News Analysis
Capital Relief Trades
Meaningful constituent?
Perceived difference between IRB, standardised banks narrowing
Recent transactions imply that the difference between how IRB and standardised banks are perceived by capital relief trade market participants is narrowing. However, opinions vary on whether standardised banks can ever become a meaningful constituent in significant risk transfer, given the barriers to entry that remain.
Synthetic securitisation only became a viable option for standardised banks when the new regulatory framework introduced more efficient risk-weight formulae in January (SCI passim). “The new securitisation regulations have helped level the playing field and created more options for standardised banks. Standardised banks now have more flexibility and potential transaction efficiency than was the case under the previous framework’s ratings-based approach, for example, including with regards to retained senior tranche risk weights,” confirms Robert Bradbury, head of structuring and advisory at StormHarbour.
However, Giuliano Giovannetti, md at Granular Investments, notes that smaller banks are yet to make use of the option in a meaningful way. “A few examples are happening - such as the Cajamar, Banca Popolare di Bari and Banco BPM deals that involved both private and supranational investors - but issues clearly remain around the complexity of risk transfer deals and the costs associated with them,” he observes.
Around €6trn in loans sitting on European bank balance sheets are treated under the standardised approach. In contrast, about €100bn of IRB loans are synthetically securitised each year.
If a level playing field for small and big banks is to be achieved, there must be a way for the former to implement a transaction independently and with a high degree of certainty of regulatory approval, according to Giovannetti. He indicates that previous risk transfer deals could be used by smaller banks as templates, but there is not much publicly available information.
“For instance, it would be helpful if regulators could specify that if certain wording is used, they’ll be comfortable with a given transaction,” he observes. “This would reduce the need to incur costs on documentation and legal fees, and provide assurance that the regulator will approve the transaction for SRT. Alternatively, an industry association could produce a template that would have a similar effect, but some sort of regulatory endorsement would still be needed.”
Chorus Capital cio Kaikobad Kakalia, for one, expects standardised bank SRT issuance to grow over the next year or two - albeit it will take time for this segment to gain traction and scale up. “It’s not only regulation that restricts standardised banks’ risk transfer activity, but also their own internal resourcing and capability. Crucially, they must have a sufficient quality and quantity of historic performance data to justify their risk metrics, which they typically lack.”
Riccardo Gallina, head of loan management and advisory at Banca IMI, suggests that there is potential for standardised banks to become meaningful constituents of the SRT market. “I anticipate that standardised bank SRT issuance volumes will continue to grow. Certainly, there is a lot of interest in this kind of tool among standardised banks,” he says.
But he points out that the returns typically requested by traditional junior investors mean that transaction costs may be unaffordable for most standardised originators, given the conservative calibration of the SEC-SA approach requires standardised originators to protect a thicker first-loss tranche compared to IRB ones. “Consequently, we need to see investors accepting lower returns – as well as new categories of investors entering the market - and work on different tranching solutions or provide more comfort around the performance of the securitised portfolio. Since standardised banks don’t have validated PD/LGD internal models, one way of doing this is to provide investors with solid historical performance data on the underlying portfolios.”
Indeed, in terms of best practices regarding standardised bank SRT deals, Banca IMI - acting as arranger/advisor - typically works on portfolio selection and different tranching solutions in order to optimise economics for the client and finding the most competitive investors, considering the risks to be covered. Gallina notes that the process involves preparing an exhaustive due diligence package that can give comfort to investors with regard to portfolio performance.
Looking ahead, bank demand for capital is robust and investor capacity is available from both traditional sources - such as hedge funds and pension funds - and re/insurers, which now represent about a third of the US synthetic securitisation market (SCI 3 July). “The US example shows that the risk transfer market could see significant growth, given the right conditions. Standardisation of contracts and certainty of regulatory approval would help develop the European synthetic securitisation sector greatly,” Giovannetti concludes.
Corinne Smith
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News Analysis
Capital Relief Trades
Optimisation opportunities
Synthetic, true sale options explored for emerging markets
Qbera Capital has plans to deliver innovative balance sheet optimisation strategies to financial institutions and non-bank financial institutions (NBFIs) in emerging markets. With a particular focus on African, Middle Eastern and Indian firms, Qbera Capital is looking at the possibility of utilising various strategies, including true-sale and synthetic securitisation methods, to help these companies achieve both risk transfer and funding goals.
Headquartered in London with a presence in Johannesburg and Dubai, Qbera Capital is an independent asset manager, facilitating and providing debt and equity solutions via fund management services and corporate advisory. The advisory arm operates through Qbera Advisory, incorporating the balance sheet optimisation and securitisation advisory business.
The advisory business is focussed on Sub-Saharan Africa, the Middle East, South-East Asia and the Indian subcontinent, advising a range of companies from mid-market to established large corporates, financial and non-bank financial institutions (NBFI). Depending on the client’s requirements and their growth phase, the proposed solutions may vary from facilitating private debt and/or equity solutions, all the way to accessing the capital markets.
In terms of current projects, Paul Petkov, coo and head of securitisation advisory at the firm comments: “We are at various stages of discussion with existing and prospective clients on the use of securitisation structures. The requirements vary depending on the requirements, be it to optimise their balance sheets, mitigate credit risk, reduce the risk weighted assets, provide a better funding mix, improve capital-related ratios or consider, if appropriate, internal capital re-distribution.”
While true sale securitisation can be very challenging and time consuming across emerging markets, Petkov adds that synthetic securitisation appeals to banks and NBFIs as it provides credit risk mitigation and allows the originator to free-up capital. This can then be directed toward new, potentially green, projects and/or geographies, while also addressing concentration limits constraints and, in certain cases, improving key capital ratios.
In terms of Qbera’s Africa focus, Petkov says that after the US$1bn African Development Bank’s (AfDB) CRT transaction hit the market, synthetic securitisation is now firmly on the radar of many African financial institutions and NBFIs. He notes that, “whether financial institution or NBFI, and whether directly impacted by Basel IV or not, the roll out in 2022, with the expectations for higher capital requirements, provides an additional motivation for engaging in balance sheet optimisation and potentially in synthetic securitisation.”
In terms of whether working with firms in emerging markets presents any additional challenges, Petkov says, contrastingly, “It is a misconception that the UK and EU banks would have better-quality data, which, of course, is key for structuring, executing and replenishing a capital relief trade. In my experience and from what we have seen recently, it is actually the opposite. This may be due to the fact that, historically, the largest UK Banks - HSBC, RBS and Lloyds - have acquired [several] financial institutions [over the years] and have kept many legacy systems in place.”
Petkov concludes: “So, for us when discussing balance sheet optimisation with a client, the time to market with a potential synthetic trade, everything else being equal, should be shorter than when having a similar conversation with a major European or UK financial institution.”
Richard Budden
News Analysis
Structured Finance
ESG scores launched
New scoring system has "limited" credit rating impact
Fitch has introduced new ESG Relevance scores for structured finance and covered bonds, which communicate how material an ESG factor is to a credit decision. The agency has assigned elevated scores to approximately 18% of structured finance and covered bond transactions and programmes, although these will have limited impact as a key driver but “widespread resonance” as a credit factor and provide greater transparency.
Speaking at Fitch’s structured finance event in London yesterday, Andrew Steel, Fitch’s global head of sustainable finance, commented: “Investors have been asking us to look at ESG as a separate sub category, what the relevance of ESG factors are to a deal and how material it is.” Until now, said Steele, “If you wanted to look at an individual aspect, it was very hard to see each ESG element in a deal. So we have extracted these risk factors from existing criteria to see what’s relevant from a credit perspective.”
As such, he continued, the firm is now “looking at every sector, factor by factor, in a transaction specific, credit-focused manner which is integrated with our core credit rating analysis. We have been going through each transaction to score these elements.”
The new Relevance scores were built using a transaction/programme level system to assign scores to ABS, CMBS and RMBS programmes as well as covered bonds and consider the structure and relevance of ESG factors to Fitch’s rated transactions and programmes. The scores are assigned independent of, and do not necessarily correlate with, the ESG Relevance Scores assigned to the originators or issuing financial institutions of the structured finance transaction or covered bond programme.
The rating agency notes that based on over 67,000 individual scores, which assessed the relevance and materiality of 14 ESG factors to approximately 4,800 structured finance transactions and covered bond programmes, ESG was observed to have a direct impact on just over 2% of all transactions. These transactions were consequently assigned at least one score of 5 indicating that the ESG factor was either a positive or a negative key driver of the rating on an individual basis.
ESG Relevance Scores communicate how material an ESG factor was to a credit decision and, by assigning elevated scores of 4 or 5, Fitch analysts are able to highlight those factors that are deemed particularly relevant and, therefore, influential to a rating decision. Across Fitch’s scored structured finance and covered bond portfolios, elevated scores were assigned to approximately 18% of transactions and programs.
Fitch reports that social relevance was the biggest surprise, with significant impact across structured finance, accounting for just over 50% of all elevated Relevance scores. Within ABS, elevated scores were the result of pending litigation related to US student loan transactions, in CMBS, the effect of structural shifts in consumer preferences impacting retail properties and, in RMBS, the positive impact of government-backed collateral.
Fitch adds that governance issues are consistent across structured finance and covered bonds, but differ substantially from the governance sector-specific issues identified in other Fitch-scored asset classes. The firm adds that, while the vast majority of governance scores were assigned a baseline score of 3, approximately 9% of structured finance transactions (and 18% of covered bond deals) received at least one elevated governance score.
Looking further into the scores, Fitch notes that, globally, ESG factors were found to be most impactful in EMEA where 32% of scored transactions received at least one elevated score, followed by Latin America with 23% of transactions and North America with 16% of transactions receiving elevated scores. APAC transactions were least impacted by ESG factors with only 5% of the region’s transactions elevated.
In terms of asset class, RMBS was the most impacted sector, says Fitch, with elevated scores assigned to 24% of scored transactions, principally driven by operational risk concerns including those regarding servicer disruption. Following this, 17% of CMBS transactions are assigned with elevated scores as a result of shifting consumer preferences impacting US CMBS retail properties.
While RMBS was the most impacted sector, Tuuli Krane, structured finance analyst and senior director at Fitch, commented that this was partly a result of a large number of legacy RMBS with servicing or other issues which “skews” the results. In fact, she added that in RMBS there is also the highest proportion of positive scores, particularly as a result of RMBS programmes with a strong emphasis on sustainability, like Obvion’s green RMBS transactions.
Fitch notes that of the scores assigned, the vast majority was a 4, indicating that the ESG factors influencing RMBS and CMBS, while impactful, were generally not material enough to drive a rating action. Although, of note, 3% of RMBS and 1% of CMBS transactions were observed to have ESG factors with a positive impact on the credit rating.
Significantly, Fitch notes that the analysts are not passing judgement on the effectiveness of a transaction’s or programme’s ESG, but how the different elements of ESG impact the credit rating. As such, a transaction or programme with pronounced ESG risks that have no credit rating impact could receive a neutral score – as such, the lack of credit rating impact could be a valuable differentiator for use in portfolio analysis, the agency proposes.
Fitch adds that the Relevance scores are “observational” as they look at how much an ESG element affects a rating and therefore no rating should change. The agency concludes that the scores will, theoretically, provide greater granularity on why the ratings change and provide greater transparency where ESG risks have an impact on a rating decision.
Richard Budden
News
ABS
Auto SRT finalised
Excess spread follows new regulatory guidance
Santander has completed its eighth transaction from the Kimi programme. The €799m true sale significant risk transfer deal references Finnish auto loans and, unlike its predecessor Kimi 7, excess spread in the transaction flows all the way to the bottom of the waterfall following new regulatory guidance.
Rated by Fitch and Moody’s, the transaction consists of €725.2m class A notes, €42m class B notes, €8m class C notes and €24m class D notes. The class A notes priced at one-month Euribor plus 70bp (with an effective DM equal to 18bp, due to negative interest rates). The class B notes priced at 73bp, while the class C and D notes printed at a fixed 1.4% and 5% respectively.
The weighted average life of class A is equal to 1.59 years and 2.59 years for the rest of the tranches. The tranches amortise pro-rata, although the senior tranche amortises sequentially for a period of time before it switches to sequential.
Steve Gandy, md and head of private debt mobilisation, notes and structuring at Santander Corporate and Investment Banking, comments: “It’s an amortisation structure that optimises credit enhancement and makes the deal economically feasible. Credit enhancement would have been higher without the feature, since the rating agencies would ask for additional subordination that would make the transaction less efficient.”
Excess spread in this latest Kimi 8 transaction is not diverted back to the originator (SCI 19 December 2018), due to new regulatory guidance. “In this case, excess spread flows all the way to the bottom, following the latest JST feedback on excess spread and it’s reflected in the pricing,” says Gandy. Under the ECB’s new guidance, issuers are advised to sell a significant amount of the senior tranches, since that would reflect market pricing (SCI 4 October).
Additionally, an amortising liquidity reserve is fully funded at closing and sized at 0.5% of the class A and B note balance. The reserve is available to pay senior expenses and class A and B note interest in the event of a cashflow disruption.
The transaction benefits from a highly granular portfolio: the largest and 10 largest borrowers represent 0.05% and 0.3% of the pool respectively. The portfolio also benefits from geographical diversification across Finland and a diversified mix of vehicle brands.
However, 57% of the portfolio consists of balloon loans with a final payment of around 32.5% of the current balloon loan balance. In total, balloon payments represent only 18.5% of total cashflows and Moody’s notes that associated risks are limited because there is a variety of brands in the portfolio and the originator is independent of any car manufacturer.
The portfolio comprises 46,771 monthly-paying standardised hire-purchase auto loans that independent dealerships have granted mainly to private individuals (90.6%) or to commercial borrowers (9.4%) resident or registered in Finland. Of the collateral, 31.4% is new cars and 68.6% used cars.
Stelios Papadopoulos
News
ABS
Inaugural French ABS prepped
ABS is first SME deal from promotional bank
Bpifrance is marketing a debut €2bn SME ABS. The transaction, dubbed Bpifrance 2019-1, is a three-year revolving cash securitisation of medium to long term secured and unsecured loans to SMEs and mid-cap companies located in France and originated by Bpifrance Financement.
Bpifrance financement is the French national promotional bank responsible for the financing of companies within the Bpifrance group, with its mission to finance and stimulate French SME growth and innovation. The three main activities of BPI are to provide credit to French companies, guarantee loans and fund innovation and, Moody’s notes, the loans backing this transaction have been granted by BPI only in case a commercial bank has also provided a loan to the same borrower (in co-financing).
BPI is owned by commercial banks, 9%, and Bpifrance, which is owned by EPIC Bpifrance, 50%, and Caisse des Dépots, 50% and both of these entities are 100% owned by the French government. Bpifrance is a public group aiming at financing and developing French companies, and acting in accordance with the public policies conducted both by the state and regional authorities.
Moody’s and Scope have assigned provisional ratings of Aaa/AAA to the €1.55bn class A notes, while the €450.30m class Bs are unrated. There is 22.5% subordination on the class As and legal final maturity on all the classes is 25 October 2052.
Moody’s notes that the transaction is supported by a very granular securitised portfolio, with the top borrower group, top five and top 20 borrower group exposures being 0.39%, 1.90% and 7.08% respectively. Additionally, the maximum loan exposure is less than €8m while there is relatively limited exposure to real estate, with 23% of the initial portfolio exposed to the building and real estate sector.
Furthermore, there is the presence of co-financing with each borrower of the securitised portfolio granted a loan by a third-party commercial bank as a pre-condition to the granting of a loan from the Bpi Financement. This means that every loan request has been submitted to two parallel underwriting processes from both Bpifrance Financement and the third-party commercial bank.
Challenges to the transaction include the relatively long WAL of the portfolio of 5.6 years and the total portfolio after replenishment might have a weighted average life up to 6.3 years, exposing the portfolio to cyclical volatility. There is also a low level of collateralisation of the portfolio with loans benefitting from a first lien mortgage representing 64.75% of the total portfolio, while the three-year revolving nature of the pool also poses the risk that additional portfolios may be sold to the issuer, while the servicer has retained some flexibility in the composition of the portfolio.
Meanwhile, in Italy, Banca di Cividale has issued a €458.50m securitisation. Dubbed Civitas SPV series 2019-1, the transaction is backed by secured and unsecured loans granted by the bank to Italian SMEs.
S&P has assigned ratings to the transaction of single-A to the €320m class A notes and triple-B to the €50m class Bs. The €88.50m class Cs are unrated.
The rating agency notes that the portfolio is concentrated in the Italian region of Friuli Venezia Giulia, 61.7%, which is the location of the originator's headquarters. Additionally, the transaction is structured with a combined waterfall for both principal and interest payments and the rated notes are pass-through.
Furthermore, adds the S&P, the interest rate risk exposure deriving from the mismatch between the interest rate paid under the loans and the interest rate paid under the notes is not hedged. Finally, the transaction includes a cash reserve, funded on the closing date with part of the proceeds from the issuance of the unrated class C notes, which provides liquidity support and credit to the notes throughout the transaction's life.
Richard Budden
News
Structured Finance
SCI Start the Week - 14 October
A review of securitisation activity over the past seven days
SCI CRT Seminar
The line-up for SCI's 5th 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. For more information on the event or to register, click here.
Transaction of the week
JPMorgan Chase Bank 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. See SCI 10 October for more
Stories of the week
Framework focus
EBA synthetics paper welcomed, despite concerns
Opening up
Platform hopes to securitise global banks' trade finance assets
Performance hurdles
Loan sell-offs hampering US CLOs
Other deal-related news
- 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 (SCI 9 October).
- 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 (SCI 9 October).
- 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 centre (SCI 10 October).
- 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 (SCI 10 October).
- 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 (SCI 11 October).
Data
BWIC volume
Secondary market commentary from SCI PriceABS
11 October 2019
US CLO
A quieter end to the week with 13 covers today - 2 x AAA, 2 x AA, 2 x A and 7 x BBB. The >4y WAL AAAs traded in a 126dm-130dm range today, furthermore this week has seen a lot more supply week on week (23m last week) in >4y WAL AAA US CLO with around $117m of supply of 1st pay AAA but dm's on these widened 7bps on the week to 124dm, mainly due to a wide 158dm trade on ZAIS7 2017-2A A on Monday. Ignoring this trade spreads tightened 2bps on the week to 115dm.
The AA trades today were 2 clips of OCT38 2018-1A A3A (Octagon) which traded at 185dm / 6.9y WAL, double-A BSL CLOs have traded in a 175dm-192dm range this month so today's trade sits nicely in the middle of this range. The single-A trades were two clips of VOYA 2017-3A B that traded at 260dm / 6.4y WAL, note Single-As have traded in a 252dm-290dm range so today's trade is at the tighter end of the range. The BBBs traded in a 389dm-428dm range today whilst month to date we have observed a range of 320dm-477dm for BBBs. Although no BB trades today, we have observed 16bps compression in BB spreads down to 732dm across 32m of supply (vs 43m last week). Please refer to your SCI Sales representative for further details.
EUR CLO
There are 6 x AAA CVRs and 1 x BB with disclosed prices today. The AAA spreads range from 122dm to 132dm. The tight end of the range is ALME 4X AR managed by Apollo and the wide end are HARVT 17X A (Investcorp) and DRYD 2017-56X ANV (PGIM). These spreads look like a further firming in AAA levels. On 8 Oct we saw a number of AAAs trade with spreads in the range 125dm to 141dm but the majority were around 137dm. The BB is AVOCA 14X ER which traded at 100.12 / 501dm. This bond traded at M90s / 601dm on 10 Oct. BB trades on 10 Oct were in the range 600dm to 670dm so this looks like an outlier. We'll have to see if this level is maintained.
SCI proprietary data points on NAV, CPR, Attachment point, Detachment point & Comments are all available via trial, go to APPS SCI + GO on Bloomberg, or contact us for a trial direct via SCI
News
Capital Relief Trades
Positive impact
Capital allocation factor debuts
Societe Generale has completed an innovative risk transfer transaction that, for the first time, incorporates a capital allocation factor that incentivises additional positive impact finance lending. Mariner Investment Group has purchased the junior tranche of notes through its IIFC platform.
Dubbed Jupiter, the US$3.4bn transaction references more than 250 loans in over 40 countries across a variety of sectors, including energy, infrastructure, shipping, aircraft, metals and mining, real estate and TMT. Under the terms of the transaction, SG has committed to dedicate 25% of the risk-weighted asset reduction to spur new positive impact financing over the next three years.
By reallocating the released capital from the legacy loan book and dedicating it to enhance the capacity to finance new positive impact projects, the parties aim to strongly advance the UN Sustainable Development Goals. Additionally, if the bank is able to redeploy 50% of the RWA towards the positive impact capital allocation factor by the fourth anniversary of the transaction, Mariner has agreed to a reduction in the coupon - thereby creating a positive pricing incentive for additional positive impact finance investment.
Molly Whitehouse, lead structurer for the Mariner Investment Group investment team, comments: “This deal again illustrates the extent to which credit risk transfer transactions have become an efficient tool for lending institutions. Now, the power of credit risk transfers is also being harnessed for critically important socially responsible investments.”
With the addition of its investment in Jupiter, Mariner Investment Group holds a total of over US$7bn in impact-related initial deal notional, including the landmark US$1bn Room2Run synthetic securitisation in cooperation with the African Development Bank.
Corinne Smith
News
Capital Relief Trades
Best in class
SCI Capital Relief Trades Awards winners revealed
The winners of SCI’s inaugural Capital Relief Trades Awards were revealed at a ceremony last night. The selections reflect the vibrancy and innovation evident across the risk transfer market over the last 12 months and emphasise the utility of synthetic securitisation - not only as a risk management tool, but also as a way of mobilising private capital for environmental and social gains.
At the top of the bill was the Issuer of the Year Award, which was won by Santander in recognition of the lender’s prolific issuance and innovative structural achievements. The bank has issued 13 capital relief trades – both traditional and synthetic - totalling €25.6bn, across nine countries (US, Latin America and Europe) and six different asset classes (SME, large corporate, auto, consumer, project finance and CRE) since September 2018, placing €3.5bn of first loss and mezzanine tranches with 40 different investors.
Among the innovative deals completed by Santander during the awards period was Santa Fe Synthetic CLO, the first synthetic securitisation transaction ever executed in Mexico. The deal references a portfolio of 4,115 Mexican SME loans and a triple-A rating was obtained on the senior tranche from local rating agency Verum, enabling Santander to achieve capital relief at both the local and group level. Unfunded credit protection was purchased from the International Finance Corporation, following a competitive auction with several investors.
Meanwhile, Credit Suisse was named as SCI’s Arranger of the Year in recognition of the variety of structures it has placed and the breadth of its investor base. Since September 2018, the bank has arranged five capital relief trades providing protection on approximately €15bn of reference assets with an aggregate tranche size of approximately €850m.
In terms of deal highlights, Credit Suisse placed two unfunded deals from 4Q18 and 2Q19 referencing a Sfr1bn portfolio of short-term mortgage loans each, which were executed with an insurance company as counterparty. The innovative feature of these two transactions is that they operate similarly to a facility and therefore the transaction sizes are not static, but can vary depending on the situation.
Another stand-out deal is the Sfr4.5bn Elvetia 11 from 3Q19, which features a dual-tranche structure and aims to expand insurer involvement in the SRT market. The Sfr202.5m equity tranche is a funded CLN issuance bought by a single institutional investor, while Sfr67.5m unfunded mezzanine tranche protection is provided by a syndicate of insurance companies.
Lloyds Banking Group’s synthetic UK RMBS Syon Securities 2019 (SCI 25 July) won the Deal of the Year category. While the transaction was motivated by prudent risk management as part of the bank’s broader plan to support the UK economy, its innovative use of risk transfer - combined with the deal’s scalability for the issuer and repeatability for other UK mortgage lenders - gives it potential benchmark status.
For the Impact Deal of the Year Award, SCI chose Room2Run (SCI 20 September 2018) as winner, given that it is the first-ever synthetic securitisation with a multilateral development bank. The transaction freed up US$650m in extra lending capacity for the African Development Bank, which it has committed to deploy in renewable energy developments in African countries. As well as setting the benchmark for how risk transfer technology can be deployed innovatively and to positive effect, the transaction overcame a number of structural and regulatory hurdles in the process.
For the Innovation of the Year Award, Societe Generale’s US$3.4bn FCT Jupiter 2019 (SCI 16 October) transaction stood out for introducing a number of ground-breaking structural innovations. Placed with Mariner Investment Group and referencing more than 250 diversified specialised lending and corporate assets in over 40 countries, the deal features a first-of-its-kind Positive Impact Capital Allocation factor, through which the bank has committed to dedicate 25% of the RWA reduction within three years to reduce the capital burden for new Positive Impact Finance lending.
The terms of the transaction also introduce a pricing incentive for additional impact allocation. If Societe Generale redeploys 50% of the RWA release towards the Positive Impact Capital Allocation factor by the end of the replenishment period, the coupon on the transaction will be reduced, thereby enhancing its capacity to originate Positive Impact Finance projects.
Away from deal categories, the EIF won SCI’s Investor of the Year Award for providing an unparalleled level of support to the capital relief trades market in Europe, bringing numerous synthetic securitisations across the line. The EIF is not only a key driver of innovation, participating in numerous benchmark transactions across jurisdiction and asset class, but it has also helped open up the risk transfer market to a broader range of participants.
As part of this process, the fund is piloting three transactions with a third-party credit fund, backed by SME loans from three different jurisdictions. The deals are expected to be announced before the end of the year.
Clifford Chance was named Law Firm of the Year, in recognition of the firm’s dominance and influence across all sectors of the CRT business. With the exception of France and Italy, it has acted as originator and drafting counsel on the majority of synthetic securitisation transactions in the market over the past 12 months. At the same time, it has participated in advocacy relating to the implementation of the EU Securitisation Regulation and is extensively involved in discussions with all major regulators and industry bodies in relation to the continued evolution of the regulatory landscape.
Scope Ratings was selected as SCI’s Advisor/Service Provider of the Year, thanks to its involvement in innovative risk transfer transactions in unusual asset classes and standardised bank deals. The award also recognises that a multidisciplinary approach to ratings has aided the rating agency’s work.
Arch Capital Group is SCI’s Credit Insurer of the Year, in recognition of its position as global leader in mortgage credit risk transfer and the completion of a first-of-its-kind transaction with ING. Dubbed Simba (SCI 2 November 2018), the deal was ground-breaking in that it was the first unfunded significant risk transfer trade executed between a European bank and an insurance counterparty and the first mortgage SRT approved by the ECB. Arch also formed Arch MRT during the awards period, designed in collaboration with Fannie Mae and Freddie Mac to address key risk issues and reduce costs related to procuring and managing certain forms of credit protection.
Finally, PGGM credit and insurance-linked investments head Mascha Canio received SCI’s Personal Contribution to the Industry Award. Heading up a team responsible for one of the largest investment portfolios in the sector that has driven market growth while setting a benchmark that others follow would perhaps be enough to justify the award. But her personal contribution extends further as one of the most long-standing and visible investors and an advocate for focusing on risk-sharing and transparency to ensure the capital relief trade market’s future sustainability.
Honourable mentions
Issuer of the Year: Lloyds
Arranger of the Year: Banca IMI
Transaction of the Year: Santa Fe Synthetic CLO
Impact Deal of the Year: FCT Jupiter 2019
Innovation of the Year: Simba
Investor of the Year: D. E. Shaw
Law Firm of the Year: Latham & Watkins
Credit Insurer of the Year: Liberty Specialty Markets
Advisor/Service Provider of the Year: Aon
To read the coverage of the awards in full, click here.
News
Capital Relief Trades
Risk transfer round-up - 18 October
CRT sector developments and deal news
Nordea is rumoured to be prepping a corporate capital relief trade for this year. The Nordic lender’s last risk transfer transaction - dubbed Archean I - closed in August 2016 (see SCI’s capital relief trades database).
News
CMBS
Affordable housing eyed
Agency CMBS eminent domain exposure gauged
The King County Housing Authority (KCHA), a municipal corporation created by the State of Washington, last week acquired two properties securitised in Fannie Mae DUS CMBS by exercising its power of eminent domain in lieu of condemnation. The move follows Microsoft’s US$500m pledge in January to preserve existing affordable housing, drive construction of new units and partner with non-profits to address the affordable housing crisis on the Eastside of King County and the Puget Sound region.
The two affected properties are the 240-unit Kendall Ridge Apartment Homes multifamily complex in Bellevue and the 207-unit Emerson Apartments in Kirkland. KCHA regards the properties as being at high risk of losing their existing affordability, given that they are in areas with significantly appreciating housing costs.
Puget Sound has become the sixth most expensive region in the US, with a 21% increase in jobs since 2011 but only a 13% increase in housing units.
KCHA has announced its intention to acquire five properties in King County - including the two Fannie Mae ones - using eminent domain as part of its five-year strategy for acquiring or building 2,250 units of affordable housing located near high capacity and reliable transit. The authority may choose to explore this option with additional properties, however.
In terms of the agency CMBS universe, Morgan Stanley CRE research analysts estimate that US$5.06bn of Fannie Mae DUS, US$3.82bn of Freddie K and US$428.94m of Freddie SB securities have exposure to properties in King County.
In the case of properties securing Fannie Mae CMBS, if they are acquired through eminent domain or purchased in lieu of going through the eminent domain process, the loan documents do not require the borrower to pay a prepayment premium. Further, Fannie Mae's CMBS disclosure documents also state that no prepayment premium will be paid under these circumstances. Consequently, investors will receive a payoff at par on the securities upon the closing of the property acquisition.
Meanwhile, US$225m of Microsoft’s commitment is set to be invested at below market rate returns, focusing on preserving and developing new middle-income housing on King County’s Eastside. US$250m will be invested at market rate returns to support low-income housing across the King County region, while US$25m will be pledged in philanthropic grants to address homelessness. The majority of this capital will be deployed over three years.
The commitment accompanied a joint declaration from the mayors of nine of the largest cities around Seattle - Auburn, Bellevue, Federal Way, Issaquah, Kent, Kirkland, Redmond, Renton and Sammamish - to take steps to increase affordable housing capacity, including changes in zoning to increase the pipeline of housing in selected areas, providing desirable public land near transit locations, addressing permitting processes and fees, and creating tax incentives for developers. However, KCHA is believed to currently be the only governmental entity using eminent domain as part of its strategy to preserve affordable housing.
Corinne Smith
Market Moves
Structured Finance
Serbian NPL disposal plans announced
Sector developments and company hires
Associate appointed
Channel Capital Advisors has hired Pouya Jafari as an associate in London. He was previously a credit analyst at Wells Fargo, in London.
Serbian NPL disposal planned
The Serbian Deposit Insurance Agency has invited bids for the sale of a €1.82bn NPL portfolio. Letters of interest can be submitted up to 8 November and deadline for the submission of binding offers is 15 April, 2020.
Market Moves
Structured Finance
Indian ABS soars
Sector developments and company hires
CLO business announced
AllianceBernstein has announced a new loan and CLO management business, hiring Scott Macklin to lead the effort. Macklin was previously head of research in Och-Ziff’s credit business and the new firm will be initially funded with investments from AXA Equitable Life Insurance Company, expanding on the existing relationship between AB and AXA Equitable Holdings.
ILS fund launch announced
Markel CATCo Investment Management has confirmed that Rick Montgomerie and Charlie Vaughan, the portfolio managers for its Aquilo Fund, will be leaving the company with the intention of establishing a new investment manager and fund - Chard Re Investment Management (Chard Re). Elizabeth Simmons, the fund's underwriter, will also be leaving to join Chard Re, which is intended to launch 1 January, 2020. Markel Corporation intends to be a seed investor in Chard Re, subject to the fund reaching a specified level of invested capital and subject to finalising definitive agreements, and take a 12.5-17% ownership position.
The intention is for the assets and liabilities of the Aquilo Fund (existing business and side pockets) to be transferred to Chard Re, pending investor and regulatory approval. Chard Re will manage the Aquilo Fund run-off.
Indian ABS soaring
Crisil reports that the volume of securitisation transactions soared 48% on-year to Rs 1 lakh crore (approximately US$14bn) in the first half of fiscal 2020 as housing finance companies (HFCs) and non-banking finance companies (NBFCs) – together referred to as non-banks – resorted significantly to this route for fund-raising. Growth rode on both, established and new originators entering the market to augment their resources profile in a challenging financing environment. The number of active originators was close to 100 in the first half of this fiscal, compared with around 70 in the corresponding period of last fiscal.
Overall, growth was broad-based with both mortgage backed securitisation (MBS) and asset-backed securitisation (ABS) logging healthy uptick in volume. MBS volume rose 16% on-year, which is impressive given that some HFCs that were large originators last fiscal had limited transactions during the second quarter of this fiscal because of muted or negative growth in assets under management. In effect, the entry of new originators and the hunt for alternate source of funding, drove volume. The ABS segment saw volume zooming 69%, benefitting from a doubling in vehicle loan securitisation growth, and continued expansion of the asset class base.
Securitisation of gold loan receivables, personal loan receivables, two-wheeler loan receivables and lease rental receivables are now mainstream, with newer originators increasingly participating in such transactions. The volume of pass through certificates (PTCs), which remain the preferred route for ABS transactions, spurted 63% on-year. Consequently, the share of PTCs in total securitisation rose to 41% from 36% in fiscal 2019. Direct assignment (DA) volumes grew 39% on-year to Rs 59,000 crore.
Market Moves
Structured Finance
Euro advisory firm boosts SF expertise
Company hires and sector developments
Euro advisory firm boosts SF expertise
Zedra has hired Rens van Hoof as head of capital market solutions out of its Amsterdam offices. He has a range of experience covering special purpose vehicles for securitisation, structures for bond issues and commodity trade finance, as well as private equity, real estate and investment funds to serve financial institutions, asset managers and large corporate firms.
Fed finalises risk rules
The US Federal Reserve Board has finalised rules that tailor its regulations for domestic and foreign banks to more closely match their risk profiles. The rules reduce compliance requirements for firms with less risk while maintaining the most stringent requirements for the largest and most complex banks.
The rules establish a framework that sorts banks with US$100bn or more in total assets into four different categories based on several factors, including asset size, cross-jurisdictional activity, reliance on short-term wholesale funding, nonbank assets, and off-balance sheet exposure. Significant levels of these factors result in risk and complexity to a bank and can in turn bring risk to the financial system and broader economy.
While generally similar to the proposals released for comment over the past year, the final rules simplify the proposals by applying liquidity standards to a foreign bank's U.S. intermediate holding company (IHC) based on the risk profile of the IHC, rather than on the combined U.S. operations of the foreign bank. Additionally, for larger firms, the final rules apply standardized liquidity requirements at the higher end of the range that was proposed for both domestic and foreign banks. The Board estimates that the changes in the aggregate will result in a 0.6% decrease in required capital and a reduction of 2% of required liquid assets for all banks with assets of US$100bn or more. The rules do not reduce capital or liquidity requirements for firms in the highest risk categories, including US global systemically important banks.
Libor transition tax relief proposed
The US Treasury and the Internal Revenue Service today issued proposed regulations allowing taxpayers to avoid adverse tax consequences from changing the terms of debt, derivatives, and other financial contracts to replace reference rates based on interbank offered rates (IBORs) with certain alternative reference rates. The proposed rules respond to a request for guidance from the Alternative Reference Rates Committee (ARRC), a broad-based committee of private sector and ex-officio government stakeholders convened by the Board of Governors of the Federal Reserve System in advance of the expected market transition from IBORs to alternative reference rates, such as the Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York.
These proposed regulations address the possibility that modifying a debt instrument, derivative, or other financial contract to replace a reference rate based on an IBOR could be a taxable transaction for Federal income tax purposes or could result in other tax consequences. Without this critical guidance, market participants would face significant tax uncertainties in making necessary modifications to these contracts.
Interested parties are invited to submit written comments on the proposed regulations through 25 November, 2019.
Resi acquisition announced
Redwood Trust is to acquire CoreVest American Finance Lender, a nationwide US originator and portfolio manager of business-purpose residential loans (BPLs), and several of its affiliates, from certain affiliates of Fortress Investment Group's credit funds business and CoreVest Management Partners. The acquisition includes the CoreVest operating platform and over US$900m of related financial assets. Collectively, the platform and assets will significantly expand Redwood's presence in the BPL market, furthering its position as a leading private-sector source of housing-market liquidity. Importantly, the transaction also advances several of Redwood's key corporate strategic initiatives, including broadening and diversifying its revenue streams, significantly expanding its capacity to create proprietary credit investments, and profitably scaling its infrastructure and operations.
Under the terms of the agreement, Redwood will acquire CoreVest's operating platform and assets – including its business-purpose loan portfolio and subordinate bonds from CoreVest-sponsored securitisations – from the Sellers. Consideration for the acquisition is approximately US$490m, net of in-place financing on the financial assets. Redwood plans to fund this transaction with a mix of cash on hand and shares of Redwood stock. The Redwood shares are payable to the CoreVest executive management team and vest over a two-year period.
Market Moves
Structured Finance
RTS draft published
Sector developments and company hires
The European Commission has published the Delegated Regulation on Regulatory Technical Standards (RTS) regarding the disclosure requirements in the Securitisation Regulation, detailing what information has to be disclosed by the sellers of European securitisations. Rabobank’s structured finance analysts comment that, although this new regulation does not contain much new information, the arrival of the act marks an important step in the legal process of implementing the new securitisation regulations.
Following industry consultations, a final paper and an important revision on some of the requirements through an opinion/amendment which ESMA published at the beginning of this year, the rules have now officially come together in this Delegated Regulation.
PCS comments that while the data disclosure requirements will apply to all European securitisations, the issue of what qualifies as a European securitisation remains unsettled. The third-party verifier adds that a question still remains as to whether “the data requirements apply only to securitisations issued by European entities or do they apply to all securitisations sold in Europe, so snaring non-European issuers?”
The draft RTS is now presented to the European Council and the European Parliament for three months and, during that period, either may object to and veto the RTS. Once the three month period has expired without objection, the RTS is published in the Official Journal and twenty days after publication it is law. PCS comments that in all likelihood unless there is a market revolt, the new data requirements will come into force late January or early February 2020.
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