Contents

ABS

Issuance wave

Opel and Sabadell settle first full-stack SRTs

Opel and Sabadell have settled their first full-stack significant risk transfer transactions. The true sale deals are the latest in a slew of such issuance, following the introduction of the STS framework this year (SCI 27 September).

The €900m Opel deal, dubbed E-CARAT 10, is backed by German auto loans. According to Boudewijn Dierick, head of ABS markets at BNP Paribas, which acted as arranger on the transaction: “It’s the first full-stack E-CARAT deal that has been done for both funding and capital relief purposes. Eight tranches have the effect of optimising capital, rather than three, and the plan is to replicate the structure for future full-stack transactions.”

Rated by DBRS and S&P, the transaction consists of €797.4m AAA/AAA rated class A notes (which priced at one-month Euribor plus 70bp), €21.6m AA/AA rated class B notes (plus 70bp), €18m AA/A rated class C notes (plus 110bp), €18m A/BBB rated class D notes (plus 150bp), €18m BBB/BB class E notes (plus 235bp), €9m BB/B- class F notes (plus 350bp), €9m B/CCC+ class G notes (plus 500bp) and €9m unrated class H notes (which priced at a fixed 7%). Classes A to G were placed, but Opel bank retained 5% of each note for risk retention purposes.

The deal features pro-rata amortisation, with triggers to sequential, and a 2.2-year weighted average life. The pro-rata feature ensures that capital efficiency does not erode after the end of the replenishment period and permits banks to extend the duration of a deal.

Alex Garrod, svp at DBRS, notes: “The deal references German auto loans where losses have been extremely low and tranches are very thin, so there was sensitivity over the structural features. Overall, net losses have been under 1% and the portfolio is granular compared to other German captive portfolios.”

He continues: “However, the length of the pro-rata amortisation may be an issue, given the sensitivity of the cashflows to a change in pool performance. However, various triggers to sequential mitigate this. If you didn’t have them, it could be difficult to pay the notes in full as an elongated pro-rata period would allow more principal to the subordinated notes compared to a sequential redemption.”

Additionally, the transaction suffers from limited levels of excess spread. Garrod comments: “The starting yield is 2.6% and, following the end of the revolving period, there is a 2.5% floor on the asset side. However, higher levels of excess spread could be used to cure the principal deficiency ledger and thus lengthen the pro-rata amortisation. Furthermore, there’s nothing surprising about low yield levels, given that Opel bank is a captive lender and offers financing primarily to support new vehicle sales for their respective OEM.” 

Meanwhile, Sabadell’s SRT – dubbed Sabadell Consumo One - is a €1bn true sale securitisation that is backed by Spanish unsecured consumer loans. Rated by Moody’s and DBRS, the transaction consists of €875m Aa3/AA rated class A notes (which priced at three-month Euribor plus 41bp), €35m Baa3/A rated class B notes (priced at three month euribor plus 140bps), €35m Ba2/BBB rated class C notes (plus 245bp), €25m B1/B rated class D notes (plus 385bp), €30m unrated class E notes (plus 575bp) and €9m unrated class F notes (plus 598bp).

The deal also includes an €80m excess spread securitisation position at the bottom of the capital stack (class Z) that was sold with the rest of the tranches. Further features include pro-rata amortisation, a two-year weighted average life and a one-year revolving period. 

Sergio Palavecino, Spain cfo at Sabadell, notes: “The transaction is our first full-stack deal and capital relief trade. By selling the whole stack and the excess spread position, we achieve both funding and capital benefits and surrender any excess spread benefits or risks.”

However, although the excess spread has been sold, Moody’s notes that the transaction does feature excess spread in trapped form. Alberto Barbáchano, vp at Moody’s, explains: “If there are no defaults, then the most junior investor will benefit from excess spread rather than the originator. Yet, if not, the structure benefits from an artificial write-off that traps the available excess spread to cover any losses.”

He continues: “In this respect, the deal benefits from strong default definitions, compared to other Spanish consumer deals. The full amount of the loan will be artificially written off, if it has been six months in arrears.”

The ECB’s latest QE decision and spread levels were key drivers behind the decision. Palavecino states: “We chose to come out this year, due to tight spreads. So, before the summer, we estimated that we could release efficient levels of capital. Six months ago, spreads would have been wider, so the cost of capital would have been prohibitive. The ECB’s QE decision was also already discounted by the market, so it made a lot of sense for the economics of the deal.”

Looking ahead, Palavecino concludes: “We intend to originate one to two transactions per year and we won’t be restricted to consumer loans. SMEs is another potential candidate, since we have a large exposure to the asset class.”

Stelios Papadopoulos

Derivatives

Problem solving

Credit derivative hedges mooted in a deteriorating environment

The end of the credit cycle and fears over global geopolitical and natural events are driving European portfolio managers to look for ways to protect themselves against the expected downturn. Credit derivatives provide a variety of potential solutions.

“Without doubt the slowdown is coming and fixed income managers need to deal with that,” says Juan Valencia, credit strategist at Société Générale. “We’re at the end of the cycle, but how painful the effects will be depends on a whole range of factors, from the depth of the US recession to how Brexit is resolved.”

While credit spreads will move wider overall, Valencia says there will be variances in when and how severely that happens between different areas of the market. “Defaults will pick up and inevitably the high yield space is where we will see that acceleration first and we expect the US high yield sector to hurt the most in 2020. That will push spreads out and there will be a knock-on effect into European high yield, then US IG and finally European IG.”

Valencia expects the latter to be most resilient, given its distance from the most volatile sector and that European markets more broadly will continue to be supported by regulators. “If the worst happens, the ECB will have no option but to step up QE - which may not stop spreads from widening, but will keep volatility relatively low,” he says.

Nevertheless, Valencia argues: “European investors still need to protect positions as they cannot simply quit credit, so instead we think they should look at CDS indices. Admittedly, there are disparities between index products and the make-up of the underlying market – notably there are a large number of US issuers of euro-denominated bonds at the moment, but iTraxx Main currently only contains European issuers. However, an index position in the short-term still affords investors some element of protection and longer-term the CDS index and the underlying market typically start to move in step with each other, providing a more effective hedge over time.”

He continues: “Even though they are not a perfect fit, keeping to index products and their greater liquidity – bid-ask is less than a basis point on the iTraxx Main – makes most sense for most fixed income investors. There are possibilities beyond that within credit and even into cross-asset structures, such as running a dynamic strategy of credit index protection versus equity put options, but that adds complexity that is unnecessary for the majority of portfolio managers.”

Paola Lamedica, European credit and options strategist at BNP Paribas, is also in favour of keeping hedging strategies straightforward. “It’s usually best to keep things simple in any event. The full effect of a potential downturn is still some way off and there’s no point in making positions more complicated than they need to be.”

How to approach those positions depends, Lamedica says, on what an investor believes will be the main driver of the downturn. “If you anticipate idiosyncratic widening as a result of macro events - such as slowing growth and a hard Brexit - there is one approach. But if you think there will be systemic widening because everyone has gone long in the search for yield and now has to unwind, there is another.”

For protection against idiosyncratic moves, Lamedica suggests looking at tranche trades. For example, buying protection on the iTraxx Xover Series 30 five-year 10-20% tranche with delta.

She explains: “The trade will make money if there is an acceleration of defaults or deterioration in high yield names – 10% of the names in Xover S30 are triple-C and 36% are single-B, plus the portfolio has already had three defaults. It not only protects against growth not picking up, but also provides some element of protection against a hard Brexit scenario as the index is heavy on UK names. Furthermore, even if we don’t see any defaults, the trade is carry positive – tranches are one of the few instruments where you can create a hedge with a profile that is carry positive.”

On the other hand, to protect against systemic moves, it clearly makes sense to utilise the most liquid CDS indices. “CDS index levels are tight, tighter than cash at the moment, which has underperformed on heavy supply,” Lamedica observes.  “The ideal time to set up a hedge is when valuations look stretched. However, the difficulty lies in timing because we don’t know when the widening is going to happen.”

“So rather than the index, utilising a convex instrument - such as an option - could work,” she continues. “The inherent flexibility of options enables investors to more precisely construct a hedge to protect against their individual downside expectations. Furthermore, Lamedica argues that an options strategy makes the most sense as they can be bought in size without moving the already tight underlying market.”

“Investors who believe that volatility is capped, with QE and potentially fiscal policy on the cards once again now, tend to buy payer spreads in the current environment as it makes money on moderate widening in credit. And, if that doesn’t happen, you’re only going to lose the initial premium,” says Lamedica.

Even such a seemingly simple structure is not without its potential downside, however. As Lamedica concludes: “Of course, you still have to get it right – with options, timing is everything. But you do at least have the flexibility to play with that timing, as well as variations in strikes, pay-off and so on.”

Mark Pelham

CDS

Index ingenuity

Credit derivatives strategy finds value in capital constraints

With doveish central bank policy in the US and Europe having a tightening effect on yields across a range of asset classes, investors are increasingly seeing the appeal of alternative investment strategies. This is especially true of strategies utilising credit derivatives, which are also being deployed in novel ways that take advantage of regulatory capital constraints experienced by banks.

Seeking to capitalise on these trends, Axiom Alternative Investments launched its Credit Opportunity Fund in December last year, growing it from an initial €20m to almost €100m today. This particular fund is a Luxembourg RAIF structure, but the firm plans to launch a UCITS version later this year, with both investing in the same credit derivatives – namely iTraxx and CDX indices as well as holding some cash, such as treasuries.

David Benamou, cio at Axiom, says the fund captures two main opportunities, with one being a “relatively traditional, long-short strategy” using credit derivatives on indices to capitalise on pricing dislocations in order to drive a return. The other part of the approach is more unusual, coming from “the regulatory need for banks to recycle risks in order to improve their return on capital”.

The portfolio is designed to be positive carry and non-directional, with a positively convex risk profile which could improve performance in case of large market moves. This should, in theory, protect it from disruption in the event of a downturn scenario.

The firm also recently hired CDS veteran Bedis Gharbi as a senior portfolio manager, to support the growth of the fund. On the less traditional side of the fund’s strategy, he comments that it “takes advantage of regulatory constraints [on] banks’ credit derivatives desks.”

He adds: “Investment banks are now very constrained from a regulatory capital point of view and that has impacted their ability to trade indices profitably. As such, we saw an opening for a strategy such as Axiom’s that is also scalable, in a market that needs alternative ways to generate return.”

In general, investment banks are often less able now to sell the super senior tranche of a credit derivatives index, as a result of the low yields offered - they still, however, need to dispose of them to reduce their cost of capital. A willing buyer, however, might then be able to generate yield by holding these tranches.

Of the plans to launch a UCITS version of the fund, Gharbi notes that UCITS funds can bring in a wider investor base, although there are more investment restrictions associated with this structure. He adds that while the underlying assets are the same, the UCITS fund will position towards the more liquid end of the indices, with a lower target return of 5-6%, compared to the hedge fund, targeting 10-12%.

The investor base in the current Credit Opportunity Fund is mainly family offices, hedge funds and wealth management firms; groups that tend to be more knowledgeable about the kind of products the firm offers, says Gharbi. He adds that one hurdle to gaining investment in the fund is that some investors simply aren’t well versed in credit derivatives investment strategies.

As a result, Gharbi says: “We have taken steps to help with this - for example including a glossary in our investment materials. Having said that, tranche trading, index trading and trading on options are very well understood by some investors, who know that it is a very liquid and standardised investment strategy.”

The firm remains optimistic that it will grow the investor base further within the existing fund and note that they have already received a lot of interest for the UCITS fund. In line with this growth, Benamou says the firm is open to new hires, and it also intends to launch some other initiatives later in the year - one in the credit derivative space and another in the fixed income space, but not in credit derivatives.

Richard Budden

ABS

Spanish SRT finalised

Santander completes full-stack auto ABS

Santander has priced a €555.5m true sale significant risk transfer transaction dubbed Santander Consumer Spain Auto 2019-1. The full-stack deal has been driven by new regulatory guidelines on excess spread and adds to this year’s healthy flow of full-stack SRT issuance (SCI passim).

The transaction consists of €440m class A notes (which priced at 45bp), €57.7m class B notes (85bp), €27.8m class C notes (1.48% fixed), €10m class D notes (1.98% fixed), €10m class E notes (3.19% fixed) and €10m class F notes (5.93% fixed). The deal has been rated by DBRS and Fitch, although the rating agencies haven’t yet disclosed their final ratings. The transaction features a 4.36-year weighted average life, two-year revolving period and pro-rata amortisation.   

According to Steve Gandy, md and head of private debt mobilisation, notes and structuring at Santander Corporate and Investment Banking: “Under the ECB’s new guidelines on excess spread, it is advisable to sell a significant amount of the senior tranches. It offers certainty that the pricing we achieve on the tranches reflects market pricing. If we retained class A, the regulator would fear that excess spread could be inflated and used to artificially support the junior tranches, therefore keeping investors from taking any risk.”

The excess spread has been structured in a ‘use it or lose it’ format, since a trapping mechanism requires the recognition of excess spread as a securitisation position, which is accompanied by a 1250% risk weight and therefore a full capital charge and a deduction from capital. Market observers have referred to this regulatory treatment as the most salient obstacle to any pick-up in full stack issuance (SCI 27 September). 

Consequently - unlike Sabadell’s latest consumer SRT - no excess spread securitisation position has been sold to investors, allowing Santander to retain the benefit of excess spread (SCI 2 October). The ECB’s revised ruling on excess spread was an important driver behind the transaction along with the funding benefit of selling the senior tranches. Furthermore, the extension of QE and continued multilateral and traditional investor interest enables the sale of the senior tranches at competitive levels.

Santander is expected to complete another true sale auto SRT from the KIMI programme this month. The lender’s last KIMI deal – the seventh in the series - was finalised last year and referenced a €665.3m portfolio of Finnish auto loans (SCI 19 December 2018).

Stelios Papadopoulos

Structured Finance

SCI Start the Week - 30 September

A review of securitisation activity over the past seven days

Transaction of the week
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. See SCI 24 September for more...

Stories of the week
Polish debut
STS ABS gains EIB support
Portfolio-based cover opportunities eyed
New reinsurance platform to harness synthetic ABS overlap opportunities
STS synthetics framework unveiled
EBA publishes landmark consultation

Other deal-related news

• 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% (SCI 23 September).
• 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, existing limited partners, and BCC. The transaction involved Sankaty Credit Opportunities II and Sankaty Credit Opportunities III, as well as other legacy BCC investment vehicles (SCI 23 September).
• 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 (SCI 24 September).
• National Australia Bank has agreed to provide a A$57m securitisation warehouse funding facility to personal lender Symple Loans (SCI 25 September).
• 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 (SCI 26 September).
   

Data

BWIC volume

Upcoming SCI event

Capital Relief Trades Seminar, 17 October, London

Capital Relief Trades

Nascent stages

CRT mezz investor base needs time to develop

The pace of growth of the risk transfer market is likely to be tied to the development of the synthetic mezzanine risk market, which is currently at a nascent stage (SCI 9 August). Traditional capital relief trade investors have limited appetite for mezz, as absolute returns are low, even though the risk/reward proposition is compelling.

“There is an interesting opportunity to create and scale a new mezz investor base, by attracting asset managers and insurance companies that currently invest in mezz ABS and CLOs. A different type of capital – targeting 3%-4% returns, rather than 8%-10% - is required,” says Kaikobad Kakalia, cio at Chorus Capital.

Robert Bradbury, head of structuring and advisory at StormHarbour, agrees that growing CRT mezzanine tranche volumes arising from dual-tranche structures may find demand from three types of investors: those seeking risk-adjusted returns (such as insurers); those with a mandate which includes bespoke transactions that offer relative value to comparable traded instruments (such as some CLO mezzanine investors); and/or those with very good access to leverage (such as real money investors that can borrow with cheap funding rates). While demand from the latter is less likely due to the lower expected returns from these tranches (and hence a smaller difference between the tranche return and the cost of the leverage), the natural place for insurers to play in is mezzanine, as risk-adjusted returns are often more important to them than absolute returns.

Kakalia concurs: “The scale in this segment will most likely come from insurance companies. They are likely to find the risk/return interesting. However, most insurers will require ratings and banks are yet to issue rated mezzanine tranches.”

The investor base for mezzanine tranches needs time to evolve. Although synthetic mezz risk presents an attractive risk/reward profile, there is an opportunity cost – the decision whether to tie up cash long term in a lower risk but lower yielding asset is not an easy one for many investors.

As such, a slew of mezzanine-only rated deals is unlikely; rather, they’ll emerge on a case-by-case basis. “The overall analysis becomes more complex and expensive for publicly rated CRTs. Among several possibilities for transactions adding mezzanine protection to an existing structure (as opposed to incorporating the dual-tranche aspect from the outset), one possible approach may simply involve a standard structure and a mezzanine guarantee that incorporates the notes issued by the SPV,” Bradbury concludes.

Corinne Smith

Capital Relief Trades

Risk transfer round-up - 4 October

Capital relief trade sector developments and deal news

HSBC is rumoured to be readying a corporate capital relief trade for 4Q19. According to SCI data, the lender’s last risk transfer transaction was completed in December 2015 and was dubbed Metrix Portfolio Distribution (see SCI’s capital relief trades database).

NPLs

Autumn sales

Italian NPL, UTP disposals continue apace

Illimity Bank and a Cerberus Capital Management affiliate have acquired a second unlikely-to-pay loan portfolio from Banca Monte Paschi di Siena (MPS), following a previous MPS transaction with Cerberus (SCI 2 August). Separately, UniCredit has disclosed a pair of non-performing loan transactions.

In the latest MPS transaction, the Cerberus affiliate provided the equity tranche, while illimity provided senior financing for roughly €110m. The financing is secured by a mainly corporate secured UTP loans portfolio, with a total GBV of €455m. With this transaction, Cerberus group companies have now acquired Italian NPLs representing a total GBV in excess of €6bn.

Meanwhile, one of UniCredit’s NPL transactions involves a securitisation vehicle managed by Illimity. The agreement concerns the disposal of an Italian SME portfolio with a total gross claim value of approximately €730m on a non-recourse basis.

The second UniCredit deal was executed via its AO UniCredit Bank (Russia) subsidiary and involves a loan sale and purchase agreement with EOS, in relation to the disposal on a non-recourse basis of non-performing exposures composed of loans granted to private individual customers. The portfolio consists entirely of Russian loans with a total claim value of €45.2m.

Both disposals are part of UniCredit's ongoing activities to further reduce NPEs under its Transform 2019 plan. The accounting impact is expected in the 3Q19 financial statements.

Banca IFIS’ latest Market Watch NPL report estimates that a further €34.9bn GBV of Italian NPL and €28.1bn GBV of Italian UTP loan disposals remain in the pipeline for 2019.

Corinne Smith

RMBS

Development drive

Canadian private RMBS boost

Home Trust Company became the fourth issuer to tap the Canadian private RMBS market with its private placement of Classic RMBS Trust Series 2019-1 (SCI 23 September). The firm plans to issue two transactions a year from the programme and, in doing so, help drive the development of the sector.

“The more paper that’s issued, the more liquid the product is and the more competitive the market becomes. We hope that more Canadian RMBS issuers will take advantage of the appetite for such bonds,” notes Brad Kotush, evp and cfo at Home Capital Group.

Home Trust placed its inaugural private near prime RMBS with both Canadian and US investors. The firm retained C$75m of the notes to satisfy risk retention requirements.

Kotush says that the establishment of a near prime RMBS programme was a sensible step to take in order to diversify the firm’s funding sources. Its overall book comprises roughly 60% uninsured and 40% CMHC-insured mortgages.

“We’ve historically funded the uninsured mortgages through deposits and credit lines. We have a C$150m repo facility for the uninsured mortgages and a C$300m facility for the insured mortgages. But the Classic RMBS platform now provides us with the ability to emphasise securitisation or deposits, depending on market conditions,” he explains.

The government-sponsored securitisation programme - which accounts for the vast majority of Canadian MBS – consists of prime insured mortgages and there are specific requirements that a loan must meet for it to qualify for insurance. A near prime loan would hit 80%-90% of these requirements.

“It’s difficult to compete in the prime universe, given the government guarantee. Hence our focus on near prime private issuances,” Kotush observes.

He adds: “Near prime has a higher interest rate and therefore a better yield for investors. Indeed, we’ve had a very positive response from investors, who value the opportunity to invest in an alternative to CMHC paper.”

The Classic RMBS programme differs to the other Canadian private RMBS programmes in the way it addresses renewals: their offerings are five-year term structures, whereas Home Trust’s is a self-amortising structure with a 2.4-year WAL. To mitigate the balloon risk present in Canadian mortgages, the firm - as servicer on the deal - is required to renew all mortgages that satisfy the renewal eligibility criteria

In the event that it does not renew a mortgage loan and it has not been repaid by the borrower, the servicer will extend the maturity date of the mortgage loan for sequential periods of no longer than six months. Renewed and extended loans will remain in the pool and proceeds will continue to flow to noteholders.

The notes are backed by 1,327 fixed rate mortgage loans originated primarily by a network of Home Trust-approved brokers. Approximately 91% of the properties are located in Ontario.

The pool is highly seasoned - with a weighted average seasoning of 37 months - and over 80% of the loans were originated prior to 2018. The 20 largest borrowers represent 5.40% of the aggregate loan balance.

The majority (69.2%) of loans are to self-employed borrowers, while 26.7% are secured by rental or leased properties. However, the weighted average LTV ratio of the loans was 69.4%, as at 1 August 2019.

Looking ahead, Kotush suggests that a falling rate environment may increase the attractiveness of issuing Canadian private RMBS, while the continued healthy housing market supports investor demand.

Corinne Smith

RMBS

Reverse mortgage RMBS prepped

First post-crisis deal backed by newly-originated reverse mortgage loans markets

RMF is marketing its first private RMBS backed by jumbo proprietary reverse mortgages loans and, according to KBRA, the first RMBS backed by newly-originated reverse mortgages since the financial crisis. Dubbed RMF Proprietary Issuance Trust 2019-1, the US$256.667m transaction is backed by 385 reverse mortgage loans.

The assets are composed of recently originated, with WALA of five months, reverse mortgages that typically exceed the current FHA jumbo loan principal balance limit and so they are not insured by the FHA under the Home Equity Conversion Mortgage (HECM) program. KBRA notes that any loss resulting from disposition of the property at net proceeds less than the accrued loan balance is borne by the transaction structure, unlike HECM loans where this loss (if any) is covered by the FHA up to the maximum claim amount.

KBRA and Morningstar have provisionally rated the US$237.676m class A notes as triple-A/triple-A, the US$10.868m class M1s as double-A/double-A plus and the US$8.123m class M2s as double-A minus/double-A minus. The stated final maturity on all the notes is October 2063.

KBRA notes that credit support for the transaction is provided by the differential in coupon between the loan assets – WAVG 6.82% - and the rate on the notes alongside subordination.

The rating agency adds that a reverse mortgage is usually utilised to release home equity that has accumulated in relation to the value of the property, with no mortgage payments due until a repayment event occurs for the last surviving borrower. Accrued interest is added to the balance of the loan over time and is due following the repayment event.

With no periodic mortgage repayments due, the concept of a loan-level probability of default (PD) seen in a traditional RMBS transaction does not apply. Instead, the relevant reverse mortgage concept is probability - or in the case of co-borrowers, the joint probability - of repayment, which is driven by various repayment events.

Repayment events include mortality, the probability of a borrower becoming deceased, which is typically based on relevant actuarial tables, morbidity, a repayment event caused by the borrower moving to long term care, usually based on medical reasons, the rate of which is estimated by observed historical data either from the issuer or other proxy sources and other prepayment, repayment of the loan through other means including full prepayment due to borrower’s sale of the property; the refinancing of the reverse mortgage; or curtailment payments.

KBRA assesses that one of the primary risks to investors in a reverse mortgage transaction are negative carry generated by periodic bond debt service backed by a pool of assets that does not require the related obligors to make periodic payments. Another major risk is that the ultimate repayment of principal in the face of a negatively amortising loan balance on an asset that may experience depreciation due to market cycles or property condition issues specific to the subject property.

The rating agency adds that the transaction is supported by the fixed rate nature of the assets and liabilities which creates a known rate of accrual on both the loans and the notes. This removes a potential variable in assessing the cross-over point at which the loan balance might exceed property value and the corresponding level of debt in the transaction at the time.

Additionally, all available funds, after payment of transaction expenses will be used to pay the notes. The deal pool also has a relatively low borrower weighted average age of 77, meaning mortality and morbidity events will be more back-loaded vs pools with borrowers of higher average age and so a longer duration over which loan balances accrue and increase the LTV of the loans at repayment.

KBRA notes that the relatively longer-term repayment profile increases the exposure of the pool to future property value cycles, though it may also increase the pool’s exposure to more long-term home price growth.

The rating agency adds that RMF utilises Celink which is the largest reverse mortgage subservicer in the industry and that the number of qualified servicers in the reverse mortgage sector is limited. The next big sub-servicer in the sector is Reverse Mortgage Solutions, founded in 2007, but its parent company, Ditech Holding Corporation filed for Chapter 11 bankruptcy in February 2019.

Additionally, Woodward Capital Management is marketing the first transaction for which Quicken Loans is the sole originator and servicer. Dubbed RCKT Mortgage Trust 2019-1, the US$351.329m securitisation is backed by 465 prime jumbo and agency-eligible mortgage loans, each with an original term to maturity of 30 years, with 363 of the loans being prime jumbo.

The remaining 102 mortgage loans comprising 17.4% of the pool balance are agency-eligible loans underwritten to either or both of the Fannie Mae or Freddie Mac guidelines. Moody’s and KBRA have assigned provisional ratings on the transaction of Aaa/AAA on the seniors.

Moody’s notes that the transaction benefits from a collateral pool that is of high credit quality and is further supported by an unambiguous representation and warranty framework and a shifting interest structure that incorporates a subordination floor. There is no master servicer in this transaction although Citibank will be the securities administrator and the trustee will be Wilmington Savings Fund Society.

Richard Budden

Structured Finance

B-piece service bulks out

Sector developments and company hires

B-piece service bulks out

Greystone, has added Paul Smyth, Cary Williams, and Paul Jankovsky as mds and Robert Farrington as a director to its CMBS platform. Based in Irving, Texas, the team brings to Greystone extensive expertise in CMBS B-Piece acquisitions as well as special servicing. While originating debt for clients across all of Greystone’s lending platforms, Smyth and his team will also pursue B-Piece investment and special servicing opportunities. These additional capabilities enable more certainty of loan execution and full continuity throughout the lifecycle of a CMBS loan, from origination to payoff.

CarVal MBO

Cargill is set to sell its ownership and economic interest in CarVal Investors to a partnership comprised of the firm’s senior management team. The transaction is expected to close in 4Q19, pending consents to the change in control from investors in CarVal’s funds. As part of the purchasing partnership, CarVal managing principals Lucas Detor, James Ganley and Jody Gunderson will continue to hold their roles going forward. Following the completion of the MBO, Cargill will remain invested in CarVal’s funds.

MBS portal launched

Broadridge Financial Solutions, has announced the launch of a new centralised Trade Assignment Portal (TAP) that will allow mortgage originators and broker-dealers to transform the execution of Mortgage-Backed Securities (MBS) Trade Assignments. TAP is a web-based platform, maximising operational efficiency through a well-managed workflow to facilitate the initiation, review, acceptance, e-signatures, status tracking, archival, and straight-through execution of MBS Trade Assignments. Several originators, including Freedom Mortgage, and Tier 1 broker-dealers are completing user acceptance testing in preparation for going live on TAP. Once live, these firms can expect an improvement in efficiency while eliminating errors in the execution of MBS Trade Assignments.

Wing Chau settles

Wing Chau and his firm Harding Advisory have settled with the US SEC in connection with violations of Section 206(2) of the Advisers Act and Section 17(a)(2) of the Securities Act in their role as investment managers for the Lexington V Capital Funding and Neo CDO 2007-1 transactions. The Commission alleges that by acting in conflict with the offering circulars for these CDOs, Harding and Chau negligently breached their obligations to the issuers by failing to use reasonable care in selecting for inclusion in their portfolios millions of dollars’ worth of triple-B rated notes from a CDO known as Norma. Norma was structured by a subsidiary of Merrill Lynch, pursuant to an agreement with Magnetar Capital. The Norma notes defaulted on 10 March 2008, while Neo defaulted on 20 December 2007 and Lexington defaulted on 23 July 2009. Accordingly, Chau is prohibited from acting as an employee, officer, director or member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company, with a right to apply for re-entry after one year. Chau has also been ordered to pay disgorgement of US$95,490 and a civil money penalty of US$850,000.

Structured Finance

CLO firm co-founder to retire

Sector developments and company hires

30-year CIRT debuts

Fannie Mae has completed its sixth Credit Insurance Risk Transfer transaction of 2019: CIRT 2019-3 covers US$14.8bn in unpaid principal balance of 21- to 30-year original term fixed-rate loans. The deal marks the first time a 30-year bulk CIRT transaction was structured with an extended policy term of 12.5 years and a 40bp retention layer, compared to a 10-year policy term and a retention layer of between 50bp-60bp for similar past deals. These changes in the structure increased the risk transfer on the covered pool of loans. With 21 insurers and reinsurers providing coverage, demand for this transaction was among the strongest the GSE has ever had.

CLO firm makes senior appointment

Churchill Asset Management has appointed Joe Cambareri, as md and chief accounting officer, effective 23 September 2019. Cambareri is responsible for the day-to-day management of Churchill’s finance and accounting function and reports directly to cfo, Shai Vichness. Cambareri brings over 20 years of finance, accounting, operations, reporting and tax experience to Churchill, related to a variety of direct lending funds, separately managed accounts, collateralized loan obligations and public and private business development companies. Prior to joining Churchill, Cambareri served as cfo for nine years at Greenwich, CT-based Credit Value Partners, a credit-focused asset manager owned by New York Life.

Co-founder to retire

Highland Capital Management co-founder Mark Okada is retiring from the firm, stepping down from his full-time role at end-2019. He will assume a senior advisory role through the end of the year to support transition activities and will retain his ownership stake, following his retirement. Highland president James Dondero - who founded the firm with Okada - will continue to oversee the management of Highland and all affiliated businesses, taking over as co-cio following Okada's retirement. Okada has already transitioned a number of responsibilities in recent years to senior leadership on the credit research and structured products teams, as well as to co-cio Joe Sowin, who oversees day-to-day investment activities across the Highland platform.

CRE firm makes raft of hires

Sabal Capital Partners has made hire four executives to its CRE lending team, in the form of William Sampson, head of CRE securitisation, New York and he was previously executive director of Morgan Stanley’s EMEA CRE credit group, as well as executive director and head of securitization underwriting for Morgan Stanley’s CMBS group. Sabal has also hired Allison Toy as head of CRE underwriting, New York, having most recently served as director of CRE capital markets and finance for Wells Fargo Securities.

Additionally the firm has hired Brandon Goldschmidt as director CRE originations (LA), having most recently been at Ladder Capital Finance (Situs) in Los Angeles, supporting the underwriting and closing process of more than $300 million of CMBS and balance sheet bridge loans. Finally, Sabal has hired Kurt Clauss as an associate (New York) and most recently served as associate director in Cushman & Wakefield’s commercial real estate valuation and advisory group.

Forever 21 exposure eyed

Moody’s notes that store closures as a result of Forever 21’s recent bankruptcy filing could negatively impact US CMBS loans with large exposure to the tenant, particularly among properties that have seen other recent tenant departures. Of 150 loans secured by retail properties with exposure to Forever 21 in deals the agency rates, the tenant represents more than 10% of the collateral square-footage at only seven properties, for an aggregate allocated loan balance of US$814m. Furthermore, at 14 of the properties (across 28 loans), Forever 21 had a footprint greater than the company’s average store size of 38,000 square-feet.

ILN debut

Tullett Prebon, part of TP ICAP, has successfully settled of the first Insurance Linked Notes (ILN) transaction following onboarding of the first group of clients to its newly launched ILN platform. The new ILN initiative is spearheaded by Tullett Prebon’s ILS desk, which was formed in 2008 and is a leading broker in catastrophe bond secondary trading worldwide. ILNs are fully collateralized, securitized, listed and tradable instruments. They are Industry Loss based instruments, similar, to Industry Loss Warranties, but designed to provide clients with a more cost efficient method of protecting, investing in and hedging catastrophe risk.

Software acquisition announced

Moody’s has acquired Deloitte’s ABS Suite, a software platform used by issuers and trustees for the administration of asset-backed and mortgage-backed securities programs. The ABS Suite product and personnel will join Moody’s Analytics’ Structured Solutions business, which provides research, data and analytical tools to participants on all sides of the market for structured finance transactions. ABS Suite complements Moody’s Ki platform, the next-generation version of Moody’s ABS System. The terms of the transaction were not disclosed, and it will not have a material impact on Moody’s 2019 financial results. The transaction was funded with cash on hand.

Structured Finance

ILS acquisition announced

Company hires and sector developments

Acquisition announced

Artex Risk Solutions has announced that it has reached agreement to acquire Horseshoe Insurance Services Holdings., significantly strengthening its ILS operations. The transaction is subject to regulatory approval and expected to complete before the end of the year. On completion, Horseshoe will become the global brand of ILS services for Artex, which will operate as one global team across multiple jurisdictions to better serve its clients and provide consistent delivery of services regardless of the domicile.

Commercial director appointed

Vistra has hired Gary Webb as commercial director for capital markets. He was previously a senior business development executive, structured debt markets at Intertrust.

Debut home renovation programme launched

HolaDomus has launched its first Home Renovation Programme developed under the EuroPACE initiative - HolaDomus. HolaDomus has full support and commitment from the City of Olot that co-created a One Stop Shop to operate the programme.  Under the auspices of the EuroPACE project, partners have been designing and developing the HolaDomus programme since 2018. The city of Olot played a key role by passing a local ordinance, setting up a one stop shop to operate the programme and opening a local office in Olot. The GNE Finance team arranged financing, legal, operational, and marketing aspects of the programme. The Basque Government Energy Agency (EVE) and AGENEX provided support selecting eligible measures and developing contractor training modules. UpSocial is running an energy poverty pilot involving 15 families in Olot. Joule Assets Europe provided a digital tool for contractor management. CASE offered an invaluable contribution to programme scalability with its EU-28  research, while CBI has been investigating  financing alternatives in the selected countries.  

Pricing specialist hired

ICE Data Services has hired Varun Pawar as a senior director. He was previously global head of Bloomberg Evaluated Pricing service.