Contents

Structured Finance

Italian renaissance?

Spike in new issuance supported for now

The uptick in Italian ABS/MBS primary issuance in the past month or so gives the impression of a long-awaited re-start to the market. However, while there are a range of factors supporting the trend, old concerns remain.   

Despite the flurry of deals recently, the total volume of Italian securitisations this year to date is actually slightly down on 2018 to mid-July. However, as Mark Hale, ceo at Prytania Asset Management, notes: “While Italian ABS/MBS issuance is small by comparison to UK and Dutch volumes, as you would expect, the proportion of Italian issuance within the total for Europe has grown this year.”

The pick-up in Italian issuance shares some drivers with the rest of Europe, according to one euro ABS/MBS trader. “The overall market is buying with the expectation the ECB will continue to buy ABS and Italian paper has always had success in the purchase programmes. At the same time, along with the rest of Europe, the first three to four months of the year were very slow as we awaited STS clarification, which created strong investor appetite. So, Italian issuers are now looking to meet the demand created by both those causes.”

However, the impetus behind current issuance levels goes beyond broader European issues. “The last six months has seen a clean-up of legacy transactions, mainly from the early 2000s, and that has created strong replacement demand with investors who are clearly very comfortable with Italian risk,” explains the trader.

Equally, each sector within Italian ABS/MBS has its own quirks. Notably, Italy continues to play a significant role in CMBS issuance.

“The European CMBS market is a pale shadow of what it once was, but Italian paper makes up a disproportionately large part of it,” says Hale. “That’s partly because there is less competition for commercial real estate assets in Italy than in other jurisdictions. There is also a relatively weak banking sector, so that allows other participants to originate loans at far wider speeds than elsewhere, so the arbitrage to structure new issue CMBS at today’s debt spreads is more feasible. Consequently, the Italian market is able to issue more deals than elsewhere in Europe.”

The trader is also positive about the sector, but does express some concerns. “Given the volume of commercial real estate assets Italian firms hold, CMBS should be an even bigger market than we see now. But historically issuers have kept the better assets to themselves and put the rest into their CMBS, which doesn’t encourage confidence. That said, there is positive sentiment on the CRE sector at the moment and if that translates into activity picking up further and a greater turnaround in portfolios, we could see a growth in CMBS to better reflect the Italian market.”

However, in the past few weeks consumer finance ABS, and autos in particular, have been the main focus for primary issuance. Colin Behar, senior investment analyst at Prytania Asset Management, highlights the recently priced AutoFlorence 1 (SCI 22 July) and Brignole CO 2019-1 deals.

He explains: “They have two relatively different stories, but also have strong similarities – they are selling the full capital structure with similar collateral that is predominantly higher yielding and shorter-dated and both issuers were looking to optimise their balance sheet. The result was very successful deals.”

It is a different story in RMBS. “We’ve not seen a big revival in Italian RMBS, despite how tight spreads have remained,” says Hale. “Italian institutions have so many alternative sources of finance, the necessity to access the public ABS market is not there. We had hoped with the extent to which the ECB was going to be pulling back and with Italian RMBS deals being called and paid down that, thanks to the relatively tight spreads, there would be an uptick in primary activity but, away from non-performing loans, there is not a lot of new lending or portfolios being sold for the ABS market.”

Overall, though, Behar takes a positive view on future supply. “The deals done so far this year show the value not necessarily on a funding cost front, but for balance sheet enhancement for originators of utilising securitisation. So, we could see a number of new issuers coming to market and potentially a continuing increase in new deals. However, new originators will take three to six months to get everything in place, so it’s more likely the impact won’t be seen until early 2020 rather than this year.”

The trader is equally positive about demand for Italian paper. “The story is improving economically, yet you get a better yield in Italy – it’s not yet where it should be in comparison to other similar European countries. The higher yields are primarily a result of political uncertainty and, should that get worse, then the market might begin to suffer again. But in the short-term there is no obvious trigger for that, so the market should continue to improve, albeit very slowly.”

Behar agrees that political uncertainty remains a major concern. “Political volatility is the one area that drives prices on Italian govvies that is yet to spill over into our market. However, it does reduce the number of people who are willing to look at Italian ABS.”

Further, Hale suggests this is unlikely to change any time soon. “Some of the shorter-term areas of concern and sources of volatility have been overcome, such as the European elections and the row between the EU and Italy over its current year budget. However, ultimately Italy still has an inherently unstable coalition and a trajectory in fiscal policy that is at odds with what Brussels believes is correct. That serves to represent a long-term negative sentiment bubbling in the background that could at any moment blow up.”

Mark Pelham

Capital Relief Trades

Benchmark SRT inked

Bank of Scotland completes unusual synthetic UK RMBS

Bank of Scotland has launched its first post-crisis synthetic UK RMBS. Dubbed Syon Securities 2019, the £150m CLN references a £1bn portfolio of UK residential mortgages.

Synthetic securitisations of UK mortgages are highly unusual, with only two post-crisis transactions having been completed thus far (see SCI’s capital relief trades database). However, Syon Securities is expected to act as a benchmark that will help spur future issuance.

“We’ve observed a pick-up in LTV ratios and most banks have internal risk limits, so this deal will provide a benchmark that could be replicated by other UK banks,” says Duncan Paxman, director at Fitch.

The lowest risk weight available in the securitisation regime under the CRR is typically higher than mortgage risk weights, so capital relief is generally not available at an acceptable cost of capital, if that is the primary motivation. Hence, banks would normally aim for accounting derecognition through the sale of a mortgage portfolio, when seeking to manage capital or leverage.

However, for Syon Securities, the primary motivation is prudent risk management within the context of providing support for first-time buyers - thereby rendering regulatory capital considerations less relevant in the decision-making process.

Indeed, the reference portfolio comprises loans with LTV ratios greater than 90% and less than or equal to 95%; the type of mortgage that is typically sought by first-time buyers. These loans are not eligible for the UK government’s Help to Buy scheme.

KBRA and Fitch have rated four Syon Securities tranches, which pay SONIA plus 3% (class A), SONIA plus 3.5% (class B), SONIA plus 4% (class C) and SONIA plus 5% (class D). The pricing for the unrated class Z tranche has not been disclosed. Further features include a weighted average life equal to 5.5 years.

Fixed-rate loans account for 98.7% of the pool, all of which revert to Halifax’s Homeowner standard variable rate (SVR) on expiry of the fixed-rate period. The rest of the pool pays a floating interest rate. Loan reversions are concentrated in 2020 and 2021, reflecting the predominance of the two-year fixed product in the pool.

Paxman notes: “It’s an unusual transaction, given that the guarantee covers both principal and accrued interest. The feature provides additional risk transfer, but introduces uncertainty as a result. The issuer accrues interest more quickly in a rising rate environment, leaving the transaction vulnerable to interest rate scenarios; it’s an issue due to the reversion to a variable rate after the initial fixed period.”

However, the deal has a comprehensive set of eligibility criteria and the static nature of the portfolio offers protection from adverse selection. “It’s a prime pool with no adverse credit, since it excludes borrowers with prior bankruptcy orders or court judgements, albeit with specific attributes,” states Paxman.

Bank of Scotland has a strong market position with borrowers that are first-time buyers. The bank has a long record as the largest mortgage lender in the UK, offering substantial experience and performance data to refine product offerings and lending criteria. Additionally, the bank has a mixed distribution network, reducing reliance on one source.

Nevertheless, the principal positive rating driver is the subordination. The deal is exposed to default timing due to the presence of pro-rata amortisation and the subordination had to compensate for that. Further protection has been added through an amortisation stop trigger, which kicks in if arrears exceed 1.5% of the reference pool balance.

The pool has concentration in Scotland, where 20.1% of the loans (unweighted) are located. Loans secured against flats comprise 13.5% of the portfolio and 86.5% of the pool is backed by houses or bungalows.

Stelios Papadopoulos

ABS

Making an impact

Debut impact ABS provides finance to EM microfinance & SME lenders

ResponsAbility Investments has closed its debut US$175m impact securitisation, backed by loans to 26 microfinance and SME finance firms in emerging markets across the globe.  Arranged by JPMorgan, with initial capital from the Overseas Private Investment Corporation (OPIC), the transaction is set to be the first of many from the firm, with hopes of it also being replicated by other businesses, boosting the availability of funding to microfinance and SME lenders, globally.

While a newcomer to the ABS market, ResponsAbility has been an active impact asset manager since 2003 and has grown to offer six business lines providing equity and debt investment opportunities backed by financial institutions from a variety of developing countries. This securitisation provides finance to 26 financial institutions that offer microfinance and SME loans in countries across the world, from continents including Africa, South America and Asia.

Denominated in USD, the deal provides senior and mezzanine fixed rate notes and a variable rate junior note, which varies according to the performance of the underlying loan portfolio. Thomas Müller, co-head financial institutions debt, at ResponsAbility, says: “Usually, microfinance investing opportunities are offered through mutual funds, but this securitisation opens up the asset class to a broader range of investors - particularly as it is fixed duration, locked in capital and issued in dollars.”

In terms of pricing on the transaction, it doesn’t seem to have been penalised for its unusual collateral, notes Eric Wragge, md, securitised products group at JPMorgan: “There aren’t good comparables to benchmark to; however pricing does not seem far out of line with other ABS asset classes featuring similar attachment points – tighter than some and wider than others. The class A notes were sold at 283bp and the class Bs was sold at 543bp - both USD and [with] 3 yr WALs.”

He continues: “Because of the unusual collateral, it’s hard to say whether pricing compares well with other asset classes, but ultimately investors were happy with the returns and it was able to attract several institutional investors – who were attracted by the social benefits as well as the financial returns. There was pension fund, development agency, asset manager, and family office participation.”

Müller adds that the deal took about a year to complete, in part as a result of the time taken for OPIC to get their side of the process finalised. He notes that the deal is a purely cash securitisation which makes sense when the firm is lending to borrowers in cash, adding that the firm may look to include a guarantee mechanism (like in the recent FMO deal) but that, regardless, this wouldn’t make it “strictly synthetic”.

Structurally, it is relatively vanilla, with three classes of notes and, while it has been compared with a CLO, says Wragge, it is a static pool with no ramping up period... Wragge adds: “Borrowers were already lined up before hand and received their loans on the closing of the securitisation.  More like certain types of ABS, it has a short three year WAL in line with the underlying bullet loans.”

One of the innovative elements of the transaction, comments Wragge, is the exposure to a range of local currencies, rarely seen in securitisation, with the main one being Indian Rupees. The currencies are swapped to USD by MFX, a specialist hedge counterparty backed by government development agencies and, therefore, willing to absorb some of the costs which are passed on to the borrowers in the deal.

In terms of getting investors comfortable with the risks, Müller comments that his firm has been in the space for 15 years and completed a number of prior transactions with the firms backing the deal and so accumulated a large body of performance data. As such, Müller’s firm can show evidence of a strong track record for each business in the deal and, on top of this, it does all of its own underwriting and due diligence, taking a hands-on approach with offices throughout the world, meeting the financial institutions as part of that process.

He adds that, following on from this deal, he hopes the firm becomes a programmatic issuer and to also “tweak and improve the structure going forward.” Müller adds that, in time, he hopes the firm doesn’t need to utilise OPIC’s support as “the goal of sustainable finance is ultimately to not use government agencies. We would also like to get ratings on future deals.”

In terms of the future of deals like these in helping fund businesses in emerging markets, Wragge is optimistic. He concludes: “One of the great things about deals like this is that they provide a more long lasting route to growth for these microfinance and SME firms than a lump sum cash injection. They hopefully provide a better way to help the economies of these countries grow, too. We hope that this model will be similarly copied by other firms.”

Other key investors in the transaction are Swedish pension firm, Alecta, and Calvert Capital, an impact investment firm.

Richard Budden

CLOs

Ratings efficiency

NAIC decision to boost CLO of one volumes?

CLO of one activity is rising, as direct lenders seek to broaden their syndication channels and insurers put money to work in ratings-efficient investments. NAIC’s recent move to no longer accept certain private fund ratings could further boost volumes.

The ‘CLO of one’ phenomenon is driven by ratings-sensitive investors and direct lenders seeking to package direct lending funds in an easily investable way, according to Jerry van Koolbergen, md at DBRS. One way of achieving this is to have the funds themselves rated, although this is difficult using a fixed income lens. Alternatively, they can be repackaged using a classic structured finance ratings approach.

“Direct lenders ramp up a portfolio over time in a similar way to how middle market CLOs and warehouses are ramped, so it’s possible to rate the portfolio using a CLO lens - providing the manager includes typical CLO features, such as covenants around origination standards. If a portfolio is being ramped up over the course of a year, say, we can construct a matrix of permutations that may become more or less investment grade but which can be rated accordingly,” van Koolbergen explains.

He continues: “If the investor holds a pari passu strip of such a CLO, the economics could mirror an LP interest in a direct lending fund. If it is truly a CLO of one - in other words, a single institution is investing - the investor owns all of the risk. However, more and more of such structures we’re seeing have multiple investors.”

The portfolios tend to be structured to enable a portion of the assets to obtain a NAIC 1 (equivalent to single-A or above) or NAIC 2 (equivalent to a triple-B rating category) rating. The typical size is in line with other CLOs and the fully-ramped tranching is also similar, depending on the goal of the investor. Some versions have two tranches; others feature a full capital stack.

Van Koolbergen notes that subordination levels change over time as the deal ramps. “When there are few assets in the fund at the beginning, the pool may be too concentrated to rate, but the ratings can rise over time as the diversity score improves. It’s a dynamic process and follows the origination rhythm of the direct lender. At the end of the ramp-up, there is usually 25%-33% subordination to the single-A or double-A rated tranche.”

He reports an uptick in enquiries in connection with CLOs of one, following NAIC’s recent decision to no longer accept certain private fund ratings, which closed the door on some options for regulatory capital-efficient instruments. “In light of this, a more typical construct like securitisation seems like a better strategy for many insurers. While the product is unlikely to ever become mainstream, we are seeing them more routinely because many direct lenders also have CLO departments, so connecting them makes sense.”

Corinne Smith

CMBS

Unique approach

Underwriting flex space in CMBS examined

Coworking company exposures in US CMBS are expected to increase as the buildings they occupy are refinanced and the popularity of flexible work arrangements continues to rise. However, underwriting properties with significant exposure to such tenants requires a unique approach.

WeWork is the largest coworking space provider in the US, with 493 locations across 96 cities, according to DBRS. It is also the largest office tenant in Manhattan, leasing 5.3 million square-feet, as of September 2018.

A DBRS analysis from March found that properties tenanted by WeWork secure 23 CMBS loans. Walter Johnston, vp CMBS ratings at Morningstar Credit Ratings, suggests that this is mainly because the buildings that WeWork leases are often class B or C spaces, rather than newer developments. However, as these class B and C properties refinance, the firm’s exposure in CMBS will likely grow.

Johnston says that there are two main areas of concern regarding WeWork exposure in CMBS. First is the risky structure of WeWork as a company: coworking start-ups depend on outside investment to launch and are generally non-investment grade entities.

Second is the firm’s business plan, as its profitability is correlated to the office market. “Coworking spaces are like a put on the office market: given that WeWork pays a fixed rate for space and then re-lets that space, the firm captures profit when the office market goes up, but is on the hook when it goes down,” Johnston observes.

Indeed, while a coworking tenant might be occupying a space fully on paper, the actual occupancy may vary, since its users can sign monthly, daily or minute-by-minute rental plans. As such, when analysing properties with coworking tenants, MCR combines methods traditionally used for significant single-tenant exposures with adjustments that are more unique to coworking.

These include four main underwriting levers, one of which is a minimum vacancy number to ensure that the agency ends up with a figure that’s sustainable for the long term. “For WeWork, we look at market vacancy levels or a look-through of the space and typically apply a higher vacancy to reflect the changing levels of occupancy,” Johnston notes.

Another lever is tenant improvement allowance. WeWork TIs can be higher than average because it typically costs more to renovate its spaces, while if the firm were to vacate a building, the landlord would have to convert it back to traditional office space.

A further lever is cap rate, which is also typically higher for WeWork, due to its correlated exposure to the office market. Finally, MCR undertakes a lit/dark analysis to estimate what the value is if tenants vacate, plus lease-up costs and capital improvements. Usually the agency weights the lit value higher, but in the case of WeWork, it increases the weight of the dark portion.

“All things equal, we would end up with a more conservative number for WeWork, compared to an investment-grade tenant with no issues but all other factors remaining the same,” Johnston observes.

Although WeWork has seen surprising growth, it’s unclear how much of it is sustainable. Johnston points to the incentives it has offered in the past – such as 100% commission to brokers if they bring in a competitor’s tenant or offering one year of occupancy free for a two-year lease – to ensure occupancy (on average, the firm’s buildings are 80% occupied) as an example.

“Many other firms have entered the coworking space, but they’re much smaller than WeWork. We have seen some of these other names in a couple of CMBS loans, but they are not as prevalent as WeWork and often don’t typically occupy entire buildings like WeWork does,” he says.

Coworking providers leased more than 23 million square-feet in 2018, according to Jones Lang LaSalle. While flex space inventory currently accounts for less than 5% of US office stock, the firm anticipates that this will increase to 30% by 2030.

However, for coworking to become a new paradigm for the office sector, WeWork - or any other coworking company – would have to begin consistently making money and for many more participants to enter the space. “The remote working trend is another force affecting the sector, but we’re not sounding an alarm on office yet,” Johnston concludes.

Corinne Smith

ABS

Rights firm hits play on ABS debut

Unusual securitisation backed by music rights collateral

SESAC, a music rights firm acquired by Blackstone in 2017, is marketing an inaugural whole-business securitisation. Dubbed SESAC Finance 2019-1, the US$560m transaction is structured by Guggenheim and secured by music affiliate agreements, license agreements and software and intellectual property of the SESAC Group.

The transaction has been assigned provisional ratings by Morningstar and KBRA of triple-B/triple-B minus on the US$30m class A1 notes and triple-B/triple-B minus on the US$530m class A2 notes. The class A1 notes are variable rate and can be drawn on a revolving basis until the renewal date of July 2024, while the class A2s are fixed-rate and have an anticipated repayment date of July 2026.

The transaction is supported by SESAC’s strong revenue growth since 1994, which continued to grow even during the last recession. This is due, says Morningstar, to the on-going growth and diversification of SESAC’s affiliate-based business model and its expanding licensee network, across its different revenue-generating channels.

Further strengths of the deal include the for-profit nature of SESAC, which is the only company in the top-three of the industry with a for-profit status, allowing it to be more selective in accepting and managing affiliates and affiliate compensation. Furthermore, the rating agency adds that the company’s music affiliate retention rate of 99.7% since 2003, with a strong and diverse affiliate base of 35,000 songwriters.

The deal also features several robust structural elements such as rapid amortisation and cash flow sweep events tied to specific debt service coverage ratios, which help protect the transaction from deteriorating business conditions. The rating agency says that the deal also has an interest reserve account to be funded at closing, expected to be in the form of letters of credit, providing three months’ worth of interest on the senior notes.

Morningstar also highlights a number of concerns of the transaction, including high leverage on the deal of 6.4x on a funded debt basis and 6.7x, assuming the VFN is fully drawn – this is at the higher end of recent whole business ABS transactions.  The agency adds that the deal is weakened by exposure to TV and radio – areas of the industry that have seen slower growth - as well as the potentially sizeable impact of a loss of affiliates or licensees.

Finally, regulation may be a potential headwind for the transaction, with SESAC being subject to copyright law provisions, for which there can be no assurance that the relevant copyright law provisions will not be amended or modified in future. Morningstar notes that this could adversely affect the ability of the manager to renew securitised music affiliate and license agreements or enter into new securitised music affiliate agreements.   

Richard Budden

ABS

Funding trade

Trade finance fund utilises securitisation technology and assets

Finance securitisation specialist Channel Capital Advisors has launched its first trade finance fund. The fund is structured utilising securitisation technology and also invests in the instruments.

Paul Wilson, cio at Channel, says: “We have been looking to launch this for a number of years, but now we have a well-established track record in trade finance and customer confidence, the time is right. It requires a different approach to our existing business because it utilises fiduciary capital, but we have not set up the fund in a traditional structure. Instead, it has been structured as profit participation notes, so is effectively a securitisation that has an underlying of a broad range of trade finance assets. The assets are typically short-dated, that we actively manage in and out.”

The fund’s trade finance assets include any kind of working capital financing – receivables, supply chain, and so on – and are subject to standard securitisation documentation. But unlike the deals that Channel has been structuring, placing and programme managing since 2013, they are not stand-alone assets but one among many within the fund.

Equally, the fund has a much broader portfolio and can utilise any kind of trade finance assets beyond securitised ones as well. It can include, for example, traditional trade financings backed by letters of credit.

“We have the expertise and the systems to manage all of those assets in one place,” says Wilson. “At the same time, we have our large securitisation business running alongside the fund and we can source assets from there. So we effectively have an origination engine for the fund as well.”

Wilson believes the fund adds further value by taking a conservative approach. “Other trade finance funds struggle to find assets at their target yields. Whereas we are aiming for lower risk and slightly lower return, and believe that is a more fruitful space to work and where we’ll find a lot more assets.”

He is also keen to emphasise that the fund is Sharia-compliant. “Sharia compliance makes matters more complex, but really only requires the client to go through an additional piece of documentation. That requires some education, but after they have been through it once, it’s very straightforward. Ultimately, Sharia compliance is very important to investors who need it and has no impact on those who do not, so it was a vital step for us to take.”

Mark Pelham

Structured Finance

SCI Start the Week - 22 July

A review of securitisation activity over the past seven days

Market commentary
Activity eased up across the US CLO market last week, driven by both macro and seasonal factors (SCI 17 July).

"In general, new issue pricing is spotty - prices are really moving around," said one trader. "It seems like there are places in the capital structure and with certain issuers where the underwriters are having trouble finding buyers. At the same time, we are seeing a little bit less overall new issue volume at the moment."

Meanwhile, in the secondary market, BWIC supply remains steady if unspectacular. The trader reported: "Stuff is getting done, but we're not exactly seeing a wave of buyers."

Other deal-related news

• Equity participation in aircraft ABS is picking up, following the execution of transactions with broadly syndicated E-notes, aimed at creating a liquid secondary market. However, the market may be underestimating residual value risk (SCI 19 July).  
• ResponsAbility Investments has closed a US$175m securitisation of micro-finance and SME loans to 26 businesses in emerging markets. The proceeds will be used to fund financial intermediaries providing capital to 30,000 small businesses and 5.6 million microfinance borrowers, 81% of whom are women (SCI 18 July).
• The African Development Bank Group has approved an innovative multinational financing programme for distributed energy service companies (DESCOs), which would see 900,000 households in sub-Saharan Africa - about 4.5 million people - gain access to solar power by 2025. The DESCOs Financing Program promotes securitisation financing techniques to address barriers to accessing finance for DESCOs, while supporting their growth and expansion into existing and new markets (SCI 15 July).
• The EIB, the EIF and Česká spořitelna (ČS) have inked a capital relief trade. The synthetic securitisation will channel €306m of new financing into SME businesses in the Czech Republic (SCI 18 July).
• Stenn International has launched a debut US$200m securitisation with Natixis, backed by international trade finance receivables. The deal looks set to be the first of many, as the firm intends to become a programmatic ABS issuer while also expanding into back-up servicing and IFRS 10 derecognition services (SCI 17 July).
• Triodos Bank has retained its debut €841m securitisation of Dutch prime residential mortgages. Dubbed Sinopel 2019, the deal is backed by 3,810 mortgages, all of which offer lower interest rates depending on the energy-efficiency of the house (SCI 19 July).
• Arbuthnot has purchased a portfolio of residential mortgages totalling approximately £266m for a discounted rate of 97.2%. The transaction is expected to complete on 8 August, when the mortgage contracts will be released from the securitisation vehicles in which they are currently held (SCI 17 July).
• The Business Mortgage Finance 6 interim application was heard and granted by the court on 11 July. As such, the high court has ordered that neither Greencoat Holdings nor Portfolio Logistics shall act as if it were appointed as an additional trustee or agent under the terms of the trust deed (SCI 17 July).
• The cure payment has been received from the mezzanine agent in connection with the Maroon loan securitised in the Elizabeth Finance 2018-1 loan. Accordingly, the loan EOD has been remedied and the loan is now a corrected loan (SCI 17 July).
• Lapis Municipal Structured Management has replaced Cohen Municipal Capital Management as portfolio manager to Non-Profit Preferred Funding Trust I, a muni CDO. Moody's has confirmed that the appointment will not impact the deal's ratings (SCI 19 July). For more CDO manager transfers, see SCI's database.
• Santander has submitted a notification to ESMA and the UK FCA regarding pre-2019 securitisations issued from its Holmes RMBS programme that the requirements of Articles 19 to 22 of the Securitisation Regulation have been satisfied. As such, the notes should be designated under the STS framework (SCI 17 July).
• Moody's has upgraded three tranches from ING's Orange Lion 2013-10 RMBS, reflecting increased credit enhancement and better-than-expected collateral performance (SCI 19 July). The preplaced transaction caused a stir at issuance, due to its lack of call option or step-up coupon (SCI 4 July 2013).

Regulatory round-up

• Capital relief trade issuers are attempting to anonymise loan-by-loan data in transactions, while simultaneously complying with ESMA's requirement to disclose such data as part of the new securitisation regulation (SCI 22 February). Market participants are concerned that unless regulators address this tension, it could cause a breach of confidentiality provisions (SCI 19 July).
• ESMA has published additional resources to assist industry implementation of its draft technical standards on disclosure requirements for the Securitisation Regulation (SR). First, it has updated its SR Q&As, clarifying different aspects of the draft disclosure technical standards, including how some specific fields in the templates should be completed. Second, ESMA has published a set of reporting instructions and XML schema for the templates set out in its draft technical standards on disclosure requirements (SCI 18 July).
• The FDIC has issued a notice of proposed rulemaking on amending the securitisation safe harbour rule. The proposed changes are intended to remove the requirement that safe harbour transactions that do not otherwise have to comply with US SEC Regulation AB would have to do so in order to be afforded safe harbour treatment (SCI 18 July).

Data

Pricings
Auto ABS issuance switched up a gear last week, accounting for a large portion of prints. The week was also notable for the number of RMBS that priced.

Last week's auto ABS issuance comprised: €660m Auto ABS Italian Balloon 2019-1 (retained), €950m AutoFlorence 1, US$243.51m CPS Auto Receivables Trust 2019-C, US$850m Exeter Automobile Receivables Trust 2019-3, US$1.05bn GM Financial Consumer Automobile Receivables Trust 2019-3, US$1.25bn Nissan Auto Lease Trust 2019-B, US$466.30m Oscar US 2019-2, US$365.26m Prestige Auto Receivables Trust 2019-1 and US$1.18bn Santander Retail Auto Lease Trust 2019-B. The US$443.25m DLL 2019-MA2, US$1.05bn John Deere Owner Trust 2019-B, US$498.30m Nelnet Student Loan Trust 2019-3 and US$450m Sierra Timeshare 2019-2 Receivables Funding were the other ABS prints.

Meanwhile, the RMBS pricings consisted of €455.9m European Residential Loan Securitisation 2019-NPL1, €290m Finance Ireland RMBS No. 1, US$400m NRZ Advance Receivables Trust 2019-T1, €841m Sinopel 2019 (retained), US$756m STACR 2019-DNA3 and US$361m Verus Securitization Trust 2019-INV2. The CMBS prints were US$1.2bn FREMF 2019-K735, US$747m MSC 2019-H7 and £750m Westfield Stratford City Finance No. 2.

Finally, among last week's CLO issuance were US$300.5m ABCPI Direct Lending CLO VI, €478m Harvest CLO XXII, US$749m Oaktree CLO 2019-3, US$427.72m Romark CLO III and US$310m Symphony CLO XVIII (refinancing).

BWIC volume

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Capital Relief Trades Seminar, 17 October, London

Capital Relief Trades

Revving up

Italian auto SRT completed

BNP Paribas has completed a €950m significant risk transfer transaction of Italian auto loans. Dubbed AutoFlorence 1, the true sale securitisation is the bank’s first post-crisis Italian capital relief trade.

According to Boudewijn Dierick, head of ABS markets at BNP Paribas: “We successfully passed both phases of the SRT tests. First, there’s the SRT tests, where you have to sell over 50% of the mezzanine tranches; we sold 95% of each tranche in the capital stack.”

He continues: “The second is the commensurate risk transfer tests, which are less black and white. During this second phase, the regulator evaluates the transaction using various scenarios of expected and unexpected losses.”

The excess spread in this transaction takes the form of a ‘use it or lose it’ mechanism, whereby during each payment period, excess spread may be used to cover credit losses materialising during that period. Excess spread not used for that purpose during the payment period is returned to the originator or the holder of the excess spread note.

Rated by S&P and DBRS, the transaction consists of €807.5m AA/AA rated class A notes (which priced at one-month Euribor plus 75bp), €38m AA/A(low) rated class B notes (plus 140bp, €28.5m A/BBB rated class C notes (plus 220bp), €23.75m BBB/BB(high) rated class D notes (plus 320bp), €19m B/B(high) rated class E notes (plus 450bp), €33.25m unrated class F notes (7%). 

BNP Paribas sold the whole capital stack, but the significant risk transfer was mainly achieved by selling classes B to F. At the bottom of the waterfall, the bank added a deferred purchase price (DPP) for credit enhancement purposes.

The transaction features a one-year revolving period and weighted average life equal to 2.84 years. The tranches amortise on a pro-rata basis.

Dierick notes: “The rationale for structuring the amortisation on a pro-rata basis is that it keeps the relative size of the tranches stable over time. In the end, the coupon that you pay on the notes remains constant over time.”

However, the transaction will switch permanently to sequential if any of three events occur. First, the cumulative gross default is greater than 2% before the first year, 3% before the second year, 4% before the third year and 6% after the third year.

Second, the clean-up call condition is triggered, which means that the portfolio's outstanding principal is less than or equal to 10% of the initial portfolio. Third, class F PDL exceeds 0.50% of the portfolio's outstanding principal. The PDL is divided into six sub-ledgers from class A to class F.

Additionally, there is liquidity reserve support only for classes A, B and C. Principal proceeds can also be used for curing interest shortfalls for class A, B and C.

The underlying portfolio comprises unsecured auto loan receivables that BNP Paribas subsidiary Findomestic originated and granted to private individuals for the purchase of new cars (45.57%), used cars (43.48%) and a smaller portion of motorcycles, camper and other vehicles (10.96%). The pool is granular and geographically diversified across Italy, with 59.49% in the north, 17.08% in the centre and 23.43% in the south.

The pool has low borrower concentration risk, with the top 20 borrowers accounting for only 0.24%.

Stelios Papadopoulos

Capital Relief Trades

BMO SRT launched

BMO expands mid-market exposure

Bank of Montreal (BMO) has completed a five-year financial guarantee that references US and Canadian senior secured and unsecured corporate loans. Dubbed Manitoulin USD Algonquin 2019-1, the transaction differs from previous Manitoulin deals due to the additional numbers of mid-sized corporate borrowers in the portfolio.   

The risk transfer trade features a replenishment period and complies with risk retention rules. The portfolio is expected to include both large and mid-sized corporate borrowers.

The underlying loans benefit from credit enhancement and diversification by jurisdiction and size. Assessment of portfolio quality may include a ratings mapping of BMO’s internal ratings model for each borrower.

The transaction has been analysed with DBRS’ CLO methodology, which constructs worst-case portfolio composition scenarios with the aim of analysing performance. 

BMO has issued five tranches comprising classes A to E. The class B tranche includes US$4m of notes, the class C tranche includes US$5m of notes and the class D tranche includes US$6.5m of notes. The unrated class E tranche totals US$162.5m.

DBRS has assigned ratings of triple-A to the class A tranche, double-A to the class B tranche, single-A to the class C tranche and triple-B to the class D tranche. 

According to SCI’s capital relief trades database, the latest deal is BMO’s second Manitoulin transaction this year (see SCI’s capital relief trades database).   

Stelios Papadopoulos

Capital Relief Trades

Risk transfer round-up - 24 July

CRT sector developments and deal news

Banca Popolare dell ‘Alto Adige is believed to be readying a capital relief trade that is expected to close in 4Q19. The transaction would be the bank’s first risk transfer transaction and is riding a wave of Italian securitisation issuance (SCI 24 July).

Indeed, as part of the same trend, BNP Paribas completed its debut Italian auto SRT (SCI 22 July) and Monte dei Paschi di Siena is rumoured to be prepping a risk transfer trade for 4Q19 (SCI 19 July).  

NPLs

First-mover disadvantage

NPL ABS downgrade structurally specific

Scope Ratings has downgraded Elrond NPL 2017 after a performance review. The move appears to be a deal-specific one, as most European non-performing loan ABS deals are performing as expected.

David Bergman, md and head of structured finance at Scope Ratings, explains: “Elrond has been consistently below expectations in terms of timing for the collections and that is made worse by the deal’s structure – it does not have a strong class B interest subordination trigger, which leaves the class A noteholders more exposed to delayed collections timing. In other transactions, the issuer can shut off class B interest payments in this situation.”

Thomas Miller-Jones, associate director at Scope Ratings, adds: “As we’ve noted before, this was one of the first GACs deals and that is a disadvantage. At that time, servicers were still calibrating their business plans and getting a better understanding of timelines and structures.”

Elsewhere in the NPL ABS sector, Scope has primarily been able to affirm its ratings following reviews undertaken this year. However, there was one exception, with the class B notes of Aragorn NPL 2018 being cut from single-B to single-B minus in June, as a result of cumulative collections underperformance; the observed recovery rate on closed positions; and the breach of the class B subordination trigger.

Bergman notes: “Banca Monte dei Paschi di Siena’s jumbo Siena NPL 2018 has also been lagging behind the business plan. However, the notes are protected by a lot of credit enhancement.”

NPL ABS deals more broadly are performing according to expectations, Bergman says. But he warns: “They do depend a lot on the macro environment, so performance varies from jurisdiction to jurisdiction. At present, Spain is strong, while the macro background in Italy is weaker - with zero growth and falling house prices. Nevertheless, the performance of most Italian deals so far is reasonably good.”

Elrond NPL 2017 is a static cash securitisation of secured and unsecured NPLs extended to companies and individuals in Italy. Scope downgraded the €363.7m class A notes to double-B from triple-B minus and the €42.5m class B notes to single-B minus from single-B plus. The agency does not rate the deal’s €20m class J notes.

Scope says the rating actions are primarily driven by the current performance of the transaction. Aggregate gross collections (standing at €141.2m, as of 31 December 2018) are approximately 25% below the initial business plan. An additional review of gross collections through 31 May 2019 indicate gross collections may again fall short of initial business expectations for the first interest payment date of 2019, which is partially attributed to tied-up cash-in-court proceeds and distribution of CCM guarantees.

Positive performance has been observed via profitability metrics on closed positions. The cumulative profitability ratio through 31 December 2018 is 137%.

Scope does not consider the potential support from the GACS guarantee in its rating analysis.

Mark Pelham

Structured Finance

ABS head named

Company hires and sector developments

Euro ABS head appointed

Santander has hired Francesco Dissera as head of continential Europe, securitisation, based out of Milan. He was previously md and partner, head of structuring and advisory at StormHarbour.

PM appoitment duoble

Man GLG has hired Patrick Kenney and Santiago Pardo as portfolio managers to its credit business in London. Prior to this, Pardo worked in credit investments at the Abraaj Group, while Kenney was at Overland Advisors working on global distressed and non-US credit.

Redemption post-suspension

The Lusitano Mortgages No. 2 RMBS is set to be redeemed in full at its principal amount outstanding, plus accrued and unpaid interest, on the August IPD. The move comes after trading of the notes was suspended by the Irish Stock Exchange, in compliance with a direction from the Central Bank of Ireland issued pursuant to the Transparency Directive, for a period of 10 days from 15 July. The suspension was due to the issuer’s audited financial statements not being available.

Structured Finance

Esoteric ABS head announced

Sector developments and company hires

Esoteric ABS head named

MUFG has hired Keith Allman as md and head of esoteric ABS, effective August 14 and he will be responsible for the coverage of all US esoteric ABS assets. Allman brings 17 years of structured-finance and aviation experience as a banker at Deutsche Bank and Citigroup, and most recently as an investor at Loomis Sayles & Company.

Levered certificates debut

LendingClub has issued its next-generation certificates - dubbed Levered Certificates - backed by over US$100m of marketplace loans originated via the platform. The structure consists of two securities: one equity certificate (providing exposure to a pool of unsecured personal loans) and one fixed-rate note (providing stable term financing over the life of the certificate). Both instruments trade in the OTC market with CUSIPs and are cleared through the DTCC.

ILS compliance chief promoted

Hiscox has promoted Andrew Hughes to the role of managing principal, Hiscox ILS. Hughes has been with Hiscox ILS in Bermuda since 2015, working as its general counsel and chief compliance officer. His appointment is subject to Department of Immigration and Bermuda Regulatory approval. 

Senior counsel appointed

Chapman and Cutler has hired Scott Elsworth as senior counsel in its asset securitisation department, based in Chicago. Elsworth’s practice is focused on representing commercial banks and corporations in structured finance matters involving a wide variety of asset classes, and the negotiation and documentation of complex lending transactions. He was previously special counsel at Katten Muchin Rosenman.

Sustainable capital markets appointment announced

BNP Paribas has hired Chaoni Huang as executive director, head of sustainable capital markets in APAC. She was previously an executive director at Natixis within its green and sustainable solutions APAC team.

Structured Finance

Mortgage firm completes residuals sale

Company hires and sector developments

Residual sale

Charter Mortgages is set to sell its residual economic interest in the Precise Mortgage Funding 2019-1B RMBS to JPMorgan - which managed the sale process and purchased the RC2 certificates for onward sale - for a cash consideration of £6.2m. The transaction is expected to complete on 31July and will generate a pre-tax gain of £28.8m and a reduction in risk-weighted assets of circa £206.7m. The associated increase in common equity tier 1 capital ratio will be reinvested to support new loan originations in Charter Court's specialist lending segments and ongoing business activities. A sub-component of the PMF 2019-1B residual interest (the RC1 certificates) were sold to a third-party investor earlier in July.

Solar warehouse launched

NAB has provided a A$130m ABS warehouse faciliity to Brighte  - an Australian digital platform that facilitates payment plans for solar energy, batteries and home improvements. As part of this the bank also provided A$80m as the senior funder.