Contents

CLOs

New ventures

Asset manager building out structured credit strategies

BlueBay is expanding its structured finance and CLO investment strategies. As well as aiming to launch a US focused structured credit strategy this year, the firm is looking at the possibility of issuing a debut CLO in 2020.

In line with this expansion, BlueBay hired Sid Chhabra last year as partner and global head of structured credit and CLOs and, more recently, structured credit trader and investor, Alex Navin, as portfolio manager. As well as making senior level hires, the firm is moving existing staff – typically those involved in the leveraged loan space – into structured finance roles.

BlueBay now has three options for investors to obtain structured credit exposure, with the first being the multi asset credit strategy in which there is a structured credit segment which aims to provide 4-6% returns. This is followed by a structured credit UCITS which has more of a focus on investment grade tranches in CLOs and ABS and, finally, there is an opportunistic strategy which targets double-digit returns and invests in mezzanine and equity tranches of securitisations.

Additionally, the firm is now looking to launch an opportunistic strategy for US investors in 4Q19, which will take a slightly more opportunistic strategy toward structured credit with, like the current UK offering, hopeful double-digit returns. Chhabra comments that it aims to achieve this by looking at funding dislocations in the structured credit space, such as widening in certain mezzanine tranches of US and European CLOs.

He adds that the firm is also looking at the possibility of launching a BSL European CLO in 2020. This, he says, will be a public, rated vehicle and will utilise expertise of BlueBay’s existing large leveraged finance team.

In terms of CLO investments, Chhabra says his firm doesn’t have a preference with regard to geography, manager type or size and that middle market CLOs will probably be avoided for the time being. He does comment, however, that smaller managers can outperform larger ones, with one reason being that smaller managers might only have one focus, in CLOs.

He continues: “Larger managers might have a range of investment strategies. The benefit of larger managers can be more stable teams and platforms which can be particularly important when the new issue CLO market faces a period of declining volumes, as smaller managers may see pressure on revenues and challenges to hold on to key and experienced team members. On the whole though, we don’t have a preference in terms of manager one way or the others – we look at a range of criteria when analysing managers and securities”.

In terms of ABS, Chhabra says that while yields for European ABS are low on an absolute basis - as they don’t have Euribor floors - his firm is able to find attractive spots on a relative value basis, such as in mezz tranches, like in Italian ABS. He adds: “UK RMBS is certainly of interest; we added positions during January and we’ve rotated out of some UK RMBS positions recently. However, we definitely feel that opportunities could open up with Brexit related economic volatility, which could provide attractive entry points.”

He notes too that while there are “are certain technical reasons why European ABS may be more appealing to investors at the moment, I think it is too much of a blanket statement to say that the US ABS market should be avoided. For one, the European economy is showing a number of signs that it is slowing, highlighted by the most recent figures from Germany, while the US economy continues to be in a better shape versus the European economy.”

Within the US, he suggests that student loan ABS and subprime auto is an area they are less bullish about, due to inherent product risks. Opportunities are, however, open in non-QM RMBS seniors and aircraft ABS is also an area that “looks attractive”, adds Chhabra.

BlueBay has also incorporated an ESG focus at a credit analysis level and that, while BlueBay wouldn’t necessarily exclude certain companies or sectors, each investment is assessed beforehand. Should an investment score very low against these ESG measures, says Chhabra, it wouldn’t likely be included as part of the firm’s strategy.

Looking more generally at the sentiment toward structured credit, Chhabra is optimistic that it will see increasing interest, not just at BlueBay, but among the wider, investment community. He concludes: “More broadly we think that structured credit can still provide yield premium over corporate debt. As such, we think that investors, particularly in Europe, are underallocated in structured credit, but they will increase their focus on this sector in the coming months.”

Richard Budden

CLOs

Track record

Middle market origination processes scrutinised

A deteriorating credit environment is expected to prove challenging for new US middle market loan platforms, whose fee revenue may not be enough to support them through stressful periods. Against this backdrop, a manager’s track record, alignment of interest and competitive advantages should be among investors’ primary considerations.

David Heilbrunn, senior md and head of product development, capital raising and CLOs at Churchill Asset Management, notes that there has been an influx of money raised in the middle market loan space by new platforms that haven’t yet been tested. “If and when middle market borrowers start entering more stressful periods, significant resources will likely be necessary to optimise outcomes. Many platforms simply aren’t set up for this eventuality and fee revenue may not be enough to support them throughout difficult times,” he indicates.

As such, Mathew Linett, senior md and head of underwriting at Churchill Asset Management, recommends that an investor’s primary consideration should be a manager’s track record. “Questions they should ask include whether the team is long-tenured and invested, as well as whether it has performed through a cycle. Another area investors should scrutinise is how managers diversify their loan book across industries, sponsors and borrowers.”

Managers with competitive advantages should also be high on an investor’s wish-list. “Lending is a business. And, just like in any other business, operators with sustainable competitive advantages tend to generate premium returns,” notes David Golub, president of Golub Capital.

He continues: “Another piece of advice would be to pay close attention to alignment of interest. In our experience, good underwriting comes from investment teams with investor-aligned incentives - and the inverse is also true. Incentives that emphasise credit quality over volume and long-term performance over annual performance are key.”

Golub says that his firm’s strategy for this phase of the economic cycle involves much of what it has done for the past several years: staying highly selective on underwriting; investing at the top of the capital structure; partnering with strong private equity sponsors and resilient companies; seeking to avoid lending to businesses with significant cyclicality; and leaning on its competitive advantages.

Golub Capital’s investment process typically comprises four high-level phases: triage, evaluation, full due diligence and documentation. In the triage phase, the firm focuses on quickly identifying ‘fatal flaws’ and delivering prompt feedback to the sponsor.

In the evaluation phase, it fleshes out key risks and opportunities and develops a plan to assess these issues in more detail. The next phase - full due diligence - focuses on addressing the issues identified during evaluation and independently verifying key information through third-party due diligence.

Finally, the documentation phase focuses on ensuring the credit agreement has appropriate contractual protections. The whole process from initial triage to final documentation and closing typically takes about 2-4 months.

For Churchill Asset Management, there are three main stages describing how the firm thinks about credit. The first entails the initial screening of a prospective investment, which involves reviewing the material provided by the private equity sponsor.

“If the opportunity looks interesting, we’ll then put together a memorandum for our investment committee, outlining among other things the company’s creditworthiness based on its cashflow characteristics, performance through a cycle, competitive position and the associated industry dynamics,” Linett explains. “To the extent the committee is comfortable with the opportunity, the next step is to undertake full due diligence – speak directly with the private equity firm, analyse market studies, do our own research and run different modelling scenarios and so on. These findings will be presented to the investment committee and if there is unanimous agreement, we will further diligence the borrower and PE sponsor.”

When analysing a prospective borrower, Churchill typically takes into consideration their experience within the industry, quality of earnings, length of tenure and quality of management team. For a private equity sponsor, it is important to understand their adaptability, structure in terms of skin in the game, LTV (in other words, what percentage of the capital structure will Churchill be lending) and equity contribution. All of these diligence items are aggregated and used in determining the appropriate leverage to put on the credit and making sure Churchill is structuring an appropriate risk-adjusted return for its investors.

Heilbrunn says that a critical factor in the firm’s decision-making is whether or not the underlining management team has the ability to effectively operate through challenging market environments. “We want evidence that management is well-aligned and has the demonstrated ability to work through challenging situations when they arise.”

Although every situation is idiosyncratic, Linett suggests that from the initial screen, it takes around two weeks to sign off on an investment. However, he concedes that it may take much longer to gather all the information Churchill needs before the initial screen.

Golub notes that his firm focuses on lending to middle market companies with strong fundamentals, in resilient industries, backed by experienced, relationship-oriented private equity sponsors. “We like businesses that are highly important to their customers, have high barriers to entry in their core market and have owners and executives with expertise to run the business well and handle unexpected events. And we always look for businesses with what we call a ‘second way out’ - businesses with enough strategic value to potential acquirors in a distressed sale scenario to cover most or all of our loan.”

The firm primarily lends to US middle market companies in four areas where it believes it has a lot of expertise: software, healthcare, consumer and diversified industries. “We avoid companies and industries that we think are highly cyclical, seasonal or vulnerable to shocks from commodity or foreign exchange markets. For example, we typically don’t lend to companies in sectors like real estate, fashion, homebuilding, mining and energy,” Golub says.

Churchill also typically avoids lending to borrowers in industries reliant on commodities, as well as the heavy cyclicals, media, biotech and pharma sectors.

Both firms include affirmative and negative covenants in their loan agreements. These could comprise maintenance covenants stipulating total net leverage and key attachment points, a fixed charge covenant, restrictions on a borrower’s ability to make dividends and add additional indebtedness, as well as affirmative information covenants to ensure annual insurance certificates and monthly financial statements are provided.

“Covenants act as early warning systems that allow us to keep ahead of any issues and work them out consensually with the appropriate parties,” Linett notes.

Additionally, ongoing monitoring is a crucial element of both firms’ investment processes. For instance, Churchill utilises a customer surveillance report to assess trends.

“To the extent we have any questions about the results, we’ll organise a call; otherwise, we have quarterly meetings to address any situations before there is a permanent impairment. It’s an iterative process from close to loan repayment,” says Linett.

Heilbrunn adds: “Ongoing monitoring is critically important and enables us to get back around the table with the underlining borrower and private equity owner to address any issues before they become critical. Out of the 600-plus loans we have originated, around half of them have had amendments to address issues as they have arisen. With losses limited to 19 names out of over 600, the importance of careful monitoring and aggressive action if and when needed is clear.”

Golub Capital also seeks to detect issues early and work with the private equity sponsor to resolve them promptly. “Information is one critical element of our approach. Our borrowers generally deliver monthly management reporting packages, including financial statements and management discussion and analysis. We’ve made major investments in technology and infrastructure to help us aggregate and monitor all the information we receive from borrowers,” observes Golub.

Organisational ‘checks and balances’ are another critical element for Golub Capital. For example, the firm generally has two teams responsible for monitoring each borrower - the original deal team and an independent portfolio monitoring group that reports directly to Golub.

“We’ve found that this dual coverage structure helps us spot problems early,” he concludes.

Corinne Smith

Capital Relief Trades

Senior mezz eyed

CRT issuers target asset managers

Banks are targeting asset managers for the senior mezzanine tranches of dual-tranche capital relief trades, given that the market for the senior mezzanine remains less deep relative to that of the junior mezzanine tranche. Asset managers are drawn to the risk/return profile of the senior mezzanine, although their approach to capital relief trades will likely remain opportunistic going forward.  

The market for junior or junior mezzanine risk is deep, homogeneous, well understood and pays good returns of 8.5% for solid euro issuance and up to low double-digits for leveraged finance deals. According to Robert Bradbury, head of structuring and advisory at StormHarbour: “Banks have had no reason to attract investors anywhere else in the capital stack, except in a few SSA deals. An important question raised by the new regulations and the reduction in ‘cliff’ effects is how thick you want the protection to be. Compared to the previous framework, there are more choices in terms of where you put the tranches.”

He continues: “Thicker tranches may provide you with more options, but these depend on a host of factors - including potential losses over time, relative investor appetite for different parts of the capital structure and how long the bank wants the transaction to last.”

This creates possibilities for dual-tranche transactions, but few existing junior or junior mezzanine investors in this space are likely to be drawn to the more senior mezzanine on its own, given lower yields and smaller sizes and pipelines. Nevertheless, insurers have stepped in to fill the gap, since the pricing from their perspective can be attractive on a risk-adjusted basis (SCI 22 March). However, the complexity of the deals requires a lot of work on top of the small sizes and opportunity set.

The situation is further complicated by the current balance of power. Senior mezzanine investors aren’t able to pick terms, since junior investors - predominantly hedge funds - guarantee both size and a funded deal.

Consequently, banks have to prioritise the needs of junior investors on a range of issues, including eligibility criteria, call options and replenishment. Yet banks could attract more interest in the senior mezzanine tranche from the existing hedge fund base by slicing the senior mezzanine into even thinner tranches that offer higher returns or use leverage.

Bradbury observes: “In theory, you might do that, especially for larger transactions. In many cases, however, execution would be a key hurdle, since it would make the transactions more complex. If banks have large and successful existing programmes, they don’t want to complicate things further by dealing with multiple counterparties; they just want to get things done.”

Similarly, leverage would also be prohibitive. Juan Carlos Martorell, structurer and md at Mizuho, states: “Existing hedge fund investors can buy both the junior and senior mezzanine tranches - otherwise known as a unitranche - and use leverage to up the returns in repo SRT fashion.”

He continues: “However, not many use leverage, due to mandate limitations that prevent them from taking leverage on leverage. In repo SRTs, investors may have to post collateral for their repo trades when using leverage and investing in very thin mezzanine tranches with leverage can be volatile.”

Hence, issuers are now targeting real money asset managers to address the challenge (SCI 2 August). The latter tend to be sophisticated ABS buyers that invest in highly rated senior and mezzanine tranches and can see an opportunity in the relatively higher returns of synthetic securitisations.

One of these asset managers is insurer-owned M&G. The firm has already executed dual-tranche deals and has been further targeted by banks for future dual-tranche transactions.

James King, portfolio manager at M&G, notes: “The risk/return profile of the senior mezzanine tranche is often attractive. However, for the most part, CRTs are not comparable to public deals and this becomes more problematic with thinner tranches. Theoretically, the underlying loans might be the same if you compare it to public deals, but it might have different LTVs, bank underwriting capabilities and servicing track records.”

He continues: “Nevertheless, we are comfortable with that, given that it’s a small portion of what we do and we make sure that we know the bank we are dealing with. Furthermore, CRT structures have become more standardised and simpler over time.”   

Synthetic securitisations constitute a minority of M&G’s ABS investments, given the firm’s preference for more liquid exposures. Indeed, it has €25bn of AUM in ABS; King’s team manages €6bn, of which synthetic securitisations represent less than 3%.

The tranche sizes of dual-tranche CRTs are small compared to the cash that M&G needs to invest, but the firm is comfortable with the idea of devoting a portion of its cash to more illiquid, thinner tranches - preferably those referencing granular SME loans - provided that the bulk of the exposure remains with the more liquid structured credit investments. Similar to hedge funds, any further tranching of the senior mezzanine is prohibitive from M&G’s perspective.

King states: “Once you move away from senior triple-A, you are already more leveraged and we are not a fan of deals that are over-structured, so further slicing does not work for us. If tranches are too thin, then they are more volatile, since they absorb fewer losses.”

However, this doesn’t mean that the firm wouldn’t consider transactions with structural features that are non-vanilla and have become a more standardised feature of the market. King concludes: “It’s interesting that we have recently seen SRT deals in continental Europe with excess spread. This opens up the market to consumer risk where you need excess spread, otherwise the banks need to pay too high coupons on the tranches to absorb the higher expected losses. We are comfortable with the feature and are familiar with it from cash deals.”

Stelios Papadopoulos

ABS

Whole biz debut double

Early learning, pet supply franchises securitised

Two US whole business securitisations are marketing, representing debut transactions from both firms. The deals comprise the US$250m Primrose Funding 2019-1, from an early childcare education company and the second is a US$355m ABS dubbed PSP Funding 2019-1, from a company that provides pet supplies.

Primrose Funding 2019-1 comprises US$10m class A1 notes and US$265m class Bs, both provisionally rated triple-B by KBRA and PSP Funding 2019-1 comprises US$25m class A1 notes and US$330m class A2 notes, also both provisionally rated triple-B by KBRA.

Primrose Funding 2019-1 marks the first securitisation for Primrose, in which Primrose School Franchising Company and certain affiliates will contribute substantially all of their revenue-generating assets to the issuer. The transaction’s collateral comprises existing and future franchise and development agreements, curriculum and other franchise fees and securitisation intellectual property.

Primrose’s franchisee network provides early childhood education and childcare throughout the US, with 405 schools, across 29 states. In the year ending 30 June, 2019, the firm generated system-wide sales of approximately US$822m and operated an entirely franchised business model, with over 300 franchisees.

The firm was previously acquired by affiliates of Roark Capital, which is also acting as financial sponsor in this transaction. Roark has previous experience with franchise securitisations through its ownership of several other franchises, including Jimmy John’s and Massage Envy.

KBRA highlights that the transaction also benefits from several structural features, including cash flow sweeping event, rapid amortisation event, manager termination and event of default trigger. The rating agency adds that while Primrose’s school-level operations for franchisees are complex, its manager operations are less complex compared to other companies in the WBS sector, such as franchised restaurants.

PCS Funding 2019-1 is the first whole businesses securitisation from Pet Supplies Plus, which has 460 locations across the US, with annual system-wide sales of US$1bn. The transaction includes royalties from 241 franchise locations and 219 company-operated stores, located across 33 states.

KBRS notes that Pet Supplies Plus is the largest independent pet specialty retailers and largest pet franchise concept in the US by units. The rating agency adds that the ABS is supported by strong industry fundamentals, with the overall pet care industry having grown each year since 2000 with around 68% of all US households owning a pet.

It notes that the firm is modestly franchised, at 52%  which leads to higher operational complexity and a less stable stream of recurring cash flows. However, the firm’s franchisee base is diversified, says KBRA, with the average franshisee owning 2.5 stores and around 95% of PSP’s franchisees owning five stores.

The transaction is also supported by similar structural protections as other WBS transactions rated by KBRA including cash sweeping and rapid amortisation event as well as manager termination and event of default DSCR trigger. Both the Primrose and PSC securitisations feature Citibank as trustee and Barclays as sole structuring adviser.

Richard Budden

ABS

Branching out

UK marketplace lender brings US deal

Funding Circle Holdings is in the market with its first ABS collateralised by loans made to SMEs incorporated in the US. Dubbed Small Business Lending Trust 2019-A, the US$198.45m transaction is backed by 1,394 loans originated via the Funding Circle online lending platform, secured by a lien on the assets of each borrower and a personal guarantee.

In the US, Funding Circle offers fixed rate, fully amortising loans with original balances typically ranging from US$25,000-US$500,000 and original terms ranging from 6-60 months. Origination fees – which are deducted from the borrower’s total loan amount prior to disbursement - are charged to the borrower based on the borrower’s risk profile and loan term.

The average years in business of borrowers receiving loans through the Funding Circle platform in the US is approximately 11 years, with a minimum of two years. Generally, the primary purpose of the loans is for working capital, inventory and general business purposes.

Funding Circle originates loans in the US through multiple ‘whole’ loan channels and a ‘partial’ loan market. The latter are primarily funded by accredited investors and smaller institutions, while the former are primarily funded by institutional lenders.

The assets in this securitisation were funded through the whole loan channel and retained by Funding Circle.

The platform has historically facilitated loan applications in the US through ‘direct’ and ‘indirect’ channels. Direct channels refer to instances when a borrower contacts Funding Circle directly, while indirect channels consist of premium partners and a limited number of specialist commercial brokers.

Premium partners are select, strategic partners, include Lending Club, Intuit and Stripe. Lending Club’s partnership with Funding Circle, which was announced in April, involves Lending Club connecting all applicants for small business loans to Funding Circle.  

The specialist commercial brokers, meanwhile, introduce businesses on a revenue share arrangement. However, driven largely by weaker performance, Funding Circle has reduced its use of broker channels from more than 2,200 to below 20 since 4Q16.

The average collateral principal balance and weighted average contractual interest rate for loans in SBIZ 2019-A is US$130,288 and 13.1% respectively, with ranges of approximately US$12,000-US$500,000 and 5%-23% respectively. The weighted average remaining term is 48 months.

Although the weighted average seasoning of the collateral is approximately two months, KBRA notes that the pool is diverse among borrowers. The largest loan represents 0.34% of the transaction and the 10 largest loans collectively represent less than 3.5% of the transaction. There are 15 loans in the pool with a current balance of approximately US$500,000, representing approximately 5.5% of the transaction, each with a credit score of single-B or higher. 

The loans were funded by Funding Circle subsidiary FC Capital US, pursuant to an existing warehouse agreement. Prior to the closing date, FC Capital US will sell the loans back to FC Marketplace, pursuant to a sponsor transfer agreement.

Funding Circle will then transfer the loans to the depositor (FC Depositor US), which will sell and contribute all right, title and interest in the loans to the issuer in exchange for the notes. Pursuant to a grantor trust agreement, the issuer will then contribute the loans to Small Business Lending Grantor Trust 2019-A.

Provisionally rated by KBRA, the transaction comprises US$142.8m single-A minus rated class A notes, US$15.75m triple-B class Bs, US$18.9m double-B class Cs and US$21m single-B plus class D notes. The deal is arranged by Credit Suisse, which also acts as initial purchaser.

The platform employs a hybrid servicing strategy in the US, using Portfolio Financial Servicing Company (PFSC) as a sub-servicer. PFSC is responsible for payment processing, invoicing/statements, contract accounting and customer service, while the collections and recovery function of the servicer role is managed in-house by Funding Circle.

KBRA has previously rated two transactions collateralised by UK SME loans originated via the Funding Circle platform – Small Business Origination Loan Trust 2019-1 and 2018-1 (see SCI’s primary issuance database). The platform also originates loans in Germany and the Netherlands.

Corinne Smith

ABS

Venture ABS prepped

Horizon Technology Finance hits the market

Horizon Technology Finance is marketing an ABS backed by secured liens on non-investment grade performing loans made to growth stage companies in the technology, life sciences and healthcare sectors. Venture debt ABS is an emerging asset class, but is expected to remain constrained by the very nature of the market.

The assets in venture debt ABS are distinct from traditional CLO assets, given that the underlying companies are in their early growth stages, usually generate small earnings and feature at least one round of private equity financing. Furthermore, there are fewer participants than in the middle market and broadly syndicated loan market.

Rohit Bharill, head of ABS at Morningstar Credit Ratings, notes: “Industry diversity is usually more concentrated in venture debt ABS, with broad industry groups such as technology and life sciences most commonly represented. However, the individual subgroups within each industry add to the diversification.”

John Nagykery, CLO team lead at Morningstar, adds: “Leverage ratios tend to be lower, as seen in the Horizon Funding Trust 2019-1 transaction. This transaction’s eligible venture loans need to have an initial loan-to-value below 40% and minimum cash yields of 9%.”

He continues: “Another distinct feature of the collateral is an amortising debt profile, compared to the term debt of a CLO. This enables the deals to pay down faster, once they are out of their revolving periods, and reduces investors’ principal exposure in the event of elevated defaults.”

Nevertheless, the market will likely remain constrained. Nagykery notes: “Relative to broadly syndicated or middle market loan volumes, the future potential market size of venture debt will be limited by the very nature of companies it serves - in their early growth stages, with many performance hurdles to cross, rather than seasoned and performing.”

Provisionally rated by Morningstar, the Horizon transaction consists of US$100m single-A plus rated class A notes. A residual certificate will also be issued that will constitute an eligible horizontal interest for the purpose of satisfying the US risk-retention rules.

Credit enhancement consists of excess cashflow, overcollateralisation and the reserve account. Excess cashflow is anticipated because of the differential between the interest payable on the loans and the interest payable on the notes. Upon a rapid amortisation event, excess cashflow from interest collections is redirected to repay note principal.

The transaction also features a US$1.2m cash reserve account, funded at closing, which is available to pay transaction expenses and interest on the notes.

The initial portfolio is US$160m and consists of 61.3% first- and 38.7% second-lien loans across three sectors - life sciences (40.2%), technology (47.7%) and healthcare (12.1%). The initial portfolio will be composed of loans to 25 obligors.

Most assets are amortising, with only 1.9% of the initial collateral pool having a balloon payment at maturity.

Stelios Papadopoulos

Structured Finance

SCI Start the Week - 5 August

A review of securitisation activity over the past seven days

Market commentary
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.  

"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.

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."

SCI's latest podcast is now live

Stories of the week
Closer look
US CRE CLOs are booming, but caution is advised
Dual-tranche deal finalised
Standard Chartered targets wide distribution
Performance model revealed
Innovative approach highlights smaller manager outperformance
QM revisited
Private mortgage market to fill the void?

Other deal-related news

• 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 defendants (SCI 29 July).
• 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 (SCI 29 July).
• 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 (SCI 31 July).
• The International Swaps and Derivatives Association (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 (SCI 31 July).
• 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 (SCI 31 July).
• 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 (SCI 2 August).
• 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 (SCI 2 August).

Regulatory round-up

• 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 (SCI 29 July).
• 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 2 August).
• 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 (SCI 2 August).
• 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. 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 (SCI 2 August).

Data

Pricings
Deals that priced last week included:
ABS
Magnolia BTV 1; Marzio Finance 6-2019; Oaktown Re III; Upstart Securitization Trust 2019-2; Vantage Data Centers 2019-1
CLO
Anchorage Capital CLO 11 2019-11; Ares European CLO XII 2019-12; Ares XLI 2016-41 (refinancing); Bain Capital Credit CLO 2019-2; Barings Euro CLO 2019-1; Credit Advisors CLO 2017-1 (refinancing); Euro-Galaxy V CLO (refinancing); GoldenTree 2019-5; Golub Capital Partners CLO 43 2019-43; Hayfin Emerald CLO III 2019-3; Jamestown CLO IX 2016-9 (refinancing); Man GLG Euro CLO II 2016-2 (refinancing); OZLM XXIV CLO 2019-24; Parallel CLO 2019-1; Steele Creek CLO 2019-2; Trinitas CLO XI 2019-11; Venture 38 CLO 2019-38; Voya CLO 2016-2 (refinancing); ZAIS CLO 13
CMBS
JPMCC 2019-BOLT
CRE CLO
BDS 2019-FL4
RMBS
Angel Oak Mortgage Trust 2019-4; BPCE Home Loans FCT 2019-2; Connecticut Avenue Securities 2019-R05; Home Partners of America 2019-1; New Residential Mortgage Loan Trust 2019-RPL2; Station Place Securitization Trust 2019-WL1
WBS
SESAC Finance Series 2019-1

BWIC volume

Upcoming SCI event

Capital Relief Trades Seminar, 17 October, London

Capital Relief Trades

Risk transfer round-up - 9 August

CRT sector developments and deal news

BNP Paribas is rumoured to be prepping a corporate capital relief trade for 3Q19. The lender’s last risk transfer transaction closed last month. Dubbed AutoFlorence 1, the true sale deal is its first post-crisis Italian SRT (SCI 22 July).

The BNPP transaction follows rumours of another risk transfer trade from Societe Generale. The bank is believed to be readying an SME SRT that is expected to close in September.

NPLs

NPL disposals sealed

Two banks offload Italian loan portfolios

Two disposals of Italian non-performing and performing loans (NPLs) originated by Unicredit and ING have been sealed. The first transaction comprises a portfolio of unsecured SME NPLs while the second, from ING, comprises performing and non-performing real estate leasing positions.

ING’s disposal was valued at €1.6bn by gross book value, consists of 4,000 performing and non-performing real estate leasing positions. The transaction was supported by Banca Finint, with Goldman Sachs acting as the main investor.

Banca Finint notes that in addition to the assignment of credits to a securitisation vehicle, the structure of the transaction provides for the simultaneous demerger governed by the Dutch legislation on contracts and assets underlying a so-called LeaseCo, controlled by Securitisation Services. Additionally, the securities issued by the vehicle to finance the purchase of the portfolio were subscribed by a Goldman Sachs investment vehicle.

Banca Finint is a co-investor in the transaction and also acted as an advisor. The bank’s Securitisation Services branch is master servicer, corporate servicer and calculation agent on the transaction.

With regard to the €450m portfolio disposal from Unicredit, the bank sold a portion of the total portfolio to a securitisation vehicle managed by Illimity, valued at €240m by gross book value. The rest of the portfolio, at €210m of gross book value was sold to Guber.

Richard Budden

NPLs

JV agreed

Intesa readies UTP securitisation

Intesa San Paolo has reached an agreement with Prelios that involves the securitisation of a €3bn (GBV) corporate and SME unlikely-to-pay portfolio. The deal follows a similar NPL agreement with Intrum that was finalised last year and is part of a wider joint venture trend (SCI 14 December 2018).

The agreement consists of a 10-year contract for the servicing of an approximately €6.7bn portfolio (GBV) of corporate and SME UTP loans that is accompanied by a performance fee structure, aimed at maximising the amount of performing positions. The securitisation consists of a senior tranche that is equivalent to 70% of the portfolio, plus junior and mezzanine tranches that correspond to 30% of the portfolio.

Intesa Sanpaolo will underwrite the senior tranche and 5% of the junior and mezzanine tranches, while Prelios will invest in the remaining 95%. The transaction will enable the Italian lender to focus on the proactive credit management of an early delinquency loan portfolio using external platforms for the management of subsequent stages, while further accelerating the achievement of its NPL reduction target, as set out in its 2018-2021 business plan.

According to Massimo Famularo, board member at Frontis NPL: “It’s a further step in the process of NPL reduction and forms part of a wider strategy aimed at redeploying human resources to sub-performing claims, while using external partners for non-performing ones.”

He continues: “So far, the NPE reduction strategy has been conducted at no extraordinary cost to shareholders. It’s likely that securitisation has been selected to maximise the transfer price to the SPV and retain the opportunity of a potential future earn-out.”

The partnership model can address specific challenges pertaining to UTPs. Proper management of UTPs requires specific skills, since these exposures can become non-performing while cashflows can be collected over a longer time horizon. Since most UTP securitisations involve a large share of secured loans, applying a real estate approach in order to maximise future asset values makes sense (SCI 11 July).

Looking ahead, Famularo notes: “We will see more UTP securitisations, including some from a few mid-sized banks, and there is another notable one by SGA and Prelios that is pending. The idea is to transfer UTPs to a wider fund that will manage them as a portfolio. In this way, banks can trade their existing UTPs with shares in the fund. Banks will then be allowed to derecognise these exposures, since they won’t own a majority of shares.”

The deal is expected to close in November.     

Stelios Papadopoulos

Structured Finance

CLO partner appointed

Sector developments and company hires

CLO firm partner promotion

DFG Investment Advisers has promoted Timothy Milton to partner. Since joining the firm in 2014, Milton has been responsible for the management of the Vibrant Capital CLO platform in his capacity as co-portfolio manager. In addition, Eduardo Cabral has joined DFG’s credit research team as an md, having been a portfolio manager and senior analyst at long/short funds focused on fundamental investing across debt and equity since 2011. Roberta Goss, co-portfolio manager of the Vibrant CLO platform, has decided to leave the firm to join another credit platform.

Global trading head appointed

Sebastien Cottrell has assumed responsibility for securitised products trading globally, at Deutsche Bank. Cottrell has been with the bank for 10 years in a variety of roles, including correlation trading and most recently, head of US CLO trading.

Law firm makes handful of hires

Walker & Dunlop has added five debt and equity finance professionals in Houston, Texas: mds Mike Melody, Tom Melody, Tom Fish and Paul House, as well as svp Jonathan Paine. The group - which previously oversaw Jones Lang LaSalle's national capital markets finance platform - will be responsible for securing financing for owners and developers of all commercial real estate asset classes in Southwestern US. The addition of the team marks Walker & Dunlop's first office in Houston, which will
comprise a 10-person staff, with plans for continued expansion.
Ukranian disposals

First Financial Network has announced the offering of three pools of Ukrainian non-performing loans totaling US$1.35bn. The largest of the three pools, the $540 million IMEXBANK loan portfolio, includes the real estate-owned Chornomorets Stadium in Odessa.

Structured Finance

Alt credit co-head hired

Company hires and sector developments

Alt credit co-head nabbed

Ares has hired Joel Holsinger to its credit group as co-head of alternative credit, effective immediately. Holsinger will serve on the Ares management committee and work alongside Keith Ashton as co-head of alternative credit to expand the firm's global coverage of the US$4trn alternative credit sector. Ares' alternative credit strategy pursues asset-focused direct investments primarily in North America and Europe across a spectrum of specialty assets, real assets and financial assets. Holsinger was previously a partner with Fortress Investment Group.

BDC merger

OHA Investment Corp (OHAI) is set to merge with Portman Ridge Finance Corp (PTMN), a BDC managed by Sierra Crest Investment Management, an affiliate of BC Partners Advisors and LibreMax Capital. The transaction is the result of OHAI’s previously announced review of strategic alternatives and has been approved by a unanimous vote of the OHAI and PTMN boards. The combined company is expected to have total assets of approximately US$372m and a NAV of approximately US$181m. OHAI stockholders – which are expected to own approximately 16% of the combined company – will benefit from PTMN’s lower fee structure (1.50% management fee versus current management fee of 1.75% and 17.5% incentive fee versus current incentive fee of 20%) and should expect to realise net investment income, net asset value and distribution accretion within the first year following closing of the transaction. Under the terms of the proposed transaction, OHAI’s stockholders will receive value per share of approximately 108% of OHAI’s net asset value per share at the time of the closing of the transaction. As of 31 March 2019, OHAI’s net asset value was US$37.1m, or US$1.84 per share.

Investment chief retires

Bill Roth, vp and cio of Two Harbors Investment Corp, intends to retire on 31 December 2019 and will be succeeded by William Greenberg and Matthew Koeppen as vps and co-cios. Greenberg has been with Two Harbors since 2012 and most recently served as md, co-deputy cio, with primary responsibility for the investment and hedging strategy of the company’s MSR portfolio, as well as managing the investment securities portfolio. Prior to joining Two Harbors, he was an md at UBS, holding a variety of senior positions with responsibilities including managing the mortgage repurchase liability risk related to over US$100bn of RMBS and whole loans. Koeppen has been with Two Harbors since 2010 and was most recently md, co-deputy cio, with primary responsibility for the investment and hedging strategy of the company’s investment securities portfolio. Prior to joining Two Harbors, he held a variety of positions with Black River Asset Management, including md of business development.

Structured Finance

AM acquisition

Sector developments and company hires

Asset management acquisition

Assured Guaranty US Holdings is set to acquire all of the outstanding equity interests in BlueMountain Capital Management and its associated entities for approximately US$160m, subject to certain adjustments, as part of a strategic objective to diversify into fee-based revenue sources. The acquisition is expected to complete in 4Q19, subject to customary closing conditions. As part of the agreement, BlueMountain co-founder, ceo and cio Andrew Feldstein will join Assured Guaranty as cio and head of asset management, while retaining his current roles at BlueMountain. Assured Guaranty intends to allocate US$500m of its financial guaranty subsidiaries’ investment portfolios over a three-year period to be managed by the new asset management platform and expects it to form the basis for further development of a presence in the asset management sector. Additionally, the firm will contribute US$60m in working capital to BlueMountain at closing and intends to provide an additional US$30m of working capital within a year of closing. US$114.8m of the purchase price will be payable in cash, with the remainder payable, at Assured Guaranty’s election, in cash, its common shares, a one-year promissory note or in a combination of such assets. As part of that payment, Assured Guaranty expects to issue US$22.5m of its common shares to Feldstein.

IO suit

Briefs have been filed in connection with a lawsuit – brought by Silian Ventures – seeking to determine whether BNY Mellon, as trustee, should pay IO noteholders of Countrywide RMBS based on the mortgages' original rates or the rates that were modified to lower levels after the onset of the financial crisis. IO holders will receive greater interest distributions if the court decides in their favour. Changes to the trustee's cashflow calculations would affect 278 legacy transactions, according to Moody’s.