Contents

Structured Finance

New Japanese investors 'on verge' of US CLO market

Large banks' track record tempts new entrants

Several Japanese firms are looking to invest in US CLOs for the first time, while many others that retreated after the financial crisis are considering re-entering the sector. At the same time, there is strong appetite from European investors, even for US CLOs issued in dollars, because of portfolio diversification and spreads on offer.

In April this year, DFG Investment Advisers nabbed CIFC’s ex co-ceo, Oliver Wriedt, while announcing a rebranding of its firm to Vibrant. Wriedt, now managing partner and ceo at DFG, is tasked with driving institutionalisation of the business and growing the investor base in its core areas of US non-investment grade and structured credit.

As part of this, Wriedt is developing a broader Japanese investor base, with the primary goal to bring in firms that have not invested in CLOs before. He comments: “In Japan, we are seeking to broaden our client base by educating first time investors in US CLOs on the opportunity set. There are a number of large banks that have long had an appetite for US CLOs, mainly at the triple-A level.”

He continues: “Today, there are also around 20 to 30 other firms – including smaller banks and insurers in the life insurance and property casualty space – that are looking closely at investing in CLOs and are on the verge of re-entering the CLO space after pulling back, post financial crisis.”

Large banks in Japan are well-established investors in CLOs, particularly at the senior level and this which could be drawing in new players such as smaller banks and insurers, says Wriedt. He notes that smaller banks will most likely look to invest at the triple-A level, but insurers might look further down the capital stack.

DFG’s proposal to these investors is one focussed on “next generation asset management”, combining deep market access and 12 years of investment expertise, deploying billions of dollars across the CLO capital structure. Wriedt adds that the firm’s proprietary systems can offer significant risk management and reporting capabilities that are especially valuable in today’s climate.

Moving away from Japan to the US, the firm has existing institutional support from banks, insurers and money managers – the focus here is therefore expanding and strengthening this footprint. This goes hand in hand with continued education of investors on the firm’s platform and track record.

In Europe, the firm hopes to “continue broadening out [its] institutional infrastructure”, says Wriedt. He adds that this is achieved by, “structuring a number of our CLOs with European risk retention compliant status, which has proven popular with a number of European institutional investors who are still willing to invest, despite notes being issued in USD.”

Additionally, Wriedt suggests that European investors are drawn to US CLOs because they find the European market limited due to a lack of diversification, while spreads are incredibly tight. He adds that although Europe will continue to be a strong region for DFG, expansion there is “not on the immediate horizon.”

Meanwhile, says Wriedt, his firm is “laser-focussed” on expansion of its existing structured credit and CLO management platforms. In structured credit, he concludes, the firm continues to look at other asset classes that may provide relative value opportunities, such as student loan ABS, structured real estate and subprime auto.

Richard Budden

ABS

DNS debut

ExteNet preps inaugural securitisation

The first securitisation backed exclusively by distributed network systems (DNS) assets has hit the market. ExteNet Issuer Series 2019-1 is secured by around 5,800 nodes associated with 267 multi-carrier and multi-technology outdoor (95) and indoor (172) DNS networks and related licenses and equipment.

ExteNet, the sponsor of the transaction and the manager of the securitised assets, is currently the largest independent owner and operator of DNS in North America. The DNS sites are contracted to primarily wireless telephony carriers under DNS licenses (totalling 1,740), which give the carriers the right to place equipment on and/or connect to specific DNS sites. The cashflows generated through the licenses will be used to repay the securities.

As of April 2019, the DNS networks generated annualised run rate revenue (ARRR) of around US$58.6m, including ARRR that will come from contracts on DNS sites that are still under construction at transaction closing (accounting for around 7.5% of the assets). As of 30 April, the asset pool generated around 37% of its ARRR from Verizon, and roughly 96% of its ARRR from the four largest wireless carriers (AT&T, Sprint, T-Mobile and Verizon) combined. Moody’s notes that these percentages are higher than recent traditional wireless tower ABS deals, which typically have at least 80% of ARRR coming from the largest four carriers and more than 90% of ARRR coming from telephony/data lessees.

Around 16.5% (44) of the DNS networks in the ExteNet pool are located in New York, which accounts for approximately 44.4% of the ARRR net cashflow. The share of ARRNCF generated by New York is large relative to the percentage of DNS networks in the state because of the quality of the networks' location, according to Moody’s. Indeed, around 66.3% of the DNS sites are located in the top 10 states, which account for approximately 86.6% of the ARRNCF.

The initial DNS licenses have long terms, locked-in escalators and automatic renewals, which are expected to reduce the potential volatility of future cashflows. The weighted average remaining current term for all DNS licenses is around 4.7 years and the weighted average remaining final term is around 18.5 years. At the end of the current term, DNS licensees have the option to either opt out of their licenses or renew/renegotiate the license provisions.

Moody’s cites favourable wireless infrastructure industry fundamentals, strong contractual cashflows, an experienced management team, subordination of class C interest and a strong DSCR trigger as key credit strengths of the transaction. Meanwhile, key credit challenges include potentially higher churn risk for outdoor DNS sites, an unrated manager, potential changes in pool composition, ARRR subject to DNS completion risk and long-term technology risk.

Provisionally rated by Moody’s, ExteNet Issuer Series 2019-1 comprises A3 rated class A1 VFN and US$263m A2 notes, as well as US$39m Baa3 class Bs and US$66m unrated class Cs. The amount issued under the VFN will be zero at closing, but the issuer may draw up to US$75m until the VFN ARD, providing certain criteria are met.

The transaction is underwritten by Barclays and Deutsche Bank.

Corinne Smith

ABS

Debut franchise ABS prepped

Transaction announced despite association objections

Jack in the Box is marketing an inaugural US$1.450bn whole business securitisation backed by 2,240 franchised quick service restaurants distributed across the US. Dubbed Jack in the Box Funding 2019-1, the transaction has been announced despite a number of criticisms from the firm’s franchisee association.

S&P notes that Jack in the Box will use around US$1.054bn of net proceeds from the debt issuance to repay existing debt in its entirety and to pay transaction fees and expenses, with excess proceeds used for general corporate purposes. Additionally, the issuance will lead to increased leverage to approximately 5.42x from 3.9x on a total debt-adjusted EBITDA basis, assuming the series 2019-1 class A1 is fully drawn.

The transaction has faced criticism from the Jack in the Box National Franchisee Association, which says the securitisation will impair their rights under the franchise agreement and this follows on from other criticisms from the association regarding the company’s management team and company performance. This culminated in a vote of no confidence in the ceo, as well as filing complaints with the the California Department of Business Oversight and the Superior Court of the State of California for the County of Los Angeles.

S&P comments that some of the accusations of mismanagement stem from claims that Jack in the Box withheld an audit of the marketing fund and that the company mischaracterised a tenant improvement contribution program for purposes of shifting the company's financial obligations to the franchisees. The rating agency notes that the firm has hit back, saying that the franchisees are trying to exert leverage over the company to extract certain concessions.

The rating agency adds that “evidence to date seems to support management's claim”, as there have been no defaults or delinquencies in payments coming from its franchisees, scheduled remodelings have continued, and the existing franchisees have absorbed 100% of the refranchised stores. As such, S&P says that, under the current circumstances, it is unlikely that this will lead to substantial cash flow deterioration.  

S&P also says that the firm’s leverage is low compared to other quick service restaurants and adds that the transaction is supported by the 94% franchised nature of the Jack in the Box business, resulting in a less volatile cash flow stream. Additionally, the company has strong brand recognition, stable performance since 2011 and has a back-up manager with the ability to maintain cash flow in the event of a manager bankruptcy.

The rating agency notes that the restaurant industry is highly competitive in terms of price and product offerings with “meaningful weakness” observed in certain restaurant operators. However, the agency adds that the quick service restaurant sector has, overall, been performing well and Jack in the Box has seen positive total system-wide sales averaging 2.2% YoY growth over the past five years.

The deal is provisionally rated by S&P as triple-B on the US$150m class A1 notes, US$500n class A2-I notes, US$500m A2-II notes and the US$300m class A2-III notes. The class A1s are variable funding notes, while the rest are senior term ABS notes and they all have a legal maturity of 30 years.

Richard Budden

Structured Finance

SCI Start the Week - 17 June

A review of securitisation activity over the past seven days

Transaction of the week
Fair Oaks recently priced its debut European CLO, Fair Oaks Loan Funding, backed by an ESG-compliant portfolio. Between marketing and pricing, the €332.6m transaction underwent some structural changes, ultimately receiving a wide range of participation across the capital stack - including US and European investors (SCI 10 June).

Tyler Wallace, portfolio manager at Fair Oaks, comments that, overall, the transaction has been a success - although it was delayed by a "few weeks", as a result of an early Easter and public holidays. The deal has also undergone some changes from the original structure.

These include the introduction of unrated €2m class Z notes and €1m class M notes, which he says are "generally a result of the originator model we use. The Z and M notes are essentially fee notes, which you put in note form - they're not offered."

As well as this, the class A tranche has been split in two, with the new, smaller, class A2 notes now having a Euribor cap. This, he explains, benefits the equity and is generally cheaper than issuing a fixed-rate tranche.

Additionally, Wallace comments that the transaction has a two-year reinvestment period, which "made sense from an equity perspective, given the steepness of the triple-A curve." He continues: "It also isn't surprising that the class A notes are looking to price circa 20bp inside the last debut Euro CLO, which had a 4.5-year reinvestment period. The equity retains the option to reset or refinance after one year."

In terms of investor reception, Wallace says that the ESG element of the transaction was a conversation starter with investors, particularly attracting more attention from European firms. It didn't, however, impact the pricing of the deal.

Other deal-related news

• Managers' desire for greater flexibility - in order to navigate the current challenging credit conditions - is spurring innovation across the US CLO market. While alternative structures - such as MASCOTs - may have the most staying power, other features appear to be more opportunistic (SCI 10 June).
• Expectations for the return of meaningful equity release mortgage securitisation volumes remain high. Life insurance companies could play a significant role in the development of the sector, as both issuers and investors (SCI 13 June).
• Freddie Mac is expanding its K-deals CMBS programme with securities designed to meet the needs of investors seeking green bonds. The new KG-deals will exclusively securitise workforce housing loans made through the GSE's Green Advantage platform, which requires borrowers to make energy and water efficiency improvements to their properties (SCI 12 June).
• Dock Street Capital Management has been appointed successor collateral manager to Sorin Real Estate CDO III (SCI 12 June). The CRE CDO was previously being managed by Torchlight Investors subsidiary Collateral Management, which assumed the responsibility from RE CDO Management in February 2013 (see SCI's CDO manager transfer database).
• AFME's 1Q19 Securitisation Data Report shows that €32.4bn of securitised product was issued in Europe in the first quarter, a decline of 63.4% from 4Q18 and 44.7% from 1Q18. Of the amount issued, €16.5bn was placed (representing 50.9%), compared to the 39.9% of issuance placed in 4Q18 and the 55.1% of issuance in 1Q18 (SCI 10 June).
• The Colony IV Portfolio loan, securitised in JPMCC 2006-LDP9, has been liquidated with a 66% loss severity on the original US$171.4m balance (or 78% on the current balance of US$144.1m). For more CMBS-related news, see SCI's CMBS loan events database.

Data

Pricings
Auto-related ABS once again accounted for the majority of last week's pricings. A mix of aircraft ABS, whole business securitisations, CLOs and RMBS made up the remainder.

The auto-related ABS prints comprised: US$553.58m ARI Fleet Lease Trust 2019-A, US$1.21bn Drive Auto Receivables Trust 2019-3, US$300m Navistar Financial Dealer Note Master Owner Trust II Series 2019-1, US$1.5bn Toyota Auto Loan Extended Note Trust 2019-1 and US$1.2bn Westlake Automobile Receivables Trust 2019-2. The aircraft ABS issuance consisted of US$354.90m AASET 2019-1 and US$517.1m Business Jet Securities 2019-1, while the whole business deals were US$335m ME Funding series 2019-1 and US$1bn Wendy's Funding Series 2019-1.

Among last week's CLO prints were US$402.03m Ballyrock CLO 2019-1, US$559.40m Carlyle US CLO 2019-2, US$403.05m Hayfin Kingsland XI and €285m Tikehau CLO II (refinancing). Finally, a sole RMBS priced - A$1.5bn Kingfisher Trust 2019-1.

BWIC volume

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

Capital Relief Trades

Corporate ramp-up

Standard Chartered steps up corporate CRT issuance

Standard Chartered has completed a risk transfer transaction that references a US$1bn portfolio of corporate revolvers. Dubbed Chakra 3, the US$90m CLN is the third in a series of programmatic corporate CRTs, as the bank builds up the corporate and institutional banking (CIB) business in the US and Europe while managing concentration risks through the credit cycle.

According to sources close to the transaction, the underlying assets are revolving facilities with legal final maturities of up to six years, although such assets are typically refinanced earlier. The tranches amortise sequentially and there are no excess spread features as per PRA requirements.

Tranche thickness ranges from 0%-9% which is broadly similar to Sealane 4 (0.5%-9%), a trade finance CRT that the lender completed last year (SCI 14 November 2018). Although the thickness is similar, Standard Chartered hasn’t carved up the latest transaction in dual tranche fashion.

Banks may split the junior tranche into thinner tranches to cope with the thicker tranche requirements of the new Securitisation Regulation, although slicing the risk may also depend on other considerations, such as the pricing that the bank can negotiate with investors (SCI 22 March). Standard Chartered, Lloyds, Santander and Credit Suisse have all completed dual tranche transactions (see SCI’s capital relief trades database).

Standard Chartered returned to risk transfer trades last year following a three year hiatus as a result of a £3.3bn rights issue in 2015 that boosted the bank’s capital position. The lender’s CET1 ratio rose from 11.4% at end 2015 to 13.9% in 1Q18 and 1Q19, respectively.

The bank’s return to capital relief trades last year was marked by the replacement of two maturing transactions from the Shangren and Sealane programs. Overall, the bank completed four transactions and three of these referenced trade finance assets.

Standard Chartered is aiming to hit growth targets by focusing on large corporate clients that use the bank’s global network, with CIB supporting such clients with transaction banking, corporate finance and borrowing needs across more than 60 markets. The CIB client base includes large corporations, governments, banks and investors operating or investing in Asia, Africa and the Middle East.

Stelios Papadopoulos

CLOs

Line-up takes shape

Middle market CLO seminar to include private debt panel

The line-up for SCI’s 1st Annual Middle Market CLO Seminar on 26 June is taking shape. Supported by Cadwalader and Dechert, the event is being held at 200 Liberty Street, New York, and features six panel discussions - including one on the growth of the private debt market.

In the market overview panel, speakers will explore current and future trends in the middle market CLO space, as well as structural innovations. Meanwhile, the regulatory considerations panel examines how managers are addressing skin-in-the-game issues and the impact of the SEC/Golub no-action letter.

The investor panel outlines the variety of vehicles being used by new investors and lenders to express their views on the market, as well as how to differentiate between the upper, traditional and lower middle market segments. A panel on performance and relative value looks at supply/demand dynamics, the pricing and terms of middle market loans, and portfolio credit quality. Finally, a panel on structuring considerations highlights the process of transitioning a warehouse facility into a CLO, as well as the impact of applicable margin reset mechanisms.

The afternoon networking break includes a whiskey tasting session, while a cocktail reception will round the day off.

Speakers include representatives from Antares Capital, Barclays, BNP Paribas, Brightwood, Churchill Asset Management, Citi, Eagle Point Credit Management, Garrison Investment Group, Golub Capital, GreensLedge, Guggenheim Partners, LSTA, MidCap Financial Services, Moody’s, Morgan Stanley, Natixis, Vista Capital Partners, Wells Fargo and White & Case.

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

NPLs

Setting standards?

NPL templates simplified

Debitos has further developed and simplified the EBA’s NPL templates without altering their basic structure. The EBA’s templates are not yet binding, but Debitos assumes that they will be at some point, as the supervisor is readying guidelines that will allow servicers to incorporate the templates into their reporting systems.

Debitos ceo Timur Peters notes: “We see the templates as a first important step towards setting standards in the market. However, the EBA templates have been hardly used so far - possibly due to the extremely high complexity of the data records. We have now further developed the templates without changing their basic structure.”

The EBA introduced the data templates in December 2017 in order to help banks and investors trade non-performing loans (SCI 15 December 2017). The authority started from comparable report structures, such as AnaCredit – an ECB dataset containing detailed information on individual bank loans in the euro area - and built in data fields for NPLs.

However, this has resulted in an overloading of the data structure that can be hard to incorporate into systems. Indeed, the EBA templates have more than 400 data fields and an operating manual of more than 175 pages.

Peters states: “You end up filling it manually, as the excel sheet isn’t formatted. We have implemented the 175-page guidelines in a way that can overcome these challenges through drop-down menus and validation rules that check the accuracy of the data. The validation rules allow the fields to be automatically checked without a handbook.”

Debitos has also hidden fields that aren’t crucial from the perspective of market participants. Bankruptcy claims, for instance, are important - but knowing where the original loan came from is not, since investors are more interested in expected payments or remaining claims.

The move coincides with a roundtable on NPL transaction platforms involving the EBA, ECB and European Commission representatives where Debitos presented the initiative. As the market awaits the official publication of the directive for credit purchasers and servicers in August, the EBA will design guidelines that will allow servicers to incorporate its data templates into their reporting systems (SCI 3 April).

The use of the EBA templates is not yet mandatory, but the supervisor is said to be working on the issue. “We assume that the templates will be become binding for market participants, such as servicers and NPL buyers,” concludes Peters.

Stelios Papadopoulos

RMBS

Irish exit

Re-performing loan RMBS marketing

An Irish re-performing loan RMBS has hit the market. The €336.56m Shamrock Residential 2019-1 is backed by owner-occupied (accounting for 92.98% of the pool) and buy-to-let loans that are currently in the mortgage book of Lone Star Funds, which acquired them in 2015.

The transaction securitises 1,711 loan parts originated by Bank of Scotland (Ireland) (accounting for 33.5% of the pool), Start Mortgages (16.5%), Irish Nationwide Building Society (47.4%) and Nua Mortgages (2.6%). The majority (87%) of the loans were in arrears longer than three months at some point in their history.

Approximately 68% of the portfolio has been restructured, with 36.2% restructured in the last 18 months. The most common form of restructuring in the portfolio is an arrears capitalisation (44%).

A portion (5.3%) of the pool has been restructured as split loans, some with an affordable interest-accruing balance (aggregating €10.9m) and the remainder warehoused to be paid only at maturity and bearing no interest until maturity (aggregating €6.9m). Additionally, 4.4% of the loans have been restructured where €5.9m of the outstanding balance can be written off if the loan is not in arrears for a period greater than three months on or before a specified date and no interest is payable.

Servicing of the Start Mortgages, Nua Mortgages and Bank of Scotland originated loans is conducted by Start (accounting for 52.6% of the portfolio), while Pepper will administer the Irish Nationwide originated loans (47.4%). The servicers are also expected to be appointed as administrators of the respective assets. Hudson Advisors Ireland will be appointed as the issuer administration consultant and, as such, will act in an oversight and monitoring capacity.

Under the transaction documents, the servicers can restructure a borrower's loan without repurchasing it from the securitised portfolio. These restructures can take the form of a term extension, a reduction in the rate payable or an arrears capitalisation.

But since most of the pool has already gone through a permanent restructure, taking into account borrowers' circumstances and based on a downward trend in restructuring over the past two years, S&P expects the level of restructuring to continue to decline in the future - absent any macroeconomic volatility.

The servicing strategy involves both rehabilitating borrowers and the use of assisted voluntary sales.

The weighted-average current loan to value indexed of the portfolio is 80.5%, with 23.3% of the loans in negative equity. Approximately 25.39% are interest-only and 12% of loans are to self-employed borrowers. Weighted average seasoning of the portfolio is 152 months.

In terms of geographical exposure, the properties are concentrated in Dublin (32.78%). Cork, Meath, Kildare, Galway and Louth account for a further 9.54%, 5.65%, 5.17%, 3.95% and 3.69% respectively.

Provisionally rated by DBRS and S&P, Shamrock 2019-1 comprises AAA/AAA class A notes, AA/AA class Bs, A/A+ class Cs, BBB (low)/BBB+ class Ds, BB (low)/BB class Es, B/B class Fs and B (low)/B- class Gs. Unrated class Z1 and Z2 notes will be retained by the seller, while the proceeds of the class RFN notes will be used to establish the reserve fund.

The reserve fund is split into a non-liquidity reserve fund (NLRF) and a liquidity reserve fund (LRF). The former will provide liquidity and credit support to the rated notes, while the latter will provide liquidity support to the class A notes.

Morgan Stanley is sole arranger on the deal.

Corinne Smith

Structured Finance

Risk firm in international ILS hiring spree

Sector developments and company hires

BD appointed

IHS Markit has appointed Sandrine Markham director, business development for Debtdomain in EMEA and APAC, reporting to Patricia Tessier, md and co-head of loan platforms at the firm. With more than 20 years’ experience in financial data and financial technology, Markham played a transformational role at Debtdomain from start-up to becoming a leading loan syndication platform in EMEA. The Debtdomain business was acquired by IHS Markit in August 2018, as part of the acquisition of Ipreo, where Markham was a director.

ILS firm in hiring spree

Artex Risk Solutions has announced a number of appointments within its international division. Scott Cobon has been promoted to md, Bermuda, with responsibility for the continued development of this growing office, which handles a diverse range of insurance management products, including captives, ILS and commercial structures. He previously worked as a treaty reinsurance broker in Sydney, Australia and began his career with PricewaterhouseCoopers in Brisbane. Rob Eastham is moving into the new role of executive chairman of Artex Bermuda and is an industry veteran with 38 years of experience in the Bermuda insurance industry. Paul Eaton has been appointed md, ILS, with responsibility for driving the strategy, planning and growth of Artex' ILS business across all locations. Eaton joined Artex in 2004 after a 13-year career with RSA in various underwriting and management roles. Based in Guernsey, he is a director of Artex Guernsey’s ILS cell companies. Mike Matthews has joined Artex as commercial director, Artex International. In this newly established role, he is responsible for the strategy, planning and delivery of growth for the international business. This role encompasses sales, marketing, product development and supporting client services.

Law firm boosts SF team

Clifford Chance has announced that James Cotins and Matthew Lyons have joined the firm's structured finance practice as partners in New York. They join from Alston & Bird and bring extensive experience in all aspects of the securitisation of loans and securities backed by commercial real estate. Cotins and Lyons routinely advise all main participants in commercial real estate-related securitisations, including commercial mortgage-backed securitisations, resecuritisations and CRE CLOs, as well as net-lease and single-family rental securitisations. They also represent sponsors, issuers, underwriters, collateral managers, loan sellers and rating agencies in public and private financing transactions, as well as lenders and investors in the acquisition, disposition and financing of commercial real estate-related assets.

RMBS RFC

Moody’s is seeking feedback from market participants on proposed changes to its approach to rating US prime residential mortgage-backed securities (RMBS) backed by government-sponsored enterprise (GSE) and private label prime first-lien mortgage loans originated during or after 2009. Market participants are invited to comment on the Request for Comment (RFC) by 15 July 15, 2019, by submitting their responses on the Request for Comment.

Structured Finance

Ratings slip-up leads to downgrade

Company hires and sector developments

Acquisitions

PERILS has acquired Toronto-based Catastrophe Indices & Quantification (CatIQ), a provider of catastrophe loss and exposure information in Canada. CatIQ will continue to be managed day-to-day by Joel Baker, ceo and founder, while md Laura Twidle will continue to lead the CatIQ team. The firm will also maintain its 11-member advisory board, which includes senior representatives from six Canadian primary writers and global reinsurers on a rotation basis, as well as permanent representatives from Aon, Guy Carpenter, the Insurance Bureau of Canada, the Institute for Catastrophic Loss Reduction and Environment and Climate Change Canada.

Capital markets team bulked out

Cross River Bank has expanded its capital markets portfolio and team, with several new hires from Laurel Road, which was acquired by KeyBank in April. The hires include Noah Cooper - who becomes Cross River’s svp, head of capital markets – as well as Rahul Jha, Joshua Karlgaard and Ryan Callahan. The team will focus on managing the bank’s balance sheet and secondary market activities, including securitisation and loan pool sales. In addition, Cross River is providing a US$70m warehouse facility to Idea Financial, which will enable it to deliver greater access to credit for small business customers nationwide.

GSE competition encouraged 

FHFA director Mark Calabria last week, in the agency’s annual report, encouraged Congress to enact housing finance reform that seeks to increase competition to Fannie Mae and Freddie Mac – by chartering new housing finance providers - and strengthen the FHFA’s safety and soundness powers. Moody’s notes in its latest Credit Outlook publication that a materially lower market share for the GSEs would erode the creditworthiness of both companies and could lead the rating agency to reduce its assumptions of extraordinary federal government support. Additionally, it suggests that more competitors could also lead to weaker underwriting standards or price competition – both credit negatives for GSE creditors – while flexibility to develop stronger capital requirements is credit positive, as it would increase their ability to absorb unexpected losses.

Mortimer downgrade

Moody's has downgraded the provisional ratings of the class D, E and X notes in Mortimer BTL 2019-1 from Baa1, B3 and B1 respectively to Baa2, Caa1 and B2. The move reflects the correction of an input error by Moody's in the yield vector assumption used in its cashflow analysis. The yield vector used to assign provisional ratings did not include any stress related to the basis risk arising because of a potential mismatch between Libor paid by the underlying mortgages and the SONIA rate paid under the notes.

Structured Finance

Securitised products head retires

Sector developments and company hires

Bank SPG head retires

Lloyds Bank is making several changes to leadership positions in its North America business, to boost services provided to clients in the region focused on Lloyds Bank’s US-UK gateway. Parker Russell, head of the US securitised products group (SPG), has decided to retire after eleven years with the group and a finance career spanning over thirty five years. Parker has been instrumental in expanding Lloyds Bank’s asset-backed program in North America and in helping to develop many client relationships. Parker’s responsibilities will be absorbed by other members of the leadership team, including Tom Spary, who will lead the SPG team in New York.

CDO manager transfer

Mount Street Portfolio Advisers (MSPA) has been named successor asset manager to Talon Funding I. Moody's confirms that the move will not impact any of the ABS CDO’s ratings. Portigon Financial Services was previously collateral manager on the deal, as well as swap counterparty – although the swap was novated to Erste Abwicklungsanstalt (EAA) in May 2016, following the transfer of Portigon to EEA. Mount Street acquired EAA in December 2016 and renamed the firm MSPA (SCI 3 November 2017). For more CDO manager transfers, see SCI’s database.

Non-QM acquisition

Pretium is set to acquire Deephaven Mortgage from Värde Partners. Deephaven partnered with Värde in 2014 to fund its growth and expansion, and has invested in over US$4bn of non-qualified mortgage loans to become a leading issuer of non-QM RMBS. Pretium is an alternative investment management firm focused on residential real estate, mortgage credit and corporate credit with more than US$10bn in assets under management. Progress Residential manages Pretium’s single-family rental homes and the acquisition of Deephaven is viewed as a synergistic extension of the firm’s existing strategies in mortgage credit. The transaction is subject to customary closing conditions and regulatory approvals, and is expected to close in 2H19.

Trade finance firm taps SF talent

Stenn International has hired Chris Rigby to the newly appointed role of global head of finance and capital markets. He joins from Lloyds where he was most recently md of the bank’s securitised products group and before that was in HSBC’s structured finance group.

Structured Finance

Global reinsurance consolidation

Sector developments and company hires

HATS 2016-1 redeemed

KBRA has withdrawn its ratings from Honor Automobile Trust Securitization 2016-1, after the notes were paid in full on 17 June. Given the remaining pool factor was less than 20% of the cut-off date pool balance, the servicer exercised its option to purchase the trust property and redeem the notes. Westlake took over servicing of the troubled auto ABS, following Honor Finance’s resignation as servicer (SCI 21 November 2018).

ILS restructured

The implementation of the restructuring of Ballantyne Re has been completed and distributions were made to noteholders on 17 June (SCI 15 April). In addition, DTC has allocated escrow CUSIPs to the scheme notes to facilitate the distribution of the deferred consideration (expected to represent up to approximately 1% of the par value of the scheme notes) to the scheme noteholders and the Assured Guaranty financial guarantees trust interests to the Assured Guaranty guaranteed noteholders. Ballantyne has executed an assignment agreement for the purpose of ensuring that any residual assets are available for distribution as deferred considerations.

Madden plea

Three Capital One cardholders have filed a putative class action in the Eastern District of New York alleging the rates of interest they paid to a securitisation trust unlawfully exceed the 16% threshold in New York’s usury statutes. As such, the plaintiffs are seeking to recoup the allegedly excessive interest payments and an injunction to cap the interest rates going forward. Additionally, the plaintiffs are looking to leverage the Second Circuit’s decision in Madden v Midland Funding and argue that, despite the loans being credit card receivables from otherwise performing loans deposited into securitisation trusts, the holders (securitisation vehicles) do not have the originating national bank’s right to collect interest rates above the limits of New York’s usury laws.

In a note on the case from Cadwalader, the firm states that “in many corners, Madden is viewed to be ‘bad law’” but add that it has still to be reversed and so cases such as this one continue to crop up, despite performing credit card receivables originated by a bank being a structure unrelated to the bank origination model used by marketplace lenders. However, until Madden is reversed, Cadwalader states that firm should exercise caution when acquiring, securitising or accepting as collateral consumer loans, or ABS backed by such loans, when they were originated in the Second Circuit states (New York, Connecticut and Vermont) and carry a rate above the applicable general usury rate – generally 16% in New York, 12% in Connecticut and 18% in Vermont.

Reinsurance consolidation

AIG has formed AIG Re, which consolidates its assumed reinsurance operations - including Validus Re, AlphaCat and Talbot Treaty - into one global business. Christopher Schaper has been appointed ceo of AIG Re, effective 1 July 2019, with responsibility for implementing AIG’s assumed reinsurance strategy. Based in Bermuda, he will report to Peter Zaffino, president and ceo, AIG General Insurance, and global coo of AIG. Schaper was previously ceo of Marsh’s managing general agent businesses and has also worked at Montpelier Re, Endurance Specialty Insurance, Gerling Global Financial Products, Employers Reinsurance Corporation, CIGNA and USF&G.

Structured Finance

Chinese law firm nabs SF expert

Sector developments and company hires

China

Han Kun has hired Li Huhuan as partner to the firm’s Shanghai office. Huhuan focuses his practice on asset securitization, insurance fund management, and mergers and acquisitions.  Prior to joining Han Kun, Huhuan practiced with several well-known PRC law firms for more than eleven years. 

Industry body rebrand

The Structured Finance Industry Group (SFIG) has relaunched as The Structured Finance Association (SFA). Coinciding with the name change, the association has launched a new website and a programme to promote the positive impact securitisation has on people’s lives and the economy.

US

CBRE has hired Justin Glasgow to its Washington office to the role of svp, debt and structured finance. He was previously cio of Kettler.