Contents

Capital Relief Trades

Helping hand

Refugee risk-sharing facility inked

Dutch development bank FMO has signed a pilot bilateral risk-sharing facility under its NASIRA programme, which guarantees portfolios of loans to vulnerable, underserved entrepreneurs in sub-Saharan Africa and countries neighbouring Europe. The agreement is with Jordanian microfinance institution (MFI) Tamweelcom and will support access to finance for Syrian refugee entrepreneurs.

Jordanian banks have historically refrained from providing financing to Syrians living in Jordan, largely due to perceived high risks. Similarly, with a political solution to the Syrian crisis still pending, most MFIs have also remained on the sidelines.

Underserved entrepreneur segments targeted by NASIRA are women, young people and migrants. NASIRA’s approach to blended finance – where public capital is used to facilitate private sector investment in sustainable development projects – is based on synthetic securitisation. The programme can guarantee up to €500m of loans and new exposures can be added for a four-year period.

NASIRA was the first transaction to be signed under European Fund for Sustainable Development (EFSD) programme, which contributed €75m to the fund (representing the first-loss tranche), with the Dutch government’s MASSIF Fund – which FMO manages – also contributing €7.5m to the tranche. The remainder of the funds will be provided by FMO and potentially other global investors. The EFSD has also provided up to €8m for technical support, to be divided equally between projects in sub-Saharan Africa and the countries neighbouring Europe.

Under the pilot facility, FMO will provide US$1.5m unfunded credit protection to Tamweelcom through the MASSIF Fund. Syrian refugees in possession of UNHCR identification and a Jordanian Ministry of Interior Card can apply for loans of JOD1,000-JOD7,000 (equivalent to approximately US$1,400-US$9,900). The loans will be used for income-generating businesses, rather than for consumption purposes.

Maurits Fliehe Boeschoten, senior advisor, structured finance at FMO, says that the deal is similar in concept to the African Development Bank’s Room2Run risk transfer transaction (SCI 20 September 2018) - albeit the guarantee is employed in a slightly different way. The risk-sharing facility is accompanied by a capacity development project.

With the support of consultant Making Cents International, Tamweelcom will onboard new borrowers to a blockchain database - thereby creating a digital ID, including the borrower’s credit history. This information becomes verifiable, immutable and portable across borders, providing an incentive for refugees to settle the loan before returning home - as they will bring their credit record - and potentially facilitating access to loans in Syria.

In addition, FMO will support Tamweelcom by improving the reporting capabilities on the guaranteed portfolio and help it gain risk management knowledge, in collaboration with Hypoport’s investor reporting tool Prommise. “African banks tend to be very conservative and haven’t gone through the cycles that resulted in credit availability in developed countries, yet the quality of their data is often better because they don’t have legacy IT systems,” explains Fliehe Boeschoten. “As arranger and investor in the Tamweelcom facility, the data is uploaded for us in a rough format and then we undertake the reporting and quality checks. FMO portfolio analysts have the same screens as the partner bank and the hope is that after a while, they’ll understand their own risk profile better and ultimately won’t need a guarantee in order to lend to vulnerable borrowers.”

FMO has a number of other NASIRA agreements in the pipeline, including portfolios sized at around €10m and €20m. The programme can accommodate even larger portfolios, according to Fliehe Boeschoten.

“African banks typically have large loan books. But refugees represent a small group of borrowers, so in the case of Tamweelcom, a facility of less than €3m makes sense,” he observes.

In terms of sourcing loans for NASIRA, FMO approaches banks with SME portfolios to see if they’re interested in participating in the programme. “FMO has been in the development sector for over 50 years and has a large client/partner network. Africa has a young population and banks need to begin tailoring their banking services accordingly. Consequently, our aim is to work with partner banks to help make them inclusive, build businesses and become part of the economic fabric of a country,” says Fliehe Boeschoten.

The NASIRA facility for European neighbouring countries is expected to be signed in November. FMO is also exploring additional EFSD projects and will expand risk-sharing agreements into venture capital.

“We believe strongly that alignment of interest is necessary to enter such markets. Securitisation has driven improvements in data quality and reporting, which support alignment of interest. We embrace the new securitisation regulations, as we feel they reduce concerns among partner banks and the fact we’re complying with the rules provides them with more comfort,” Fliehe Boeschoten concludes.

Corinne Smith

Derivatives

Buy-side buy-in

End-user use of complex credit on the increase

The continuing need to search for yield is causing the buy-side to look beyond traditional credit. New and old funds alike are looking for opportunities in the derivatives space.

“The majority of our buy-side clients trade diversified credit and are always looking for opportunities across the asset class,” says Rohan Douglas, ceo at Quantifi. “What we’re seeing lately is a move towards more complex instruments – tranches, both standardised and bespoke, credit options and TRS.”

TRS have seen some reticence from the buy-side (SCI 22 February 2019), but one London-based banker says that standardised iBoxx TRS are seeing consistently rising levels of end-user activity. "The instruments are being increasingly embraced by the asset management community, who use them for a variety of purposes, including heding and inflow/outflow management, as well as overlay strategies to tweak their market exposure. Overall, we've seen consistent growth in use over the past few years."

In terms of the sub-sectors that TRS cover, each index has a strong following from the relevant dedicated investor base, according to the banker. “IG is the biggest market so sees plenty of activity, whereas HY relative to its size has the greater activity. That discrepancy is partly due to the nature of TRS, which incorporate exposure to both interest rate and credit spread moves.”

He continues: “In the high yield market rates and credit are both significant factors so TRS are a natural fit, but in investment grade the volatility of interest rates is the main driver. That means that TRS has to directly compete with more liquid purely interest rate focused instruments like Bund futures, which limits the potential for IG TRS to some extent.”

Meanwhile, the most recently launched product TRS on an additional tier-1 capital (AT1) index has started promisingly, the banker reports. “AT1 has been welcomed as there is no direct benchmark competition and the structure of the iBoxx TRS is particularly representative of the sub-sector.”

There is also a rise in buy-side interest in products beyond the traditional group of credit derivatives instruments. “We’re also seeing a move towards ETFs on bonds and even options on those ETFs,” says Douglas. “Equally, we’re seeing greater use of even more esoteric structures such as CoCos.”

At the same time, Douglas reports: “In addition to diversification within existing credit funds we’re also seeing a steady flow of start-ups being created in both the US and Europe, though at the moment significantly more so in Europe. Most of these new funds are involved in middle of the road credit – corporate bonds and the like – but many are also moving beyond that with some getting involve in the ABS/CLO space and even the underlying loans, whereas others have opted to focus on something more complex – again, this means a shift into the synthetic space.”

Mark Pelham

Capital Relief Trades

Auto SRT completed

Innovative direct CLN structure debuts

Santander has completed its first synthetic significant risk transfer transaction that references a portfolio of US auto loans (SCI 2 July). Dubbed Santander Synthetic Prime Auto Issuance 2019-A, the US$1.38bn transaction features a novel CLN structure, whereby notes are issued directly by Santander rather than through an SPV.

Steve Gandy, md and structurer at Santander, notes: “We completed two cash US auto deals in the past. But given the change in regulatory views over excess spread, we had to do it in synthetic format for it to make sense (SCI 19 December 2018).”

He continues: “The deal is issued as a direct CLN, which is the most tax efficient structure for the underlying portfolio. The structure also enabled us to broaden the investor base to US Reg S investors, who wouldn’t typically be considered as non-US persons, according to CFTC definitions.”

Santander retained the deal’s class A, B and H notes, but sold the class C, D, E, F and G notes to investors. The US$44.2m class G notes pay 10%, class Fs pay 6.875%, class Es 6.375%, class Ds 5.875% and class Cs 3.4875%.

Further features include a portfolio weighted average life equal to 1.64 years, as well as a regulatory and tax call. The amortisation structure is pro-rata, but excludes the class G notes from amortisation until the note represents 7.5% of the combined outstanding notes’ balance, while class H remains always subordinated.

Santander added the feature because it wanted to achieve a better credit profile for the more senior tranches. The hybrid amortisation structure makes the cost of the protection more acceptable to the bank.

Sebastian Dietzsch, analyst at Scope ratings, states: “The credit enhancement looks high for prime borrowers, but it had to be, since credit enhancement can’t be built up in sequential fashion; the pro-rata structure renders the higher tranches vulnerable to defaults and timing. The triggering of sequential amortisation resulting from high cumulative losses would take time and the effect of excluding class G to build up further credit enhancement for the senior tranches helps, but is limited.”

The transaction features an immediate loss-determination mechanism, reflecting Santander’s IFRS 9 provisions. This mechanism is in line with the quick realisation of recovery proceeds, due to SCUSA’s repossession and sales processes.

Credit event recognition typically follows stages through the workout period until the determination of final recoveries. SCUSA’S collection process allows autos to be repossessed and sold quickly, thus accelerating recoveries. Consequently, back-loaded losses are minimised. 

The portfolio is positively selected with respect to the FICO scores of the obligors and the financing of new and used vehicles, compared to the net loss performance data presented by SCUSA. The portfolio is also well seasoned, which reflects positively on expected portfolio defaults.

However, the loans have high LTV ratios at more than 96% on average, which reduces potential recovery proceeds on defaulted positions. “Yet this is mitigated by the high obligor quality, with average FICO scores at 753. So, because of this, we don’t expect many defaults and associated losses,” says Dietzsch.

The reference loan portfolio is static and comprises 59,771 auto loans mainly granted to US private individuals. The borrowers under these loans predominantly qualify as prime borrowers, with average FICO scores ranging from 630 to 900.

The loans financed the acquisition of new and used vehicles mainly from Fiat Chrysler Automobiles (accounting for 96.9% of the current loan balance), together with attached insurances, service charges and taxes. The obligors show moderate levels of payment-to-income of 8% on average and debt payment-to-income of 30.4% on average, which partially offsets the high average loan-to-value of 96.7%.

Santander Consumer USA is servicing the loans, which were purchased by Santander in Spain.

Stelios Papadopoulos

CMBS

Odds "stacked against borrowers" in CMBS

SCI reviews Ann Hambly's CMBS 911 – Are you ready for the crash?

In CMBS 911: Are you ready for the crash?, author and ceo of 1^st Service Solutions Ann Hambly, emphasises that when a CMBS loan becomes distressed, it is an emergency situation for a borrower from which they’re unlikely to come out unscathed. This is because, without the right knowledge and expertise, the odds are stacked against them in a distressed CMBS, with most outcomes typically favouring investors.

Early on in the book, Hambly stresses that - while a distressed CMBS transaction is like an emergency scenario - there is a clear order of events to the process. The key players in a CMBS post-closing are the primary or sub-servicer, the master servicer, the special servicer, the directing certificate holder/controlling class/B-piece buyer, the trustee and the rating agency.

As a borrower advocate, Hambly says that when a CMBS loan becomes distressed, she reviews:

• CMBS pool documents to understand the motives and investment levels of the servicers;
• Pooling and servicing agreement to understand the roles, responsibilities and limitations of the various parties involved in the pool;
• Status of the property to understand the issues currently at hand and its future value;
• Status of the property owner, to understand their motives, abilities and inclinations to work towards saving the property or not.

Hambly notes that, when a borrower feels that they may not be able to make a loan payment, they should inform the master servicer as soon as they can. The master servicer’s role is then to advise about temporary relief on their payments, revised loan terms, or to reduce the debt.

Special Servicers

Hambly emphasises in chapter five that when a borrower has to request intervention from the special servicer, it is akin to calling for emergency assistance. This process begins through the issuance of a letter of imminent default which transfers the loan from the master servicer to the special servicer.

This officially puts the creditors on notice, signalling the likelihood that the borrower may not be able to make payments on the loan now, or in future. At this point, the special servicer gains a large amount of influence over the borrower, who is often required to perform “all types of reviews” says Hambly.

The special servicer will also request or perform a number of actions such as an appraisal of the property, feedback from real estate brokers and a first-hand inspection of the property. Also, a special servicer will ask a borrower to first provide additional cash to show a commitment to make good on any agreement.

Hambly advises that borrowers should therefore set aside a sizeable cash reserve for future negotiations with their special servicer to boost the leverage they have to negotiate. A big problem for borrowers however, says Hambly, is that special servicers only serve the “bond certificate holders whose investments funded the loans in the first place.”

Pooling and servicing agreement

Hambly outlines that special servicers are governed by the servicing standards established in the pooling and servicing agreement (PSA), which isn’t accessible to the borrower. This agreement establishes the hierarchy of payment schedules based on bond classes and outlines what a special servicer can and cannot do to get the greatest return on investment on a CMBS property.

The situation gets more complex when you introduce the controlling class representative (CCR), for the particular pool the loan is in. The CCRs, says Hambly, represent the lowest rated investors and those at highest risk of loss and each CCR has its own motivations, financial implications and decision-making protocol.

A borrower will never speak to a CCR, however, and in most cases won’t ever know who they are. Additionally, she says that a special servicer – who borrowers are meant to turn to for help, is not obliged to do so and not even under an obligation to identify what they can and cannot do to help a CMBS borrower.

Non-recourse

As CMBS loans are non-recourse, continues Hambly, the only collateral available to service the loan is the property with the owners not liable for repayment. The special servicer then has two options – foreclosure and sale of the property or to reach an agreement with the borrower regarding repayment terms.

However, for a special servicer to consider repayment terms, the borrower has to offer a structure that will be better for the certificate holders than if the special servicer foreclosed and ultimately sold the property. Borrowers typically then have to offer new capital to motivate a special servicer to begin discussing any allowances.

Hambly says that, faced with the challenge of finding additional capital, borrowers may not be able to decide if it is worth it in the long run when the outcome is uncertain and can end up choosing the best of the bad options, particularly when much is overseen by the special servicer and the CRR.

She says that they look at:

• Market conditions and the property’s presumed potential
• The borrower’s willingness to work towards an agreement by providing more skin in the game in the form of new capital.
• The special servicer’s own investment in the CMBS pool.

The 90 day period

Hambly emphasises that borrowers have little time to resolve a troubled loan, but the sooner they request intervention from the special servicer, the better the resolution options available.  In the world of CMBS servicing, 90 days is the window of opportunity – golden hour - in which a borrower can resolve a trouble loan.

The longer a loan is in special servicing without a suggested resolution plan from the borrower, the higher the likelihood the special servicer will act in the investors’ interest and/or that it will be foreclosed on. The timeline is roughly as follows:

Month one and two: the borrower contacts the master servicer and makes the formal request for their loan to be transferred to the special servicer, which can take up to 60 days.

Month three: the special servicer assesses the property across a range of measures. The first three months – or 90 days –are crucial for the borrower to present a sound proposal to the special servicer to get the best outcome.

Months four and five: the special servicer reviews all information available and begins to provide feedback.

Months six to nine: negotiations take place between borrower and the special servicer for the purpose of a resolution that meets the objectives of the special servicer, CCR and borrower.

Months nine to 12: completion of negotiations and deal terms; the legal process is started; modification documents are drafted and finalised which leads to closure of the deal.

Forms of accommodation

Towards the end of the book, Hambly identifies four key accommodations servicers can make for a struggling CMBS borrower. The first and simplest, maturity date extention, occurs when a borrower has a maturity loan that needs a more time to pay off.

This is problematic, however, when servicers often charge a 5% late fee on a balloon payment, even if a borrower is only a few days late on making a final payment. Had a borrower contacted the special servicer prior to a maturity date to request a formal forbearance, she says, they could have made an accommodation and avoided a large penalty.

Second, payment modification, is used when borrowers are unable to make a payment temporarily but the issue is curable within the remainder of the loan term. A borrower can contact a special servicer and submit a plan within 30 days of a loan being transferred. They could then request future loan payments be immediately reduced and all net cash flow placed into a designed reserve account dedicated to tenant improvement for the new tenant.

Third, debt deferral, involves bifurcation of the loan into an A and B note, with payments made on the larger A note, but none on the smaller B note. The borrower then contributes new equity to stabilise the property and the loan’s maturity date is extended. On maturity, the loan is repaid with the A note paid in full first, then the borrower receives the new equity and any remaining proceeds are split between the borrower and the paying of the B note, with any remaining balance owed on the B note written off.

Debt forgiveness, Hambly says, is the most severe option, meaning the funds are sacrificed for the sake of saving a property from total foreclosure and/or abandonment. An unfortunate situation can arise when a borrower asks for partial debt forgiveness but, when the special servicer denies this request and demands the loan is paid in full on reaching the maturity date, they have to concede defeat and the worst outcome - maturity default.

Soon, says Hambly, the special servicer forecloses on the property and the borrower loses his investment in the property plus all the additional capital invested during the stabilisation period. Hambly concludes that a better option, if the borrower had been informed, would be to request a discounted pay off of the note before emptying the cash reserves and before putting in more money.

Richard Budden

Structured Finance

Pre-summer rush

European ABS market update

Activity levels are currently high across the European ABS/MBS and CLO markets and that looks set to continue.

“It’s very busy in both primary and secondary,” confirms one trader. “It feels like the usual rush before the summer holidays, but we’re also feeling the effects of pent-up issuance from the quiet first quarter. We’re seeing lots of new issues with different jurisdictions, collateral and deal types, as well as strong secondary volumes and plenty of bid lists across asset classes.”

Despite the hefty supply, new deals and BWICs are trading strongly. For example, Green STORM 2019 priced yesterday with seniors coming in at MS+22bp - 5bp inside initial price talk - and SBOLT 2019-2 seniors came in at one-month Libor plus 120bp, in line with 120 area talk. Meanwhile, yesterday’s bid lists went through at or around market expectations, keeping secondary spreads flat to slightly tighter on the morning’s open.

Notwithstanding the diversity and volumes, the trader suggests there’s no particular highlight. “There’s nothing unusual or stand-out on offer; it’s just with all the supply, we’re able to pick and choose what we want, which is a good position to be in.”

Tomorrow’s US holiday is unlikely to change sentiment, according to the trader. “The US is not a major factor – other than dollar tranches, we don’t see much US buying. While in broader markets, the US has a greater impact on many levels, European ABS structures are unique and the market tends to carry on regardless – people will note it’s 4 July and move on.”

Indeed, the trader adds: “There are no signs of the European market slowing down –the pipeline was still being added to yesterday evening, with the AutoFlorence Italian auto deal joining. I think this pattern will wash over into at least next week and the only change you’ll see is longer marketing periods, as people have so many deals to choose from.”

Mark Pelham

Structured Finance

SCI Start the Week - 1 July

A review of securitisation activity over the past seven days

Transaction of the week
Blackstone is marketing an inaugural US$264.5m forward-mortgage RMBS featuring unique collateral characteristics pertaining to underwriting and property concentration. Dubbed FWD 2019-INV1, the transaction is backed by 1,724 first-lien, fixed-rate investment-purpose mortgages, originated mostly by Finance of America (SCI 26 June).

The collateral comprises residential mortgage loans secured by non-owner-occupied properties, with 58.7% of the mortgages backed by single-family residences, 9.2% planned-unit developments, 6.3% condominiums and 25.8% two-to-four-family homes. All of the loans were originated for borrowers intending to use the property for business or commercial purposes.

The pool was primarily underwritten using FICO or LTV ratios and about 66.5% of the loans are underwritten to actual or estimated rental incomes, while around 33.5% of the loans were underwritten to a borrower's debt-to-income (DTI) ratio. All are exempt from qualified mortgage/ability-to-repay rules.

While securitisations with 100% investment properties have existed for several years in the single-family rental (SFR) securitisation sector, S&P notes that this transaction is more aligned with an RMBS. This is because of the diversity of individual underlying loans, multiple property operators and a focus on borrower FICO scores and LTVs.

The rating agency adds that FWD 2019-INV1 does not include the same provisions and characteristics often seen in SFR securitisations, such as the substitution of properties and CMBS-like features. Furthermore, S&P says that the collateral in this RMBS is unique, largely due to underwriting methods and investor property concentration.

Other deal-related news

• The EIF is taking on the risk of Banco BPM's €55m mezzanine guarantee in connection with the Italian lender's first capital relief trade, referencing a portfolio of midcap corporate loans. The regulatory capital that will be released is enough to fund €330m of SME lending (SCI 28 June).
• The UK mortgage market is furiously price competitive, with ring-fenced high street banks crowding out challenger banks and non-bank lenders. At the same time, the concurrence of TFS refinancing and call dates of outstanding transactions is increasing the diversity of the UK RMBS sector (SCI 28 June).
• The JUNO (ECLIPSE 2007-2) CMBS failed to file its financial statements for 2017, together with its annual return by 21 June, as required by the Companies Registration Office (see SCI's CMBS loan events database). The issuer has a further 28 days to submit its audited financial statements, but its auditors have advised that they cannot give any assurance that the statements will be completed within this extended period.
• Scope notes that the introduction of a ReoCo in the Belvedere SPV will not, in and of itself, result in a reduction or withdrawal of the current ratings of the class A notes (SCI 28 June). The agency adds that the implementation of the ReoCo could be positive for the issuer, as the ReoCo can add value to the properties and re-sell them on the market with a profit, therefore increasing recoveries.

Regulatory round-up

• The securitisation market now appears to be embracing the new Securitisation Regulation and adapting to the regime, following uncertainty over technical standards in Q1. Nevertheless, market participants are still grappling with practical challenges, whose solution remains elusive (SCI 28 June).
• The Australian Office of Financial Management (AOFM) has released for public comment its draft guiding investment principles for Australian Business Securitisation Fund investment. The recommendations are intended to be principles-based rather than prescriptive and will be used by the AOFM for identifying transactions that meet the government's primary objective of increasing the availability of finance to SMEs and contributing to the development of market infrastructure that facilitates securitisation of SME loans (SCI 24 June).
• Barclays, in partnership with Annaly Capital Management, has released a study entitled 'GSE Reform: Unfinished Business', which lays out steps that policymakers might take to reform Fannie Mae and Freddie Mac. Among the key takeaways of the report is that a revolving credit risk transfer structure could enable the GSEs to shed credit risk on most future production, thereby avoiding execution risk while protecting the taxpayer (SCI 27 June).
• The UK FCA, the US CFTC and the SEC have announced that they will make "collaborative efforts" to explore ways to address industry concerns over manufactured credit events and foster transparency, accountability, integrity, good conduct and investor protection in the credit derivatives markets. Such collaborative efforts will not preclude other appropriate actions by the respective agencies, which note in a statement that opportunistic CDS strategies raise various issues under securities, derivatives, conduct and antifraud laws, as well as public policy concerns (SCI 26 June).

Data

Pricings
Consumer ABS accounted for the majority of last week's pricings. Among the prints were a handful of European securitisations.

Last week's ABS new issues comprised: US$300m College Avenue Student Loans 2019-A, €430m Columbus Master Credit Cards 2019-01, US$325m Mariner Finance Issuance Trust 2019-A, US$339.25m Marlette Funding Trust 2019-3, €3.45bn SC Germany Mobility 2019-1, US$548m Silver Aircraft Lease Investment and €2.26bn Siena PMI 2016 - Series 2. Meanwhile, the CLO prints included US$354.9m Battery Park CLO, US$504m CarVal CLO III, US$451.8m Fortress Credit BSL CLO VII, US$466.60m Golub Capital Partners CLO 35(B) (refinancing), €382.20m Providus CLO III and US$509.1m Woodmont 2019-6. The US$1.02bn CHC 2019-CHC, €276.5m EOS (ELoC 35), US$914m GSMS 2019-GC40 and US$481m JPMCC 2019-MFP made up last week's CMBS pricings, while the sole RMBS print was £638m Paragon Mortgages No. 26.

BWIC volume

Structured Finance

Latest podcast now live!

Mascots, Japanese CLO investors and STS struggles

In this month's edition of the SCI podcast, the editorial team get stuck into some interesting topics affecting the securitisation market today. First, our editor, Corinne Smith discusses some recent structural innovations in US CLOs, including MASCOTs - or modifiable and splitable/combinable tranches - and the benefits these offer investors.

Next up, Stelios Papadopoulos, senior reporter, looks at some of the challenges firms are facing when trying to comply with the STS regulation and, finally, Richard Budden, deputy editor, discusses attempts being made by one firm to attract a broader range of Japanese investors to the US CLO market, including both first time investors, as well as those that pulled back after the financial crisis.

Click here to listen or feel free to search for Structured Credit Investor on Spotify or iTunes where it can also be found, along with all previous episodes.

Structured Finance

Rarely-seen synthetic securitisation revealed

Transaction references unusual pool of US auto loans

Santander has issued a rare synthetic securitisation referencing a collateral pool of US prime auto loans. Dubbed Santander Synthetic Prime Auto Issuance 2019-A, the deal comprises credit-linked notes (CLNs) referencing the performance of a static US$1.381bn portfolio of 59,771 auto loans made to high-quality borrowers across the US, for the purchase of new and used vehicles.

DBRS and Scope have rated four of the CLNs as single-A/single-A on the US$96.7m class Cs, triple-B/triple-B minus on the US$60.783m class Ds, double-B (low)/double-B on the US$34.536m class Es and single-B (low)/double-B minus on the US$23.5m class Fs. Neither rating agency has rated the class A, class B, class G or class H CLNs.

Credit enhancement is provided on the transaction in the form of subordination and in the event of a performance-related subordination event related to the reference portfolio, the class A through to class G notes will be paid down sequentially. Likewise, net credit loss amounts on the reference portfolio will be applied on a reverse-sequential basis to the notes, starting with the most subordinate tranche.

In terms of its ratings, Scope notes that it has incorporated its view on a potential US economic slowdown, in the context of the portfolio’s relatively limited 4.5-year risk horizon. The rating agency adds that the low unemployment level and generally good credit quality of the obligors – based on FICO scores – also limits the impact of economic stress on the portfolio.

Scope adds that the “efficient synthetic structure” is a strength of the transaction, which works with “an immediate loss-determination mechanism reflecting Santander’s IFRS 9 provisions. This mechanism is in line with the quick realisation of recovery proceeds due to Santander Consumer USA’s repossession and sales processes in addition to limiting the counterparty exposure to Santander.”

Potential transactional weaknesses include pro-rata amortisation and the portfolio of loans having a high average LTV of 96%. Likewise, Scope adds, the deal is weakened by Santander’s ability to reclassify bankruptcy and failure-to-pay cases as restructuring – potentially leaving restructured loans in the reference portfolio, adversely impacting transaction performance.

Santander has also issued a synthetic securitisation of loans to SMEs and self-employed borrowers, originated or acquired by Santander UK. Dubbed York 2019-1 CLO, the transaction references a £3.080bn portfolio of 3,466 referenced obligations to 1,268 borrowers.

Scope has assigned ratings to four credit protection agreements of triple-A on the £2.394bn class As, single-A on the £264.35m class Bs, triple-B on the £93.3m class Cs, double-B on the £124.4m class Ds, while the £233.25m class Es are not rated.

The amortisation mechanism, notes Scope, will be modified pro-rata, subject to performance and concentration triggers for senior credit protections, tranches A to C, but is strictly sequential for the subordinated junior credit protections, tranches D and E. Additionally, Scope says that the static nature and granularity of the portfolio is a strength of York 2019-1 CLO, with 484 exposures to 339 borrower groups and 12 effective industries.

Similarly, the 10 largest borrower groups only accounting for 4.85% of the portfolio and single exposures are capped at 0.5% of the reference notional. On the downside, the rating agency says that the modified pro-rate amortisation structure is a potential weak point of the deal, alongside uncertain macroeconomic conditions in the UK and the relatively recent status of Santander’s SME lending activity.

The reference loan portfolio comprises 3,466 loans mostly originated through the bank’s e-commercial banking channel, around 87%, with the rest by Santander Business Banking, around 13%. Of these, they are mostly term loans, around 77%, with the rest being revolving facilities, around 23%, and most are secured, making up 85% of the portfolio.

Additionally, the portfolio is diversified across industry sectors, with 16.4% being in accommodation and food services, 12.9% care homes and 12.5% professional and other services. The reference loans are mostly denominated in British pounds, 94.7%, and the rest in USD or EUR.

Richard Budden

Structured Finance

CLO firm boosts research team

Company hires and sector developments

CEDE made public

AIR Worldwide has published its Catastrophe Exposure Data Exchange (CEDE) database schema publicly. The aim is to facilitate accurate and transparent data exchange throughout the insurance value chain more efficiently, and to encourage additional analytics on a greater number of exposures. In addition, AIR is actively supporting the ModEx Open Exposure Data Format (OED) by freely providing its CEDE format as the database structure for models running on Oasis LMF, an open-source non-profit loss modeling framework.

CLO firm completes research hires

CIFC has completed the first phase of its UK research team recruitment with the appointment of its fourth analyst. Senior analyst Rinse Terpstra has joined from Chenavari Investment Managers where he worked as a senior investment analyst focusing on CLOs. Analyst Zoltan Paller has joined from UBS where he focused on leveraged finance and direct lending opportunities in the EMEA region.  Analyst Max Elliott-Taylor has joined from Investcorp Credit Management in London where he was an associate in the credit research team investing in leveraged loans and high yield bonds for five years. Analyst Alessandro Garello Cantoni has joined from Bank of America Merrill Lynch where he worked for five years focusing on Italian and Iberian markets and later leveraged finance origination in the EMEA region.

The hires follow the opening of the London office and the pricing of the firm’s first European CLO in the form of the €407m CIFC European Funding CLO I, arranged by Deutsche Bank.

RMBS refi announced

Lone Star is prepping a €458.9m RMBS, dubbed ERLS 2019-NPL1, backed by non-performing Irish residential mortgage loans and some first-charge performing loans. The mortgage portfolio to be purchased under ERLS 2019-NPL1 comprises part of the portfolio under ERLS 2017-NPL1 and the remaining from the part of the portfolios of: LSF IX Java Investments and of LSF IX Paris Investments. Java Investments acquired the legal and beneficial title of the loans from Investec Bank and Nua Mortgages Limited in September 2014. Paris Investments acquired the legal and beneficial title of the loans from Bank of Scotland (Ireland) in October 2014.

DBRS has provisionally rated the class A notes as triple-A, the class Bs as triple-B and the class Cs as double-B. The class P and class Ds are unrated and retained by the sellers.

TENAX acquisition

Fosun International has acquired a majority shareholder interest in TENAX CAPITAL, a boutique asset management company headquartered in London with approximately €1bn AUM. Founded in 2004, TENAX specialises in actively managed strategies ranging from SME private debt to ILS that are particularly attractive to insurance companies and banks. The acquisition is part of Fosun's strategy to grow its global asset management business and will provide European and global investors with access to China's fast-growing financial markets. Completion of the transaction is pending regulatory approval and is expected to close in 2H19.

Structured Finance

EBRD appoints Greece, Cyprus lead

Company hires and sector developments

EBRD hires NPL vet

The EBRD has appointed Andreea Moraru to lead its operations in Greece and Cyprus from November, following the retirement of the current holder of the role, Sabina Dziurman. Based in Athens, Moraru will continue the EBRD’s efforts to support the private sector in the two countries, improve competitiveness and strengthen the regional integration of the local economies with investments and policy engagement. She is currently a senior banker within the EBRD’s financial institutions team and has been instrumental in leading and structuring a wide range of debt and equity projects, as well as developing leasing, covered bonds and NPL business in the EBRD’s countries of operations.

Elizabeth Finance development

The servicer of Elizabeth Finance 2018-1 has been notified that the mezzanine lender wishes to make a cure payment in respect of the outstanding loan event of default that occurred as a result of the loan to covenant breach under the Maroon loan. The cure payment has to be made by no later than 16 July 2019.

Origination co-operation

Assured Guaranty Municipal Corp and Assured Guaranty (Europe) have entered into an exclusive co-operation agreement with independent arranger and advisor DTW Capital Solutions, based in Sydney, Australia. DTW will act as origination consultant to Assured Guaranty for the provision of financial guarantees in relation to infrastructure finance and structured finance transactions with underlying assets located in Australia or New Zealand. In this role, DTW will facilitate the introduction of prospective issuers to Assured Guaranty and other market participants undertaking transactions where financial guarantees could be beneficial.

Pre-2019 STS designation request

Lloyds subsidiary Bank of Scotland has announced that it intends to notify ESMA in respect of the STS designation of the notes in its Penarth Master Issuer programme, and has appointed PCS as an authorised third party to assess the compliance of the securitisation funded by the notes with the STS criteria for pre-2019 issuances prior to the originator submitting the STS notification.

Structured Finance

Greencoat Investments notice received

Sector developments and company hires

BUMF 6 application discontinued

A notice of discontinuance from Greencoat Investments has been received by Business Mortgage Finance 6, purporting to discontinue its application for an administrative order with respect to the issuer, which had been listed to be heard before a High Court Judge at the beginning of July (SCI 16 April). This hearing has now been vacated and the application struck out with judgment, since the applicant failed to transfer £350,000 by way of security for the issuer's costs. The issuer will be seeking its costs to date in contesting the application from the applicant on an indemnity basis. The notice of discontinuance follows a purported enforcement notice from Greencoat Holdings and Portfolio Logistics, who claimed to have been appointed - on behalf of the class A noteholders - as trustees of the notes, and an out-of-court appointment of a receiver of the issuer. The issuer, in turn, informed noteholders that it considers each of these actions to be entirely spurious, invalid and of no effect and that it will be taking steps in court in relation to them.