News Analysis
Structured Finance
STS mirage
"Still no level playing field" despite regulation
Despite the high bar that issuers must clear to achieve the STS designation on securitisations, the deals continue to have unfair levels of capital treatment compared with other investment products, even backed by the same underlying collateral. A lack of incentive to invest in securitisation - even STS deals – therefore continues to remain, but the task of addressing this issue is ultimately a political one and so not likely to be amended soon.
Bank of America Merrill Lynch structured finance analysts recently criticised STS in terms of the impact it has so far had on the securitisation market in Europe. The analysts comment that the concept that regulation, in this case STS, has “levelled the playing field across different exposures…is a mirage, unlikely to be reached.”
The structured finance analysts add that, under Solvency II, there remains a large discrepancy in the capital treatment of, for example, a 25-year residential mortgage pool with capital charges of only 3% and a five year RMBS with capital charges of 5% at triple A, increasing down the capital stack. This only becomes more pronounced without STS, they say, and note that a five year triple-A RMBS without STS would be subject to 62.5% capital charges.
The analysts also highlight that, under Solvency II, there is no recognition of the protection provided to a senior tranche in a securitisation in the form of credit enhancement, compared to holding the pool directly. As such, under Solvency II, holding asset portfolios - be they corporate loans or residential mortgages - is actually more beneficial than holding a senior tranche in a securitisation of the same portfolio.
Ian Bell, head of the PCS Secretariat, says he agrees with BAML’s broad conclusion that it is still not a level playing field and adds that this is, in part, because there remains “a non-holistic approach across capital requirements and asset classes, with incredibly complex and poorly conceived regulations.”
He continues: “Much of the issues aren’t a conscious decision, but some of it is politically driven, largely around capital treatment, due to the stigma surrounding securitisation after the financial crisis. Either way it is a situation that needs to be fixed.”
Politics, he says, is a big factor in how the regulation has been developed and that this is embodied in CRR where there is, for example, no capital requirement to invest in European sovereign bonds, despite investors taking a 75% write off in Greek bonds after the crisis. Similarly, the capital charges are still lower to invest in SMEs than they are to invest in RMBS which, “for better or worse, is a political decision”, he says.
As a result, while Bell notes that the main action that can boost the ABS sector in Europe would be to address the imbalance in capital charges enshrined by CRR and Solvency II, this will only be resolved through political, rather than regulatory, action. He adds that “the process is long and slow – however, the STS regulation does have a review at the two year point and so this would be a good opportunity to press for reform.”
Bell does not agree entirely with BAML, however, in that he says the bank has “an implicit view that certain asset classes should receive equal capital treatment, be they STS or not, based purely on past credit performance.” He adds that, although European RMBS didn’t see any losses as was seen in the financial crisis in the US, that isn’t to say it couldn’t have happened in Europe.
Similarly, he doesn’t think capital treatment should be solely derived from past credit performance and that triple-A RMBS should, therefore, necessarily get the same capital treatment, with or without STS. Bell agrees with BAML’s analysts, however, in that steps still need to be taken to boost the ABS market in terms of CRR, LCR and Solvency II, which currently do not reflect the value of STS and its gold standard status.
On acquiring the STS label, he adds: “It is an enormously complex and arduous process with a huge amount of necessary work and information required. Basically, the rules set an incredibly high bar to clear but rewards those who do with a chocolate medal in terms of capital treatment – it doesn’t add up.”
While STS does stand for simple, transparent and standardised, there are currently private transactions listed on ESMA’s STS registry, with no corresponding details at all on the deals themselves. Bell, says, however that STS wasn’t designed to boost transparency: “It was designed to boost the structural quality of securitisation. The transparency requirements in the regulation are not just for STS. They are the same for all securitisations under Article 7. One of the main things that the EU wanted to improve though have been addressed by STS.”
He continues: “In that regard it works. What STS does is ensures that the risks involved in investing are simple, visible and capable of being accurately weighed. It does not seek to reduce credit risk but to make sure that such risk is appreciated at its true value. In my opinion, STS goes a long way to achieve this.”
At the moment, the only deals listed are ABS and RMBS, with the label not open to CMBS although Bell says that a CLO can be STS-eligible, provided it isn’t managed. “In a managed CLO", he says, "you are investing in the skill of the manager. That is fine, but it is not a simple asset-backed deal since, at any point the investor will not know what his assets are tomorrow. “"
In this regard there is already a clear split between STS and non-STS securitisations, but this is not necessarily a negative. “I don’t think bifurcation between STS and non-STS is a bad or a good thing – it is an unavoidable and necessary thing” says Bell. “In fact,” he continues, “the STS regime leads to bifurcation by design. The whole point of STS is to have a higher tier if you like, that some securitisations meet, while excluding others. I note that…pretty much all the securitisations that could meet STS in Europe so far have attained the label.”
In terms of the success of STS, Bell concludes that it is too soon to tell: “I don’t think it has opened the floodgates so to speak, but it certainly has seen good take up aside from the three month hiatus at the start of the year. European issuance looks like it might equal last year’s but the thing you have to remember, is that the main driver of ABS issuance in Europe is ultimately central bank policy. If the Bank of England or ECB continue to hand out free money to banks, they will take it and the incentive to securitise is massively reduced.”
Richard Budden
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News Analysis
Structured Finance
Tweaking tradition
Dutch securitisation evolving across established sectors
The Dutch securitisation market is seeing innovation and growth away from its traditional strong focus on prime RMBS. This trend is evolutionary rather than revolutionary, as participants seek to build on the sector’s well-established foundations.
Some asset classes are simply returning to life, notably CMBS. “CMBS has been picking up since last year and the two big issuers, Goldman Sachs and Morgan Stanley, have been back in the market with new Kanaal and ELoC deals,” says Thomas Wilson, director securitisation & covered bonds at Rabobank.
ABS deals remain few and far between, however. Wilson reports: “Auto activity remains light, with our two major players - Athlon and LeasePlan - the only issuers. However, we’re seeing consolidation below them at the regional level, which could bring new issuers to market.”
Consumer ABS is even quieter, according to Wilson. “The sector is very small, but with the recent introduction of LTV caps on mortgages, we could see a partial shift away from residential lending platforms to consumer ABS.”
Egbert Bronsema, portfolio manager at Aegon Asset Management, highlights the success of Aurorus 2016 and 2017. “The demand for these unsecured consumer loan issues from Chenavari-owned Qander show the potential for the sector,” he says.
Bronsema also sees potential in the SME sector, but fruition appears to be further away in its case. “SME lending is happening, but we are not seeing any securitisation deals. Pre-crisis it wasn’t a large sector, with just a couple of Dutch synthetic SME deals placed publicly. Currently, there is nothing in the pipeline, synthetic or otherwise, as far as I’m aware.”
Post-crisis synthetics have been in the capital relief trade space instead. Wilson says: “We at Rabobank have done a couple of regulatory-driven synthetic securitisations, but I don’t see any other issues of this type in the last few years. However, I understand quite a few institutions are now looking at capital relief trades in light of Basel 4 to see whether they now make economic sense to them, either as synthetic deals or full cap stack issues. Portfolios that are particularly influenced include mortgages, corporate portfolios and trade finance books.”
Inevitably, innovation in the Netherlands is primarily being seen within the most traditional space. “For example, the green securitisations, such as the Green STORM 2019 deal, are examples of product innovation within RMBS and adds to the variety of ABS investment opportunities,” says Wilson.
Bronsema notes that innovation in RMBS has come in part with the arrival of buy-to-let (BTL) mortgages to the Netherlands. “There are two new issuers. Dominvest is a new platform and RNHB had never issued before 2017. The former is very much for pure BTL and the latter utilises mixed loans – both small balance commercial and BTL for professional landlords – but both add to the diversification of the RMBS market.”
Wilson adds: “The arrival of the BTL platforms is a result of the significant growth in the amount of private investment in residential property in the Netherlands in recent years. So, I expect more of this kind of issuance to come in the future.”
Equally, expectations are high for further securitisation of portfolios of Dutch loans that have been created or traded in recent years, Bronsema suggests. “For example, some new originators have entered the Dutch market looking to securitise, such as Tulp Hypotheken and Elan.”
Overall, Bronsema says: “The broader story is that less mainstream issuers are getting involved in Dutch RMBS and most are doing it for arbitrage rather than funding purposes. Now, as prime spreads get ever tighter, differentiation between issuers and between the pure funding deals and arb deals is clearly visible – consequently, there are opportunities to take advantage of that price tiering.”
Mark Pelham
News Analysis
CMBS
Balancing act
European CMBS learning from US CRE structures
European CMBS are increasingly likely to continue following patterns set by their US counterparts and the market could even soon see it first CRE CLOs. However, in taking their lead from across the Atlantic, European issuers will need to find the right balance.
A report from Cadwalader, Wickersham & Taft (CWT) explains that while both jurisdictions are seeing sustained growth in CMBS, the European and US markets are not always directly comparable. “European CMBS is secured by properties in various jurisdictions and, therefore, the legal frameworks and requirements, in addition to the associated risks, may vary from transaction to transaction,” it notes.
However, the report continues: “The size and consistency of the US market and the presence of significant loan sponsors (which often have growing European operations) mean that developments in US CMBS will have a strong influence on structural features that are incorporated into European CMBS. In addition, the growth of commercial mortgage direct lending and loan-on-loan finance in Europe (which will require additional sources of take-out financings) are strong indicators of the development of a CRE CLO market in Europe.”
Sabah Nawaz, a special counsel in CWT’s London office, confirms: “We are seeing continued interest from clients on both sides of the Atlantic in relation to the structuring of European CMBS and US CMBS. In addition, the activity levels of loan-on-loan financing in Europe are attracting attention from European clients as to how CRE CLOs are structured in the US as a means of refinancing loan-on-loan transactions.”
The report goes on to set out a series of trends in commercial real estate securitisation and compares them across European CMBS, US CMBS and US CRE CLOs. The topics addressed are: application of principal and interest; financial covenants; liquidity; notes; permitted change of control; prepayment fees; property releases; reporting; transaction structure; and valuations.
Overall, the report concludes that it is inevitable that there will be a gradual tendency towards further US transaction features being implemented in European transactions. “This is significantly driven by US loan sponsors, which require financial covenants applicable to the loan sponsor group to be the same in their US and European financings. However, there will be investor resistance to certain US transaction features that are sought to be introduced to the European market, e.g., where an even more permissive regime is sought in respect of financial covenants than previously seen.”
CWT continues: “There has to be a balancing exercise in the European market, where a combination of factors such as unusual or untested assets or assets that are perceived to present more risk also affect investor demand. Related to this, the approach to structuring European CMBS will continue to differ from the US market where a European transaction comprises a number of jurisdictions or unusual underlying assets, which may require bespoke features to be incorporated that cannot be carried across into other transactions. Notwithstanding this, there are still features in US CMBS which could be usefully incorporated in European CMBS to the advantage of European investors, e.g., deemed valuations.”
Mark Pelham
News Analysis
Structured Finance
Brexit impact gauged
UK ABS expected to withstand no-deal
A no-deal Brexit scenario isn’t expected to significantly affect the economics of UK ABS transactions. However, Brexit raises challenges by splitting UK and EU regulation.
One risk to ABS investors from a no-deal Brexit is the potential for a recession or a sharp downturn in the UK economy, and whether this would be severe enough to prevent a meaningful number of consumers making payments on mortgages and other loans. However, it would take a severe and lengthy deterioration in economic conditions for a typical UK ABS transaction to begin taking credit losses.
A case in point is the triple-B rated Finsbury Square 2019-1 class D RMBS bond, which has a 6% loss cushion provided by junior bonds and a cash reserve, as well as excess profit of 1.5% per annum that would be diverted to cover losses. Consequently, total losses over a three-year period would need to be greater than 10% of the pool. The worst case historical experience is 0.1% of losses per annum.
According to a recent TwentyFour Asset Management client memo: “To get 10% of losses would require more than 10% of defaults/repossessions every year and a loss severity on each loan of 35%. Bear in mind with loss severity, that these mortgages have an average LTV of 73%, so there is an additional 27% of homeowner’s equity that would take the hit before the loan suffers a loss.”
Nevertheless, confidence in credit risk does not necessarily eliminate the potential for short-term pricing volatility, albeit European ABS markets typically exhibit lower volatility than more mainstream alternatives. For instance, in response to the 2016 EU referendum, UK investment grade corporate bonds saw spread widening of 29bp and UK high yield corporates widened 106bp, whereas triple-A and triple-B UK RMBS widened 22bp and 25bp respectively.
However, this still leaves open the question of liquidity. One of the biggest risks to liquidity in any asset class is a sudden reduction in its overall investor base.
Nevertheless, TwentyFour AM believes that in the case of UK ABS, a capital exodus would be unlikely as the investor base contains a large component of domestic buyers, supplemented by big overseas accounts from the US, Asia and to a limited extent Europe. Additionally, the vast majority of senior European ABS tranches are eligible collateral for central banks and are therefore expected to remain liquid. Furthermore, BWIC trading increases during periods of volatility.
Consequently, the focus of the concerns around Brexit pertain more to regulatory challenges rather than the economics. According to Kevin Ingram, partner at Clifford Chance: “Brexit leads to a splitting of UK and EU regulation in a way that creates parallel systems that don’t necessarily recognise each other and this is the biggest challenge.”
Similarly, Andrew Mulley, head of issuer services at Citi, notes: “The securitisation market is currently managing the implementation of the STS regulation, which includes technical standards that are likely to be published after 31 October. Market participants want to understand whether or not there will be any divergence in the regulation.”
He continues: “Technical standards, for example, are expected to include additional asset-level data, which could require servicing system changes. This means that deals issued after 1 January 2019 will have to be re-modelled.”
One solution is so-called ‘equivalence’, but European policymakers appear to be unwilling to engage on the issue at the moment given the political uncertainty.
Andrew Bryan, knowledge director at Clifford Chance, notes: “It’s something that’s been left for a transition period and we should bear in mind that it’s not a single thing; there are dozens of regimes under which the UK would need to get equivalence and at the moment it would have to apply on a regime-by-regime basis. It’s also a poor basis for long-term business planning, since many equivalence determinations can be revoked unilaterally by the European Commission in as little as 30 days' notice.”
Nevertheless, preparations have been made on the UK side with legislation that incorporates current EU law into UK law. The UK has also introduced a temporary permissions regime that allows EU27 institutions to carry on operating in the UK for up to three years. Equally, UK banks have been setting up entities in the EU that would allow them to continue with their activities across the continent.
Stelios Papadopoulos
News
ABS
Consent challenges
Transactions losing value without Libor fallback language
Investors are working with an asset registry and communication platform to obtain noteholder consent in order to insert Libor fallback language in certain securitisations, ahead of the 2021 deadline. This is driven by concerns that transactions without fallback language are losing value compared to newer deals with the necessary language to transition to a new reference rate.
DealVector has been mandated by investors to try and get support for an amendment to include Libor fallback language for the Navient securitisations, SLCLT 2007-1 and CEDLT 2007-A prior to 2021. The firm has experience in this field having worked to obtain noteholder consent on US$30bn of Navient and Nelnet bonds with regard to the legal final maturity issue in 2016-2017.
Jim Kranz, vice president, business development at DealVector, says that the task involves working on six tranches and the firm has obtained 100% consent on three so far, but is confident on the outlook for the other three. He says: “With regard to the Navient transactions, we were approached by an investor, which is concerned that those deals may lose value if not amended to include LIBOR fallback language. In fact the investor said that new issue student loan ABS with fallback language included is trading 5bp tighter.”
Additionally, Kranz says that his firm has been mandated for other deals: “We also have a mandate to include Libor fallback language in a series of TruPS CDOs. This is a much bigger task as the collateral issued by the banks also needs to be amended. Thus we will be contacting the banks to get consent from them and then shepherd the consents through the Trustee DTC system to gain the bondholders’ consent. It is a big challenge and probably more time consuming than student loan ABS.”
With regard to whether the 2021 deadline is likely to be met for all securitisations, Dave Jefferds, co-founder and ceo at DealVector, thinks that, as a result of the complexity in ABS, many deals will have difficulty meeting the deadline. He adds that those with the most difficulty are the older vintages issued before the Libor scandal that haven’t got fallback language built in, or don’t have the ability to easily refinance before 2021.
He adds that CLOs are “are a bit of a different animal because, post-Volcker, many have already adopted refinance mechanisms that may make it easier to adopt necessary fallback language. This should ease the transition for CLOs, to an extent.”
He says, too, that the amendment process is generally harder for ABS than certain vanilla asset classes “like corporate bonds, because the trust often has to get approval from the entire capital structure all in one go. So senior, mezz, and junior investors all must get on the same page, and this may complicate the process. "
Kranz points out that not just investors, but issuers too, can come to the firm for assistance and that it has the systems and processes in place to alert custodians as soon as consent is “on the way” and to highlight relevant information needed to set up the consent. Additionally, Kranz says the firm has tabulation tools to ensure all consents are accounted for and “do not get lost in the process.”
In terms of whether the transition to a new reference rate will continue to be investor led, Kranz thinks so, although it might differ depending on the asset class. He concludes: “Student loan issuers have been proactive to date, thus the SLABS sector could be an easier one to solve - the community is a bit more tightknit and successfully navigated the legal final maturity issue. We have a huge database of SLABS investors and can therefore get in touch with the bondholders to gain necessary consent for insertion of Libor fallback language.”
The current investor lead mandate for SLCLT 2007-1 and CEDLT 2007-A can be found at my.dealvector.com/ilink/Libor_Fallback while a generic Libor legacy registration hub can be found at www.liborhub.com.
Richard Budden
News
Structured Finance
SCI Start the Week - 12 August
A review of securitisation activity over the past seven days
SCI CRT awards
Don't miss out on your chance to win: the submissions deadline for the inaugural SCI Capital Relief Trades Awards is Friday (16 August). The aim of the awards is to recognise excellence in, and help bring mainstream attention to, the risk transfer industry. The winners will be announced at the SCI Capital Relief Trades Seminar on 17 October. Further information and details of how to pitch can be found here.
Transaction of the week
Venture ABS prepped (SCI 9 August)
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.
Stories of the week
Keeping it private
Public European middle market CLOs are struggling, but private deals are booming
New ventures
Asset manager building out structured credit strategies
Senior mezz eyed
CRT issuers target asset managers
Track record
Middle market origination processes scrutinised
Other deal-related news
- 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 (SCI 6 August)
- First Financial Network has announced the offering of three pools of Ukrainian non-performing loans totalling US$1.35bn (SCI 6 August)
- 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 (SCI 7 August)
- 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 (SCI 8 August)
- 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. This could affect 278 legacy transactions, according to Moody's (SCI 9 August)
Data
Pricings
Deals that priced last week included:
ABS
Barclays Dryrock Issuance Trust Series 2019-1; CarNow Auto Receivables Trust 2019-1; Chesapeake Funding II 2019-2; ECMC Group Student Loan Trust 2019-1; GLS Auto Receivables 2019-3; GM Financial Automobile Leasing Trust 2019-3; Hilton Grand Vacations Trust 2019-A; Hyundai Auto Lease Securitization Trust 2019-B; Rongteng 2019-2; SoFi Professional Loan Program 2019-C; Toyota Auto Receivables 2019-C
CLO
2019 Popolare Bari SME; Aurium I Reset; CIFC 2019-V; Crown Point CLO 8; Dunedin Park CLO 2019-1; Garrison MML CLO 2019-1; Octagon Investment Partners 43 CLO 2019-4; OZLME CLO 2016-1 (refinancing); Peaks CLO 2017-2 (refinancing); Madison Park Funding XXIV (refinancing); TICP CLO XIV
CMBS
Citigroup Commercial Mortgage Trust 2019-GC41
RMBS
Verus Securitization Trust 2019-3
BWIC volume
Upcoming SCI event
Capital Relief Trades Seminar, 17 October, London
News
Capital Relief Trades
Risk transfer round-up - 16 August
CRT sector developments and deal news
UBI Banca is rumoured to be prepping an SME and corporate SRT for 3Q19. The alleged transaction is riding a wave of Italian SRT issuance that includes a number of standardised banks.
Banca Popolare di Bari completed the first SRTs between a standardised bank and a private investor last month (SCI 2 August). Banca Popolare dell'Alto Adige and Monte dei Paschi di Siena are also expected to complete their own risk transfer trades in 4Q19.
News
CLOs
Insurer markets CFO
Transaction backed by 'highly diverse' PE portfolio
Nassau Alternative Investments is marketing a collateralised fund obligation (CFO) comprising private equity (PE) fund commitments acquired by Nassau Life Insurance Company (NNY). The, largely static, transaction is dubbed Nassau 2019 CFO, and is backed by interests in a diversified pool totalling around US$375.7m in NAV of funded commitments and US$79.3m in unfunded capital commitments.
Fitch comments that the CFO portfolio is the most diversified the agency has rated and comprises 109, mainly US, funds managed by 69 fund managers, with 1,273 underlying investments, spread across strategy, vintage, managers, funds and underlying holdings. The agency adds that the portfolio diversification is counterbalanced by a focus on funds run by smaller and mid-sized managers and a higher allocation to third and fourth-quartile funds relative to other private equity CFO portfolios.
Two investments in the portfolio are side vehicles, where NNY owned the underlying holdings directly and made commitments to Kayne Anderson and ICG Fund Advisors to invest directly in loan participation, warrants and equity alongside these managers mezzanine debt funds. Fitch adds that all underlying holdings in the side vehicles are identical to those in the actual funds and represent similar exposures to investments in the actual funds.
Fitch has assigned expected ratings of single-A plus (three-month Libor plus 225bp) on the liquidity loan facility, which is not drawn at launch but as an initial commitment of US$30m, single-A on the US$187.8m class A notes and double-B on the US$75.2m class Bs. There are also US$112.7m in equity notes.
Fitch adds that the transaction comprises a higher balance of debt funds than some previous PE CFOs rated by the firm, which may provide more steady cash flows relative to buyout funds. The agency suggests that this may reduce the need to draw on contingent liquidity available to the PEF CFO in a downturn.
The CFO is expected to be structured as a special-purpose entity, which will be the sole equity holder of AssetCo. The net cash received by the issuer via the issuance of the class A and B notes will be used to purchase 100% shareholding interests in AssetCo.
Additionally, AssetCo will hold the fund investments as the limited partner (LP) for each of the underlying interests, except with respect to investments held in side vehicles. AssetCo will then transfer cash distributions received from the fund investments to the issuer which will apply the distributions quarterly.
Furthermore, Fitch notes that as PE fund distributions can be uncertain, the transaction has structural protections to help the rated notes weather negative market cycles. For example, the class A and B notes are scheduled to begin amortising around two years and nine months after the CFO closes, but feature a long legal maturity of 15 years, which could be helpful weathering a downturn.
Additionally, the liquidity loan facility helps to cover operating expenses, interest on class A notes and capital calls if cash flow is insufficient, further helping to mitigate volatility in the PE market.
rb@structuredcreditinvestor.com
News
NPLs
Pricing tension
Houlihan Lokey model leveraged in shipping deal
Nord LB completed a landmark €2.6bn shipping non-performing loan deal with Cerberus in April that utilised Houlihan Lokey’s proprietary pricing model. The model aids pricing tension and helps keep traditional distressed investors disciplined.
According to Zam Khan, md at Houlihan Lokey: “We included lower cost of capital end-investors - such as sovereign wealth funds - from the start, which aids pricing tension and helps keep more traditional distressed investors disciplined. Nevertheless, the issue is figuring out the underlying value, and we developed a framework and models that mapped out where the asset class is in the cycle compared to simply observing precedent market values.”
Houlihan Lokey served as the exclusive financial advisor to Nord LB. The transaction was carried out by Houlihan Lokey's financial institutions group in Europe and, in particular, the firm's strategic portfolio and capital advisory team for European banks. The firm leveraged its expertise in the shipping loan sector, where it developed proprietary pricing models and critical market intelligence - including investor appetite for various forms of risk.
Houlihan Lokey utilised a multi-step process, involving a variety of capital sources - including alternative investors, sovereign wealth funds and financial institutions - in order to match risk profile with risk appetite, as well as achieve an optimal price and capital outcome.
Nord LB is in the midst of a multi-year transformation process with the aim of repositioning the bank and it entails the removal of large NPL exposures from its balance sheet. This transaction reduced Nord LB's overall NPL portfolio by more than a third from €7.5bn to €4.9bn and represents one of the largest global private shipping loan portfolio transactions by gross book value in the past decade.
The shipping market has undergone challenges, but investors are increasingly drawn to the asset class, given the ECB’s provisioning push (SCI 1 February). Khan notes: “Investors such as Cerberus can bring operational expertise, which adds value. Furthermore, their funds are typically locked up for five to seven years, so it’s more compelling for them to work out the portfolio.”
Thomas Chambers, vp at Houlihan Lokey, concludes: “Shipping loans - as opposed to other asset classes - have mobile collateral; in effect, allowing you to invest anywhere in the world. Furthermore, banks are under pressure to sell, due to regulatory scrutiny and the upcoming Basel 4 regime.”
Stelios Papadopoulos
News
RMBS
Higher yields?
Bluestone debuts UK RMBS
Bluestone Mortgages is in the market with its first UK RMBS. Dubbed Genesis Mortgage Funding 2019-1, the transaction is backed by a £198.05m portfolio of owner-occupied (comprising 80.8% of the pool) and buy-to-let loans secured by first-ranking mortgages in the higher-yielding market segment.
DBRS notes that in comparison to other specialist lenders, Bluestone’s portfolio and origination are geared towards lending to borrowers with weaker credit history. However, this is mitigated in Genesis 2019-1 by relatively higher yields (the pool has a weighted-average coupon of 4.7%), conservative set-up of LTV limits and the prevalence of repayment loans. Interest-only loans, which account for 16.5% of the pool, are only offered to the most creditworthy BTL borrowers.
The current provisional portfolio - excluding the offers pipeline - consists of 1,111 loans with an aggregated principal balance of £198m extended to 1,101 borrowers, while the aggregated balance of the current offers pipeline stands at €26.7m and consists of 145 loans extended to 142 borrowers, as of 21 June 2019. Fixed-rate mortgage loans account for 94.5% of the pool and have different reset intervals: most reset after two (56.2%), five (33.9%) or three (4.5%) years. The majority of loans (99.3%) are classified as performing or current, and the remaining 0.7% of loans are less than three months in arrears.
The pool has a weighted-average seasoning of 0.6 years and comprises 15.8% Help-to-Buy loans and 19.2% BTL loans. Of the borrowers, 35.8% are self-employed or retired, 26.1% have prior CCJs and 5.3% have had a prior bankruptcy or IVA. London and the South East of England accounts for 41.2% of the geographical exposure.
DBRS has assigned provisional ratings of triple-A to the class A notes, double-A to the class Bs, single-A (high) to the class Cs, triple-B (high) to the class Ds, double-B (high) to the class Es and single-B (low) to the class Fs. There are also unrated class G, X and Z notes.
The notes will pay a floating-rate interest rate indexed to daily-compounded SONIA plus a margin. To mitigate the interest rate risk that arises due to fixed-floating mismatch, the issuer will enter into a swap agreement with NAB.
Once a loan reaches the reset period, a borrower will switch to paying a floating interest rate linked to the Bluestone variable rate (BVR) plus the revisionary margin. The BVR is expected to reset or be reviewed at least once every quarter and will be set such that it at least exceeds the daily compounded SONIA over the previous calendar month plus 1%.
The transaction features a prefunding period until the first IPD on 16 December, during which the proceeds may be used to purchase an additional £10m-£20m loans. At closing, the issuer will deposit the excess proceeds from the issuance of the notes into the prefunded account. To mitigate the risk of negative carry arising until the first IPD, the transaction includes a £400m pre-funding revenue reserve.
Following the first optional redemption date falling in September 2022, the margin payable on the notes increase. The residual certificateholders on the step-up date have the call option to redeem the notes in full.
However, if this option is not exercised, Bluestone is required to auction the portfolio in the market with the help of an independent advisor. Any such portfolio sale must be at a minimum price which ensures that all notes outstanding, together with accrued interest and senior costs are paid in full.
The structure also includes a PDL comprising seven sub-ledgers - class A PDL to class G PDL - that provision for realised losses, as well as the use of any principal receipts applied to meet any shortfall in payment of senior fees and interest on the most-senior class of notes outstanding. The losses will be allocated starting from class G PDL and then to sub-ledgers of each class of notes in reverse sequential order.
Bluestone Group was founded in Australia in 2000 as a specialist mortgage lender. In 2014, it acquired Basinghall Finance, which was set up initially to acquire portfolios of loans but subsequently originated approximately £400m of its own BTL product.
Following the acquisition of Basinghall, Bluestone renamed it Bluestone Mortgages and installed a management team comprising executives with experience from Bluestone’s Australian operations, along with recruits with significant experience in the UK market. The company started lending in the specialist residential space in late 2015 and has originated more than 1,900 mortgage loans with an initial loan balance of approximately £340m.
Corinne Smith
Market Moves
Structured Finance
NPL disposals inked
Sector developments and company hires
ABSF tender
The Australian Office of Financial Management is inviting tender submissions for the provision of investment management services for the Australian Business Securitisation Fund (ABSF) by 6 September (SCI 24 June). The AOFM is seeking to appoint an investment manager to assist with the evaluation of investment proposals and provide ongoing portfolio management services. The investment manager should have extensive experience managing structured credit investments - including via warehouse facilities - directly for institutional clients or in a managed fund context. The term of the contractual arrangement with the successful tenderer(s) will be one two-year initial term, plus one additional two-year option to extend and one additional one-year option to extend.
NPL sales
Banca Monte dei Paschi di Siena has sold a further four non-performing loan portfolios for approximately €340m. The transactions are in addition to those recently finalised with Illimity Bank and Cerberus Capital Management (SCI 2 August) and brings the total of non-performing exposures sold by the bank since end-July to almost €1.5bn. The latest deals involve the sale of €137m secured and unsecured exposures, as well as three transactions in mainly secured unlikely-to-pay exposures in the Banca Mps and Mps Capital Services portfolios in the amount of €202m.
Online lending funding line
LendInvest has received a £200 million investment from National Australia Bank (NAB), in a deal "supported by HM Treasury", the firm says. LendInvest has now raised over £1.8 billion of debt and equity from investors. This new funding expands LendInvest’s capacity to lend in the UK buy-to-let market.
Market Moves
Structured Finance
Syncora Guarantee acquired
Sector developments and company hires
Syncora sale
GoldenTree Asset Management entity Star Insurance Holdings is set to acquire Syncora Holdings’ New York financial guarantee insurance subsidiary Syncora Guarantee (SGI) for US$392.5m in cash, subject to adjustment. The cash purchase price for SGI represents a premium to the closing share price of Syncora’s common stock on 1 March 2019, the trading day prior to the announcement of the strategic review process. In addition to the cash purchase price, after the closing of the sale, Syncora will have cash in the amount of US$32m and specified non-core assets currently held at SGI, including certain non-cash assets of Pike Pointe Holdings and an 80% interest in Swap Financial Group. The closing is expected to take place by end-4Q19 or during 1Q20. Syncora - working with its financial advisor Moelis & Company and its US legal advisor Debevoise & Plimpton - commenced a formal review process to explore and evaluate strategic alternatives, which included the sale of Syncora or SGI. The process included solicitations of interest from dozens of potential acquirers, executed non-disclosure agreements with 20 potential acquirers and bids from five interested parties.
Manager transfer
Dock Street Capital Management has been appointed replacement collateral manager to House of Europe Funding III. Under the provisions of an amendment to the collateral management agreement, Dock Street agrees to assume all the duties and obligations of the previous collateral manager Hypo Real Estate Bank. Moody’s confirms that the move will not impact the ABS CDO’s ratings. For more CDO manager transfers, see SCI’s database.
Market Moves
Structured Finance
Whole biz downgrade announced
Company developments and company hires
Acquisitions
Crescent Capital BDC is set to acquire Alcentra Capital Corp, a middle-market BDC. The transaction is the result of Alcentra Capital’s previously announced review of strategic alternatives led by an independent director committee. Under the terms of the transaction, in exchange for approximately 12.9 million shares of Alcentra Capital common stock, Alcentra Capital’s stockholders will receive approximately US$19.3m in cash, or US$1.50 per share, from Crescent BDC, 5.2 million shares of Crescent BDC common stock and US$21.6m in cash, or US$1.68 per share, from CBDC Advisors, Crescent BDC’s investment adviser. The total cash and stock consideration to be received at closing is currently estimated to be approximately US$141.9m, after taking into account certain post-closing adjustments - representing 1x Alcentra Capital’s net asset value per share, as of 30 June 2019, and 1.36x the closing price of Alcentra Capital’s common stock on 12 August 2019. Following the transaction, Crescent BDC stockholders and Alcentra Capital stockholders are expected to own approximately 81% and 19% respectively of the combined company, which will remain externally managed by Crescent Capital Advisors.
Agency appoints SF vet
ARC has appointed Philip Walsh has been appointed as senior structured finance specialist, under contract. He was previously md and head of the European structured finance business development function at Fitch Ratings, has over 40 years’ experience of complex financings and has spent over 20 years in investment banking. Walsh takes up his post with immediate effect and has responsibility for mentoring the structured finance team, developing and enhancing ARC’s structured finance methodologies as well as fostering and developing relationships with investors and other key market participants.
Barney’s CMBS credit negative
Moody’s notes that Barney’s bankruptcy filing on 6 August and store closures are credit negative for the two US CMBS Moody’s rates with material exposure to the company, DBUBS 2011-LC2 and GSMS 2010-C1, though low loan leverage and the strong locations and demographics surrounding the properties backing the loans help limit these effects.
While the softening of their New York City and Chicago retail submarkets could lead to significant costs and lengthier searches for new tenants, Moody’s expects the impact on these loans to be muted based on the current leverage and in-place rents prior to Barney’s announcement.
BUMF 6 correspondence
Roundstone Technologies (RTL), a company incorporated in the British Virgin Islands, has sent correspondence to a number of parties to the transaction documents governing the Business Mortgage Finance 6 securitisation. This correspondence contends that RTL has certain rights under a purported sale and purchase agreement dated 28 June and asks the addressees to take various action in relation to the same. In particular, pursuant to the purported agreement, RTL purports to have purchased the loans outstanding and all monies standing to the credit of the issuer's bank accounts, and plans to take steps to perfect and transfer the full legal title and/or interest in the collateral security to an unspecified UK affiliate. The issuer wishes to confirm that such an agreement has been declared by the court to be invalid and that it will, if appropriate, make an application to the high court for urgent relief, including preventing RTL from taking any further action. So far as the issuer is aware, RTL is purporting to act through Clifden Management, who is RTL's ‘adviser’.
Whole-biz deal downgraded
KBRA has downgraded the class A1 and class A2 notes of TGIF Funding 2017-1 from triple-B to triple-B minus. The rating agency states that TGI Friday’s has been negatively impacted – like other businesses in the restaurant sector - by factors including a shift in consumer preferences and competition from lower-cost alternatives including fast casual dining, quick-serve restaurants, and other food service alternatives. Additionally, since transaction close, overall same-store sales have experienced nine consecutive quarters of decline although there has been positive growth at company-operated locations in two of those nine quarters.
The rating agency adds that overall store count has also decreased, resulting in a reduction in system-wide sales from approximately US$2.5bn at transaction close to approximately US$2bn for the most recent period. The transaction’s debt service coverage ratio has also declined from approximately 2.2x at transaction close to approximately 1.9x. The senior leverage ratio has increased from approximately 6.1x to 6.8x for the same periods.
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