenges and legislative amendments pertaining to UTPs make it clear that the structuring of UTP securitisations will be very different to traditional NPL deals. “A ramp-up and revolving structure that provides sufficient liquidity to the transaction is credit positive, if it helps the SPV provide restructuring solutions to borrowers,” notes Ghidoni.

Revolving structures and ramp-up periods would allow vehicles to benefit from new liquidity from the additional issuance of notes and use part of a transaction’s proceeds to grant loans to debtors in difficulties. This structure would be ultimately reflected in a securitisation’s waterfall.

Nevertheless, there are alternatives to UTP securitisations, such as restructurings. Indeed, the bulk of UTP exposures are large corporate loans and restructurings typically apply to them.

Under this option, banks could liaise directly with specialised investors, such as turnaround or vulture funds, without the involvement of servicers. Scope expects banks to manage part of their corporate exposures through investors specialised in corporate restructurings.  

Consequently, securitisations might be more attractive for mixed portfolios. Ghidoni concludes: “Loan restructurings are relevant to large corporate loans. Securitisations, on the other hand, can allow banks to offload more granular portfolios and to potentially broaden the investor base.”

Stelios Papadopoulos

CLOs

Addressing the arb

CLO structural innovations aim at wider investor base

European CLO issuance totalled approximately €7.73bn in Q1, comprising 16 new issues and two refinancings. March alone saw nine transactions price, which showcased a range of structural innovations designed to address the current challenging arbitrage and appeal to a wider investor base.

“Appealing to a wider investor base is an important consideration for a syndicated deal, rather than one with a Japanese anchor investor,” notes Cameron Saylor, partner in Paul Hastings’ structured credit practice.

The recent €407.9m Hayfin Emerald CLO II, for example, is unique in that the €100m junior triple-A tranche pays a lower margin during the deal’s non-call period and steps up to a higher margin after the non-call period. Additionally, the transaction features an unrated split equity tranche (€28.75m class S1 and €26.82m class S2), whereby the senior equity piece behaves like a single-B rated tranche but has a turbo feature that allows it to amortise with a material portion of the remaining interest proceeds in advance of payments to the junior equity piece.

Guggenheim’s €409.79m Bilbao CLO II, which priced at the beginning of March, also includes €29.57m class S1 and €21.82m class S2 notes. Split equity tranches were first seen in Carlyle Global Market Strategies Euro CLO 2016-1, with the junior equity serving as a more highly levered instrument than typical equity.

Hayfin Emerald CLO II – along with KKR’s €456.3m Avoca CLO XX, in March – is also noteworthy for having ‘flat’ triple- and double-B ratings, adding almost 2% more subordination at the triple-B level. TwentyFour Asset Management notes that this was well received by the market, with the bonds trading 25bp tighter than the triple-B minus tranche of Euro-Galaxy VII that priced two days later.

The firm adds: “Minus ratings have been the norm for BBB/BB/B rated bonds so far in 2019. Structurally, we have seen managers stretch ratings to the limit, but on the flip side the majority of single-B tranches were mostly retained or not even structured, as it made no sense to issue debt at the same or wider yield than the equity.”

Another feature that is becoming more common across the European CLO market is the class Z or M note, which is essentially a fee-sharing note. “As the arbitrage is challenging, most CLO managers are having to give up some fees,” Saylor explains. “Historically, this has been done via a side letter, with the equity holder agreeing a percentage of the manager’s fees. However, this is an illiquid right, so the Z/M note certificates that right - which is then freely tradable and is able to be valued.”

Fee-sharing notes were last month included in the Arbour CLO VI (€250,000 class M), CVC Cordatus Loan Fund XIV (€40.4m class M1 and €1m M2) and Euro-Galaxy VII (€4m class Z) transactions. Of Oaktree Capital Management’s Arbour CLO VI, Fitch notes that the manager is expected to acquire the class M notes and receive interest on them in addition to collateral management fees.

“M notes will pay both senior and subordinated M interests, pari passu with senior and subordinated collateral management fees respectively. The M interests will make the overall senior and subordinated manager compensations in line with the market standards of 15bp and 35bp of the aggregate collateral balance,” the agency adds.

Meanwhile, Avoca CLO XX is the latest CLO to feature unfloored tranches. The €10m single-A rated class C2 notes and the €7m triple-B D2s have no Euribor floor until the end of the non-call period, with a margin of 3.01% and 4.21% respectively. After the non-call period, Euribor is floored at 0%, with the same spread as classes C1 (2.70%) and D1 (3.90%) respectively.

March also saw a number of CLOs comprise both floating and fixed rate tranches. Ares European CLO XI, Arbour CLO VI and Avoca CLO XX all included double-A rated class B1 and class B2 floating and fixed rate tranches respectively, while Bilbao CLO II included triple-A rated class A1A and class A1B, as well as double-A rated class A2A and class A2B floating and fixed rate tranches.

A further structural innovation – albeit one that was common pre-crisis – that may be on the cards is combination notes, whereby two or more tranches of a CLO are combined. S&P says it has received a number of enquiries about rating potential combo notes.

“The appeal is to create different risk/return profiles from the underlying securities. Investors are able to access higher returns from a junior piece, while benefiting from the protection provided by a senior tranche,” the agency explains.

Looking ahead, Saylor anticipates that CLO managers will continue to seek ways to make the arbitrage work. “Subject to certain structural changes, a better supply of underlying assets would be the best way of fixing the arb issue,” he concludes.

Corinne Smith

Structured Finance

Positive sentiment?

European ABS market update

European ABS primary issuance is gaining momentum, as the second quarter begins. Indeed, the variety of deals on offer appears to be boosting sentiment, with a newly announced marketplace lending securitisation joining the re-performing and non-conforming RMBS in the pipeline (see SCI’s deal pipeline).

“The European primary market is a lot busier than it was even a few weeks ago,” says one portfolio manager. “Notably, a couple of STS-eligible deals – Obvion’s €1bn STORM 2019-I and Venn Partners’ €101.8m Cartesian Residential Mortgages Blue – and some UK issues, including Funding Circle’s £180m SBOLT 2019-1, are currently marketing.”

The portfolio manager points to the preponderance of smaller-sized transactions in the pipeline at the moment, such as the €141.44m Delft 2019 and £207.4m Barley Hill No. 1 RMBS. “Delft is a refinancing of the EMF-NL 2008-2 Dutch non-conforming deal, so whatever remains in the pool is being securitised. The motivation behind Barley Hill is less clear – although I understand that the originator, TwentyFour Asset Management, is trying to roll the warehousing as quickly as possible to benefit from cheap securitisation execution.”

Meanwhile, Bank of Ireland’s latest buy-to-let RMBS – the €377.3m Mulcair Securities – has benefitted from a positive reception. “We’ve seen a few re-performing loan deals out of Ireland over the last couple of years, but Mulcair appears to have the cleanest pool so far. The arrears in the pool are minimal (accounting for 1.4% of the portfolio) and the borrowers have been re-performing for a while, which suggest better credit metrics,” the portfolio manager observes.

Given the recent spate of new issuance, market focus has largely switched from secondary to primary activity. “It is relatively quiet in terms of secondary market activity. A couple of BWICs are circulating, but the names on the lists aren’t especially noteworthy,” the portfolio manager notes.

He concludes: “The market is ticking along and spreads continue to grind tighter, although UK levels are a bit softer – which is unsurprising, given Brexit shenanigans. However, the securitisation market is likely to be insulated from the Brexit fall-out to a certain extent.”

Corinne Smith

Structured Finance

SCI Start the Week - 1 April

A review of securitisation activity over the past seven days

SCI seminars

• SCI's 2nd Annual NPL Securitisation Seminar will be held on 13 May in Milan. For more information or to register, click here.
• SCI's 1^st Annual Middle Market CLO Seminar will be held on 26 June in New York. For more information or to register, click here.

Market commentary
European ABS secondary market activity was relatively subdued last week. However, the primary market picked up pace, with a pair of CMBS in focus and a new UK RMBS mandated (SCI 28 March).

"Given the lack of new issuance this year, we are expecting the two CMBS currently in the market - Kanaal CMBS Finance 2019 [SCI 20 March] and Taurus 2019-1 FR [SCI 27 March] - to be successful. For example, guidance for the latter has tightened across the capital structure, with the class A notes now talked at three-month Euribor plus 100bp area," said one trader.

Regarding Cerberus's £3.9bn Towd Point Mortgage Funding 2019 - Granite4 (SCI 25 March), the trader noted that it is "curious" how the bonds were placed, with the almost £3bn senior tranche preplaced at three-month Libor plus 102.5bp DM and the class B through F tranches available upon request from the joint leads Bank of America Merrill Lynch, Barclays and Morgan Stanley.

"I guess the seller and/or leads are concerned about the Brexit headline risk, so opted for a club placement," the trader suggested.

In secondary, there was a focus on continental short-dated paper. "Clients are keeping a defensive view on the sector, given the general negative sentiment that they expect to arise in the second half of the year," the trader observed.

Transaction of the week
Bank of America Merrill Lynch priced a €249.6m European CMBS last week. Dubbed Taurus 2019-1 FR, it is backed by 206 predominantly office properties located throughout France, let by Electricite de France (EDF) (SCI 27 March).

The transaction is a securitisation of a five-year senior CRE acquisition facility advanced by BAML to Colony Capital in the context of a sale-and-lease-back operation between Colony and EDF. The 206 assets securing the senior loan are held by three French borrowers: ColPower SCI, ColPowerSister SAS and ColMDB SAS.

Fitch suggests that the transaction could be constrained by the rating of EDF - the sole tenant in the transaction - which provides 98% of gross rental income for a WAL lease term to first break of six years. The agency notes that the structure of the financing exposes noteholders to collateral risks because senior noteholders could become materially more exposed to properties with the poorest prospects of income-generation, if Colony Capital were to release the better-quality assets.

The agency adds that while the portfolio is used by EDF and ENEDIS to facilitate the maintenance of the local electricity grid, it is unclear which sites are and will remain essential to these operators, exposing noteholders to the potential loss of the current tenant in part of the portfolio. As such, it might prove challenging to attract enough interest among potential alternative occupiers to create rental value in many of the buildings the tenant could elect to vacate.

Rental income from an investment grade tenant for an average of six years provides for significant equity distributions after debt service and, with an all-in LTV of 78.9%, Fitch indicates that the sponsor can be confident of recouping its upfront equity investment prior to loan maturity, regardless of its ability to refinance.

Other deal-related news

• HSBC's Metrix series 2015-1 CLN has suffered another credit event. The issuer received a credit event notice confirming that a bankruptcy credit event occurred on 15 March with respect to a reference entity that is believed to be Interserve, which was recently sold out of administration after shareholders rejected a rescue deal for the company (SCI 27 March).
• Cerberus is in the market with Towd Point Mortgage Funding 2019 - Granite4, backed by prime UK residential mortgages previously securitised within the Towd Point Mortgage Funding 2016 - Granite 1 and 2016 - Granite2 RMBS. The majority (93.1%) of the £3.9bn pool is represented by the assets of Granite 1 - which will be transferred by a true sale - with the remainder represented by the assets of Granite 2, which will be transferred to the issuer by way of English and Scots law declarations of trust (SCI 25 March).
• Prime Collateralised Securities (PCS) has announced its inaugural transaction to be verified as STS-compliant, marking the second European securitisation to receive the STS label. The transaction, dubbed Storm 2019-1, is a €1.1bn Dutch RMBS from Obvion and is expected to close on 12 April (SCI 26 March).
• Freddie Mac has completed exchanges of Freddie Mac Gold PCs for UMBS Mirror Certificates via its Dealer Direct portal, as part of the single security initiative. Specifically, the GSE has conducted exchanges of certain eligible Freddie Mac 45-day payment delay Gold Mortgage Participation Certificates (PCs) and Giant PC securities held in its portfolio for Freddie Mac 55-day payment delay, TBA-eligible Uniform Mortgage-backed Securities (UMBS) Mirror Certificates (SCI 29 March).
• Bank of Ireland has mandated a new Irish buy-to-let RMBS deal. Dubbed Mulcair Securities, the €358m transaction securitises a legacy BTL loan portfolio that was originated by the Bank of Ireland, ICS Building Society and Bank of Ireland Mortgage Bank. The rationale behind the deal is to offload non-performing exposures from the seller's balance sheet (according to EBA definitions) (SCI 29 March).
• LendingHome has completed its first syndicated, revolving securitisation of residential transition loans, issuing approximately US$208m of unrated ABS. The revolving structure facilitates efficient funding for the asset class, as the underlying residential transition loans typically pay off in approximately seven months (SCI 28 March).
• CCR Re has launched the first sidecar domiciled in France, dubbed 157 Re. By accepting a 25% stake in Cat World's Property Cat portfolio, 157 Re is offering a fully collateralised capacity to CCR Re, enabling it to continue its diversification and growth (SCI 28 March).

Regulatory round-up

• The ECB will adopt the new transparency requirements of the Securitisation Regulation (the new ESMA reporting templates) for its collateral framework in the future. The new reporting standards will apply for new securitisation transactions issued after 1 January, providing two conditions are fulfilled: the new ESMA reporting templates have been adopted; and at least one securitisation repository has been registered with ESMA. Three months after both conditions are fulfilled, the new reporting templates will become a requirement for ECB repo eligibility (SCI 27 March).

Data

Pricings
European securitisation issuance ended the quarter on a high, with a trio of prints last week and a number of deals remaining in the pipeline. A pair of Australian RMBS also priced.

Last week's ABS pricings consisted of £500m Driver UK Master Compartment 5, US$209.7m FCI Funding 2019-1, US$38.6m SHREC ABS 1 Series 2019-1 and US$482.6m SoFi Professional Loan Program 2019-B Trust. The RMBS comprised A$600m Resimac Premier Series 2019-1 and A$750m Triton Trust No. 8 Bond Series 2019-2, while a CMBS - €237.1m Taurus 2019-1 FR - also priced. Among the CLO prints were US$589.3m Ares LIII, €456.3m Avoca CLO XX, US$511m Greywolf CLO IV (refinancing), US$404.55m LCM 30, US$503m Madison Park XXXIV, US$410m Maranon Loan Funding 2019-1 and US$745m Oaktree CLO 2019-1.

BWIC volume

Capital Relief Trades

Risk transfer round-up - 3 April

CRT sector developments and deal news

Deutsche Bank has completed its first capital relief trade for the year. Dubbed CRAFT 2019-1, the US$382.5m nine-year CLN pays a coupon of 10.3%. The transaction features a seven-year WAL and a two-year non-call period.

The German lender’s last CRAFT transaction was inked in June 2018. Dubbed CRAFT 2018-2, the US$210m CLN paid Libor plus 10% (see SCI’s capital relief trades database).

CLOs

US manager on "verge" of issuing Euro CLO

Investors show heightened scrutiny toward first timer issuers

Angelo, Gordon is very close to issuing its inaugural European CLO, finding parts of the process “more straightforward than expected”. The transaction was discussed at IMN’s CLO conference in London today, where it was also noted that investors are displaying an increasingly critical approach toward first time managers.

Steven Paget, md at Angelo, Gordon commented that his firm is on the verge of launching a debut European CLO this year. He added that the process has been more straightforward than expected, particularly in terms of allocations.

Paget said that there are, however, certain challenges faced as a new manager, particularly coming from the US, where there is a perception of a certain degree of opportunism. He said that, as such, the key thing for his firm has been to show that they are “setting up the business for the long term and utilising an experienced team of analysts.”

He emphasised that Angelo, Gordon also benefits from the support of a large US platform which has issued 18 CLOs to date. As a result, Paget said this goes some way to showing that the firm has the experience and expertise to issue a CLO in Europe.

Charles Hand, md at Bank of America Merrill Lynch, commented that he has also been working on Angelo, Gordon’s first European CLO and added that he had worked alongside a number of other first time issuers. He noted that first time issuers generally benefit from having access to a large amount of capital and a large team to draw on.

It is key, suggested Hand, when working with early stage managers, to “sit down and find out what they want to do and what their style is” and that he is confident that the market remains open to new managers. Investors are more careful with first time managers, however, and said that they “ask tough questions about staffing and the commitment to a deal. They want to know that they will be a repeat manager and that there is liquidity in the shelf.”

Similarly, Florent Chagnard, director at Credit Suisse, added that CLO investors are getting “more picky and wanting to invest in managers that will be here for a long time” as well as demanding deeper insights into managers’ retention solutions, track record and infrastructure. Despite this, Chagnard said that investors are still “open to new managers” because of the illiquidity premium on new issuers.

In line with this. Chagnard predicted that around 40-45 managers will come to market in Europe this year and he expects to see more manager tiering, along with more creative structures. He added that this is a reflection of a more mature market, and that investors are also displaying different expectations depending on the manager, although he noted that while there is growing manager differentiation in Europe, it is still more pronounced in the US.

Matthew Layton, partner at Pearl Diver Capital, commented that, from an investor perspective, US CLOs are currently more favourable but that key themes are present in both markets, such as a benign immediate outlook. In the US and Europe, he has seen some managers issuing shorter duration deals with three year investment periods, which he is wary of as they may exemplify a short term route of getting a deal to market that “may not pay off in the long term.”

Layton added that he has seen structural similarities across US and European CLO too, such as growing triple-C allocations. In fact, he said that some US CLOs have 50% triple-C buckets and commented that this greater structural flexibility is healthy for the market.

In terms of the future of the market, Hand commented that he is concerned about how to get “long term locked up capital” and how his investor clients will “go out and raise money”. Second to that he said he has some concerns about downgrades and that “we have already seen some triple Cs and double Bs with minuses on them.”

Layton commented that his concern is “people buying the rallies as opposed to the dips”. He added that at some point “things will widen and stay that way for a while” which is “fine – that’s a market” but, conversely, if the market stays “tight due to too much liquidity, things will remain artificially inflated.”

Finally, Jonathan Butler, European head of leveraged finance at PGIM, concluded that his main concern is the trend toward lack of documentation in the leverage loan market and “what this will mean through a cycle”.

Richard Budden

NPLs

Obstacles remain

European Parliament postpones NPL trading vote

The European Parliament on Monday (1 April) postponed a vote on a non-performing loan secondary market directive until next week, increasing the time pressure to reach an agreement with the European Council before May’s parliamentary elections. The challenging timeframe is further complicated by controversial parliamentary amendments to the original draft, including higher initial capital for servicers and caps on fees and penalties that the Council may find objectionable.   

The proposed new directive attempts to remove obstacles to the transfer of NPLs from banks to non-credit institutions and harmonise the authorisation requirements for credit services across the EU. It limits the scope of the loans to non-performing ones and lays out borrower protection requirements for authorised credit servicers, including policies that take into account a borrower’s financial situation and, where available, referring borrowers to debt advice or social services.

The proposal also allows credit servicers to operate cross-border. Currently, potential NPL buyers face barriers to cross-border purchases of credit, due to different national regulatory regimes. This has led to an inefficient secondary market for NPLs.

The typical EU decision-making options are either an adoption of a proposal before it goes for a parliamentary plenary meeting and Council negotiations or proceeding directly to trilogue meetings. The second option ended up being the preferred one for the NPL directive; however, it requires an absolute majority.

An absolute majority stipulates the consent of half the members of the Economic and Monetary Affairs Committee (ECON). The total number of ECON members at the moment equals 61 MEPs. According to ECON sources, the Monday vote was postponed because the committee concluded that the required majority wasn’t achievable, given that not enough committee members were present.

Among the European Parliament’s demands that the Council may find objectionable are management systems that allow for sufficient initial capital, as well as caps on the fees and penalties charged, so that they don’t exceed the cost of managing the debt. Increasing the initial capital for servicers means that only large players may survive, while smaller ones may either need to merge or raise additional capital. However, caps on fees may dampen the market power of the larger players.

Indeed, the end result may be the creation of an even more competitive market by forcing smaller players to grow and reducing the fees of the bigger servicers.

Looking ahead, one ECON source believes that a compromise deal is possible, despite the tight deadline. He concludes: “If a successful vote occurs next week and a mandate for negotiations is given, then an agreement with the Council can be found. Parliament and Council agree on most issues.”

Stelios Papadopoulos

Structured Finance

GSE reforms proposed

Sector developments and company hires

Debt service reserve guarantee provided

Assured Guaranty (Europe) plc (AGE) has issued a £135m, five-year Debt Service Reserve (DSR) Guarantee to benefit Dwr Cymru (Financing) Limited and Dwr Cymru Cyfyngedig, both companies forming part of the Welsh Water group. The guarantee provided by AGE will replace the existing liquidity facilities provided by banks within the Welsh Water group’s securitisation structure. AGE’s guarantee was structured to fit within Dwr Cymru (Financing) Limited’s existing securitisation documents and covers certain senior payment obligations due to bondholders and other senior creditors.

Europe

Man GLG, the investment management arm of Man Group, has hired Kaushik Rambhiya as pm within its credit business. He will be responsible for long-short strategies focussed on Asian and emerging market credit within Man GLG’s global credit multi strategy. He joins from Aventicum Capital Management where he was chair of the investment committee and lead pm.

GSE reform memo issued

President Trump has issued a memo on Federal Housing Finance Reform declaring that the housing finance system is in “urgent need of reform” and directing officials to develop a plan for administrative and legislative reform. Treasury secretary Steve Mnuchin, Federal Housing Finance Agency (FHFA) acting director Joseph Otting, and housing secretary Ben Carson were among the memo recipients since the effort includes the GSEs and the Federal Housing Administration (FHA) – among others.

The memorandum highlights the administration’s priorities and lays out four broad housing reform goals with respect to the GSEs. These reform goals include, ending the conservatorships of the GSEs upon the completion of specified reforms, facilitating competition in the housing finance market, establishing regulation of the GSEs that safeguards their safety and soundness and minimizes the risks they pose to the financial stability of the United States, and providing that the Federal Government is properly compensated for any explicit or implicit support it provides to the GSEs or the secondary housing finance market.

ILS

Kristina Maffit has been hired as vp, property reinsurance for Brit Global Specialty Bermuda, based out of Brit’s Bermuda office. Maffit will manage the property reinsurance underwriting team, writing US cat business on behalf of Brit’s Lloyd’s syndicates. She joins from alternative investment manager Elementum where she spent six years as a portfolio management associate, specialising in collateralised natural catastrophe reinsurance investments.

Structured Finance

UK resi disposal confirmed

Sector developments and company hires

ILS

Chris McKeown, former ceo of New Ocean Capital Management, has stepped down from his role as vice chairman of AXA XL to pursue other interests. McKeown was the founding ceo of New Ocean in 2013 and AXA XL completed the acquisition of all third-party ownership interests in the firm in November 2018, transforming New Ocean into an internally-managed entity focused on delivering customised portfolios of risk to third-party investors directly aligned with AXA XL's global underwriting franchise. 

NPL sale

AIB Group has agreed to sell a non-performing loan portfolio to Everyday Finance, as part of a consortium arrangement with Everyday and affiliates of Cerberus Capital Management. The portfolio – which comprises around 2,2000 loans predominantly secured by investment asset properties – has a gross NPE value of €1bn and a fully loaded risk weighted assets position of €750m. At completion, AIB will receive a cash consideration of approximately €800m.

Resi disposal finalised    

NRAM, part of UK Asset Resolution Limited (UKAR), has agreed to sell two separate portfolios of residential owner-occupied mortgages and unsecured loans to Citi for £4.9bn. The majority of financing for the transaction is being provided by PIMCO and financial completion is financial completion is expected within the next few weeks and will enable UKAR to repay all outstanding government loans to HM Treasury. The sale is based on the portfolio position as at 30 September 2018, from which point the purchaser will acquire the risks and rewards of ownership of approximately 66,000 NRAM loans.

UKAR notes that a key consideration in selecting the successful bidder was the continued fair treatment of customers. There will be no changes to the terms and conditions of the loans as a result of this transaction. Customers will receive the same protections for the lifetime of their mortgage as they do under UKAR’s ownership without affecting their ability to re-mortgage. The mortgages will continue to be administered by the same servicing company, providing continuity of service. Customers do not need to take any action, those included in the transaction will be contacted in due course to explain the change in ownership.

Volatility ETF launched

Tabula has launched an ETF that provides short exposure to volatility in North American and European High Yield CDS markets by tracking the return of two credit volatility indices, rebalanced to an equal weighting monthly. Dubbed, Tabula JPMorgan Global Credit Volatility Premium Index UCITS ETF (EUR), it aims to achieve the returns of the JPMorgan Global Credit Volatility Premium Index (JCREVOLP Index), less fees and expenses. To minimise market exposure, each credit volatility index sells and simultaneously delta hedges option strangles on the relevant CDS indices. The fund aims to replicate the performance of the index via an OTC total return swap whereby it receives the return of the index in exchange for agreed payments to the swap counterparty. The fund aims to achieve returns due by investing in cash and non-cash collateral, in the ranges of approximately 10% and 90% of its net asset value respectively.

Structured Finance

CEO appointed

Company hires and sector developments

CEO appointed

DFG Investment Advisers has hired Oliver Wriedt as ceo. The firm is also unifying its products under one brand, Vibrant. Wriedt will play an instrumental role in growing and further institutionalising DFG’s business, helping to diversify its product offerings and elevate the new Vibrant brand among the investment community. He was most recently co-ceo of CIFC Asset Management.

Credit firm bulks out

Imperial Capital (International) has hired three senior professionals to expand its London operations across multiple areas of its global corporate credit business. Simon Quinn joins in sales, Alex Gutiérrez Rubino in trading and Peter Kawada in research, all at md level. Quinn was most recently an md at Barclays, managing the Dutch, Scandinavian, Italian, Swiss and middle markets credit sales teams. Gutiérrez Rubino brings experience in credit, structured products and ABS, having most recently been an md at Stormharbour Securities, where he set up a secondary trading business in distressed debt and special situations. Kawada will focus on European high yield, distressed and event-driven situations, having previously been a distressed debt analyst at Jefferies International’s European credit desk.

ILS

PIMCO has hired Michael Beck as svp, ILS portfolio management. He was previously coo at Mt. Logan Re.

Structured Finance

Independent director hired

Company hires and sector developments

Europe

Prytania Asset Management has appointed Eric Felton as independent director. Most recently, Felton spent 13 years as cfo of GCM Grosvenor and before that, he was an audit partner at Ernst & Young and Arthur Andersen in the financial services sector. Concurrently, Joseph MacHale is retiring from the Prytania board, after 16 years of service since the firm’s inception in 2003. However, he remains a shareholder of the management company and an investor in the firm’s products.

Retail resolution

The resolution of the US$200m Independence Mall loan, securitised in WBCMT 2007-C33 and transferred to special servicing in May 2017 (see SCI’s CMBS loan events database), has become the highest realised loss recorded on any US retail property tracked by Trepp since 2010. March remittance data indicates that the REO asset in suburban Kansas City, Missouri accounted for 66% of the total losses for the month, with a write-off of US$149.7m. The one million square-foot superregional mall was sold to International Growth Properties with reported net proceeds of US$63.3m, equating to a significant discount from its most recent valuation of US$104.5m. The latest servicer comments reveal that increased competition and economic challenges made it difficult for tenants to increase sales at the property.