Contents

Insurance-linked securities

Turning point

Catastrophe bonds could see a redirection of spreads

The past two years of record-breaking reinsurance losses, along with technically-driven spread widening, have hampered the catastrophe bond market. Now, as this year’s hurricane season plays out, the market stands at what could be a turning point.

2017 was the most expensive year ever for the reinsurance industry, thanks to major losses from Mexican earthquakes, Hurricanes Harvey, Irma and Maria, wildfires in California and various smaller storm events. Nevertheless, investors who had been on the side-lines waiting for an attractive entry point into the catastrophe market that the year’s losses presented were able to quickly replace any lost or trapped capital, many utilising ILS.

2018 was another bad year for losses, following several new catastrophes - notably Hurricanes Florence and Michael - as well as Californian wildfires - and the year also brought a steady increase in loss estimates from the events of 2017. This time, existing investors suffered from a lack of capacity and mixed ILS funds investing in collateralised reinsurance as well as in cat bonds struggled to replace lost or trapped collateral. As a consequence, many were forced to sell their catastrophe bonds to generate the necessary liquidity for the January 2019 renewal cycle.

The sell-off continued into May ahead of the June 2019 renewal season, according to Florian Steiger, portfolio manager responsible for cat bond strategies at Twelve Capital. “This sent secondary spreads ever higher and the weakness in the secondary market spilled over into the primary market. Spreads have therefore moved out by 100bp-150bp from where they were two years ago and they are now at the same level as they were in 2012-2014.”

At the same time, Steiger adds: “The cat bond market has become much more diversified than it was seven years ago. There is a wider variety of perils and structures than we had in the past and, in the major risk categories, there is a far greater number of bonds – for example, there were 15 Florida hurricane bonds in 2012 and there are now 40-50.”

He continues: “You put those two elements of wide spreads and diversification together and it means that the cat bond market is probably as attractive to investors as it has ever been. This has led to growing interest in the asset class.” Twelve Capital announced last week that its Irish UCITS cat bond offering had raised close to US$400m over 18 months.

While demand is strong, supply is being hampered by wider spreads, Steiger reports. “Overall, new issuance is down in 2019 to-date because of the costs. We did have people try to come to market earlier in the year who found it too expensive. So they went to the traditional reinsurance market but that wasn’t cost effective either and they came back to cat bonds at the last minute. Typically, once the hurricane season starts on 1 June, we see no further deals but, because of the late moves back to the market, we actually saw several new deals in June this year.”

Looking ahead, Steiger concludes: “Now it’s all about wait and see – even non-hurricane bonds don’t usually appear during the season as everyone is looking out for major events that would have an impact on reinsurance as a whole. Thankfully nothing has happened yet, but the next 6-8 weeks are the decisive moments for the cat bond sector – we could do with a good year without any major losses. That could tighten spreads and encourage issuers while, in the current low yield environment, cat bond spreads are likely to remain attractive to investors.”

Mark Pelham

RMBS

QM revisited

Private mortgage market to fill the void?

The CFPB’s ANPR in relation to the GSEs’ temporary qualified mortgage provision (SCI 29 July) anticipates that the FHA and the private mortgage market may fill the void once the classification expires. However, it remains unclear whether the private mortgage market will step up in this way.   

The aim of the ANPR is to help move more risk off the GSEs’ balance sheets by reducing the percentage of high DTI loans that the companies acquire. Indeed, Walter Schmidt, svp at FTN Financial, notes that the move is part of the FHFA’s efforts to increase competition in the mortgage market and eliminate the potential for the GSEs to need a tax payer bail-out.

“There are two aspects to the ANPR: one is to allow the GSE patch to expire; the other is to adjust DTIs where necessary. The former should reduce the GSE footprint by eliminating the perceived special treatment of the GSEs, while the latter could help widen the credit box,” he explains.

He continues: “Two public policy goals are at play here: making the GSEs safe and expanding the credit box to as many creditworthy borrowers as possible. But sometimes these policy goals are in conflict with each other. What the system really needs to focus on is the middle sliver between these two sides; in other words, borrowers that are creditworthy most of the time – those with a non-traditional income stream that can sometimes become stressed from a credit perspective.”

Schmidt suggests that the ANPR is not only about the patch, but also about the fundamental relationship that the GSEs have with the mortgage market and the capital markets. “The real issues are what kind of government support these borrowers should receive and how closely the GSEs should be tied to the government. FHFA director Mark Calabria’s view is that the market should decide who is creditworthy, while many in government believe they should set standards to ensure that Wall Street doesn’t run amuck again. But wrestling with this conflict should ensure that a balance between the two sides should emerge eventually.”

The current ATR/QM rule includes a ‘general QM’ classification, which caps a borrower’s DTI ratio at 43%. However, the GSEs allow a borrower’s DTI ratio to exceed 43%.

The ANPR acknowledges that, of the GSE loans made in 2018 with DTI ratios over 43%, 69% had DTIs over 45%. Further, it states that the temporary GSE QM classification continues to dominate the conventional home purchase market, comprising 71% of that market in 2017.

At the same time, the bureau notes that 11% of high DTI borrowers are unlikely to qualify for FHA insurance because their requested loan amounts exceed the FHA’s loan limits. The ANPR suggests therefore that some high DTI borrowers might be able to benefit from loans originated by small creditors whose loans are deemed to be QMs if held in portfolio, or by other creditors willing to make non-QM loans - while other borrowers may “make different choices”, including adjusting “their borrowing to result in a lower DTI ratio.”

Nevertheless, a Morrison & Foerster client memo notes that the potential impact of eliminating the temporary GSE QM classification “cannot be overstated”. The memo states: “The ANPR acknowledges that nearly one million mortgage loans made in 2018 would not have met the general QM test. It appears likely that the vast majority of those loans simply would not have been made [without the GSE classification].”

Comments are due on the ANPR 45 days from its publication in the Federal Register.

Corinne Smith

NPLs

NPL SRT inked

Hoist Finance tackles backstop regulation

Hoist Finance has sold a €225m portfolio of Italian unsecured non-performing loans via an unrated securitisation to a fund managed by CarVal Investors. The significant risk transfer transaction is mainly carried out for capital relief purposes and will be followed by future NPL ABS deals.

The SPV will fund 95% of the net purchase price of the receivables via the issuance of senior notes and the remaining 5% through the issuance of junior notes. CarVal will buy the senior tranche, while the junior tranche will be retained on Hoist Finance’s balance sheet. Hoist Finance will make a full CET1 deduction corresponding to its investment in the junior tranche.

The firm notes that such a structure addresses the future effects of the newly adopted NPL backstop regulation, which applies to loans originated after 26 April 2019 and stipulates full provisioning for unsecured NPLs three years after they’ve defaulted. The backstop and higher capital requirements for purchased unsecured defaulted exposures are the main drivers behind the use of securitisation (SCI 16 May).

According to Klaus-Anders Nysteen, ceo at Hoist Finance: “The purpose of the transaction is not funding, since our deposit base covers that, but capital relief. We are also retaining the economic upside of the assets via the junior tranche, but the main motivation is capital relief, as well as proving that we are capable of setting up a viable structure after the implementation of the NPL backstop.”

Indeed, the NPL ABS will generate a 60bp increase in the CET1 ratio, which will in turn create additional capacity for at least €100m of NPL investments.

Unlike other debt collectors, Hoist Finance is subject to the bulk of banking regulations. This provides the firm with many advantages, such as the ability to finance acquisitions from deposits, but also means it’s subject to capital requirement regulations.

This unrated securitisation will be followed by the launch of a rated NPL ABS over the next three to six months. Nysteen explains: “It’s important for us to demonstrate to the capital markets that we have a sustainable and viable business model. Securitisation allows us to address the NPL backstop, while continuing to act as a regulated credit institution with a low cost of funding.”

He continues: “Furthermore, the comfort gained by investors in the underlying assets of this unrated securitisation deal will help us to roll it over into a rated transaction; there are mechanisms in this first deal that allow us to do that.”

However, the structure of the rated deal differs from that of the unrated one. In particular, Hoist Finance will retain the senior tranche and sell the junior tranche.

Nysteen states: “The aim of the rated securitisation is not funding, since we are using the proceeds from the sale of the assets to fund the purchase of the senior notes. Our blended cost of funding is a currently very low 1.3%, so if we retain some benefit by holding the senior piece, then that is important for our model.”

Looking ahead, he notes: “Our NPL investments have slowed down this year, due to higher risk weights, but this transaction will create capacity for more investments down the line. This NPL securitisation is our first structured credit transaction, so we focused on Italian NPLs, given the experience with GACS. However, we will be looking at future NPL securitisations that reference various asset classes and jurisdictions.”

Stelios Papadopoulos

CLOs

Performance model revealed

Innovative approach highlights smaller manager outperformance

Smaller, less well-known CLO managers often outperform their larger competitors, a new analytical model has revealed. The innovative approach utilises a mutual-fund-like analysis and the S&P LSTA index to assess manager performance and potentially bring greater clarity to performance trends.

Traditionally, assessing CLO manager performance has involved using certain metrics to look at the underlying pool of loans in a CLO to assess their quality, such as in a recent Moody’s report on US CLO manager performance. The problem with this approach, however, says Steven Abrahams, head of investment strategy at Amherst Pierpont, is that it doesn’t engage with the “very essence” of what differentiates a CLO from other types of securitisation - that it is an actively managed vehicle without a fixed pool of loans.

He adds: “As such, the approach – taken by Moody’s and others – doesn’t really draw any meaningful conclusions about the ability of a CLO manager to productively manage the pool of loans to boost returns on an ongoing basis.”

Instead, Abrahams has helped to design a new way of analysing CLOs, taking a similar approach to mutual fund analysis, with the key element being that his firm looks at a CLO as an actively managed fund of leveraged loans, that funds itself by issuing debt and equity.  Likewise, he says that he looks at a CLO like any other business with assets and liabilities, whereby the assets would be the loans on the firm’s balance sheet and the liabilities would be the debt and equity held by investors.

Abrahams elaborates: “It is the manager’s influence on the asset and liability side of the balance sheet that drives the performance of the CLO. As such, what we have done is built a way of measuring the performance of US CLOs against the S&P LSTA index which, to our knowledge, has not been done before.”

He says that using this approach has thrown up two key findings: the first is it reveals the beta of how a CLO’s leveraged loan portfolio performs compared with the broader leveraged loan index and a high level measure of the mix of loans they have. In line with this, a beta of one to the index suggests a manager holds loans with risk roughly equal to the average loan in the market, greater than one would suggest more risk than average and less than one, less risk than average – this ultimately reveals whether the manager is paying the right price for the loans on an ongoing basis.

More important than this, says Abrahams, is that it helps his frim draw up “alpha” which, he says, is more meaningful as it helps to highlight a manager’s ability to add value above and beyond simple positive returns on leveraged loans.

The result of this is that the firm has found “tremendous dispersion” between CLO managers. Abrahams adds: “Some provide routine excess returns and many of these are smaller, less-known managers. Likewise, we’ve found that many provide very average results. An analogy you could use is in the equities market whereby small caps often outperform large caps. As with that, so with CLOs, smaller managers often outperform larger ones.”

He says that the results of the new approach have surprised a lot of people in the industry and that his firm has seen a number of clients transacting on the information and moving concentrations away from larger to smaller managers. He adds that traditional measures for assessing CLO managers will still be used, but that – looking ahead - this new tool is now a vital part of his firm’s armoury.

In terms of why this disparity between smaller and larger managers exists, Abrahams suggests that smaller mangers are more nimble and can therefore move in and out of positions more quickly and easily. He concludes: “Also, a smaller manager might see a much greater impact across their CLOs by moving out of a single underperforming loan – a larger manager might not see the same boost.”

Richard Budden

Advisory

New podcast now live

The operational steps to setting up a CRT and more...

In this week's podcast, the team discuss the operational steps taken when putting together a capital relief trade, as well as some of the concerns surrounding disclosure requirements in securitisation and capital relief trades. It then rounds off with an insight into the recent securitisation from impact investor, ResponsAbility, which helps fund small businesses in emerging markets, throughout the globe.

You can listen to the podcast here and on Spotify and iTunes where all of our other podcasts can also be found. 

(Credit also is due to Joseph McDade for the great music.)

Structured Finance

SCI Start the Week - 29 July

A review of securitisation activity over the past seven days

Transaction of the week
Unusual securitisation backed by music rights collateral (SCI 23 July)

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.

Stories of the week

Offshore investment in Chinese ABS soars
Investors find relative value in second largest ABS market

Italian renaissance?
Spike in new issuance supported for now

Benchmark SRT inked
Bank of Scotland completes unusual synthetic UK RMBS

Unique approach
Underwriting flex space in CMBS examined

Other deal-related news

• 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 (SCI 23 July).
• 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 (SCI 22 July).
• 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 and one fixed-rate note (SCI 23 July).
• 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 (SCI 26 July).
• NAB has provided a A$130m ABS warehouse facility 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 (SCI 26 July)

Data

Pricings
Deals that priced last week included:

Auto ABS
CarMax Auto Owner Trust 2019-3; DT Auto Owner Trust 2019-3; Enterprise Fleet Financing 2019-2; Ford Credit Auto Lease Trust 2019-B; USAA Auto Owner Trust 2019-1

Non-auto ABS
Brignole CO 2019-1; Discover Card Master Trust 2019-A2; Mill City Solar 2019-2; Navient Student Loan Trust 2019-E; Oportun Funding II Series 2019-A

CLOs
Ares European CLO XII; GoldenTree Loan Management US CLO 5; HPS Loan Management 15-2019; Parallel 2019-1; Whitebox CLO I

CMBS
Bank 2019-BNK19

RMBS
Galton Funding Mortgage Trust 2019-2; Hawksmoor Mortgage Funding 2019-1; Light Trust 2019-1; RedZed Trust 2019-1

BWIC volume

Upcoming SCI event
Capital Relief Trades Seminar, 17 October, London

Capital Relief Trades

Dual-tranche deal finalised

Standard Chartered targets wide distribution

Standard Chartered has completed a dual-tranche capital relief trade that references an undisclosed US$2bn portfolio of corporate loans from the UK, Dubai, India and Africa. Dubbed Gongga CLO, the transaction is the bank’s second application of the dual-tranche technique (SCI 14 November 2018) and it is set to continue utilising a wide distribution strategy.   

The transaction is split between a US$120m junior mezzanine tranche (0.5% to 6.5%) and a US$70m senior mezzanine tranche (6.5% to 10%). The tranches amortise sequentially and the deal has a 1.4-year weighted average life and a 4.75-year replenishment period.

Appetite for both the junior and senior mezzanine tranches was healthy, although demand for the senior mezzanine tranche lacked depth relative to the junior because the market’s predominant hedge fund investors are less keen on it. The senior mezzanine typically pays 3%-4% on average, so it lacks the coupon and leverage benefits of the junior.

This latest transaction was widely distributed and the bank will adhere to the same approach for senior mezzanine CLNs. Indeed, Standard Chartered is targeting real money asset managers that are drawn to the risk-return profile of the senior mezzanine tranche.

The deal follows the execution of another corporate transaction by Standard Chartered in June. Dubbed Chakra 3, that deal references a disclosed portfolio of revolving credit facilities (RCFs) (SCI 21 June).

The transaction is another example of Standard Chartered’s return to risk transfer trades. The bank issued its first deals 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 13.5% at end-2Q19.

Stelios Papadopoulos

Capital Relief Trades

Landmark SRTs inked

BP Bari completes capital relief trades

Banca Popolare di Bari has completed two capital relief trades that reference respectively a €1.1bn Italian SME portfolio and a €1.8bn Italian residential mortgage portfolio. This is the first time that transactions have been carried out between an Italian standardised bank and a private investor.

The risk transfer trades were arranged by Banca IMI and they are funded first loss deals that reference predominantly southern Italian exposures.

Until last year, standardised banks needed a rating to determine their risk weights in securitisations, which can be less capital efficient. However, the revisions to the CRR that were enacted in January have rendered the deals more efficient by reducing the risk weights for the retained tranches.

Standardised banks have carried out transactions with the EIF using its mezzanine risk guarantees. This partly explains why a significant number of transactions have been with the fund and why the deals have often referenced SME portfolios. However, the lower risk weights of the new approach are expected to spur more transactions between standardised banks and private investors. 

The EIF has previously completed transactions with BP Bari. The last transaction was inked in August 2018 and included a number of features designed to address moral hazard (SCI 17 August 2018). Scope Ratings confirmed in March that the deal’s performance was in line with expectations (SCI 6 March).

Stelios Papadopoulos

Capital Relief Trades

COSME tapped

SME risk-sharing agreement signed

Italian national promotional bank Cassa Depositi e Prestiti (CDP) has tapped the EU's COSME loan guarantee facility that is managed by the EIF and backed by the European Fund for Strategic Investments, which provides first-loss guarantees. The agreement is expected to provide €3.75bn in counter-guarantees for Italy’s Guarantee Fund for SMEs, thereby facilitating up to €5.8bn of loans to domestic SMEs.

The initiative promotes the issuance of new loans to enterprises in almost any sector, for amounts up to €150,000 and with a maturity beyond 12 months. The aim is to target more than 65,000 SMEs over the next two years and activate new investments for an estimated overall amount of €8bn.

The agreement falls within the ‘Risk-sharing Platform for SMEs’ programme, structured by CDP together with the EIF, which is supported by the EFSI under the Investment Plan for Europe. Loans can be used to finance investment plans and/or working capital needs.

Italy's Guarantee Fund for SMEs - which is managed by Mediocredito Centrale on behalf of the Italian Ministry of Economic Development - is the major national aid instrument for enterprises and has a mission to support SME access to credit through direct guarantees to banks or counter-guarantees to Confidi. The guarantee can cover up to 80% of the loan and allows banks and Confidi to improve the financial conditions applied to borrowers in terms of loan amount, required collateral and interest rate levels.

“The initiative is part of a broader programme of actions that Mediocredito Centrale - through the development of specific partnerships - carries out to increase financial resources available to the Guarantee Fund, and then to increase the number of small and medium-sized enterprises that are helped through it, with consequent facilitation of access to credit. There is still significant room for growth in the use of public guarantees; therefore, it is always essential to find new opportunities for the Fund for SMEs,” says Mediocredito Centrale ceo Bernardo Mattarella.

Last year the fund approved around 130,000 guarantee applications submitted by more than 83,000 enterprises, which had access to ‘first demand’ guarantees on €19.3bn of new financing. As of end-June 2019, the fund had approved more than 939,000 guarantee applications in favour of around 380,000 enterprises – equating to an overall amount of €90.8bn in issued guarantees - since it began operations in 2000.

SMEs can apply for a loan through the Guarantee Fund via their own bank or Confidi, which will submit the application to the SME Fund on their behalf.

This is the second initiative launched in favour of the SME Guarantee Fund with the support of the COSME loan guarantee facility and together they represent the largest project ever accomplished with the support of the EU programme in a single country. Through the first guarantee initiative in favour of the Italian SME Guarantee Fund – which was launched by CDP in 2017 - over 47,000 SMEs received €4.1bn in new loans in slightly more than 18 months, originating new investments for an estimated amount of around €5.7bn.

Corinne Smith

RMBS

Crunching the numbers

'Anomalous' acquisition of mortgages 'made economic sense'

Arbuthnot Banking Group recently acquired two mortgage portfolios from the Raphael Mortgages and Magellan Funding 2 RMBS transactions, totalling approximately £266m. As well as being one of the first such transactions for the bank, the acquisition is also unusual in that such portfolios are typically snapped up by private equity firms and hedge funds, with challenger banks like Arbuthnot rarely getting a look-in.

Vivek Raja, equity research analyst at Shore Capital, one of the brokers on the deal for Arbuthnot, says that the bank acquired the loans, in part because UK mortgages are generally very solid investments, are well performing and have low rates of default. Likewise, private equity and hedge funds tend to pay a price that others like Arbuthnot can’t, in part because of this solid performance and the low default rates.

Challenger banks also don’t tend to buy up such portfolios because the economics usually don’t work. Raja comments: “The reason challenger banks haven’t been large buyers of mortgage portfolios is often they struggle to make a spread on comparatively low yielding and high quality mortgages given their funding costs are generally higher and, what is more, they aren’t able to obtain the same quantum of leverage the large banks enjoy given their capital treatment.”

Arbuthnot stands out, however, because it has a low cost of funding compared to its peers in part, says Raja, due to the legacy of its private bank, which provides a base of sticky and low-cost deposits and, more recently, its ability to obtain relatively cheap funding from SMEs. As such, he adds, due to its low cost of funding it can get the spread needed to make the acquisition make economic sense – other challengers might not get any spread on such a portfolio that yields 3.6%.

A natural next-step after acquiring a portfolio of mortgages might be securitisation, but Raja is doubtful. “Arbuthnot is unlikely to want to securitise this portfolio” he says, “as its imperative right now is to grow earnings which entails growing assets and probably keeping hold of them. Furthermore, Arbuthnot has ample funding headroom and access to low cost funding so securitisation is not likely to be a relevant consideration today.”

Other acquisitions may be on the horizon, however. Raja comments: “Arbuthnot is certainly very open minded about how it may grow its balance sheet and may be open to acquiring a range of other assets in future. The main thing is that the economics have to work and the ROE has to make sense.”

While this deal is a bit of an “anomaly” in terms of coming from a challenger bank, he does think that such firms could enter the space in future, should they lower their cost of funding. One trend that is easier to forecast, however, is whether private equity firms and hedge funds will continue to be active in the UK housing space.

Raja concludes: “The trend we’ve seen of these firms acquiring and securitising mortgage portfolios is certainly likely to continue. The UK mortgage market is in a strong position with low impairment rates and relatively good returns and it is especially worthwhile when these firms can get as much leverage on the portfolios as they do.”

Richard Budden

RMBS

Portuguese boost

RMBS tightens on call optionality

Portuguese RMBS outperformed other securitisation asset classes last week, boosted by the surprise call of the Lusitano Mortgages No. 2 transaction (SCI 22 July). The sector is expected to continue to perform strongly at tight levels.  

JPMorgan international securitisation analysts note that Portuguese RMBS was the clear outperformer last week, with ECB-eligible senior notes tightening by 3bp on an indicative basis to close the week at three-month Euribor plus 77bp - almost reaching their post-crisis tight of 76bp from 1Q18. “Lusitano 2 wasn’t expected to be redeemed, but it was and it had an impact on other Lusi deals. Previously, there was no call optionality assigned to the deconsolidated deals, but Lusi 2 being called means that similar deals are now trading with some optionality,” says a trader.

He continues: “Overall, it’s positive that a deconsolidated deal has been called. What has been described as call optionality has given a boost to prices.”

A shortage of high-quality collateral has been accompanied by strong demand for prime bonds, underpinned by the ECB’s activity in the primary market. The trader concludes: “We have seen a tightening trend in the last two months, but senior prime RMBS - including Portuguese deals - will continue performing well. German auto ABS and Dutch RMBS have also tightened and there is high demand for STS-eligible collateral, due to the associated liquidity and capital benefits.”

Stelios Papadopoulos

RMBS

Under pressure?

UK non-prime RMBS could be tested in the autumn

Attention in the UK RMBS market is turning to what might happen in September as the summer lull begins in earnest, with the new issue pipeline empty and only patchy secondary trading. In particular, focus is on non-prime sectors and the pressures they may come under.

The last few days of July saw some secondary activity both on and off BWIC, with demand for UK paper sufficient to keep spreads flat to recent tights. Primary is now shut for the summer, but expectations are for strong supply in September.

“I don’t expect UK RMBS spreads to move significantly in August, as activity has almost completely wound down. But everyone is now trying to figure out what will happen when it picks up again next month,” says one trader.

He adds: “Which way spreads will go then will depend on what’s going on in the broader market, as well as what the Bank of England is up to and, of course, where we are with Brexit.”

UK prime RMBS spreads are likely to be supported if the current broad-based demand for prime paper continues and the relative value it offers to European equivalents remains. Further, the trader argues the sector has the ability to defend itself.

“If UK product sells off in the autumn, the main prime issuers don’t really need to do anything – they are strong enough to cut supply. The niche prime issuers might have the need to do something and that could be tricky for them, but most will do their best to ride it out,” he says.

The trader continues: “Prime also benefits from no credit concerns, but for more challenging underlyings, that will creep in if the market gets difficult and put non-prime spreads under pressure. I’m primarily talking about non-conforming RMBS in this context – buy-to-let is always lumped in with non-conforming, unfairly in my view, as it has tended in the past to perform well under stress.”

There is, however, a broader issue to be considered, according to the trader. “My chief concern, and it has been one for a few years, is that there are a lot of new issuers in the non-prime space that didn’t got through the financial crisis and until they are really tested, we don’t really know how they’ll perform.”

Mark Pelham

Structured Finance

Winding up order issued for Clifden

Company hires and sector developments

Clifden wind up

A winding-up order has been issued by the High Court of Justice of the Isle of Man, Chancery Division in respect of Clifden IOM No.1 and PricewaterhouseCoopers has been appointed official receiver of the firm. The move follows a Part 8 claim issued by Clifden, naming RMAC No. 1 series 2006-NS1, 2006-NS2, 2006-NS3, 2006-NS4 and 2007-NS1 as defendents. The issuers and PwC have agreed to adjourn the hearing in respect of the claim, which was to be held on 19 July, until a date after 1 October.

Consumer ABS warehouse extended

Zip Co, an Australian non-bank lender, has extended its securitisation warehouse programme and offered existing Class B noteholders an option to exchange on a one-for-one basis into $60m of new Class B notes in the warehouse which also provides the option to refinance the facility through the rated securitisation market.  The extension of the program provides Zip with the flexibility to maintain growth and head towards its medium term goal of establishing a rated trust which will further diversify funding, provide headroom for growth and will lower its average cost of funds.

RFC on GSE patch

The CFPB has issued an advance notice of proposed rulemaking (ANPR) seeking information relating to the expiration of the temporary qualified mortgage provision applicable to mortgage loans eligible for purchase or guarantee by Fannie Mae and Freddie Mac (also known as the GSE patch), which is scheduled to expire on 10 January 2021. The ANPR states that the bureau plans to allow the GSE patch to expire in January 2021 (or after a short extension, if necessary, to facilitate a smooth and orderly transition away from the GSE patch) and it seeks comments on possible amendments to the ATR/QM rule, including whether to revise Regulation Z’s definition of a qualified mortgage and introduce an alternative method for assessing financial capacity. The CFPB says its aim is to facilitate a more transparent, level playing field that “ultimately benefits consumers through stronger consumer protection”. A bureau assessment of its ATR/QM rule found that GSE QM loans represent a “large and persistent” share of originations in the conforming mortgage market and that creditors generally offered a temporary GSE QM loan, even when a general QM loan could be originated. 

Structured Finance

Affordable loan credit insurance risk transfer closed

Sector developments and company hires

Affordable CIRT closed

Fannie Mae has executed a new credit insurance risk transfer (CIRT) transaction that, for the first time, covers a pool of primarily single-family affordable loans. These covered loans are delivered to Fannie Mae with a short-term lender repurchase obligation, provided primarily by state housing finance agencies, which serves as the initial loan credit enhancement. Dubbed CIRT LR FE 2019-1, the deal secures commitments from a panel of eight insurers and reinsurers to cover up to US$1.15bn in unpaid principal balance for loans to be acquired by Fannie Mae between July 2019 through June 2020. Additionally, it covers approximately US$600m in unpaid principal balance of loans previously acquired by the company between January 2018 through August 2018. All covered loans will be originated with fixed rate notes, original terms of 21 to 30 years and LTV ratios greater than 80% and less than or equal to 97%.

Co-portfolio manager named

Andrew Hsu has been named a co-portfolio manager of the US$53bn DoubleLine Total Return Bond Fund, alongside lead portfolio manager Jeffrey Gundlach and co-portfolio manager Philip Barach. Hsu has been a member of the DoubleLine investment team since the firm's inception and head of both the ABS and infrastructure investment teams. Prior to DoubleLine, he worked at TCW, focusing on credit analysis for structured product securities and co-managing two structured product funds. In addition, Gundlach and Sherman were appointed to the portfolio management team of the DoubleLine Low Duration Bond Fund, joining DoubleLine Capital president Barach.

Fallback adjustment vendor selected

The International Swaps and Derivatives Association, Inc. (ISDA) today announced that Bloomberg Index Services Limited (BISL) has been selected to calculate and publish adjustments related to fallbacks that ISDA intends to implement for certain interest rate benchmarks in its 2006 ISDA Definitions.

Bloomberg was chosen following an in-depth selection process, which began with a public invitation to tender published in February. The selection process was run by ISDA and included input from a selection committee with representation from buy- and sell-side market participants.

IOSCO releases LIBOR statement

The Board of the International Organization of Securities Commissions (IOSCO) has published a Statement on Communication and Outreach to Inform Relevant Stakeholders Regarding Benchmarks Transition. It seeks to inform relevant market participants of how an early transition to risk free rates (RFRs) can mitigate potential risks arising from the expected cessation of Libor. 

The key messages to take from the statement are: RFRs provide a robust alternative to IBORs and can be used in the majority of products In both new and existing IBOR contacts, the inclusion of robust fallbacks should be considered a priority, the best risk mitigation to a Libor cessation event is moving to RFRs now, it is prudent risk management for market participants to engage early in the Libor transition process in preparation for the cessation of Libor post-2021.

Middle market expert nabbed

Jessica Nels has joined Churchill Asset Management in the newly created role of principal in the capital markets and syndication team, based in Chicago. Nels will be responsible for middle market club transactions, syndication and lender relationship management, reporting to Randy Schwimmer, head of origination and capital markets. She brings over 15 years of experience in deal structuring, underwriting, originating, syndicating and managing cashflow transactions for private equity-backed middle market companies and was previously a director at Twin Brook Capital Partners. Prior to that, Nels held positions at BMO Healthcare Sponsor Finance and GE Antares Capital.

Structured Finance

CLO head hired

Sector developments and company hires

BUMF 6 injunctions granted

Final injunctions have been granted against Greencoat Investments (GIL) (including against its directors, which include Clifden IOM No.1, Rizwan Hussain, Rajnish Kalia and Alfred Oyekoya), Greencoat Holdings (GHL), Portfolio Logistics (PLL), Patrick Anthony FitzSimons, Maria Stoica and Oyekoya in connection with Business Mortgage Finance 6 (SCI 17 July). A court order has also declared that: neither GHL nor PLL has been validly or effectively appointed as an additional and/or separate trustee of the issuer; PLL has not been validly or effectively appointed as an agent of the note trustee; there is no obligation on the note trustee to declare that an EOD has taken place; none of the notes have become immediately due and repayable, nor has the floating charge crystallised under the terms of the deed of charge; neither FitzSimons nor Oyekoya has been validly or effectively appointed as receiver; BNY Mellon remains the sole note trustee and Sanne Group Secretaries (UK) remains the corporate administrator; Coral Suzanne Bidel, Marc Speight and Beejadhursingh Surnam remain the directors of the issuer; and Target Services remains the cash/bond administrator and special servicer. Further, all acts done by GHL or PLL et al are invalid and of no effect. The defendants, save for Stoica, have been ordered to pay the issuer's costs of the claim on the indemnity basis - to be assessed, if not agreed - and with an interim payment on account of those costs due within 14 days.

CLO head hired

Joel Bensoor has joined Mediobanca as head of loan and CLO trading, based in London. He was previously an investment executive, financial institutions debt and trade finance at CDC Group. Before that, he worked at Avery Row Capital, Deutsche Bank and Markit.

ILS appointments

Hisxcox has appointed Andrew Dolphin has director of underwriting, London, replacing Megan McConnell who is relocating to Manhattan to take on the role of chief underwriting officer for Hiscox USA. Doplhin's appointment is subject to board and regulatory approval. Since joining Hiscox in 2000, Dolphin has been a key part of the evolution of Hiscox Re & ILS from a syndicate focussed London-based business, to the multi-capital diverse product organisation it is today. In September 2018, Andrew was appointed coo for Hiscox Re & ILS and became a member of the executive team. Andrew will commence his new role in October and will continue to be based in London. Chris Lee has also been promoted to coo for Hiscox Re & ILS and will join the Hiscox Re & ILS Executive. Lee joined Hiscox in March 2019 as head of insight, where he was responsible for spearheading data and insights strategy. 

REIT execs charged with fraud

THe US SEC has charged Brixmor Property Group, a publicly-traded real estate investment trust, and four former senior executives with fraud in connection with a scheme to manipulate a key non-GAAP metric relied on by analysts and investors to evaluate the company's financial performance. Brixmor has agreed to settle the Commission's charges and pay a $7 million penalty. The SEC's complaint against the individuals, which was filed in the US District Court for the Southern District of New York, alleges that from the Q32013 to the 3Q2015, Brixmor ceo Michael Carroll, cfo Michael Pappagallo, cao Steven Splain and senior vp of accounting Michael Mortimer improperly adjusted Brixmor's same property net operating income in order to report quarterly numbers that hit the company’s publicly-issued growth targets. According to the complaint, certain of the defendants described their manipulation of the non-GAAP measure as "mak[ing] the sausage," using tactics such as selectively recognizing income from a "cookie jar" account, incorporating certain income that the company had represented was excluded, and improperly lowering the prior year's same property net operating income to give the appearance of stronger growth in the current year.

NPL disposals inked

Banca Monte dei Paschi di Siena has finalised the sale of non-performing exposures (NPEs) for about €455m to a subsidiary of Cerberus Capital Management. The agreement concerns the sale of unlikely-to-pay exposures owned by Banca MPS and MPS Capital Services and the portfolio mainly includes secured loans to corporate customers. The bank has also signed two agreements with Illimity Bank for the sale of almost €700m non-performing exposures. The first transaction concerns the sale without recourse of non-performing loans owned by Banca MPS and MPS Capital Services. The portfolio being sold has a value of over €240m and includes both secured and unsecured loans, originally backed by an ISMEA guarantee. The second transaction concerns the sale of unlikely-to-pay exposures owned by Banca MPS and MPS Capital Services. The portfolio being sold has a value of approximately €450m and mainly includes unsecured loans to corporate customers.

Summary judgment denied

Judge Jennifer Frisch of the Minnesota District Court, Second Judicial District, has denied Goldman Sachs’ motion for summary judgment on claims asserted by Kasowitz Benson Torres on behalf of its client, Astra Asset Management, seeking termination of the Abacus 2006-10 synthetic CDO (SCI 8 March). Astra Asset Management, an investor in Abacus, asserts that Goldman engaged in misconduct relating to the collateral that secured the notes issued by the CDO. On this motion, the court found that issues of fact exist as to whether Goldman received notice of the violations and cured the violations by repurchasing remaining ineligible securities years after it pooled them in the transaction, with the notes subsequently downgraded as a result. The court also declined to foreclose the availability of equitable remedies. The case is scheduled for trial in October. 

WAM consultation

The EBA has launched a public consultation on draft guidelines regarding the determination of the weighted average maturity (WAM) of the contractual payments due under a tranche, as per CRR Article 257(1) (a). The draft guidelines aim to ensure that the methodology applicable for the determination of the WAM for regulatory purposes is sufficiently harmonised in order to increase consistency and comparability in the own funds held by institutions, both for traditional and synthetic securitisations. The methodology should be clear to avoid arbitrage and to allow less sophisticated institutions to use SEC-ERBA when calculating the capital requirement of securitisation exposures. Comments are invited by 31 October and a public hearing will take place at the EBA premises on 3 September.