Contents

ABS

Opening up

Platform hopes to securitise global banks' trade finance assets

While trade finance assets are of growing interest to investors, due to the attractive risk-return profiles on offer, many non-bank investors are unable to easily access them, especially large institutions like pension funds. A new platform hopes to resolve this issue, however, by processing and securitising the trade finance books of multiple, major banks and so opening up the asset class to a broader investor base.

This is according to Christoph Gugelmann, founder and ceo of Tradeteq, and Nils Behling, also a founder and cfo of Tradeteq, which provides a new electronic trading platform, dubbed The Trade Asset Securitisation Company (TASC). This is designed to provide a straight-forward transformation solution that allows easy access to pools of underlying trade assets, according to specific investor’s risk-return profiles.

Gugelmann says that Tradeteq is the official technology provider for the Trade Finance Distribution Initiative, and it is engaged with 21 major banks and capital market participants. These include HSBC, ING, SMBC, Lloyds, Deutsche Bank, SCB, ANZ and Credit Agricole and Behling adds that after a lot of work, the firm is “now at point where [it] should be able to open up banks’ portfolios of trade finance receivables to investors at scale.”

Likewise, he says that the platform is getting a lot of investor interest and, as a result, the firm is growing and hiring more staff, as it continues to expand in both the London and Asia offices. In terms of the process, TASC notes are issued out of a Luxembourg-domiciled SPV, with an ISIN, and settled directly into investor portfolios through Euroclear and Clearstream.

The pass-through structure of the notes links payments under the underlying trade finance assets to the notes, which can also be issued in all major currencies and the deals have no real limits in terms of maximum size, says Behling. The platform also offers transparent and standardised legal agreements.

While trade finance receivables tend to be around 30-90 days in duration, the new platform can issue notes of any duration, from short-term to “evergreen” notes, adds Gugelmann. This enables the firm to capture a broad range of investors, from money managers that like a quick turnaround on the one hand, to pension funds and other investors that like a product with a longer duration, on the other.

Behling says that in traditional securitisation, investors have to assess and take on credit risk on a tranched basis which can be “very opaque.” Using the TASC platform however, means “there is no tranching and investors can see each asset they are investing in with complete transparency.”

Behling adds that ABS can take many months to put together, including the time needed to warehouse assets, and generally deals need to be of a certain size to be worthwhile. With this platform, he says, these issues are eliminated because “participants can issue notes of almost any size and it can be done very quickly” as there is no need for a warehouse.

As well as this, he notes, investors select the assets issued from TASC and can monitor the performance on a daily basis, as opposed to a traditional securitisation where the originating bank selects the assets. Likewise, adds Behling, the structure provides more transparency in terms of risk as it is a pure pass-through, unlike in a typical ABS where investors take a hit based on where in the capital structure they sit. 

Behling adds: “Originators also benefit from the platform as they can maintain client relationships, and the sale of trade finance assets to TASC can result in off-balance sheet treatment. Therefore, TASC offers a cost-effective way to reduce risk-weighted assets (RWAs).”

Additionally, says Behling, investors benefit from TASC, as it transforms trade assets into tradeable instruments in a fast, efficient and flexible way, offering bespoke payment dates, currencies and interest rates in a pass-through format. He concludes: “Investors can customise exposure to trade assets…do not require specialised operations or extra back-office staff. This has the effect of encouraging participation from a broad range of investors.”

Richard Budden

CLOs

Performance hurdles

Loan sell-offs hampering US CLOs

Increasing numbers of loan sell-offs are hampering performance in US CLOs relative to other US credit markets. The issue is not yet a major one and could still be overcome, but the emerging trend signals the potential for larger problems ahead. 

“You have a lot more loans trading in the 80 and 90 ranges and that’s causing problems for CLO managers,” explains one CLO trader. “CLOs are getting a lot of direct hits. When you see a loan in difficulty that’s spread across 30 CLOs, you don’t think too much about it. But when you see one manager has 2.5% or 3% of it, then it is a concern.”

The trader continues: “At the moment, it’s a story of fallen angels. But there is likely to be a clearer picture to come as the situation develops over time and that, I fear, will reveal more problems ahead. However, it’s not like the CLO market’s widespread and historic concerns with oil - it’s still idiosyncratic.”

“On top of the growing idiosyncratic issues in loans, there is pressure from where we are in the business cycle – Germany going into recession, trade wars, a general economic slowdown and so on,” says Laila Kollmorgen, md and CLO portfolio manager at Pinebridge Investments. “All are weighing heavy on markets and CLOs are no different, which is making managers more cautious. You also have added concerns in the US, in particular, around the healthcare and pharmaceutical industries - with firms potentially being driven into bankruptcy to pay claims.”

As a result, Kollmorgen continues: “Managers are being more proactive in both trading and risk management and selling credit. Now that CLOs are a bigger part of the loan market, this has a greater impact – in the past, CLO selling would cut prices by half to one point; now it can be as much as five-to-nine points, so prices are gapping down. Plus, because of where we are in the calendar, dealers aren’t willing to extend balance sheet and the investors who aren’t selling – not everyone sees now as the right time to do so or simply has different views on some credits – are not stepping in either. Because of the current environment, they are being as cautious as the sellers.”

A lack of transparency is making matters worse, according to the trader. “We need a lot more information on collateral and loan level data from the likes of Intex. Most CLO market participants don’t have a very strong sense of the players in the loan market or how liquid and levered facilities really are. At the same time, they’re dealing with next day information from the loan market and by the time that comes, a position could have moved away from you dramatically.”

“Falls in loan pricing and MVOC in both leveraged loans and CLOs create their own problem in that a lot of investors trade on headlines and, even if they think an underlying portfolio is OK, aren’t willing to take the risk,” Kollmorgen observes. “Consequently, the sell-off could continue to feed off itself into year-end. The New Year could bring some relief, with dealers’ books potentially reopening, though concerns over the path of the 2020 US presidential election and related legal proceedings could have a negative impact.”

The trader is cautiously optimistic about the extent of the issue. “All we’ve seen so far is just sparks; it’s not yet turned into a major problem - though, of course, the number and regularity of loan sell-offs continues to increase the impacts on triple-C and OC triggers could be significant and some managers may struggle. The positive is that as the situation develops, you’ll see who the best managers really are. By end-Q1 next year, I think we’ll see a full reassessment of both performance and how the situation is playing out and that will be a key time for the CLO market.”

Indeed, as Kollmorgen concludes: “Fiscal stimulus in China and Europe is likely to play a positive and balancing role. Equally, successful negotiations over the US-China trade war and some signs of economic growth could quickly improve sentiment. So, it’s not all doom and gloom – though we do need to have progress on several different fronts to move forward.”

Mark Pelham

Capital Relief Trades

Framework focus

EBA synthetics paper welcomed, despite concerns

Risk transfer market participants have welcomed the EBA’s discussion paper on STS synthetics (SCI 25 September); in particular, the standardisation that it espouses for capital relief trades. However, concerns remain over the absence of any preferential capital treatment, the collateral requirements and the banning of synthetic excess spread.

Leanne Banfield, counsel at Linklaters, explains: “The discussion at the EBA public hearing in Paris on Wednesday suggested that there is broad support for an STS framework for synthetics. However, the industry expects to see corresponding regulatory benefits for STS synthetics and without this, it is difficult to see how originators will be incentivised to structure STS transactions.”

Matthew Monahan, partner at Linklaters, adds: “It is inconsistent that differentiated regulatory capital treatment should be available for STS traditional securitisations, but not for STS synthetic securitisations. The label itself will demonstrate simplicity, transparency and standardisation in the market, but some regulatory capital benefit is required to incentivise adoption and recognise adherence to all of the criteria.”

The amended CRR that accompanied the EU Securitisation Regulation in January raised the IRB risk weight floor from 7% to 15% for non-STS transactions. Originators expect any STS synthetics to benefit from a lower 10% risk weight for senior tranches, as is the case with true sale ABS transactions. Without this, there is little incentive to put in the additional operational effort that is required for an STS designation.

But according to Robert Bradbury, head of structuring and advisory at StormHarbour: “STS could potentially help introduce more investors in the space and perhaps even enable banks to do more transactions. If you have STS synthetics, in principle you could even see funds being raised dedicated to them, similar to what has been seen with other specific asset types, such as green bond funds, for example.”

He continues: “Obviously though, clarity on the potential regulatory capital benefit remains important. Furthermore, given the nascent stages of STS for traditional securitisations, it may be beneficial to assess the impact of this before introducing something new for synthetic securitisations as well.”

Bradbury adds that although the paper provides much greater clarity, there are potential challenges that need to be addressed, such as those pertaining to criterion 31. Criterion 31 of the discussion paper states that credit protection payments should be terminated for underlying exposures where a credit event has occurred and the workout process has not been completed, two years after the scheduled legal maturity or early unwinding of a transaction. Two-year workout periods are standard practice for corporate loans, although for southern European jurisdictions such as Italy, workout periods can take longer.

Concerns also extend to less standard asset classes, such as project finance. According to Steve Gandy, md and head of private debt mobilisation, notes and structuring at Santander Corporate and Investment Banking: “In some asset classes like project finance, no STS benefit or the inability to use SEC IRBA means that securitisation of project finance would be undoable. This seems to contradict the current political environment, which seeks to promote sustainable finance, which is the case with many project finance loans. Nevertheless, 95% of the discussion paper is fine; although some criteria will need some clarifications.”

Over the last 12 years, only seven project finance CRTs have been completed and Santander originated five out of these seven transactions. Consequently, this is an issue for a limited number for banks and an asset class that is a fraction of market issuance (see SCI’s capital relief trades database).

Indeed, key issues for banks are the ban on synthetic excess spread and rules that preclude any collateral from being deposited with the protection buyer. Depositing the cash with the protection buyer provides a funding benefit, but the EBA’s discussion paper stipulates that collateral should be deposited in an account of a third-party credit institution that ring-fences it in case the originator suffers a bankruptcy. However, banks state that transactions feature rating triggers that require the transfer of cash collateral, thereby mitigating the risks that accompany this scenario.

Nevertheless, investors appear to be sympathetic to this provision of the discussion paper. According to one buy-sider: “The issue is what happens to the collateral in a resolution scenario. Rating triggers can help protect the collateral, but there’s a question about the appropriate triggers. Potential triggers could be based on the capital ratio of the bank, as opposed to ratings. Ratings are backward-looking and often adjust with a lag. There is a risk that a bank may ‘jump to default.’”

Another important provision pertains to the early termination of the protection. According to the paper, investors won’t have the option of terminating the protection if the bank goes bankrupt. Typically, they have the option of triggering this feature in a bankruptcy scenario as a hedge against deteriorating bank servicing standards.

Again, investors seem unperturbed by these stipulations. The buy-sider notes: “Early termination doesn’t matter that much. There is precedence in many jurisdictions for transactions to continue, as long as the bank keeps paying premiums. The CDS doesn’t get terminated, even if the bank undergoes a resolution event, so the EBA’s position on this isn’t something new.”

Jo Goulbourne Ranero, consultant at Allen & Overy, concludes: “If there is a failure to pay, then investors can terminate the protection, but there is no reference to continued compliance with servicing standards. As the EBA notes, the point is less relevant for originators subject to the BRRD, whose resolution would likely dis-apply originator bankruptcy termination in any event.”

Stelios Papadopoulos

NPLs

Hercules sets forth

Greek asset protection scheme approved

The European Commission has announced that the Greek government’s asset protection scheme - dubbed Hercules - complies with state aid rules, thereby paving the way for its implementation. Although the non-performing loan ABS scheme is expected to raise issuance volumes and facilitate the de-risking of bank balance sheets, the Greek market needs time to ramp up its servicing capacity.

As with the Italian GACS initiative, the Greek state will be remunerated in line with market conditions for the risk it assumes under Hercules by granting a guarantee on securitised NPLs. All asset classes will be included under the scheme, but there will be an asset class separation for each transaction. However, mixed secured and unsecured portfolios are expected to be the most common assets.

The Commission notes that if a member state intervenes as a private investor would do and is remunerated for the risk assumed in a way a private investor would accept, such interventions do not constitute state aid. Its decision is based on three factors.

First, the risk for the state will be limited, since the state guarantee only applies to the senior tranche. An independent rating agency approved by the ECB will determine the rating of the senior tranche.

Second, the state guarantee on the senior tranche will only become effective, if more than half of the non-guaranteed and risk-bearing riskier tranches have been successfully sold to private investors. This will ensure that the risk distribution of the tranches is tested and confirmed by the market before the state assumes any risk.

Third, the state's remuneration for the risk taken will be market conforming. The guarantee fee will be based on a market benchmark and correspond to the level and duration of the risk the state takes in granting the guarantee.

This means that the guarantee fee paid will increase over time in line with the duration of the state's exposure. This fee structure, in addition to the appointment of an external servicer, aims to increase the efficiency of the workout and likely recovery on the NPLs.

Notably, the scheme would permit banks to achieve significant risk transfer for the senior tranche. This would create enough volume for the banks to transfer the assets off their balance sheets, as well as reduce the bid-ask gap and improve asset quality.

According to George Kofinakos, md at StormHarbour: “The Greek government’s pending asset protection scheme is expected to reduce the NPL exposures of Greek banks. Banks will profit by offsetting a large portion of their NPL portfolio, while the net income on their balance sheet will remain unaffected, since they will retain the senior tranche.”

He continues: “On the Hellenic Republic’s side, the gain lies in the fee that the banks will pay in return for the guarantee on the senior bond. The collateralisation of this issue means that there will be no impact on either the country’s debt or Greek tax payers. StormHarbour, Fire and our joint venture EuPraxis can offer a unique combined expertise, both for securitisation structuring and NPL servicing as well.”

Nevertheless, the lack of an adequate servicing and legal infrastructure remains. Kofinakos comments: “What drives investors is servicer performance through the life of an NPL transaction. Changes to Greek insolvency rules and to foreclosure procedures helped substantially in creating a market for NPLs, since they improve the efficiency of insolvency proceedings and streamline the enforcements of creditor rights.”

He adds: “The legislation now includes a series of measures to reduce lead-time for foreclosures, such as competition in pre-bankruptcy agreements with creditors and acceleration of sale transactions to ensure higher NPL values. All the above secure a rather friendly NPL securitisation environment and a smooth running of the Hercules scheme.”

However, others remain more sceptical. For instance, Christina Papanikolopoulou, partner at Zepos & Yannopoulos, states: “The asset protection scheme is an additional positive driver - although transactions have already happened, so momentum, especially in the secured segment, has been building up. Investors wanted to enter the market way before this scheme and completed deals have set up some pricing benchmarks.”

She concludes: “Nevertheless, it is expected to further add to the secured pipeline, since mezzanine investors do find the rating that comes with it beneficial. Yet third-party servicing is a new thing in Greece, so the market will need some time for adjustment.”

Stelios Papadopoulos

Structured Finance

SCI Start the Week – 7 October

A review of securitisation activity over the past seven days

Transaction of the week
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. See SCI 4 October for more...

Stories of the week
Index ingenuity
Credit derivatives strategy finds value in capital constraints
Nascent stages
CRT mezz investor base needs time to develop
Problem solving
Credit derivative hedges mooted in a deteriorating environment
Spanish SRT finalised
Santander completes full-stack auto ABS

Other deal-related news

• 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 (SCI 30 September).
• 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. Separately, UniCredit has disclosed a pair of non-performing loan transactions (SCI 2 October).
• 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 (SCI 2 October).
• 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 (SCI 2 October).
• Tullett Prebon, part of TP ICAP, has successfully settled the first Insurance Linked Notes (ILN) transaction following onboarding of the first group of clients to its newly launched ILN platform. ILNs are fully collateralized, securitized, listed and tradable instruments (SCI 2 October).

Data

BWIC volume

Market commentary from SCI PriceABS
04 October 2019

US CLO
A busy end to the week with 26 observed covers today right across the capital structure that SCI generated DMs on - 11 x AAAs, 3 x AA, 4 x A, 1 x BBB and 7 x BBs.  The >4yr WAL AAAs traded in a tight 115dm-118dm range, whilst we observed the overall AAA market (>4y WAL) tighten 4bps on the week to 117dm.  However this was based on a lower level of liquidity than last week ($23m vs $60m).  At the BB level, todays BBs traded in a 724dm-759dm range whilst there was an outlier OAKCL 2019-1A E (OakTree) which covered at 864dm / 9.2y WAL, this tranche has a lo-MVOC of 106.02 whilst the deal carries 6% CCC and almost 3% sub 80 priced assets and the manager has a weaker record than its peers (104bps annualised default rate v 55bps cohort / -0.09 par build / 10% annualised equity return v 15.3% cohort).  Overall this week we observed BB spreads tighten 8bps to 748dm based upon $43m of supply ($62m supply last week at 756dm).
The AAs today also traded in a tight 181dm-184dm range ($9.4m aggregate).  The single-As traded in a wider dispersion 251dm-337dm range, at the wide end of the range was a recently closed CAVU 2019-1A C1 (Trimaran Advisors) at 337dm / 8.2y - this manager is inexperienced with 2.4bn AUM across 5 CLOs and has a weaker annualised default rate 91bps than the cohort 55bps, the deal closed with a WARF of 3200.  Finally the only BBB of the day OZLMF 2013-3A CR (Sculptor Capital Management) covers at 99.74 / 431dm / 5.4y WAL which is at the wide end of BBBs we have observed over the past few weeks, this deal carries 6.7% CCC, 34bps defaults, -0.15 par build and 3.64% of sub 80 priced assets.
EUR CLO
16 EUR CLO trades today. 11 x AAA ranging from 127dm to 198dm. The majority have a 130 handle. The widest trade here is OZLME 4A A2 which traded at M100h / S+198 / 4.52yr but it is a small fixed rate class managed by Sculptor AM (formerly Och-Ziff). The widest of the floaters is HAYEM 1A A2 (Hayfin Emerald) which traded at 100a / 158dm / 4.57yr which is margined off un-floored Euribor. The deal is performing OK with a below average WARF of 2874, above average WAS of 387bps and below average CCC bucket of 0.75%.
There are 2 x AA which traded at 233dm and 244dm (see PriceABS archive for details). These AA levels are quite a bit wider than we have recently. Most recent AA trades have been around 180dm to 195dm. At the BBB level we have GLME 2X D (Goldentree) at 99.78 / 326dm / 7.31yr and BABSE 2018-3X D (Barings) at 99.93 / 409dm / 7.4yr. These two trades neatly bifurcate recent traded levels which have been in the 350dm to 370dm range. The reason for this is not immediately obvious to us. They both have similar WALs and are both perfroming well and Barings' deals normally trade well in secondary.
There is one single B (TCLO 2X FR) managed by Chenavari. It traded at 90.00 / 970dm / 6.66yr. This is a bit wider than recent single B's which have been in the 890dm to 920dm range more typically.

SCI proprietary data points on NAV, CPR, Attachment point, Detachment point & Comments available via a free trial, go to APPS SCI + GO on Bloomberg, or contact us for a trial direct via SCI

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

Capital Relief Trades

Synthetic RMBS debut

Non-GSE CRT deal prepped

JPMorgan Chase Bank (JPMCB) is marketing what is believed to be the first rated synthetic mortgage risk transfer transaction originated by a US bank – Chase Mortgage Reference Notes 2019-CL1. The deal utilises tranched CDS documentation to transfer credit risk to noteholders, with principal payments based on the actual payments received from a reference pool consisting of 979 prime-quality residential mortgage loans with a total balance of US$757.23m.

The Chase 2019-CL1 capital structure comprises seven classes notes: US$696.65m class AR1s; US$35.97m M1s; US$10.22m M2s; US$6.82m M3s; US$3.41m M4s; US$1.14m M5s; and US$3.03m Bs. Fitch expects to rate the class M notes double-A, single-A, triple-B, double-B and double-B minus respectively.

The notes will be direct obligations of JPMCB, with payments subject to the performance of the mortgage loans in the reference pool. Interest will be distributed based on the uncapped floating note rate of the class M notes, while principal will be distributed to the class M and B notes based on the scheduled and unscheduled amounts of principal actually paid in the reference pool. Payments to class M and B notes will be reduced by credit events defined as realised losses and modifications resulting in reduced interest on the reference loans, due to loss mitigation.

For the purpose of calculating principal payments and loss allocations, the deal uses a hypothetical structure consisting of class AR1, MR and BR reference tranches. The principal payments and losses on the M notes will be based on the MR reference tranches and the principal payments and losses on the B notes will be based on the BR reference tranches. Interest is paid based on the class M note rate and B note rate designated for each class, and is not based on the interest payments of the reference pool.

Chase 2019-CL1 utilises a pro-rata structure, where scheduled principal is allocated pro rata based on the respective senior and subordinate percentages, while unscheduled principal is allocated to both the senior and subordinate classes pro rata based on the senior and subordinate percentages, if certain tests are passed. If the tests are not passed, the senior class is allocated 100% of all principal.

In addition, the lower-rated subordinated classes will be locked out of principal entirely if the applicable credit support percentage for such class is less than the sum of the original credit enhancement plus 25% of balance of loans that are deemed non-performing. The lockout feature helps maintain subordination for a longer period, should losses occur later in the life of the deal, by redirecting subordinate principal to classes of higher seniority if specified CE levels are not maintained. Losses are allocated reverse sequentially, with the unrated B class absorbing losses first.

Principal distribution amounts are based on the sum of the senior or subordinate percentage of the scheduled principal allocated from the reference pool and the senior or subordinate prepayment percentage of the unscheduled principal amount, which includes principal prepayments, unscheduled collections, the removal price for loan removals and net liquidation proceeds.

Given the structure and dependence on JPMCB, Fitch says its ratings on the class M notes are capped at the lower of the quality of the mortgage loan reference pool and credit enhancement available through subordination and Fitch's issuer default rating of JPMCB.

The reference collateral is high quality, consisting of 30-year fixed-rate, fully amortising loans, seasoned approximately 48 months. All the loans were originated through JPMCB's retail channel or correspondent's retail channel.

The borrowers in this pool have strong credit profiles (Fitch model FICO score of 773) and low leverage (70% combined LTV ratio). The loans were originated to JPMCB’s guidelines, which satisfy the ability to repay rule, but were not tested for qualified mortgage status.

The transaction is expected to close on 15 October. Mechanisms – incorporating significant elements of the ARRC recommendations - are included in the documentation to replace Libor with an alternative rate when a benchmark transition event occurs.

If there is a regulatory event that renders the transaction illegal or would cause JPMCB to incur penalties, or a regulator directs the bank to terminate the transaction, JPMCB will redeem the notes at par.

Mark Pelham

Capital Relief Trades

Risk transfer round-up - 10 October

Capital relief trade sector developments and deal news

RBS is rumoured to be readying a capital relief trade backed by project finance loans. According to SCI data, this would be the issuer’s first project finance risk transfer transaction (see SCI’s capital relief trades database).

The most active issuer of project finance CRTs has been Santander. SCI data note that five out of the seven such transactions that have been completed since December 2008 were issued by the Spanish bank. 

Capital Relief Trades

CRT line-up finalised

Awards ceremony to round off risk transfer event

The line-up for SCI’s 5^th Annual Capital Relief Trades Seminar on 17 October has been finalised. Hosted by Allen & Overy, the event will take place at One Bishops Square, London and features for the first time an industry awards ceremony. Other highlights include a fireside chat between Clifford Chance’s Jessica Littlewood and the EBA’s Christian Moor, as well as a PwC workshop on Basel 4 capital floors.

A structuring considerations panel explores how regulatory developments are being reflected in CRT structuring activity, while another panel focuses on the EBA’s consultation on STS criteria for synthetic securitisations. The issuer perspective panel investigates the drivers for emerging issuers, as well as barriers to entry, and the investor perspective panel looks at the shake-up that is materialising in investor preferences. Finally, an issuance trends panel covers new asset classes, jurisdictions and ways of utilising risk transfer technology.

The seminar is sponsored by ArrowMark Partners, Cadwalader, Caplantic Alternative Assets, DBRS, EIF, Latham & Watkins, Linklaters, Mariner Investment Group, Mayer Brown, Nomura, Renaissance Re, Societe Generale and Texel. Speakers also include representatives from African Development Bank, Banca IMI, Barclays, BNP Paribas, Chorus Capital, D E Shaw, NatWest, PGGM, Prime Collateralised Securities, Mizuho, Santander, Standard Chartered, StormHarbour and True Sale International.

Rounding off the day will be SCI’s inaugural Capital Relief Trades Awards ceremony, hosted by ex-Bloomberg News anchor Mark Barton, followed by a cocktail reception.

For more information on the event or to register, click here.

CLOs

Danish firm's debut CLO prepped

Inaugural ESG-compliant deal likely to be first of many

Capital Four is set to price its debut BSL CLO this week, dubbed Capital Four CLO I.  The €359.4m transaction, arranged by Goldman Sachs, is also ESG-compliant and likely to be the first of many for the firm.

Tim Smith, head of strategic planning at Capital Four, comments that, while this is the firm’s first CLO, its founders began working together around 18 years ago, investing in sub-investment grade credit, before starting the loan business around seven years ago. He adds that Capital Four therefore has a long history a strong track record in the space, so issuing a CLO was a “natural move” that also enables a broader investor base to access the firm’s loan business.

Looking ahead, Smith notes that the firm “expects CLOs to grow as a proportion of our loan AUM and so we expect to issue one to two CLOs a year, continuing our measured approach to ramping portfolios. They’ll most likely be the same as this one in being solely invested in European BSLs.”

As  result of the firm’s track record in the sub-investment grade credit space and its institutionalised platform, Smith says, “we feel that we are not like most first time issuers and don’t have the same questions over our performance or infrastructure that many debut issuers are usually faced with.”

The CLO has expected ratings from S&P and Moody’s of AAA/Aaa on the €217.70m class A notes, AA/Aa2 on the €15m class B1s, AA/Aa2 on the €20m class B2s, A/A2 on the €23.8m class Cs, BBB/Baa3 on the €22.1m class Ds, BB-/Ba3 on the €18.2m class Es and B-/B3 on the €8.4m class Fs. All the notes are floating rate, apart from the class B2s which is fixed, there is a reinvestment period of 4.5 years, maturity of 13 years and WAL of 8.5 years.

With regards to the investor base, Smith comments that it already has a number of institutional investors like pension funds and insurers that invest in Capital Four’s other products. He adds: “The CLO, however, brings in investors across the capital stack like asset managers that may also be drawn to the equity and mezz piece of the CLO.”

He adds that the CLO would be described as ESG-compliant and that the firm integrates an ESG approach throughout the company’s analytical and selection process but doesn’t invest exclusively in sustainable/ESG products. Smith notes that future CLOs will likely follow an ESG compliant approach.

He adds that, overall, the debut issuance experience has been “positive” and a “smooth process.” While the warehouse launched at the start of the year and ramped at a measured pace, this was a result of a “very selective approach” which results in a rejection of 80% of loans that are considered.

The result of this, adds Smith, is that it should help to ensure the performance of the CLO through a credit cycle. He concludes that, while the firm doesn’t “blacklist areas of the market” it does avoid sectors that are “reliant on a single risk factor” like real estate or oil and gas exposure.

Richard Budden

Structured Finance

Bank leaves CDS committee

Sector developments and company hires

Bank leaves CDS committee

Societe Generale has decided to leave the Credit Determinations Committee. The bank is not however scaling back in flow credit trading but, while remaining active in the market and trading CDS, it is opting for a more selective strategy in terms of sector and clients.

Firm nabs aviation vet

PwC has appointed Colum Carr as leader of its Aviation Finance Advisory Services practice. Carr has over 30 years of experience in the aircraft finance sector and he has advised airlines and lessors on the acquisition and financing of new and used aircraft, assisted lenders in developing their portfolios and managed an advisory company owned jointly by a leading advisor and two major airlines. He has also served at board level for an advisory company, been involved with two ABS transactions, an aircraft lease servicer and a business school. 

Structured Finance

Credit system "positive" for China SF deals

Sector developments and company hires

Credit system a positive for China SF deals

China’s plan to establish a comprehensive, nationwide credit information system by 2020 is credit positive for the country’s structured finance deals, because this system will reduce the risk of loan defaults and bolster recovery prospects, according to Moody’s. The rating agency says this development will also help break down credit information barriers in China, which will improve the quality of loan underwriting, thereby reducing the risk of defaults in loans backing structured finance deals.

The aggency adds that a comprehensive credit information system will deter negative credit behavior and make it easier to identify people with poor credit records. This, combined with the fact that authorities in China have the power to restrict certain social benefits for people with poor credit records, will reduce the propensity to default. In addition, some people who have previously defaulted on loans may be more inclined to repay the previously defaulted debts to clean up their negative credit records, which will bolster recovery prospects on defaulted loans.

Cov bond conversion credit positive

Lloyds' bondholders recently approved the conversion of covered bond Series 2018-3 from Libor to Sonia – the first UK covered bond or structured finance note to do so. Moody’s comments that the bondholder approval  is credit positive for the issuer's covered bonds and other Libor linked covered bond and structured finance securities because it paves the way for the significant stock of legacy notes that will need to transition to alternative benchmark rates before Libor’s demise at the end of 2021. It also indicates the required spread adjustment between the benchmark rates and bondholders' support of the issuers’ efforts to a transition away from Libor. 

SF partner appointed

Seyfarth Shaw has appointed partner Paul Kruger to its corporate department in New York as global chair of the firm’s structured finance group. He joins from Katten Muchin Rosenman, where he was a partner in its structured finance and securitisation group in New York. For more than 25 years, Kruger’s structured finance practice has focused on representing financial institutions, sovereign wealth funds, private equity investors, funds and corporations in a wide variety of financing transactions across the US, Asia, Europe and the Middle East. His arrival marks a significant step in Seyfarth’s strategic plan to expand its corporate presence in New York and across the US.

WSJ article questioned

KBRA has responded to a Wall Street Journal article published on 7th titled “Investors Should Fear More Competition Among Ratings Companies.” The firm says that, most notably, the author of the article incorrectly states that in his defined time period (June through September) the three European CLOs rated by KBRA had the highest levels of debt relative to equity.

KBRA states that this this is false and that a cursory review of the non-KBRA rated European CLO universe in this time period indicated at least six deals with higher leverage, and there may indeed be more. The article also says KBRA requires lower enhancement on tranches for European CLOs, by highlighting three deals in a time period that “saw dozens of CLOs rated and issued.”

KBRA adds that, given variances in structures and portfolio composition, it is impossible to infer from such a small sample size whether the deals had higher or lower credit quality than other deals in the market. Further to this point, notes KBRA, the agency’s rated deals were for three of the largest, most seasoned managers in the European CLO market, which is generally a credit positive. Another factual error - says the agency - in the article is in the lead-in chart, which is inaccurate and misleading. KBRA did not assign ratings on the AAA tranche of the three deals named in the article, nor was it asked for feedback on enhancement levels for those AAA tranches.

The agency says further that it is also unclear what data the author used to calculate the average enhancement for the most senior tranches on KBRA-rated deals. The correct average subordination for the AAA tranches of the KBRA-rated European CLO transactions is 38.17% - 34.83%, as reported - which is actually higher, not lower, enhancement than the reported subordination on AAA tranches of non-KBRA rated deals (37.71%). Finally, KBRA challenges the premise of the article that competition should be feared, and strongly believes that delivering higher quality information to investors creates positive outcomes for the market.

Structured Finance

Co-founder to depart

Company hires and sector developments

Co-founder moves on

BlueMountain’s co-founder and co-president Stephen Siderow is set to leave the firm, but he will continue in his current management role through the end of this year to support an orderly transition. The firm was acquired by Assured Guaranty at the start of the month and is making a number of changes to its platform, including the wind down of its Blue Mountain Credit Alternatives Master Fund, which holds roughly US$2.5bn AUM.

The firm says that it plans to launch new strategies aligned with the firm’s focus on collateralised loan obligations (CLOs) and structured finance. Such strategies will include the areas of CLO equity tranches, as well as asset-backed securities focused on private debt investments in specialty finance companies and assets.

UK CMBS downgrade

S&P has lowered its credit rating on Intu Metrocentre Finance fixed-rate secured notes to triple-B plus from single-A. The CMBS closed in November 2013, and is secured by a single loan backed by a UK regional shopping center. The agency says that a combination of declining cash flows from the property, combined with our view of an increasingly challenging environment for retail tenants, has worsened the credit metrics of the notes.

CRT upgrade

Moody's has upgraded from Baa3 to Baa1 the US$375m C tranche of HSBC’s capital relief trade Metrix Portfolio Distribution and affirmed the US$1.46bn (current balance) A and US$450m B tranches at Aaa and Aa1 respectively. The rating actions reflect the significant amortisation of the portfolio from US$3.55bn in October 2018. There have been three reported credit events: two bankruptcies, where final work-out has not yet been achieved; and one restructuring, where the final loss has been determined. Moody’s notes that the current pool remains well-diversified.

Housing finance MOC

Malaysia’s Cagamas and the Japan Housing Finance Agency have agreed a memorandum of cooperation (MOC), with the aim of strengthening the development of housing finance in their respective countries, particularly in the areas of green housing, MBS and other funding instruments. A central feature includes identifying and attracting private and public capital investment.

Structured Finance

Structured finance head appointed

Sector developments and company hires

EBA’s agenda released

The EBA has published its 2020 agenda, detailing its work activities for the coming year. On the securitisation side, its work will mainly be focused on STS-related mandates. In 4Q20, the authority plans to publish recommendations regarding significant risk transfer practices, as well as the hierarchy of approaches for calculating CRR risk weights. Before then, its final report to the European Commission on an STS framework for synthetics is due in Q2.

Structured finance head appointed

Wilmington Trust has appointed Alex Pashley as head of structured finance – UK. He was previously international manager at Wells Fargo and before that worked at BNP Paribas Securities Services, JPMorgan and Bank One.