Contents

Structured Finance

Portfolio-based cover opportunities eyed

New reinsurance platform to harness synthetic ABS overlap opportunities

BPL Global is to launch a new reinsurance platform and has hired Gregory King-Underwood as director to spearhead the firm’s growth strategy. This is driven by increased demand for portfolio-based risk weighted asset (RWA) solutions from financial institutions, which the firm hopes can be met by combining reinsurance and synthetic securitisation strategies.

James Esdaile, md at BPL Global, comments that King-Underwood’s hire came at a time of increasing overlap with the reinsurance market, alongside a rise in synthetic securitisation – creating BPL Global’s own reinsurance platform therefore seemed like a “natural move.” He adds that the firm has been receiving a number of enquiries from clients on the use of captives, which prompted the firm to provide additional support to cater for this interest.

Esdaile comments that by bringing reinsurance experience in-house, it allows the firm to remain competitive and offer portfolio-based cover for efficient risk transfer and better use of capital to its financial institution and corporate clients. He adds that King-Underwood’s extensive experience and knowledge harnessing these functions makes him best placed to lead the global reinsurance and portfolios solutions platform.

King-Underwood comments that the firm is “definitely” looking to grow out its synthetic securitisation business, as “the demand from our clients for portfolio-based risk-weighted asset (RWA) solutions is increasing and the pool of reinsurers comfortable with providing this type of protection is growing correspondingly.”

He continues: “While the need to better manage capital has always existed, the implementation of the IRB output floors as well as the IFRS 9 impairment provisions mean the focus on synthetic securitisation will be much more acute over the coming years.”

Likewise, he notes that BPL Global has long discussed how financial institution clients can leverage insurance to better manage risk and so the firm now aims to do the same in this developing area too. Currently, says King-Underwood, there is a relatively low level of awareness around securing this type of coverage using the insurance and reinsurance markets – this something that he hopes to help remedy by encouraging dialogue with regulators and other market participants around the various applications and benefits.

At the heart of BPL Global’s approach is innovating around portfolio-based cover, in part as a result of increased enquiries about this from financial institutions. As such, the firm aims to tap the credit (re)insurance market to service this demand.

King-Underwood says that the (re)insurance market is much better positioned to assess and understand the wide spectrum of risks associated with project and object finance portfolios, which fall within specialised lending exposures under the Basel framework. He adds that the firm will also be incorporating the other non-technical market practice aspects of the (re)insurance market, such as the confidentiality it provides, which reduces the market noise of a transaction.

He continues: “In time, we hope to foster deep and long-term relationships between financial institutions and (re)insurers allowing for more stable synthetic securitisation market development.”

In terms of the future of the synthetic securitisation, Esdaile says that while it has a chequered history, it has nonetheless survived the test of time and remains an important tool for financial institutions to manage their loan portfolios. He says:  “Indeed, the current market for funded protection for the more standardised asset classes is very sophisticated. That said, we expect the (re)insurance market to be able to also provide cover for less liquid asset classes such as project finance, where it has greater insight into the risks involved.”

Esdaile concludes: “Looking beyond the synthetic securitisation market, a portfolio-based approach to providing credit risk transfer would also be beneficial for those companies providing credit who are not (yet) financial institutions, such as Paypal and Square.”

Richard Budden

Capital Relief Trades

Full-stack SRT boost

Opel, Sabadell achieve funding and capital relief

Banco Sabadell and Opel Bank last week priced respectively full stack consumer and auto ABS deals – dubbed Sabadell Consumo 1 and E-CARAT 10 – that achieve both funding and capital relief. The latest deals add to a growing trend of true sale significant risk transfer transactions, following the introduction of the STS framework.

According to Ruben van Leeuwen, head of credit strategy and regulation at Rabobank: “The true sale format offers both funding and capital benefits and, by selling the whole capital stack, you get both. However, true sale deals work better for certain asset classes, such as consumer loans.”

He continues: “These loans tend to be homogeneous, standardised and very granular, so they are easier to analyse. STS is another driver, given that, at the moment, only true sale deals can get the STS designation.”

Similarly, Boudewijn Dierick, head of ABS markets at BNP Paribas, notes: “True sale deals work better for consumer and auto loans, especially if these loans are under the standardised approach. True sale ABS referencing assets with good historical performance can provide attractive tranching with public ratings.”

He adds: “Ratings offer better pricing than one single unrated synthetic tranche, but synthetics tend to work better for large corporates and SME portfolios that are under the advanced approach. Furthermore, regulators prefer it if banks sell the whole capital stack, but it can be an expensive option.”

Full stack auto and consumer ABS issuance has picked up in 2H19. Other full stack deals that completed this year are Autonoria 2019 (a French auto ABS), Silver Arrow 10 (a German auto ABS), AutoFlorence 1 (an Italian auto ABS) (SCI 22 July) and Brignole CO 2019 (an Italian consumer ABS).     

“Given the relatively pervasive presence of negative yields in euro-denominated ABS senior bonds and investors’ ongoing search for yield across fixed income, these subordinate bond offerings have been strongly received by investors, with many tranches garnering final coverage ratios between 3x-8x,” JPMorgan international securitisation analysts note.

However, other factors besides the cost of selling the whole capital stack could limit future issuance, including the regulatory treatment of excess spread. Markus Schaber, managing partner at Integer Advisors, states: “My understanding is that in a true sale deal, it all depends on the regulatory treatment of excess spread. If you have to deduct cumulative excess spread from capital, given that excess spread is considered a securitisation position, then it is difficult. On the other hand, if you manage to avoid a full deduction - or potentially no deduction - then it is very efficient.”

According to the UK PRA’s SRT guidance, if banks want to use excess spread in an SRT transaction, they should count it as an “off-balance sheet securitisation position” for the purposes of calculating capital requirements. In particular, banks should apply a 1250% risk weight for such positions, which amounts to a 100% capital charge and a deduction from CET1 ratios.

European regulators have been more open to the use of excess spread, providing it is structured in a trapped format.

Stelios Papadopoulos

ABS

Polish debut

STS ABS gains EIB support

PKO Leasing has closed Polish Lease Prime 1, the largest-ever Polish securitisation. The PLN2.5bn revolving lease ABS is also the first STS-eligible transaction issued on the Polish market and one of the first STS-eligible operations subscribed to by the EIB.

The cash transaction is backed by a portfolio of fully amortising lease receivables, with no residual value risk, granted mainly to Polish SMEs. The leases finance the acquisition of new or used light vehicles, trucks and trailers, machinery and equipment and other vehicles.

Rated by ARC Ratings and Scope, the transaction comprises PLN1.29bn AA-/AAA rated class A1 notes, PLN545m AA-/AAA class A2s and PLN640m BB+/BB- class Bs, all issued at 100% of their issue price. The senior notes bear interest at a rate of three-month Wibor plus 70bp, while the mezzanine notes pay plus 250bp.

The floating-rate notes amortise pro-rata, but would switch to fully sequential amortisation when certain amortisation triggers are hit. All note classes benefit from interconnected principal and interest priorities of payment, while a reserve fund provides liquidity and credit enhancement for classes A and B. A subordinated loan granted by the originator funds the mezzanine notes and the PLN58.8m reserve fund.

The notes were sold to a pool of international investors, including the EIB Group and Citi Handlowy. The EIB subscribed to PLN900m of the senior notes under its own risk and PLN640m of the mezzanine notes under a guarantee provided by the European Fund for Strategic Investments. Meanwhile, the EIF guaranteed PLN390m of the senior notes and acted as an advisor to the EIB for both its senior and mezzanine investments. 

The EIB’s participation in both tranches is expected to result in PLN4.36bn of new financing to be allocated in line with its requirements under this operation, thereby substantially supporting the Polish economy.

The transaction features a two-year replenishment period, subject to performance and asset-eligibility covenants. The legal final maturity of the notes is 28 December 2029.

Corinne Smith

Structured Finance

SCI Start the Week - 23 September

A review of securitisation activity over the past seven days

Transaction of the week
Deutsche Bank is marketing a £114m UK CMBS, dubbed Deco 2019-RAM. The transaction mainly comprises a £150m CRE loan backed by Intu Derby, a regional shopping centre in Derby, England, to The Wilmslow, a newly formed joint venture between the Intu Group and Cale Street Investments
The transaction is provisionally rated by DBRS and S&P as triple-A/triple-A on the £100.8m class A notes and double-A/double-A on the £13.2m class Bs. DBRS notes that Intu Derby is exposed to a weakening UK retail market, with several retailers currently in administration or downsizing.
See SCI 16 September for more...

Stories of the week
Case for STS synthetics outlined
Benefits of STS on synthetics clear, but objections could be raised
Legacy SRT call possibility
Regulatory triggers could lead to SRTs being called next year

Other deal-related news

• The Arab African International Bank (AAIB) is lead advisor and one of the main arrangers on a EG6bn securitisation, issued by the Tameer for Securitization Company for a portfolio of receivables originated by the New Urban Communities Authority. This is one of the biggest securitisations in the region to date (SCI 16 September).
• Croatian micro-enterprises and start-ups looking to purchase small machinery and equipment worth up to €25,000 can benefit from the guarantee extended today by the EIF to UniCredit Leasing Croatia. EIF is providing the largest leasing company in Croatia with a guarantee to grow its leasing portfolio for micro-enterprises with a higher risk profile worth €10m in total (SCI 16 September).
• Moody's comments that Spanish RMBS exposed to IRPH-indexed loans, in the context of the advocate general of CJEU's conclusion that Spain's use of Índice de referencia de préstamos hipotecarios (IRPH), an official mortgage reference index since the early 1990s, falls within the remit of EU directive 93/13/CEE. Such a conclusion, if affirmed by the CJEU, would allow Spanish courts to rule against IRPH's use on the grounds of it not being transparent to borrowers (SCI 16 September).
• Moody's has published a new overview which examines ABS issued in the US since 2013, backed primarily by commercial aircraft and their associated leases. The report details an asset description and its structure as well as asset-related credit risks in securities backed by aircraft and related leases (SCI 19 September).
• Net operating income (NOI) for properties securitised within the Fitch-rated US CMBS multi-borrower universe increased an average of 1.9% in 2018, according to Fitch Ratings. The overall growth rate in NOI, albeit positive, has slowed for the second year in a row. The growth rates were 2.1% in 2017 and 3.4% in 2016 (SCI 19 September).
• Permira Debt Managers has closed its fifth structured credit fund Permira Sigma V. Sigma V will continue the Sigma strategy, investing long-term capital in European CLOs, in both the primary and secondary markets (SCI 19 September).

Data

BWIC volume

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

RMBS

First post-crisis MH deal prepped

Transaction largely backed by legacy securitisation loans

FirstKey Mortgage is marketing the first securitisation backed by manufactured homes (MH) since the financial crisis (SCI 16 January), with over half the collateral balance comprising contracts secured from collapsed securitisations issued by GreenPoint Credit Manufactured Housing Contract Trust between 1999 to 2001. The $526.21m transaction is dubbed Towd Point Mortgage Trust 2019-MH1 and is collateralised by 25,324 first-lien, performing and re-performing, adjustable and fixed rate manufactured housing contracts, with an average contract size of $20,779.

The transaction is provisionally rated by Fitch and Morningstar as triple-A/triple-A on the US$327.83m class A1 notes (300bp), double-A/double-A plus on the US$33.15m class A2s (300bp), single-A/double-A on the US$29.99 class M1s (325bp), triple-B/single-A plus on the US$25.26m class M2s (350bp), double-B/triple-B plus on the US$27.89m class B1s (375bp), single-B/double-B plus on the US$15.79m on the class B2s (400bp). Morningstar has provisionally rated the US$22.101m class B3 notes, as single-B (425bp), while the US$22.10m class B4 notes (475bp) and B5 notes (579bp) are unrated.

Fitch notes that, of the collateral pool, 82% are secured by chattel and 18% by land-home, with MH loans typically experiencing higher default rates and lower recoveries than site-built residential home loans.  The rating agency adds, however, that the significant seasoning (an average of 21 years), short remaining lives and current OTS payment status are key mitigating factors to the pool’s credit risk.

100% of the loans are OTS current and Fitch has received a minimum of 36-month pay strings for all the loans in the pool. None of the loans are currently OTS delinquent, but 16.5% of loans have experienced one or more delinquencies in the past 24 months, and 19.9% have experienced a delinquency in the past 36 months.

Morningstar adds that these contracts are spread across 45 states, with the largest concentrations by balance in Georgia (12.2%), North Carolina (9.6%), and Texas (9.1%). 79.9% of the manufactured homes are located in private properties and about 14.5% are in communities, with around 52.3% of the contracts adjustable-rate loans while 47.7% are fixed-rate loans, with and the updated weighted average FICO being 659.

Fitch adds that, after the payment date in March 2022, Cascade, acting as the current servicer, will have the right to resign upon 180 days' prior written notice to the depositor, the asset manager, the back-up servicer and the indenture trustee. The back-up servicer, Select Portfolio Servicing (SPS), has agreed that in the event of any such resignation, it will assume the servicer's obligations.

The agency says that while SPS has limited experience in servicing MH, the company has an established and proven history in handling difficult-to-service loans and has sufficient staffing, management oversight and systems to adequately assume this responsibility should it become necessary. SPS will be reviewing all servicing remittances starting at the outset of the transaction and believes that it would need substantially less than the requisite 180 day notice to prepare for the servicing of the loans.

Morningstar adds that no current or original manufactured home or land-home values were provided, and so the agency has made certain assumptions with respect to the current and original loan-to-value ratios of the contracts. Based on these assumptions, the weighted average LTV is 98.2%, with about 48.7% of the pool by balance consists of previously modified contracts and about 43.1% consists of contracts that include deferred balances.

Richard Budden

Structured Finance

Master trust margins amended

Sector developments and company hires

Holmes Master Trust margins amended

Moody’s comments that the proposed amendments to the 2017-1 Class A2 and 2018-1 Class A3 notes issued by Holmes Master Trust will not, in and of themselves and at this time, result in a reduction or withdrawal of all the notes ratings currently assigned to Holmes Master Issuer. The proposal is to change the underlying reference index on the notes from three-month sterling Libor to daily-compounded Sonia with a margin increase of no more than 20bps on 2017-1 Class A2 and 2018-1 Class A3 notes. The proposed increased margin applies to both pre step-up margins and post step-up margins. Moody's has determined that the proposal, in and of itself and at this time, will not result in the downgrade or withdrawal of all the motes ratings currently assigned to Holmes Master Issuer.

ILS fund hire

Markel Corp has hired Brenton Slade as president of Lodgepine Capital Management, its new retrocessional ILS fund based in Bermuda (SCI 11 September). He was previously svp at Hamilton Capital Partners and coo for the Horseshoe Group. Between 2005 and 2013, Slade was a member of the executive committee and chief marketing and capital markets officer for Flagstone Reinsurance, responsible for capital market initiatives, including the ILS business.

Investment firm hires partner

SDG Investments has added Stefan Bund as a partner, joining the team of founding and managing partners Frank Ackermann und Lars Hunsche. He will focus on strategy, product structuring and internationalisation of the organisation. Bund previously served as executive board member at Scope Ratings and ceo at Scope Risk Solutions, and before that was md at WestLB and Fitch.

Near-prime Canadian RMBS

Home Trust Company has privately placed its debut near-prime RMBS – the C$500m Classic RMBS Trust Series 2019-1 – with accredited investors in Canada and the US by a syndicate led by Bank of America Merrill Lynch and co-managed by BMO Capital Markets and RBC Capital Markets. The C$425m class A tranche is rated triple-A by DBRS and Moody’s and will bear interest at an annual rate of 3.011%. The firm says that issuing RMBS, in addition to its existing base of customer deposits and CMHC-sponsored securitisation programmes, represents an attractive funding option and it expects to be a serial issuer of RMBS in the future – with the aim of helping to establish a private RMBS market in Canada.

Partner announced

Michael Halsbad has joined McDermott, Will & Emery as partner. He was previously at Drinker Biddle & Reath as partner and he has worked in the capital markets, reinsurance and insurance industries as an attorney and in investment banking for 25 years. At McDermott, Will & Emery he is in the corporate advisory group and serves as co-chair of the insurance transaction and regulation practice.

Recapitalisation finalised

Houlihan Lokey is pleased to announce that Bain Capital Credit (BCC) has completed the recapitalisation of two legacy funds and the sale of assets into a new continuation vehicle capitalised by funds managed by Neuberger Berman (NB), existing limited partners (LPs), and BCC. The transaction involved Sankaty Credit Opportunities II, LP (COPs II) and Sankaty Credit Opportunities III, LP (COPs III), as well as other legacy BCC investment vehicles. COPs II was a 2005 vintage fund with US$1.35bn of initial commitments, and COPs III was a 2007 vintage fund with US$2.2bn of initial commitments. Houlihan Lokey served as the exclusive financial advisor to BCC on the transaction. The transaction highlights the firm's ability to execute complex fund recapitalisations to address end-of-life and liquidity issues for private equity and credit-focused investment managers.

Senior trader appointed

Morgan Stanley has hired Nim Sivakumaran as a senior securitised credit trader. Sivakumaran’s most recent role was as head of European structured credit at Sculptor Capital Management.

SRT upgrades

Scope has upgrade to single-A plus the senior tranche of EIB SME Initiative for Italy, BP Bari – SME SRT. The rating action relates to the senior tranche of a financial guarantee granted by the European Investment Fund to a portfolio of Italian SME loans originated by Banca Popolare di Bari.  The rating upgrade is mainly driven by the better-than-expected performance of the transaction and structural deleveraging. Amortisation is in line with Scope’s expectation. Scope has also upgraded to triple-B plus the senior tranche of EIB SME Initiative for Italy (BCP) – SME SRT. The rating action relates to the senior tranche of a financial guarantee granted by the European Investment Fund to a portfolio of Italian SME loans originated by Banca di Credito Popolare. The rating upgrade is mainly driven by the better-than-expected performance of the transaction and structural deleveraging. Amortisation is in line with Scope’s expectation.

Structured Finance

Ceo appointed

Sector developments and company hires

Ceo appointed

CAC Specialty has appointed Michael Rice as ceo, bringing more than 25 years of experience in the insurance brokerage industry. Most recently, he served as the founding ceo and executive chairman of JLT Specialty USA. Previously, he spent more than 20 years at Aon, serving in various leadership capacities.

Morgan refis due

The August remittances for a number of Morgan Communities loans securitised in Freddie Mac CMBS report that property management has changed from Grand Atlas to Morgan Properties King of Prussia Management. The move follows the transfer of 90 Robert Morgan properties to a new joint venture with Morgan Properties, which was disclosed in a letter to the Monroe County Supreme Court arguing that receivership for at least one property - known as Greenwood Cove - is no longer necessary, given that it is now part of the JV (SCI 30 May). A recent Morgan Stanley analysis identifies a total of 47 loans in the new JV that are encumbered by around US$724m of CMBS debt. The letter states that as part of the JV, nearly US$627m of debt on 52 contributed properties will be refinanced, which "will result in the repayment in full of the plaintiff's mortgage lien".

SOFR debut

NewDay Funding 2019-2, which settled last week, is believed to be the first ABS comprising a tranche linked to the SOFR index. Arranged by Bank of America Merrill Lynch, BNP Paribas, Santander and SG, the UK credit card securitisation’s US dollar-denominated class A notes were preplaced at SOFR plus 94bp. The remainder of the capital structure – classes B to F – were sterling-denominated and linked to SONIA.

TPR acceptance

Fitch has added mortgage services provider Consolidated Analytics its list of accepted third-party review firms, performing due diligence on RMBS. The rating agency affirmed the quality and objectivity of Consolidated Analytics’ RMBS due diligence reviews, as well as the adequacy of its operations history, quality control processes and procedures, staffing and training, technology and reporting, and mortgage underwriting expertise. The firm is also approved by S&P, KBRA, Morningstar Credit Ratings and DBRS, and has undergone a review by Moody’s Analytics.

Structured Finance

US CLO firm leadership shake-up

Sector developments and company hires

CLO firm makes md appointment

MidOcean Partners has hired Natalya Michaels as md, focusing on marketing, investor relations and business development across both the private equity and credit businesses as MidOcean looks to grow the firm and expand its investor relationships. Michaels joins MidOcean with over two decades of industry experience and, most recently, she was an md at Artisan Partners, where she served as the head of business development for the thematic equity team. 

STS synthetics paper published

The EBA has launched a two-month public consultation and published a discussion paper on its proposals for a simple, transparent and standardised (STS) framework for synthetic securitisation. (SCI 20 September 2019) This work on synthetic securitisation unveils new data and insights into post-crisis market developments and trends, including data on historical default and loss performance. It also proposes a list of criteria to be considered when labelling the synthetic securitisation as ‘STS'. While the discussion paper does not provide any recommendations on any potential differentiated regulatory treatment, it does seek stakeholders' input about the possibility, its potential impact and other considerations.

The consultation runs until 25 November 2019 and a public hearing will take place at the EBA premises on 9 October 2019 from 2pm to 4pm.

US CLO business sees leadership change

Man GLG’s US CLO business is set to see a change of leadership with Richard Kurth, co-head leveraged credit and Steven Kalin, co-head leveraged credit, stepping down from their positions. They are due to be replaced by current project managers, Joshua Cringle and Jonathan Newman, who will assume the roles in the next 30 days barring any shareholder objections.

Warehouse provided

National Australia Bank has agreed to provide a A$57m securitisation warehouse funding facility to personal lender Symple Loans. The facility has the potential to scale to A$250m as the new lender aims to boost its lending book.

Structured Finance

Aussie auto ABS debut prepped

Sector developments and company hires

Aussie auto debut prepped

The first public term securitisation backed by collateral originated by Mercedes-Benz Financial Services Australia is marketing. The A$580m transaction is to be issued by Perpetual Corporate Trust as trustee of Silver Arrow Australia 2019-1 and is backed by a pool of commercial and consumer loan contracts backed by new and used motor vehicles, trucks and buses.  Fitch and S&P have provisionally rated the A$512.70m class A notes as triple-A/triple-A.

Broader investment

TFG Asset Management is broadening its structured credit investing business under Tetragon Credit Partners. The business has evolved from a historic focus on primary CLO control equity to a broader series of offerings across the CLO capital structure. Tetragon invests in both externally-managed CLOs and in CLOs managed by TFG Asset Management's LCM business. The firm has invested over US$2.4bn in CLO equity, across 105 CLOs managed by 32 managers since inception.