Contents

NPLs

LeaseCo boost

Foundation laid for leasing NPL ABS

Amendments to Italy’s securitisation law are expected to boost securitisations of non-performing leasing assets, with at least two transactions being readied for this year. Leasing NPL securitisations are rare, with the underlying assets of most NPL ABS being either corporate or SME loans.

Annalisa Dentoni-Litta, partner at Orrick, explains: “The amendments allow for the creation of ancillary SPVs called LeaseCos, which can buy leasing assets for the exclusive interest of the securitisation. Securitisation SPVs can only buy claims, but not assets.”

The introduction of a more favourable tax regime for the transfer of these leases facilitated the amendments. The issue of transferring both claims and assets in the case of leasing arises when banks recognise the loans as non-performing.

In order to achieve accounting derecognition, both the asset and the claim have to be transferred. Besides the banks that are the direct beneficiaries from these amendments, the transfer of assets to the LeaseCo provides investors with more control over them.

LeaseCos and ReoCos are real estate companies, set up for the purpose of acquiring, managing and developing real estate properties. So far, only two rated non-performing loan securitisations - Siena NPL 2018 and Pop NPL – use a real estate company as part of the securitisation structure to manage recoveries on real estate assets.

David Bergman, head of structured finance at Scope, notes: “Until the end of last year, you couldn’t transfer assets to an SPV, except unsecured recoveries from borrowers. The amendments allow for the transfer of distressed leasing assets to a vehicle with collections that are channelled to the benefit of the noteholders.”

Another factor that complicated leasing NPL issuance was the small size of non-performing leasing exposures. According to the Italian Leasing Association, only €1.5bn (GBV) of such exposures were derecognised through securitisations last year. The total balance of NPL leasing exposures is less than 10% of total Italian NPL volumes.

The amendments are also broad enough in scope to allow for the securitisation of leases that are unlikely to pay. Dentoni-Litta notes: “The amendments enable the securitisation of UTP leasing assets. If a lease is a UTP, then the contract with the borrower hasn’t been terminated. Under these circumstances, the contract could be transferred to a LeaseCo. The amendments state that the LeaseCo can be consolidated on the balance sheet of financial intermediaries, in addition to banks.”

Nevertheless, market participants still need to grapple with a few challenges. Bergman concludes: “The depreciation of certain types of machinery and equipment can be difficult to evaluate, due to their specialised nature, complicating the calculation of an expected recovery. The practical implication is that the final sale price could be very volatile. So investors could end up selling it on the market well below their original expectation.”

Stelios Papadopoulos

CLOs

Seeking warmer waters

Growing numbers of CLO issuers list on CSX

While CLO issuers are not legally obliged to list their CLO on any exchange, the favourite in recent years has been the Irish Stock Exchange (ISE). However, some now suggest that, particularly following the introduction of European market abuse regulations, other exchanges have seen an increase in CLO listings.

Nicole Pineda, partner, Harneys banking and finance team comments: “The onerous regulatory burden placed on US CLO issuers and sponsors in the EU, both from an administrative and legal perspective, combined with the relative ease, efficiency and legal certainty of the Cayman Islands as a jurisdiction, has caused a significant increase in Cayman Islands Stock Exchange (CSX) CLO listings.”

She comments that the ISE has traditionally been the favoured exchange for CLO listings because of the liquidity of initial and secondary markets, international outreach, certainty of EU legal systems and regulation, as well as cost, together with the experience and expertise of the ISE in dealing with such listings. Following the introduction of Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation or MAR), however, new rules were introduced on insider dealing, unlawful disclosure of inside information and market manipulation.

These rules may have become too burdensome for CLO issuers, leading to a growing number listing their vehicles on the CSX. Thomas Gray, senior associate, Harneys banking and finance team says that, “MAR introduced a number of obligations on CLO issuers, both when the notes are initially listed and on an on-going basis” including, public disclosure of inside information, control of inside information and insider lists and managers’ transactions.

Additionally, breach of these rules is not without consequences, adds Gray: “CLO issuers breaching MAR will be faced with administrative sanctions and other measures. These include pecuniary sanctions of up to €15m in certain circumstances for infringements for insider dealing and market manipulation.”

Furthermore, CLO notes have historically been listed on the Main Securities Market (MSM) or Global Exchange Market (GSE) of the ISE and were left out of the previous market abuse regime in the EU. MAR now, however, has an expansive scope, covering a broad range of financial activities and facilities, meaning MSM and GSE markets now fall within the scope of MAR.

On top of this, the geographical scope of MAR has broadened to a global one, so that non-EU entities, including Cayman CLO issuers, are now subject to MAR should they be dealing with financial instruments within the scope of the regulation which, says Pineda, they “inevitably will be.” As such, because of the wide reaching nature of the regulation, even US CLO issuers and sponsors need to take extra care if they choose to list in Europe, such as on the ISE.

Gray also stresses that “being a relatively new body of regulation, legal precedent is scant. In the context of similar legislation in recent history, courts in the UK have taken a broad view in the interpretation of terms such as the meaning of ‘insider information’.” He adds, however, that due to legal precedent resulting from previous cases, “the interpretation of ‘inside information’ is likely to be a broad one, in line with the wording of MAR.”

Pineda comments that, while the EU has created a robust framework for market abuse, she questions whether it is an appropriate framework for US and non-EU CLO managers and investors. Particularly, she says, in the context of CLOs pertaining to US and other non-EU underlying assets.

She says that CLO issuers’ are now showing how they feel: “Many market participants have already decided their response to this question, and have taken action by delisting their CLO securities from trading on GEM as a result of MAR.”

She continues: “This shift has not gone unnoticed, with EU legal commentators themselves noting and expecting even before the implementation of MAR that the increased burden and cost of compliance would become so overly onerous that de-listings were an inevitable certainty.”

As a result of the added burden and cost of complying with MAR and the potential level of sanctions and fines that would apply under MAR in the event of non-compliance, says Gray, many CLO issuers are looking to move their listings away from the ISE and toward the CSX.

“As a well-developed and well operated stock exchange,” Gray says, “which is internationally recognised by UK HM Revenue & Customs as a 'recognised stock exchange' under Section 841 of the Income and Corporation Taxes Act 1988 (UK) and International Organisation of Securities Commissions as an affiliate member, the CSX provides a viable listing alternative.”

On top of this, the CSX has evolved and, since April 2017, it has adopted new rules for listing debt and equity securities issued by “specialist companies” (Chapter 14) which is intended to capture CLO/securitisation SPVs. Pineda says that new listing rules include comprehensive, but not overly burdensome, requirements for listings which strike a balance - and the need for flexibility - for both CLO issuers/managers, as well as investors.

Pineda comments: “The listing requirements include; (i) providing independently audited financial statements (rule 14.2), (ii) the directors to have the appropriate experience and expertise (rule 14.7), and (iii) the securities must be freely transferable (subject to exceptions) (rule 14.10), among others.”

As such, the negative implications of listing CLOs on the ISE, combined with the benefits in listing on the CSX, has had a not unexpected result. Pineda concludes: “The on-going issues related to MAR, as well as the increased expertise of the CSX in dealing with CLO transactions, has caused market participants to show greater interest in listing their securities with CSX. Combined with the initial cost of listing on CSX being less than ISE and time efficiency and responsiveness of listing with the CSX, it is becoming an increasingly more attractive option for US CLO market participants.

Richard Budden

Structured Finance

SCI Start the Week - 20 May

A review of securitisation activity over the past seven days

Market commentary
The US CLO market last week made up some lost ground after a tough start to the year (SCI 16 May).

"We're at last heading in the right direction, after five to six months of widening or trading sideways," said one trader.

"The arb is tough and loan issuance is slow right now, making new issuance tricky, and at the same time reset volumes have slowed significantly," the trader explained. "Despite this, even though corporates have moved strongly for some time, CLOs didn't move until the last two weeks when we've seen CLO mezz rally and triple-As have stabilised in primary and started to tighten in secondary."

As a result, the trader said: "There's a positive feeling for the first time for quite some time, the trade war notwithstanding. It's still hard to know whether that's the real thing or just a Twitter thing. If it does last, then the general improvement in tone could, of course, dissipate."

Transactions of the week
Two European buy-to-let RMBS from non-bank issuers are marketing (SCI 15 May). One comes from a first-time Dutch issuer and another is an inaugural issuance from a UK lender.

The Dutch transaction from Domivest is dubbed Domi 2019-1 and is a static €267m securitisation backed by 960 loans with an average current balance of €277,643. According to Rabobank analysts, most of the loans are backed by multiple properties, with the average being 1.6 houses and average seasoning of 6.8 months.

Domivest was set up by Cervus Capital Partners and started originating loans in 2017, building up a portfolio of €365m. The Rabobank analysts note that the deal is not STS-compliant, but will seek ECB repo-eligibility.

Another European debut BTL RMBS issuer is marketing, this time from Shawbrook Bank. The £308m static transaction, dubbed Shawbrook Mortgage Funding 2019-1, comprises loans secured by mortgages on UK buy-to-let residential properties extended to 1,141 borrowers.

A notable feature of the transaction is the use of SONIA as a reference rate. As such, on each quarterly interest payment date, the coupon on the notes is calculated by compounding the daily SONIA rate for the calculation period.

Moody's notes that the transaction is supported by none of the borrowers in the pool having adverse credit history. The rating agency also says that the transaction has a better interest coverage ratio compared with other similar transactions it rates, as well as low weighted average LTVs of 67.7%, with no loan having an WA LTV of higher than 80%.

Other deal-related news

• Hoist Finance has confirmed in its latest 2019 interim report that it will securitise part of its non-performing loans, due to regulatory demands for higher risk weights for purchased defaulted assets. The securitisation option is unusual for debt collectors, given that they have to surrender some of the upside on their defaulted assets to third-party investors and - unlike other debt collectors - Hoist is regulated as a credit market company and is therefore subject to the bulk of banking regulations (SCI 16 May).
• The US$503.5m Cloverleaf Cold Storage Trust 2019-CHL2 is believed to have become the first CMBS to pay off a month after making its inaugural bond payment. The single-borrower deal - collateralised by Cloverleaf Cold Storage facilities - had its first interest payment in April and then paid off with the May remittance cycle, according to Trepp (see SCI's loan events database for more CMBS news).
• The EIB and the EIF have provided CaixaBank with a €100m guarantee for an existing loan portfolio, which will enable the bank to mobilise up to €600m of additional financing for Spanish SMEs and mid-caps (SCI 14 May). This is the first guarantee for a mezzanine tranche of a SME loan securitisation operation, in which the EIB, the EIF and CaixaBank are participating together in Spain.
• Freddie Mac has introduced a new offering designed to help financial institutions with less than US$10bn in assets access additional liquidity for the financing of affordable housing (SCI 14 May). The newly created Private Placement PC Swap execution (PPP) facility - a variant of Freddie Mac's 55-day Multifamily PC Swap - enables a lender to swap a pool of loans backed by affordable properties for Freddie Mac Multifamily PCs backed by the loans, which can then be sold to investors, returning liquidity to the financial institution.
• Dock Street Capital Management has replaced State Street Global Advisors as investment manager to Diogenes CDO I. Moody's has determined that the appointment will not at this time impact the ratings of any notes issued by the ABS CDO. For more CDO manager transfers, see SCI's database.

Regulatory round-up

• Synthetic securitisations referencing unlikely-to-pay loans are a more promising prospect than synthetic securitisations of NPLs, given their potential as an IFRS 9 hedge, according to panellists at SCI's recent NPL securitisation seminar in Milan. However, regulatory challenges and the issue of defining UTPs and credit events remain open questions (SCI 17 May). 

Data

Pricings
A slew of auto ABS issuance hit the market last week, with 10 transactions pricing. The remaining prints consisted of non-auto related ABS, CLO and RMBS deals.

The auto ABS transactions comprised: £430m Bumper UK 2019-1, US$338.99m Flagship Credit Auto Trust 2019-2, US$366.97m GMF Floorplan Owner Revolving Trust 2019-1, US$681.52m GMF Floorplan Owner Revolving Trust 2019-2, US$650m Hertz Fleet Lease Funding 2019-1, US$400m Hyundai Floorplan Master Owner Trust Series 2019-1, US$350m Mercedes-Benz Master Owner Trust 2019-A, US$650m Mercedes-Benz Master Owner Trust 2019-B, US$1bn Santander Drive Auto Receivables Trust 2019-2 and US$285m United Auto Credit Securitization Trust 2019-1. The non-auto related securitisations were US$751.14m CNH Equipment Trust 2019-B, US$450m MVW 2019-1, US$174.24m Prosper Marketplace Issuance Trust 2019-2 and €1.11bn Sunrise 2019-1.

A trio of RMBS printed: US$919m Arroyo Mortgage Trust 2019-2, A$299m Mortgage House Capital Mortgage Trust No. 1 and US$525m-equivalent Pepper Residential Securities Trust No. 24. Finally, among last week's CLO pricings were €300m Carlyle Global Market Strategies Euro CLO 2016-2 (refinancing) and US$407m Symphony CLO XXI.

BWIC volume

Upcoming SCI event
Middle Market CLOs, 26 June, New York

Capital Relief Trades

Risk transfer round-up - 24 May

CRT sector developments and deal news

Santander is believed to be readying a capital relief trade consisting of auto loans for 2Q19. The Spanish lender’s last auto risk transfer transactions were closed in November and December of last year (see SCI’s capital relief trades database).

In November 2018, the bank completed KIMI 7, a €665.3m true sale securitisation of Finnish auto loans. In December, Santander inked SC Spain Synthetic Auto 2018-1, a €60.6m synthetic securitisation of Spanish auto loans.

Derivatives

Implied volatility leads the way

Realised outpaced across European indices

The broad-based rally in credit in recent weeks is also driving up European credit option volatility away from the lows of the year. At the same time, implied volatility is outpacing realised.

European credit research analysts at JPMorgan note in a report published last week: “Credit implied volatility rose sharply over the past couple of weeks, with iTraxx Main volatility increasing 15% to 54%. Implied volatility has now returned to the highs of the year, above levels last seen in December 2018. Converting these levels into daily implied volatility, we find 2.5bp in Main and 9bp in Crossover.”

The JPMorgan analysts continue: “While realised volatility has also risen, the difference between implied and realised has now risen to around 10% across indices. Realised volatility is at levels last seen in December, suggesting that selling volatility would be a profitable strategy, even if we revisited the volatility towards the end of last year.”

However, most of the movement is restricted to the shorter end of the curve, according to the analysts. “Longer-dated volatility has been more anchored and much of the rise in implied volatility has been focused on the front month contract. Three-month implied volatility has risen by 5% for iTraxx Main, compared to the 15% rise noted earlier for one-month contracts.”

Consequently, calendar curves are currently inverted, with volatility becoming cheaper further out - particularly in the Crossover and Senior Financials indices. “This highlights that while we find short-dated options expensive, longer-dated volatility looks less so,” the analysts conclude.

Mark Pelham

NPLs

Real estate upside

National Bank of Greece opts for NPL ABS

The National Bank of Greece intends to securitise €3bn of non-performing mortgage loans by 2022. The securitisation option would allow the bank to benefit from any real estate upside and follows revelations of a government programme for the subsidising of mortgage NPL payments (SCI 22 February).

“Securitisation would allow the bank to retain some senior exposure and therefore benefit from any upside in the underlying real estate. An upside is expected, due to cuts in real estate taxes,” says Jonas Floriani, director at Axia’s research division.  

Another driver is the Greek government’s aim to subsidise monthly payments of distressed mortgages. Floriani continues: “The plan would offer protection for borrowers under certain conditions, but it also enables foreclosures and improves recoveries.”

Mortgages NPLs have until now been hard to sell, due to borrower protections and uncertainty over enforcement and foreclosures. However, the government’s new mortgage programme would allow for foreclosures, given the strict eligibility criteria that borrowers have to satisfy, should they wish to receive foreclosure protection.

Mortgages would also constitute a new trend for the National Bank of Greece, given its track record in unsecured NPL disposals - although the bank has other secured transactions in the pipeline, mainly in the SME and corporate space. The bank’s last NPL transaction was completed in June 2018 with CarVal and Intrum. Dubbed Project Earth, the €2bn portfolio referenced unsecured retail and small business NPLs.      

The bank aims to cut its NPL exposure to approximately 5% of total loans by 2022, from 41% at end-2018. This target does not take into account the possible inclusion of bad loans into two different NPL securitisation schemes that the HFSF (SCI 12 October 2018) and the Bank of Greece (SCI 27 November 2018) are working on.

Floriani explains: “The talk in the market is that the Commission will approve the HFSF plan by the end of the month. However, NBG is in a position to reassess its plans in relation to the planned securitisations. Eurobank, Alpha and Piraeus are the most likely beneficiaries of the HFSF’s programme in the short term. By August-September, we might start seeing deals under the programme.”

Looking ahead, he concludes: “The 5% target is ambitious and the market is concerned whether the banks have enough equity if capital dilutive measures are implemented. However, recoveries, liquidations, restructurings and a raft of legislation and measures have been implemented or are pending that will help banks with their deleveraging efforts.”

Stelios Papadopoulos

Structured Finance

UK CMBS loan defaults

Company hires and sector developments

Euro CMBS 2.0 default

Elizabeth Finance 2018 has become the second European CMBS 2.0 deal to suffer a loan EOD, after the Maroon Properties were valued at £86m - a decrease of £18.7m from the initial valuation in November 2017 – triggering an LTV covenant breach. Based on the updated valuation, the Maroon LTV is 77.7%, whereas the Maroon obligors are obliged to ensure that the LTV does not exceed 75%. The obligors have not cured the default and, accordingly, a loan EOD has occurred and is continuing. Notice has been served to the mezzanine lender, which may cure the EOD within 15 business days.

Infra lawyer poached

Bryan Cave Leighton Paisner (BCLP) has hired Dominic Gregory as partner, strengthening the firm’s global banking and infrastructure finance practices in Asia. Gregory will join BCLP’s Singapore office but his finance practice will span Asia, with a particular focus on Singapore, Hong Kong, Japan and Indonesia. He previously led Ashurt’s Tokyo office and has over 20 years’ experience as a finance lawyer and covers most forms of finance, including project finance, acquisition and leveraged finance, real estate finance, restructurings and high yield, asset finance, sovereign lending, investment grade lending and trade and structured finance.

New York counsel hired

Hunton Andrews Kurth has expanded its structured finance and securitisation practice with the addition of Serena Mentor as counsel in New York. Mentor has experience representing issuers, sponsors, underwriters, agents, trustees and servicers in connection with public and private ABS, with a special focus on mortgage and mortgage-related assets. She was previously senior capital markets counsel at Wells Fargo Bank.

SF indices published

Fitch Ratings has started tracking the performance of transactions issued in the China Interbank Bond Market by publishing RMBS and Consumer ABS indices. In addition, Fitch's auto ABS indices, which were launched in 4Q17, are now inclusive of both auto finance companies (AFC) and bank-originated transactions; AFC auto ABS accounts for 80% of total auto ABS.

Structured Finance

Positive performance prompts upgrades

Sector developments and company hires

Director hired to rebranded CLO platform

DFG Investment Advisers has hired John Hwang as a director and senior credit analyst on its leveraged credit team, responsible for analysing below-investment grade credit with a focus on leveraged loans for the Vibrant CLO platform. Hwang has 18 years of experience in the financial services industry and was previously an svp at Crescent Capital Group.

RA nabs ed

Scope has recruited Olivier Toutain as executive director, based in its Paris office, to enhance the analytical depth and advanced modelling capabilities of its structured finance team. Toutain was previously head of the risk modelling unit at Banque de France, having worked at Moody’s and Assurance Générale de France before that.

RMBS upgrades

Fitch has has taken various rating actions on 789 classes in 61 US RMBS re-performing loan (RPL) and seasoned performing loan (SPL) transactions. All of the transactions were issued between 2014 and 2019. Overall, the agency upgraded 150 classes, affirmed 637 classes and two classes were paid in full. Fitch comments that performance in RPL and SPL RMBS has generally been better than expected and projected mortgage pool losses have slightly improved since the prior review.

On a weighted average, Fitch's Bsf expected pool loss, which reflects a mild stress above its base case expectation, has declined 9bp on average to 7.27% from 7.36%. Additionally, the AAAsf stress scenario pool loss has gone down by 71bp, driven primarily by low delinquency and home price appreciation. The pools reviewed have a weighted average serious delinquency rate of 3.88%. Recent conditional prepayment rates (CPRs) are averaging approximately 7%.

Futhermore, Fitch notes that the solid asset performance and supportive bond structures have resulted in positive rating pressure. All bonds issued in 2015 with initial ratings below AAAsf have been upgraded. Additionally, 96% of eligible ratings from the 2016 vintage have been upgraded along with 51% of eligible ratings from the 2017 vintage.

US bank takes Euro share

Tikehau Capital Advisors has received €195m in new equity from a share capital raise of at least €300m, as well as investment from Morgan Stanley’s North Haven Tactical Value Fund, making the bank a shareholder in Tikehau.

Structured Finance

Co-cio and liquid markets head appointed

Company hires and sector developments

Credit expert poached

Crestline Investors has appointed Michael Aingorn as an md, based in New York and reporting to Keith Williams, managing partner - credit strategies. Aingorn was previously a partner at American Industrial Partners, where he helped launch the firm's credit opportunities strategy focused on investing in North American-based middle-market industrial companies. Prior to AIP, he worked at BTG Pactual, Plainfield Asset Management and Karsch Capital Management.

Emergency action

The US SEC has filed an emergency action charging New York residential and commercial real estate developer and CMBS loan sponsor Robert Morgan and two of his entities - Morgan Mezzanine Fund Manager and Morgan Acquisitions - with fraud for siphoning and misusing investor funds. The Commission is seeking an order freezing Morgan's assets and appointing a temporary receiver over the relevant funds, as well as permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, civil penalties and a permanent receiver over the entities. The complaint alleges Morgan represented to investors that their money would be used to improve multifamily properties and, based on these representations, raised more than US$80m. Instead, Morgan and his entities allegedly diverted investor funds to facilitate Ponzi scheme-like payments to earlier investors and used more than US$11m in investor funds to repay an inflated, fraudulently-obtained loan for an unrelated apartment complex.

Edward (EG) Fisher has joined Mariner Investment Group as co-cio and head of liquid market strategies. Mariner founder Bill Michaelcheck will assume the role of co-cio and continue as lead portfolio manager for the firm’s flagship multi-strategy hedge fund, as will Matt Shulman in his role as deputy portfolio manager. Fisher has more than 29 years of industry experience and was previously an md overseeing fixed income and equities trading at BNY Mellon Bank. Prior to that, he was co-founder and managing partner of 5:15 Capital Management and has also worked at Brevan Howard, Greenwich Capital Markets and Blackrock.

ILS manager acquired

SCOR Investment Partners is set to acquire 100% of the capital of Coriolis Capital, a fund manager in the ILS field, investing in catastrophe bonds, collateralised reinsurance and climate derivatives. Subject to regulatory approval, Coriolis Capital will become a fully owned subsidiary of SCOR Investment Partners, with the transaction due to be finalised in 2H19. The acquisition will provide SCOR Investment Partners with improved market access, additional expertise in financial engineering and complementary fund infrastructure. The combined platform will have US$2.1bn AUM and operate in both Paris and London.

Investment vet named co-cio

Edward (EG) Fisher has joined Mariner Investment Group as co-cio and head of liquid market strategies. Mariner founder Bill Michaelcheck will assume the role of co-cio and continue as lead portfolio manager for the firm’s flagship multi-strategy hedge fund, as will Matt Shulman in his role as deputy portfolio manager. Fisher has more than 29 years of industry experience and was previously an md overseeing fixed income and equities trading at BNY Mellon Bank. Prior to that, he was co-founder and managing partner of 5:15 Capital Management and has also worked at Brevan Howard, Greenwich Capital Markets and Blackrock.

Mexican tech-lender firm bulks out SF expertise

Credijusto has named Eduardo Mendoza as evp and head of capital markets and corporate development. The appointment comes soon after Credijusto's announcement of a US$100m warehouse line with Goldman Sachs, which Mendoza was instrumental in closing. The securitisation and asset-backed finance specialist had been working as an advisor to Credijusto since 2017, but the move to bring him in-house represents part of a broader buildup of the company's capital markets team and activity.  Mendoza will be tasked with securing further warehouse facilities, launching a credit fund and implementing a securitisation program. Mendoza previously co-founded SQN Latina, an equipment leasing platform, and was md on the securitisation-banking team at BMO Capital.