Contents

Structured Finance

STS 'not enough' for European ABS revival

Securitisation 'needs to be used more' as funding tool

At the start of last year, BNP Paribas Asset Management hired Michel Fryszman as its new head of structured finance to oversee three UCITS funds, each investing in securitisations and loan portfolios. While the funds have a fairly broad remit with regard to asset class, historical performance data is a key metric meaning first-time CLO managers are given a wide berth and UK student loan securitisations have so far been avoided.

The three UCITS funds have different investment mandates: one invests solely in triple-A rated bonds, the second invests only in investment grade securitisations and the third is more flexible, investing across triple-A to junior notes. Fryszman comments that the funds invest in securitisations with different risk/return profiles and a long track record but adds that, as UCITS, there are restraints on what the funds can invest in in terms of the volatility and liquidity of the assets.

The funds appeal to a wide-range of investors, Fryszman says, from institutional to multi-asset managers, which are drawn in as a result of the funds’ “attractive risk-return profiles but also diversification as securitisation offers access, sometimes unique, to various private debt (such as consumer loans or residential mortgages).” In line with this, he says that the funds invest across a range of asset classes and securitisations on a case-by-case basis, including ABS, RMBS, CMBS and CLOs.

In terms of whether there are any securitisations at present that Fryszman is less enthusiastic about, he says that his firm generally avoids transactions where data and track record are lacking. He adds: “There are, however, certain deals we avoid, like [UK] student loan ABS – we think that, aside from Brexit and interest rate uncertainty, these transactions are tricky to analyse in terms of future performance.”

He does have some scope for a more risk-on approach, however, noting that in the, third, ABS Opportunities Fund, returns are driven through investing in non-investment grade CLO tranches, while investing alongside ABS for “stable and diversifying cash-flows.” In terms of CLO selection, Fryszman says that the firm looks at a variety of CLOs, but that first time managers are “generally avoided”.

He adds that he doesn’t necessarily favour more conservative or aggressive CLO management styles, but looks at how managers perform over time. He comments that, while conservative managers may bring more security to debt, for example, they may however provide “lower returns to equity.” With regard to the ABS side of the investment strategy and where he looks for opportunities, he suggests there are several growth areas in Europe, but a particularly interesting one has “been in nonbank corporate lending like the securitisation of Funding Circle loans.”

On broader developments in the securitisation sector, Towd Point Mortgage Funding 2019 – Granite 4, recently launched, raising questions about the possibility of further transactions being refinanced, as many are due to be called. Fryszman isn’t so sure and says that the “jury is still out” with regard to whether there will be a number of refinancings on similar legacy deals.

He continues: “It may come down to investor appetite and that does seem to be there, but otherwise it’s uncertain whether these deals will refinance in large number. The market went through a phase thinking that QE would be coming to an end, along with Brexit. Now QE seems here to stay, perhaps this will stoke appetite for refi transactions.”

At the same time, clarity over the STS regulation has improved and a growing number of European ABS transactions have received the STS verification. In line with this, Rabobank’s structured finance analysts recently comment that the European ABS market is “back in full swing after a poor start to the year.”

Fryszman remains sceptical, however, that this is a result of growing certainty around STS and he says that he doesn’t think STS will kickstart the ABS market in Europe. He comments: “It is certainly a positive thing for the market as it brings all the existing regulations under one moniker, but it isn’t enough to trigger a higher number of issues.”

“This sounds obvious, but the market simply needs more issuers bringing transactions to market. The issue is that, to date, securitisation is not enough used as a preferred route for funding,” Fryszman concludes.

Richard Budden

Capital Relief Trades

Challenges persist

Structuring issues put shipping SRTs on hold

Capital relief trades referencing shipping loans have long been discussed and planned by a small number of issuers and arrangers. However, low performing portfolios and structural complexities pertaining to mixed portfolios that include shipping loans pose challenges that are constraining volumes.     

Nord LB, for one, has allegedly attempted a shipping SRT that was set to close in December, but the deal was reportedly shelved. The bank stated in December that it was not preparing another synthetic securitisation of shipping loans “at the moment”.

The lender is known for its legacy portfolio of distressed shipping loans and its associated deleveraging efforts. The shipping loan market has remained challenged since the 2008 financial crisis, due to tepid growth in world trade and overcapacity issues. The downturn led to the emergence of so-called ‘zombie loans’, or exposures where a vessel is turning over interest but principal can’t be paid back.

“You had a global increase in vessels and new capacity and the parties financing the debt carried on doing so for the most part, arguably exacerbating the issues of low shipping rates and increased capacity,” explains Robert Bradbury, md at StormHarbour.

However, the issue isn’t just about the performance of the loans, but also how many banks have enough shipping exposures to justify a risk transfer transaction. Global shipping exposures total €300bn, compared to €545.5bn for European corporate revolvers alone.

Another challenge is residual value risk. “The difficulty lies with the market’s volatility and the impact of that volatility on the value of a bulk carrier or similar ship. It’s a highly specialised industry, where global trade and commodity prices may be crucial in extracting value from a portfolio,” says Debashis Dey, partner at White and Case.

However, mixed portfolios could be a solution going forward. Nord LB successfully completed such a transaction over year ago.

Dubbed Northvest 2, the transaction is believed to be the largest post-crisis synthetic securitisation of shipping loans (SCI 20 December 2017). Mixed portfolios generate more volume and fees, while offering diversification.

Mixed portfolios though present a different set of issues. Dennis Heuer, partner at White and Case, notes: “A major legal challenge with Northwest 2 – as with any other capital relief trade – was ensuring that the deal had sufficiently protected cash collateral that investors can get back, if the deal gets terminated. Investors receive such protections through various ways, including preferred creditor status and a ring-fencing of assets.”

Second, it’s doubtful whether many investors would consider mixed portfolios. Bradbury states: “Partly it’s a mandate issue, since some are focused solely on SMEs, while others prefer large corporates, for example. Additionally, if you blend two or more asset classes, you may inadvertently generate structural complexity.”

SME portfolios, for instance, typically exhibit more granularity and a different maturity profile than infrastructure ones. As such, combining different assets can generate a significantly different scenario analysis of losses.

Bradbury continues: “You also have to consider a range of other structural impacts to a transaction, such as different default and recovery/workout mechanisms for different asset classes. In the case of large corporates, for example, it can be feasible for the protection buyer to sell the position, while in other asset classes this may be more difficult or less desirable. The workout period may also vary significantly between asset classes.”

Given all these issues and the fact that some investors have been involved in mixed transactions, developing a niche for shipping portfolios may be one solution. Bradbury concludes: “While risk transfer is a competitive market, there is typically much less flexibility in a tranched deal, compared to options that may be available to an investor who owns a portfolio of underlying debt positions outright.”  

Stelios Papadopoulos

Structured Finance

SCI Start the Week - 29 April

A review of securitisation activity over the past seven days

Deal-related news

• EJF Capital is eyeing opportunities in Europe, as bank consolidation pressures grow and rates continue to rise. However, the firm's plans remain at an early stage, given that European consolidation lags behind that of US banks (SCI 26 April).
• Investors in Ginnie Mae securities backed by HECMs can now take advantage of a new form of execution - the Home Equity Conversion Mortgages Backed Security (HMBS) Platinum securitisation channel. The platform is designed to ease the administrative costs of holding multiple HMBS securities and enhance market liquidity (SCI 23 April).
• The borrower behind the US$390m 666 5th Avenue asset backing the CGRBS 2013-VNO5TH CMBS has fully defeased the loan with US government securities. For more CMBS news, see SCI's CMBS loan events database.

Regulatory round-up

• The US SEC has ordered Prosper Funding to pay a US$3m penalty for miscalculating and materially overstating annualised net returns to more than 30,000 investors on individual account pages on its website and in emails soliciting additional investments. According to the order, from approximately July 2015 until May 2017, the marketplace lending platform excluded certain non-performing charged-off loans from its calculation of annualised net returns - resulting in many investors deciding to make additional investments (SCI 23 April).

Data

Pricings
No European transactions printed last week, following the Easter break. In the US, CLOs accounted for the majority of new issuance.

The CLOs that priced last week included: US$368.2m Battalion CLO X (refinancing), US$404.25m Dryden 72 CLO, US$405.1m Eaton Vance CLO 2019-1, US$404.2m LCM 29, US$801.25m Madison Park Funding XXXV, US$401.3m MMCF CLO 2019-2, US$510.65m Octagon Investment Partners 20-R (refinancing), US$597.1m Owl Rock CLO I and US$398.65m PAIA CLO 2019-1. The US$1.56bn American Express Credit Account Master Trust Series 2019-2, US$351.64m FREED ABS Trust 2019-1, US$312.6m Marlette Funding Trust 2019-2 and US$416.1m Nelnet Student Loan Trust 2019-2 made up the ABS prints, while the US$295m MSC 2019-BPR was the sole CMBS issuance.

BWIC volume

Upcoming SCI events
NPL Securitisation, 13 May, Milan

Middle Market CLOs, 26 June, New York

UTP webinar
Join SCI and Massimo Famularo of Distressed Technologies at 2pm UK time tomorrow (30 April) for a discussion of the challenges posed by unlikely-to-pay (UTP) loans and the broader non-performing exposure environment in Italy. The webinar will highlight the UTP dilemma of cure versus default rate, as well as examine the special servicing landscape and the hybrid models being adopted across the sector. Register for the webinar here.

Capital Relief Trades

Risk transfer round-up - 3 May

CRT sector developments and deal news

Santander is rumoured to be readying an SME transaction from its Magdalena programme for 2Q19.The transaction would be the issuer’s third-ever Magdalena deal.

The second Magdalena deal, dubbed FT Pymes Magdalena, was completed last August. The €166.3m CLN referenced a €2.5bn Spanish SME portfolio and paid 8.85% (see SCI’s capital relief trades database).

NPLs

Line-up finalised

NPL event includes UTP workshop

The line-up for SCI’s 2nd Annual NPL Securitisation Seminar on 13 May has been finalised. Hosted by Orrick at Corso di Porta Romana 61, Milan, the event features a Distressed Technologies workshop highlighting new models of credit management in the unlikely-to-pay (UTP) loan sector.

Another seminar highlight is a panel on NPL investment trends, which focuses on emerging opportunities, including new jurisdictions and asset types. Meanwhile, during the NPL securitisation panel, speakers will outline the steps involved in executing a transaction using the new ESMA NPE template.

The servicing panel is set to explore the different strategies employed in resolving NPEs, as well as the importance of strategic partnerships, such as joint ventures. Finally, the regulatory developments panel focuses on the European Commission’s NPL Action Plan for secondary market initiatives and the prevalence of ReoCos in Italy. A cocktail reception will round the day off.

Cerved is bronze sponsor of the event. Speakers include representatives from Arrow Global, Banca Carige, Banca IFIS, Banca IMI, Chiomenti, Citi, DBRS, Eidos Partners, EuPraxis FSI, European DataWarehouse, HSBC, Intesa Sanpaolo, Intrum, Securitisation Services, SG, S&P, StormHarbour.

For more information on the seminar or to register, click here. To listen to a recent SCI webinar on the challenges posed by UTP loans, click here.

NPLs

NPL acquisition completed

Hoist Finance purchases Getback portfolio

Hoist Finance has acquired a PLN400m non-performing loan portfolio from Polish servicer Getback. Over 95% of the assets are non-performing unsecured consumer loans, but a small proportion comprises secured consumer and SME loans. The acquisition concides with a wave of banking sector consolidation that is fuelling a growing supply of unsecured retail NPLs in the jurisdiction.   

According to Zbigniew Filipowicz, country manager at Hoist Finance Poland: “Consolidation in the Polish market is allowing us to grow and be more operationally efficient. Many of the portfolios that we have acquired as part of this transaction originate from banks we know really well, being an active player in the debt collection market.”

He adds: “In fact, when GetBack was acquiring these portfolios, we were competing head-to-head with [the firm], so we have deep knowledge of these assets. Following the acquisition of the GetBack portfolios, we will be the second-largest operator in the Polish market.”

The polish NPL market witnessed increased competition in 2017, due to banking sector consolidation. Banks are reshaping their portfolios and, in the process, contributing to supply increases of not only non-performing loans, but also performing and sub-performing ones.

Unsecured retail loans are the main beneficiary of this growth. According to Deloitte, retail NPLs increased by 8.7% from 2016 to 2017, as the stock of corporate NPLs decreased slightly by 0.2% - driven mainly by the robust corporate balance sheets.

However, funding can be an issue, according to Filipowicz. “A big challenge in the Polish NPL market is finding funding and this was true for the GetBack acquisition process. However, Hoist Finance has a unique funding structure that enables future deal-making in Poland, despite this.”

The model includes vendor relationships, diversified funding and a growing deposit base.

Looking ahead, Filipowicz notes: ”The Polish market is mature and growing, and we have a long-term commitment to it. Our aim is to be one of the top three players in Poland and Europe. We will also maintain our specialisation in bank originated debt and our ambition is to expand services to a wide range of asset classes, including NPLs.”

He concludes: “The total expected investment in portfolios is Skr5bn in 2019 and we are looking into alternative structures, such as co-investments and securitisations - which, if successfully implemented, may free up additional investment capacity.”

Stelios Papadopoulos

CMBS

Single-source solution

Pat Jackson, ceo and founder of Sabal Capital Partners, answers SCI's questions

Q: How and when did Sabal Capital Partners become involved in the securitisation market?
A: I founded Sabal Capital Partners in February 2009, with the aim of focusing on the aftermath of the financial crisis and buying distressed commercial real estate debt. By 2014, we had purchased US$8.4bn of debt, representing approximately 5,000 loans. In the process, we’d built up a team of 240 employees that sources, bids on and boards CRE assets.

Along the way, we also became an adviser to the FDIC, assessing losses as a result of bank closures ahead of the FDIC becoming the receiver. As such, we’ve provided loss estimates for around 80 banks. The majority of the assets we provide loss assessments for are small balance loans originated by regional and community banks.

We began actively lending in the small balance CRE space in 2013 and participated in the pilot roll-out of a Freddie Mac lending programme, called the Small Balance Loan Program, involving multifamily properties slated for workforce housing. The programme took off in 2014 and we’ve originated over US$1bn per year through it.

These loans are typically securitised and we raised a fund to invest in the B-pieces from that programme. We became the most prolific buyer, recognising an opportunity where banks had withdrawn from the sub-US$10m space and it wasn’t efficient for CMBS conduits to fill the void.

Q: What are your key areas of focus today?
A: We continue to be a leader in agency-focused small balance commercial real estate lending. Concurrently, we are also expanding our debt offerings beyond agency programmes.

In February, we recruited Robert Restrick - most recently with Walker & Dunlop - to lead our CMBS team. Bringing him on coincided with the launch of our new CRE loan programme, a non-agency offering.

The idea behind the programme is to provide a nationwide single-source debt solution for small balance borrowers, combining origination, loan servicing, securitisation and B-piece retention. This is a model we feel is valuable yet lacking, particularly in the small balance commercial real estate debt arena.

The platform is a balance sheet solution using capital markets execution and benefiting from alignment of interest. We’ll lend in the range of US$2m-US$20m, but our sweet spot is US$10m and below.

Q: How do you differentiate yourself from your competitors?
A: There aren’t many options for small balance borrowers, but we’re trying to create a more holistic approach. Our CRE loan programme is unique in the small balance CRE space, with the aim of providing a better credit and loan experience for borrowers.

With traditional CMBS conduits, a borrower doesn’t know where their loan will end up for servicing or the B-piece. If it’s a borrower with a US$100m-plus loan, typically they don’t care. For sub-US$10m borrowers, they can be reassured that the servicing of their loan will remain with Sabal and the B-piece is already signed off, therefore all execution uncertainty is removed. Sabal is a rated primary and special servicer for CMBS.

Small balance CMBS have been issued in the past, but our ability to hold the risk retention piece makes a big difference.

All the infrastructure in a special servicing operation and the B-piece fund with the origination platform take time and investment. Such an undertaking may put other participants off.

We prepared to launch our CMBS platform for over a year. Others have tried bringing similar offerings in a piecemeal fashion, with varying degrees of success, and ultimately the borrowers are the ones that suffer.

Q: What is your strategy going forward?
A: Our CMBS programme is just beginning, but our pipeline is huge. Our first securitisation is likely to be sized in the US$200m-US$250m range. We envisage issuing super-senior triple-A rated notes to non-investment grade notes.

The advantage of small balance loans is the diversity they’ll bring to our securitisations – the fact that there are no lumpy assets should make for an attractive bond offering. Concentration risk is limited too, since it’s a nationwide platform.

We recognise that small balance is more hands-on by virtue of its size. Sabal creates a process with integrity and efficiency – we’re not looking to bring the most elegant deal. We see US$2bn of loans a month, so we don’t have the luxury of re-inventing the wheel.

As such, using streamlined documentation - without intercreditor agreements and cash-sweep scenarios - lowers the cost of the origination process. With most of the complexities removed from the process, it costs around US$20,000-US$25,000 all-in for borrowers – which is a very competitive rate.

Although the intent is always that the loan performs as it’s underwritten and we’ll only underwrite fundamentally sound real estate, if we have to take over a loan, we’re already set up for it as a special servicer. We’ll enforce lender rights, which may include foreclosing on and taking ownership of the real estate.

At present, we don’t have a single delinquency in our portfolio. But in the event that one occurs, we can achieve the best possible outcome for investors.

As the holder of the B-notes, our priority is to achieve full recovery and make a return on our investment. Timely responses to borrowers and fast resolutions make sense to us.

Many borrowers tried to engage with servicers in the last cycle and found the experience very frustrating. We’ll make quick decisions – for instance, in connection with lease renewals that the B-piece holder signs off on – to enable a borrower to run their business efficiently.

We’ve met with rating agencies and they’re currently reviewing the platform, so that when we issue, it’s a logical next step in the evolution of the CMBS market. We anticipate favourable treatment from the agencies, given that we’ll be holding around 8.5% of each deal, providing the economics work.

Q: Which challenges/opportunities do you anticipate in the future?
A: Sabal has a highly defendable niche in small balance commercial real estate loans and no plans to expand into large balance loans at the moment. There are plenty of other options in that space. Small balance is an underserved segment of the CRE market and we will continue to be the first-mover, meeting opportunity as it emerges.

Corinne Smith

Structured Finance

SFR issuer prepays class F notes

Sector developments and company hires

EMEA
Alantra has reinforced its portfolio advisory capabilities with the addition of six senior professionals in Lisbon (Ana Almeida, as a director), London (Jim Fadel, md; Robin Michaels, director; and Meena Evans, vp), Madrid (Valerie Castro, director) and Milan (Renato Limuti, md). The firm has also hired former Carnegie md Sebastian Hougaard as an md in the Nordics, establishing its presence in Denmark. Finally, it has opened an office in Hong Kong, with the recruitment of Sandeep Talwani, who will cover South East Asia.

TwentyFour Asset Management has appointed Paul Kim as an analyst in its New York office. Kim will be a key member of TwentyFour’s multi-sector bond team, which manages the firm’s Strategic Income and Dynamic Bond strategies. He was previously a credit analyst on the high yield fixed income team at Credit Agricole.

Mid-market debt vehicle
European Risk Capital has launched CreditStream, a £1bn multi-client debt programme providing UK non-bank originator lenders with wholesale funding access to the alternative debt capital markets. With an individual deal target size of £10m-£100m, CreditStream is aimed at financing balance sheets of UK mid-market asset-based lenders, including bridging and development lenders, second charge mortgagees, consumer and SME funders, auto/equipment finance companies and fintech lenders. Unlike single-issuer debt programmes, CreditStream may be accessed by multiple originator lenders effectively sharing economies of scale, streamlined credit and documentation processes, and consequently lower risk-adjusted funding costs.

North America
Greystone has expanded its Houston-based lending and sales advisory group with the addition of Ed Gray as an md and Brooks Steele as a director. Joining from Sabal Capital Partners, the pair will help drive loan origination efforts in the Houston region across a range of lending platforms, including Fannie Mae, Freddie Mac, FHA, CMBS, bridge and mezzanine.

Fred LeMoine will succeed Nigel Godfrey as evp of insurance management services at Horseshoe Group. Godfrey, who is also the group’s cfo, is retiring but will continue to be involved with Horseshoe as a consultant, as well as chairman of its UK operations. LeMoine joined Horseshoe at the beginning of the year and has over 20 years of successful experience in the Bermuda insurance and reinsurance market, including in ILS. He was most recently cfo and coo of Aspen Bermuda, where he served on various executive committees and boards.

SFR junior prepayment
Invitation Homes last month became the first single-family rental RMBS issuer to elect to voluntarily prepay the class F notes in IHSFR 2017-SFR² reverse sequentially with unrestricted cash. Wells Fargo structured products analysts note that unrestricted cash typically comes from outside a deal, thereby leaving the underlying properties untouched. They suggest that by paying down the lower tranches and effectively converting them to equity, the move could strengthen the deal from a DSCR perspective, as the same level of rental income is now supporting less required debt service.

Structured Finance

First SOFR-indexed MBS tranche inked

Sector developments and company hires

Claims predictability to improve?
The Florida legislature last month passed a bill to reform the requirements for the assignment of benefits of claims for residential and commercial property insurance, which could improve the predictability of claims and losses for Florida catastrophe bonds. According to a recent Cadwalader client memo, assignment of benefits in Florida has been a concern for the ILS market, as related litigation has resulted in higher insurance rates and become a significant factor in losses and claims development for a number of outstanding catastrophe bonds. The Act is expected to be effective from 1 July 2019 and could rationalise loss development for Florida catastrophe bonds, as incentives for opportunistic litigation would be reduced while requiring the provision of detailed claims information.

North America
Highland Capital Management has named Joe Sowin co-cio, overseeing investment activities for the firm’s alternative investment platform, with a focus on driving information flow across investment teams and with the firm’s counterparties. Sowin previously served as head of global equity trading and will continue to manage the firm’s trading operations as co-cio. He joined the firm in 2010, after holding various trading positions at New York- and Connecticut-based hedge funds. Sowin joins Highland co-founder Mark Okada in the co-cio role. Trey Parker, a Highland partner who previously held the post alongside Okada, was named co-head of Highland’s private equity group earlier this year.

Alex Patil has joined Monroe Capital’s originations team as md, West Coast region, working with Steve Hinrichs in the firm’s Los Angeles office. Prior to Monroe, Patil was an md at Medley Management, where he led the originations efforts for the West Coast region. He was responsible for deal sourcing, underwriting, transaction execution and portfolio management.

RFC on SPV consolidation
The Australian Prudential Regulation Authority (APRA) has released for consultation proposed changes to reporting requirements for registered financial corporations (RFCs) that are not a related party of an authorised deposit-taking institution (ADI). The changes will require these entities to consolidate the positions and transactions of all securitisation SPVs in a single set of reporting for economic and financial statistics data collection. The assets and liabilities of securitisation SPVs will therefore be consolidated on to the domestic books of RFCs and assets originated into or transferred to an SPV will be included in the RFC’s reporting. The proposed changes are intended to take effect from the reporting period ending 31 July 2019, with feedback welcomed by 1 June.

SOFR-linked MBS
Ginnie Mae has settled the first REMIC tranche indexed to SOFR, representing the culmination of a team effort between the GSE and Amherst Pierpont. The security is a US$40m floating rate tranche, within a US$265m REMIC, backed by adjustable-rate mortgage pools. The interest rate formula includes a spread of 40bp over the SOFR floating rate index value.

Structured Finance

Rating agency appoints new SF head

Company hires and sector developments

Bank bulks up

Macquarie has appointed Carolyn Porretta md, structured finance and real estate, based in London. She was previously head of portfolio services, investment portfolio management at AIG, where she was responsible for managing structured products and CRE debt in EMEA.

RA hires new SF head

Scope Ratings has hired David Bergman as its new head of structured finance, succeeding Guillaume Jolivet, who becomes md of the rating agency and joins the management board with Torsten Hinrichs, coo of the Scope Group. Bergman will be based in Milan and was previously deputy head of structured finance at the firm, having joined in 2017 after working at Moody’s for over ten years.