Contents

NPLs

Real estate relief

NPL provisioning rules published

The European Council of Ministers has adopted new rules for the provisioning of non-performing loans, which stipulate loss coverage for future NPLs with different coverage requirements depending on different NPL classifications. The text is a relief for Italian banks, given the application of the rules to newly created NPLs - both secured and unsecured. Furthermore, an exception to the full provisioning requirement was made for real estate-backed loans, following Italian pressure at both the Council and Parliamentary levels.

The rules stipulate 100% provisioning for immovable collateral, such as real estate-backed loans, after nine years. Full provisioning for movable collateral, such as auto loans, kicks in after seven years and three years for unsecured exposures. However, these provisions constitute a backstop, or the minimum that banks have to comply with, since IFRS 9 or the ECB can prescribe higher provisions than this minimum. 

The provisioning rules follow stricter guidelines that were introduced by the ECB two years ago. The ECB’s criteria require full provisioning for unsecured NPLs after two years and seven years for secured NPLs.

Italian banks opposed the rules, suggesting that the ECB had overstepped its mandate, since such rules were not in the CRR. In response, the Commission drafted a proposal that was somewhat less strict than the ECB proposal, with the aim of incorporating any provisioning rules into the CRR.

The key question was whether the new rules applied to the existing stock of NPLs or newly created ones. According to sources at the European Parliament’s Economic and Monetary Affairs Committee (ECON), during the negotiations, financial stability concerns meant that the rules should apply only to newly originated loans, following the entry into force of the regulation.

This is a relief for Italian banks, which strongly oppose full provisioning for existing NPLs.

Second, exemptions to the full provisioning requirement have been avoided, so all types of loans are subjected to the requirement. However, an exception was made for real estate-backed loans, which can be provisioned for over a longer period of nine years.  

The same ECON sources state that real estate loans were given more time because they retain value for the debtor. Indeed, the issue with real estate-backed loans is different and concerns the enforcement of the collateral.

Approximately half of the Italian NPL stock is secured loans and most Italian NPL transactions are mixed portfolios. Similarly, at a European level, most transactions are backed by commercial, residential and mixed portfolios.  

Looking ahead, Massimo Famularo, board member at Frontis NPL, notes: “The market’s focus will now turn to the efficiency of the collection process, since the Council’s rules provide a strong incentive to achieve recoveries before the provisioning deadlines. However, I would expect more issuance, since higher provisioning means a lower bid-ask gap.”

Stelios Papadopoulos

Structured Finance

BWIC boom

Quarterly SCI data update

The first quarter of a year is usually quieter than the previous quarter and, for the most part, 1Q19 saw reduced activity over 4Q18 (SCI 24 January 2019). The notable exception was CLO secondary markets, where BWIC volumes boomed for the second quarter in a row, according to SCI data.

As is traditionally the case, new issuance volumes in Q1 dropped from those seen in Q4. In the US, declines were seen across the board and inevitably the busiest sector saw the biggest drop - 77 CLOs issued in Q1 versus 123 in 4Q18.

In Europe, it was a similar story, with overall volumes down and CLOs the busiest sector. But the hardest hit in terms of percentage drop was ABS, with all UK and European deals amounting to nine versus 36 in Q4.

Meanwhile, there was little to differentiate the quarters in the rest of the world, with issuance evenly split as before. Australia and Canada led the way over Asia, in terms of the number of deals issued.

Capital relief trades also saw a quiet Q1 after a busy Q4. Only three deals are recorded in the SCI CRT database (from Banca Nazionale del Lavoro, Deutsche Bank and BMO). However, there are a further two recorded as being due in 1Q19, with details yet to emerge.

SCI's CMBS loan events data from across the European and US markets followed a similar pattern to 4Q18. The percentage of dispositions remained broadly unaltered, with the exception of asset and property sales, which dropped from 16.22% to 8.62% of the loans captured. Tenants closing or vacating took a smaller drop to 18.39% from 21.08%, but that could be a blip rather than a reversal of the long-term growth trend of these events.

Conversely, as might be expected, the deal pipeline saw a significant change over the previous quarter. As at 31 March 2019, it contained 55 deals versus 12 at 2018 year-end.

However, the biggest quarter-on-quarter increase in activity was seen in CLO BWIC volumes either side of the Atlantic. US CLOs went from US$6.17bn to US$8.34bn, with approximately the same total of DNTs of around US$1.5bn. Single-As to double-Bs saw the biggest increases of bonds trading, while equity volumes actually reduced and DNTs increased proportionately - US$526.34m of original face circulated versus US$585.52m, of which US$261.48m and US$274.84 were DNTs respectively.

Of the €1.8bn of European CLO BWICs, €223.87m did not trade. The overall BWIC volume total was up, despite a reduction in volumes at the top and bottom of the stack over the previous quarter's €1.49bn. Single-Bs were notable for a return to form, reversing the previous quarter's pattern of €74.2m of the €117.15m in for the bid not trading, versus only €10.225m DNTs out of €108.71m this quarter.

For more information on SCI's market data, please email us.

ABS

Bulking up

Securitisation capabilities stretched

DLA Piper bulked up its securitisation capabilities to 20 lawyers for Stack Infrastructure’s inaugural and innovative ABS from February, due to structuring challenges. The potential for rendering the deal risk retention-compliant means that similar deals could be seen in Europe in the future.

Dubbed Stack Infrastructure Issuer series 2019-1, the deal is a securitisation of real estate and tenant lease payments for space and electrical capacity in Stack Infrastructure’s six completed and operating wholesale data centres located across five states. Stack plans to use the proceeds to repay existing debt and for other purposes, including further development of data centres. Indeed, securitisation proved an attractive tool for refinancing the data centres, due to the cheaper cost of financing.

The structure of the securitisation had to reflect the firm’s business model, which involves numerous expenses, many reserve requirements and different leases. As such, DLA Piper reviewed every lease and addressed various state-level real estate matters, including transfer tax issues. Hence requiring a team of 18-20 attorneys across the US.

Data centres are real estate facilities that house computer servers and network equipment within a highly secure environment with redundant mechanical, cooling, electrical power systems and network connections. A wholesale data centre operator - such as Stack - is responsible for maintaining the facility's infrastructure, providing physical security and re-leasing the sites' capacity as it becomes vacant. Wholesale tenants are responsible for the maintenance and management of their racks, storage and networking equipment.

Rated by S&P, the transaction comprises US$125m single-A minus rated class A1 and US$725m single-A minus class A2 notes (which priced with a 4.540% coupon) (see SCI’s primary issuance database). Among the strengths of the transaction are the current tenants’ high average credit quality, leases that are important to the tenants' core businesses - with the majority of leased capacity supporting revenue-generating services - and geographic diversity, with sites in Oregon, Georgia, Illinois, Texas and California. Weaknesses include limited industry diversity - with the majority of tenants in various subsectors of the technology industry - and limited historical sector performance data.

The deal is structured as a master trust, allowing for the addition of new collateral and the issuance of additional series of notes. David Ridenour, partner at DLA Piper, notes: “The master trust structure is an efficient way of adding new collateral to an existing pool of assets and reduces the cost of future financings. Given the asset class, the overcollateralisation of the pool and the various credit enhancement mechanisms, investors see this structure as a relatively low risk.”

Among the transaction’s protections is that a servicer must make interest advances on the notes, if deemed recoverable. The advances are meant to cover any shortfalls resulting from timing mismatches because of missed lease payments and any interest shortfalls.

If the servicer fails to make an advance, the indenture trustee must make the advance in its place. These requirements for advances serve as a form of liquidity for the notes.

Furthermore, there is a cash trap condition where, under certain conditions, excess cashflow otherwise payable to the issuer will be diverted to a cash trap reserve account.

Looking ahead, Ridenour states: “The transaction currently isn’t EU risk retention-compliant, but could be at some point. So we could see similar transactions in Europe going forward.”

Stelios Papadopoulos

Structured Finance

SCI Start the Week - 8 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 primary issuance is gaining momentum, as the second quarter begins (SCI 2 April). Indeed, the variety of deals on offer boosted sentiment last week, 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," said 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."

Bank of Ireland's latest buy-to-let RMBS - the €377.3m Mulcair Securities - also 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 observed.

Given the recent spate of new issuance, market focus largely switched from secondary to primary activity last week. "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 noted.

Deal-related news

• UK Asset Resolution (UKAR) is selling two separate NRAM 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 expected within the next few weeks, enabling UKAR to repay all outstanding government loans to HM Treasury (SCI 3 April).
• Assured Guaranty (Europe) (AGE) has issued a £135m five-year debt service reserve (DSR) guarantee to benefit Dwr Cymru (Financing) and Dwr Cymru Cyfyngedig, both companies forming part of the Welsh Water group. The guarantee will replace the existing liquidity facilities provided by banks within the Welsh Water group's securitisation structure (SCI 1 April).
• 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 (SCI 5 April).

Regulatory round-up

• President Trump has issued a memo on federal housing finance reform, directing officials to develop a plan for administrative and legislative reform. The memorandum highlights the administration's priorities and lays out four broad housing reform goals with respect to the GSEs (SCI 1 April).
• Around 60 legacy UK RMBS with a face value of £29bn could be positively affected by the UK FCA's recent proposal to relax some affordability tests for so-called 'mortgage prisoners', according to Moody's. If a significant number of borrowers are able to refinance under the new rules, some senior bonds could benefit from higher than expected increases in credit enhancement (SCI 2 April).
• 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 (SCI 3 April).  

Data

Pricings
The European ABS market recorded its busiest week year to date, with €2.8bn of issuance publicly placed. Overall supply last week was diverse, including a Dutch CMBS, a UK non-standard RMBS and an SME ABS, as well as the usual auto and consumer ABS.

The auto ABS prints comprised: US$193.62m First Investors Auto Owner Trust 2019-1, US$784.54m Ford Credit Floorplan Master Owner Trust A Series 2019-1, US$523.03m Ford Credit Floorplan Master Owner Trust A Series 2019-2 and US$1.01bn Hyundai Auto Receivables Trust 2019-A. Last week's other ABS pricings consisted of: US$188.51m BRE Grand Islander Timeshare Issuer 2019-A, US$208m EDvestinU Private Education Loan Issue No. 2 Series 2019-A, €255.1m Marzio Finance Series 5-2019 (retained), £180.26m SBOLT 2019-1, US$650.29m SCF Equipment Leasing 2019-1 and US$528.3m Trinity Rail Leasing Series 2019-1.

RMBS issuance included A$500m AFG Series 2019-1 Trust, £233m Barley Hill No. 1, €141m Delft 2019, A$400m Sapphire XXI Series 2019-1 and €2.1bn STORM 2019-I. The CMBS pricings were US$296m DBGS 2019-1735, US$1.4bn FREMF 2019-K90 and €246.4m Kanaal CMBS Finance 2019. Finally, the US$687.17m XAN 2019-RSO7 CRE CLO was also issued.

BWIC volume

Structured Finance

SCI podcast - episode six now live

CLO innovation and UTP securitisations discussed

Episode six of the monthly SCI podcast is now available. In this edition, our editor Corinne discuss some fascinating developments in the CLO sector, including how several structural innovations have begun to emerge and she asks why that has happened. Additionally, our senior reporter, Stelios, looks at difficulties involved in securitising unlikely-to-pay loans and Richard, our deputy editor, takes a broad look at the evolving CRE CLO landscape.

The podcast is also available on iTunes and Spotify. Don't forget to give us a rating and a (friendly) review, if you can!

NPLs

Foreclosure uncertainty

ECJ ruling leaves Spanish NPL investors in the dark

The European Court of Justice’s (ECJ) 26 March judgement on early-termination clauses in Spanish consumer mortgage contracts could result in the use of quicker mortgage foreclosure proceedings in Spanish non-performing loan transactions. The final outcome rests with the Spanish courts, however, prolonging existing uncertainty over the course and length of Spanish foreclosure proceedings.

Antonio Casado, analyst at Scope, notes: “The dismissal of all ongoing foreclosure proceedings would be the worst-case scenario for NPL investors. Creditors would need to turn to ordinary proceedings, which can take much longer, increasing recovery timing. The speed of the process is paramount for investors; lengthy procedures erode the net present value of expected recovery proceeds.”

In recent years, Spanish courts have declared that several standard mortgage contract clauses traditionally applied by banks were abusive and should be considered null and void. According to Scope, increased litigation resulting from this has contributed to a doubling in average foreclosure timings in Spain from around 1.5 years in 2004-2010 to around three years in 2017-2018.

One of the most controversial aspects has been the application of early-termination clauses. According to a new mortgage law, a lender must wait until 12 or 15 missed instalments before initiating foreclosure proceedings.

In the past, many contracts allowed termination after just one unpaid instalment. Since this practice was declared abusive, there has been increasing uncertainty about the course and length of foreclosure proceedings regarding consumer mortgage loans subject to such clauses.

The main question is which foreclosure proceeding follows mortgage contracts that have been terminated due to early termination clauses. The two options are either mortgage foreclosure proceedings or ordinary proceedings with lengthier recovery periods.

The ECJ ruling states that early termination clauses should be removed from mortgage contracts, since not doing so would contravene EU consumer protection directives. If the judge determines that the contract cannot survive without the early-termination clause and that the effect of invalidating the contract would be detrimental to the borrower, they can rule on the replacement of the early-termination clause by a supplementary disposition compliant with national regulation.

This would enable the continuation of mortgage foreclosure proceedings. Nevertheless, the ruling makes clear that it’s up to national courts to determine which recovery procedure is considered more protective of borrower interests.

Paula Lichtensztein, analyst at Scope, concludes: “A judge may rule in favour of ordinary proceedings, considering the potential benefits for the borrower of postponing the eviction process. However, a judge may alternatively decide that mortgage foreclosure proceedings would provide a higher degree of protection to the consumer. For instance, if the mortgaged property is the borrower’s main residence, the minimum guaranteed auction bid prices would be relatively high.”

Stelios Papadopoulos

RMBS

Inaugural non-QM RMBS prepped

Deal marks new phase for global investor

The first seasoned, non-qualified mortgage RMBS issued by a private fund managed by PIMCO is marketing. The US$382.45m transaction, dubbed BRAVO Residential Funding Trust 2019-1, is backed by 1,311 loans originated by Capital One and acquired by a PIMCO-run fund in a bulk sale.

The transaction has been assigned provisional ratings by Fitch of triple-A on the US$343.06m class A notes (350bp), double-A on the US$10.90m class A2s (350bp), single-A on the US$10.14m class A3s (350bp), triple-B on the US$6.31m class M1s, double-B on the US$4.97m class B1s, single-B on the US$3.25m class B2s, while the US$3.25m class B3 notes are unrated.

The non-QM status of many of the mortgages is a negative ratings driver on the transaction, with around 60% of the loans underwritten to satisfy the ability to repay rule, although 37% were originated prior to the rule’s implementation in January 2014, while 2.5% are investor loans, not subject to ATR. Overall, 54% of the mortgages are regarded as non-QM, due to debt-to-income ratios exceeding 43%, 18% of the loans, 40-year terms, 8% of the loans and interest only loans, 2%.

The rating agency adds that a strength of the transaction is that the collateral consists primarily of three-year fixed rate mortgages, with 5.8% comprising 15-year mortgages and 7% of the collateral comprises seven-year hybrid adjustable rate mortgage (ARM) loans.

Furthermore, the pool is seasoned over 50 months, with a very low weighted average, current combined loan-to-value ratio of 60%. Additionally, says Fitch, the borrowers have strong credit profiles, with a weighted average FICO of 752.

On the downside, Fitch notes that the deal has significant geographic concentration with 31% of the pool concentrated in New York, with the largest MSA in New York, at 37.7%, followed by Washington, at 19.5% and New Orleans, at 7.6%. Overall, the top three MSAs account for 65% of the pool, which resulted in a 126bp increase to Fitch’s triple-A expected loss.

The rating agency also notes that the deal should experience low operational risk as a result of PIMCO’s role in the transaction, adding that investment vehicles managed by PIMCO have been actively acquiring residential mortgage loan portfolios since 2011. In 3Q14, a particular fund began acquiring non-agency residential mortgage loans which, in combination with two other funds, brings PIMCO’s total non-QM loan acquisitions to US$3bn.

Fitch adds that, while the funds’ mandate still includes distressed mortgage assets, one of their current primary objectives is to focus on acquiring recently originated non-agency loans through existing and new relationships. In general, the rating agency concludes that PIMCO’s mortgage team has extensive residential mortgage experience, including in the securitisation and secondary markets.

Richard Budden

Structured Finance

European bank in major restructure

Company hires and sector developments

COO hired

Trepp has appointed Luis Amador as coo, reporting to ceo, Annemarie DiCola. Amador was recently md at Moody's Analytics, responsible for structured finance financial engineering, product management, content production, and advisory teams, providing the fixed income marketplace advanced analytics, data, credit models, and portfolio monitoring products while also performing advisory, valuation, and consulting services across sectors.

Energy and infra partner hired

Wilson Sonsini Goodrich & Rosati has appointed Hershel Wein as a partner in its energy and infrastructure practice in New York. He will also be a member of the firm's structured finance practices. Wein's past experience includes advising clients on structuring and implementing structured finance and derivatives transactions. He was previously a principal in the Washington national tax practice of KPMG.

European bank in major restructure

Societe Generale is cutting 1600 jobs as part of a large restructuring exercise and, as part of this, it will merge two business units within financing and advisory, covering client relationships, investment banking and financing activities. It will result in a new entity that could allow the bank to optimise its client portfolio and its geographic presence, by leveraging on the strength of its coverage and its leadership in structured finance.

Equity investor

LibreMax Capital has established CAVU Investment Partners in partnership with TowerBrook Capital Partners, via its TowerBrook Structured Opportunities Fund. The entity will invest in the equity tranches of new issue CLOs managed by Trimaran Advisors, the CLO management platform of LibreMax. David Moffitt, head of tactical opportunity investing and CLO management at LibreMax and president of Trimaran, will serve as president of CAVU. Under the terms of the partnership, TowerBrook has made a substantial commitment to CAVU to support multiple Trimaran CLOs. CAVU expects to begin investing in 2Q19 and can continue making investments for five to seven years.

ILS

TigerRisk Partners has recruited Kevin Feldman as partner, based in Orange County, California. He was previously md at Guy Carpenter and, before that, avp at Collins Associates.

Italian office opened

Capzanine has opened an office in Milan staffed by three investors responsible for the firm’s investments in Italian SMEs. Led by Philippe Minard, the team comprises Riccardo Dore and Tommaso Galletta. Minard headed the structured finance team at Mediobanca until the end of 2005, when he created with his partner Andrea Cappuccio - and the support of Bi Invest and Intesa Sanpaolo - the Mezzanove Capital fund dedicated to the Italian mezzanine debt market. In 2013, Mezzanove's activities evolved into Emisys Capital, where Dore and Galletta began their careers.

Strategic alternatives

Alcentra Capital Corp has engaged Houlihan Lokey as its financial advisor in connection with a formal review process to evaluate strategic alternatives for the company. The process is being led by the board’s committee of independent directors, which has not set a timetable for the conclusion of the review.

Structured Finance

Firm bulks out CRE capability

Sector developments and company hires

Board directors appointed

ISDA has appointed three new board directors and re-elected ten others. The three new directors are, Erik Tim Mueller, ceo, Eurex Clearing, Andrew Ng, group executive, head of treasury and markets, DBS Bank and Shigeru Nonomura, md, co-Head of rates trading, global markets Japan, Nomura Securities.

CMBS head hired

Natixis has recruited Andrew Taylor as md and head of CMBS, Americas. Based in New York, he will report to Jerry Tang, global head of real estate and hospitality distribution, and will be responsible for managing Natixis’ CMBS activity, including its CMBS loan pipeline, securitisation processes and new loan pricing. Taylor has over 20 years of experience in CMBS trading and previously served as md and CMBS desk head at JPMorgan since 2012. Before that, he held mortgage securities sales positions with Citi in New York.

Firm bulks out CRE platform

Sabal Capital Partners has further strengthened its commercial real estate lending team, with three new hires. At the md level, Patrick Nizich and Benjamin Kilgore join the firm based in Seattle and New York respectively. The former was previously director of loan origination at Dexia, while the latter held an originations position with Morgan Stanley, where he was involved in the origination of over US$5bn inclusive of conduit, stand-alone floating rate securitisation and balance sheet executions. At the vp level, Alexander Paroda will oversee CMBS transactions based in New York and was most recently an associate in valuation and capital advisory for Cushman & Wakefield. Additionally, the firm has recruited five new team members to support its agency-focused small balance lending programmes: Juan Aragon, sizing manager in California (formerly director and deputy chief underwriter for Hunt Real Estate Capital); Daniel Greenberg, production management advisor in Maryland (formerly with Federal Home Loan Mortgage Corp); Thomas Woolsey, trading manager in Texas (formerly senior md and trading manager with Lancaster Pollard and Co/Orix USA); Jack Adler, loan production manager in New York (formerly managing partner for Lodestone Capital); and Timothy Maloney, underwriter in California (formerly a consultant regarding LHTC/affordable housing).

Modeling agent required

The World Bank Group is seeking to hire a modeling agent to work on the development of the next phase of its Pandemic Emergency Financing Facility (PEF 2.0), an insurance-based financing mechanism supporting efforts to tackle rare, high-severity disease outbreaks, with the aim of preventing such outbreaks from becoming pandemics (SCI 30 June 2017). In advance of the scheduled maturity of the PEF 1.0 parametric insurance coverage in July 2020, the World Bank - with the help of selected re/insurance brokers - is reviewing all aspects of the structure in order to improve the programme, where necessary, for the anticipated commencement of marketing the PEF 2.0 risk transfer mechanism in May 2020. The modeling agent will be required to conduct a series of iterative risk modeling exercises and, as needed, build a risk model that will underpin the risk transfer window for PEF 2.0. Proposals are due by 26 April.

Relationship manager nabbed

Wilmington Trust has hired Yannis Kyriakopoulos as relationship manager in its global capital markets team, based in London. Kyriakopoulos is responsible for managing new business and client services for Wilmington Trust SP Services (London), which provides corporate services to companies involved in structured finance transactions. He will focus on securitisations specifically for the Greek market. Prior to joining Wilmington Trust, he was financial controller of OTE and also worked as an auditor with KPMG in Greece, specialising in the banking sector.