Contents

CLOs

Re-bridging concerns dismissed

Re-bridging loans in CRE CLOs "can offer benefits"

Re-bridging loans have started to appear in CRE CLO transactions, where a borrower has used a new bridge loan to refinance an existing one, potentially with higher proceeds and a lower interest rate. Some suggest that this need not be a cause for concern unless volumes of re-bridging loans increase substantially and, instead, they may have positive repercussions for some market participants.

KBRA adds that, year-to-date 2019, it has identified 14 loans that refinanced in CRE CLOs as well as four that modified and nine permitted modifications within one transaction. This means a total of 27 refinanced and modified loans, representing 2.7% of the CRE CLOs it rates.

Of these re-bridging loans, one was in FORT CRE 2018-1, one in HUNT 2018-FL2, three in LNCR 2018-CRE1, two in M360 2018-RE1, three in TRTX 2018-FL2, one in BDS 2019-FL4, one in GPMT 2019-FL2, one in Bancorp 2019-CRE5 and one in VMC 2019-FL3 (See SCI's deal database).

There are two common scenarios in which re-bridging is observed. One involves the refinancing of another loan with the CRE CLO sponsor including the newly refinanced loan back into the same deal, or into another one of their managed CRE CLOs; a different CRE CLO sponsor could also refinance it and subsequently add the loan to their transaction.

Additionally, re-bridging loans are observed, says KBRA, when performing loan modifications. While not an outright refinancing of the loan, such modifications can achieve a similar outcome in a more cost-effective manner.

Joe Iacono, ceo and managing partner at Crescit Capital Strategies comments: “While we have certainly seen some re-bridging loans in CRE CLOs, it still remains to a relatively small portion of the overall market.  If it increased hugely then it could become a concern.”

He continues: “Prudent lenders are aware of the issues and focus on these types of situations regardless of whether a loan has been contributed to a CLO or not.  In a CLO, in most cases the lender is retaining a 20% first loss position in the loan pool – aligning their interest with the performance of the loans.  Having some flexibility to modify or re-bridge is one of the predominate reasons issuers utilise the CLO structure versus a REMIC.”

KBRA adds that re-bridging activity resulted in an increase in the debt amount and a lower loan coupon, with an increase in total commitment of the 27 refinanced and modified loans of 14.4% and an average reduction in loan spread of 1.07%. The agency adds too that the adherence to the servicing standard for modifications is “likely limiting the ability of CRE CLO managers to modify loans versus refinancing” and as a result, the firm has seen CRE CLO managers add new language into recent transactions that provide more flexibility to modify loans.

Iacono suggests, however, that re-bridging loan activity that results in a lower coupon isn’t necessarily a problem because, “sometimes a borrower may be ahead of the original schedule and feel that the risk profile of the asset has reduced and is worthy of a reduction in the loan coupon.” He adds that “re-bridging loans can mean that borrowers are able to secure a lower rate by refinancing elsewhere.”

Additionally, from the investor viewpoint, says Iacono, they may not actually want the loan to be paid back early, so paying down bond principal. In this regard, re-bridging/modifying loans can help to keep their investment outstanding for longer.

Overall, Iacono says that CRE CLOs have otherwise not displayed a huge amount of innovation to “raise any eyebrows”, with structures remaining relatively vanilla. He notes that deal sizes are getting bigger with US$1bn-plus deals not uncommon, but that this supply is still absorbed by investors wanting to invest in US CRE but in a short-term floating rate format.

Other areas of interest within the US CRE space are microunit developments, says Iacono, “which are on the rise” while self-storage is an “interesting and quite positive sector.” Iacono concludes that he remains cautious around hotel loan requests because of the sector’s vulnerability to economic turbulence, but remains interested in “pockets of retail” but more “old fashioned retail stores”, which now seem more attractive due to less online impact.

Richard Budden

Derivatives

Correlation evolution

Tranche trading continues to gain traction

Bespoke and index tranche trading volumes have been increasing for the last few years, supported by the low yield environment. Of late, activity has begun to pick up speed and the market is set to evolve.

“The end of last year and beginning of this were very active, particularly in the two- and three-year points – spreads were wide and it was a good time to put on risk,” says Magnus Einarsson, md, structured credit trading at Nomura. “Generically, the curve became very steep on the back of these flows, which is hampering the ability of dealers to hedge their short-term risk, so we’ve seen people push out to five-years since.”

Einarsson continues: “While five years doesn’t sound that far out, it is a big move for the bespoke market and the increased activity has improved liquidity there and driven the bid-ask in dramatically. For now, there is a general reluctance to go further, though there has been some take up at longer maturities already.”

This year’s steepening curve and narrowing spreads have notably suppressed appetite for one previously popular trade, though ignited interest in another. Frédéric Couderc, co-cio at Chenavari, explains: “One big area of activity until the end of last year – selling super seniors – has dropped off a little. For example, in Europe, index correlation got so low at the beginning of this year it no longer made sense to be selling, say, two-year super senior. However, a few firms, including ourselves, saw it as an opportunity to go long equity tranches and position for future market moves.”

After a summer lull, activity has picked up once again across the board, even though spreads are yet to head wider. Couderc says: “Given where we are in the credit cycle, the current levels of spreads and the spread widening experienced in 4Q17 and 4Q18, spread widening should theoretically be investors’ main concern. However, it seems that is not the case this time - given the low yield environment and renewed ECB CSPP programme, there remains strong pressure to enhance returns and so bespokes, which provide cheap leverage, are proving popular.”

Nevertheless, Chenavari is looking elsewhere, Couderc reports. “We have been focusing on the index side as bid-offer is relatively costly on bespokes and liquidity costs kill the attraction of CSOs for us, but obviously it depends how a fund is set up – that may be less of an issue for others. Instead, the pick-up in standardised tranche volumes and consequent liquidity means you can now really do trades that allow you to express views on different parts of the capital structure and between indexes. That’s mostly what we are doing – relative value is by far the most attractive space for us right now.”

That said, Couderc adds: “We do also have a basket of names that we like and have a strategy to put on a bespoke trade if there is a spike in spreads. If the move is big enough, the trade justifies absolving the bid-offer.”

Overall, though, there is increasing focus on bespoke tranches at the moment, according Einarsson. “We are seeing a lot more interest in the space and notably on what we expect to be the next leg of the market’s evolution. Thanks to improved liquidity at the longer-end, there is now the ability to have managed portfolios, which will make people more comfortable with these instruments - not necessarily from a duration point of view, but certainly from a credit point of view and the ability to move names around.”

That will also open the market up to a different and far broader client base, which in turn will continue to boost liquidity, says Einarsson. “CLO managers, for example, have been looking at synthetic alternatives, but have kept away because of the static nature of the products that have so far been available since the bespoke tranche market re-opened in 2014/2015.”

As Einarsson concludes: “A lot of people are working on actively managed structures – no-one is quite there yet, but it will come. Even then, we’ll still be a long way off the pre-crisis model of rated tranches run by third-party managers and sold into multiple distribution channels worldwide.”

Mark Pelham

ABS

One-stop shop

New firm offers range of innovative securitised products

Gessler Capital was recently launched with a view to meet increasing demands from issuers that want off-balance sheet securitisation solutions in a more flexible format than traditional methods. As such, the Swiss firm aims to offer a range of tailored products, including CLNs and actively managed certificates, which it also hopes will appeal to investors hungry for high-yielding alternative investments.

Vincent Gessler, ceo of Gessler Capital, comments that he started his firm after working at GENTWO, where he came across a growing number of clients that want to launch off-balance sheet products. To help with Gessler Capital's strategy, it also acts as a client of GENTWO (SCI 7 June 2018) - an external service provider.

Part of the firm's strategy is to appeal to a broader target audience of clients who want to issue alternative investment products, but do not want to set up a whole securitization structure. Gessler Capital has stepped into this role, by becoming the sponsor of an off-balance-sheet Guernsey issuer solution, which is a "significant milestone for the company" notes Gessler. 

He then advises firms on issuing a range of products depending on their needs. “For clients looking to securitise a loan,” he says, “we could advise on a Credit Linked Note (CLN) solution, a product that is often the right fit for such a purpose…and investors receive a varied or fixed coupon during the tenor of the note.”

Additionally, he says that his firm can provide solutions for clients looking to raise capital to finance their business, but without losing their voting rights and control of their company. Such clients might therefore opt for an equity tracker which allows owners to continue operating their business and therefore maintain control.

The benefits of issuing securitised products, he says, is that they can help to raise liquidity, while entire deals can be wrapped into a bankable ISIN with a

term sheet in compliance with structured product standards. This enables qualified investors to participate in such alternative investment forms, and the counterparty, as the borrower, further receives liquidity to make additional transactions, notes Gessler.

Another solution Gessler Capital offers is an actively managed certificate (AMC) which is a very flexible portfolio solution that can embed both bankable and non-bankable underlying instruments. This product typically involves a strategy manager which will manage the portfolio in line with the guidelines defined in the term sheet.

Gessler notes that the investor, in turn, participates in the performance of this portfolio and agrees to the product conditions by purchasing the AMC. A significant advantage of the AMC, he adds, is that the investor does not receive money for every realisation of an investment, as with individual investments.

Instead, the investor remains permanently invested in the portfolio and provides the strategy manager with the funds for further use, thereby recycling the money within the AMC. An investor can participate in several projects through a single purchase and so indirectly diversify their risk.

Gessler comments that these alternative investments are useful additions to a diversified portfolio, due to their uncorrelated behaviour to the financial markets. He suggests that alternative investments such as these are especially relevant with a lack of other high-yielding options available and they enable investors to access a securitised product in a more straightforward and uncomplicated way.

In terms of clients, the majority are asset managers, family offices, banks, alternative investment companies, as well as start-ups. Gessler comments that, “The asset managers and banks are particularly interested in the AMC solutions and want to implement their investment strategies more efficiently on their smaller mandates or invest [in] diversified portfolios like exotic investments, such as hedge funds.”

Gessler adds that family offices see the benefits of maintaining privacy as an investor and are interested in inheritance solutions. Alternative investment professionals are, in turn, interested in direct investment opportunities and portfolio solutions, while start-ups are looking for an alternative to place equity or debt capital with qualified investors.

He adds that in terms of future projects for the firm, some shall be “rolled out shortly, and the pipeline is very promising.” Gessler comments that this means the company can now “cover a broad customer base with a cost-effective and safer-than-standard market solution – without bank issuer risk.”

Additionally, he notes that the company understands that tax implications are becoming increasingly precarious and challenging, which the firm hopes to resolve by continually expanding its securitisation solutions, to meet the different and evolving needs of its clients. He concludes: “We believe that the customer should have an array of options to choose from, underlining our ambition of offering a customer-oriented and competitive service as a one-stop-shop”.

Richard Budden

ABS

Fully equipped

US equipment ABS booming in primary and secondary

With two deals pricing last week (Ascentium Equipment Receivables 2019-2 and CNH Equipment Trust 2019-C) and another - the US$675m SCF Equipment Leasing 2019-2 - already in the visible pipeline, the 2019 boom in US equipment ABS is rolling on. Primary issuance in the sector has already seen over US$17bn this year and secondary market activity continues to grow as well.

Equipment ABS new issuance has already surpassed the 2018 full-year record-high annual supply of US$13.7bn, according to JPMorgan figures. The increase has been driven by the heavy ticket segments, with US$12.5bn year-to-date versus US$8.8bn for full-year 2018. Total equipment ABS outstanding stood at US$28bn, roughly two-thirds of which is heavy and the rest small ticket.

JPMorgan securitisation research analysts suggest that increased new issuance is a result of both more volume from incumbent issuers, as well as the entrances of new issuers. This year’s debut ABS sponsors include Hewlett Packard Financial Services (HPEFS) and Pawnee Leasing (PWNE) on the small-ticket side. BMO Financial (TFET) counts as a returning ABS issuer this year, as the company acquired GE’s transportation equipment finance business in December 2015, including the GEET ABS programme that last issued in February 2015.

Meanwhile, last year, Marlin Leasing (MLR) re-entered the ABS market after an eight-year break, Mercedes-Benz Financial launched its DTRT truck loan ABS programme and DLL Finance expanded its DLL ABS programme to cover mid/small as well as large-ticket equipment.

Bank of America Merrill Lynch securitised products strategists note that they prefer small-ticket equipment ABS over both agriculture and construction (A&C) equipment and prime auto loan ABS for the incremental spread. For example, the triple-A rated 2.7-year senior notes of the Ascentium small-ticket equipment ABS priced at 60bp compared to 42bp for the comparable tranche of the CNH A&C transaction.

“The basis between the small-ticket equipment sector and the prime auto loan sector was 17bp-27bp, depending on platform,” the BAML strategists observe.

In the secondary market, trading volume for equipment ABS has increased in tandem with growing outstandings. Average monthly trading volume was US$462m on the year (versus roughly US$30bn in outstandings), versus US$414m in 2018 and US$325m in 2017, according to JPMorgan data. Additionally, a record number of block trades has been seen this year: 51 on the heavy and 44 on the small ticket side.

The sector also benefits from good credit performance. The JPMorgan analysts note that for the 2018 heavy equipment ABS book, cumulative net losses to date span from just 10bp to 32bp, while the MMAF and SCFET programmes have seen no losses. For the small ticket 2018 vintage, DEFT, GLAC, DLL and ACER cumulative net losses stand at less than 0.5% on month 17, while AXIS - an outlier in the group - stands at 4.3% for month 19.

Mark Pelham

Structured Finance

SCI Start the Week – 21 October

A review of securitisation activity over the past seven days

CRT awards winners
The winners of SCI's inaugural Capital Relief Trades Awards were revealed at the annual SCI CRT Seminar last week. 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. To read the awards coverage in full, click here.

Transaction of the week
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). See SCI 18 October for more.

Stories of the week
Auto SRT finalised
Excess spread follows new regulatory guidance
ESG scores launched
New scoring system has "limited" credit rating impact
Positive impact
Capital allocation factor debuts

Other deal-related news

• Crisil reports that the volume of Indian 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 (SCI 15 October)
• 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 (SCI 16 October).
• 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 (SCI 16 October).
• 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 (SCI 18 October).

Data

BWIC volume

Secondary market commentary from SCI PriceABS
18 October 2019
US CLO
A quiet day today with 2 x BB covers observed, this week has been starved of BBs which has been quite rare post summer.  The BBs trade in a 938dm-951dm range for long WALs.  At the wide end is DEN14 2016-1X ER (Crestline Denali) which covers at 951dm / 8.6y WAL - this deal has a profile of Oct-23 RP, Oct-20 NC, 2016 vintage refi'd in 2018.  The performance stats are lo-MVOC 104.9, hi-WARF 2929, 0 defaults, hi-90 diversity, lo-CCC 2.52% and lo-Jnr OC cushion 3.94% whilst the manager has a good record.
The other BB today is comparable in terms of DM, AWPT 2018-9X E (ArrowMark Colorado) covers at 938dm / 8.9y WAL - this deal has a similar profile of RP Jul-23, NC Jul-20 and a 2018 vintage.  The performance stats are lo-MVOC 105.02, WARF 2825, 0 defaults, 84 diversity, hi-CCC 5% and a sound Jnr OC cushion 5.21% whilst the manager also has a sound track record versus cohorts and quite comparable to Crestline.  To date this month these have been the widest BB prints, only OZLM 2018-22A D on 8 Oct 863dm / 7.9y WAL compares with a slightly shorter WAL.
Other 8-9y WAL BBs have traded this month in a 686dm-779dm range so some softening is apparent at this end of the capital structure, note we calculated that BBs last week traded ~732dm as mentioned last Friday.
We have also observed softening this week in AAAs, the >4y WAL AAAs widened 9bps on the week to 133dm and yet a lower level of supply versus last week at this rating level.
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

Structured Finance

SCI's latest podcast is now live!

The editorial team discuss the hottest topics in securitisation today...

In this month's exciting edition of the SCI podcast, the team talks about standardised banks and the barriers they face when looking to enter the risk transfer market, Santander's latest securitisation of Finnish auto loans, Kimi 8, as well as a company that is looking to help companies in emerging markets tap synthetic securitisation to optimise their balance sheets.

Don't forget, as well as online here, it is available on Spotify (just search for Structured Credit Investor) and iTunes - if you do listen on iTunes feel free to give us a rating and write a (kind) review!

Capital Relief Trades

SCI Capital Relief Trades Awards 2019

Arranger of the Year: Credit Suisse

Credit Suisse is 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.

The transactions included both equity and mezzanine tranches, featuring flexible guarantee facilities and dual-tranche structures with a range of counterparties and investors. Equity tranches were generally CDS/CLN structures, while mezzanine tranches included CDS/CLN, financial guarantee and unfunded insurance structures placed either directly or via an SPV.

Credit Suisse arranged bilateral trades, as well as placements of CLNs with multiple investors. Investors spanned pension funds, hedge funds, family offices and insurance and reinsurance firms. Reference portfolios comprised income-producing real estate loans, senior unsecured loans and similar products provided to corporate clients.

Hannes Wilhelm, md at Credit Suisse, states that the bank’s investor universe is very large and diversified, thanks to its preference for executing broadly syndicated trades through both the investment bank and the private bank. For instance, 36 investors participated in the Sfr2.6bn Elvetia 8 deal from 4Q18 (resulting in efficient pricing of Libor plus 7.75%) and 37 participated in the Sfr5.6bn Elvetia 10 deal from 2Q19 (resulting in efficient pricing of Libor plus 7.9%).

“We typically try to syndicate deals due to cost efficiencies and the opportunity to attract not only the traditional CRT buyers, but also new investors – including, for example, family offices, for which such transactions are an attractive alternative investment,” Wilhelm says.

He continues: “We have also tried to make the documentation understandable for non-lawyers, which is another way of broadening the investor base. New entrants need to be able to fully understand a deal.”

However, syndication is not always possible if the time is short - which was one of the motivations behind two unfunded deals from 4Q18 and 2Q19 on a Sfr1bn portfolio each, which were executed with an insurance company as counterparty.

The transactions hedge the risk of a portfolio of short-term (less than two-year) mortgage loans. Credit Suisse retains the first 0.15% of losses in both deals, after which the following 4.35% of losses are hedged.

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. “This type of facility has never been structured before. Because it’s bilateral, the insurer can provide the necessary flexibility to accommodate the capital needs throughout the term of the deals – which couldn’t be achieved via a note issuance,” explains Wilhelm.

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.

The insurance policy terms are common for all insurers and the bank has a direct claim against the insurers. The transaction is callable at the bank’s option quarterly from October 2022.

Wilhelm anticipates that insurers will become increasingly more active in the capital relief trades space, especially in mezzanine tranches. “Insurance appetite for risk transfer is important for banks because under the standardised approach, banks must be able to hedge thicker tranches of 15%-20%. Insurers are able to transact on an unfunded basis and have the required rating of single-A minus or above.”

Wilhelm suggests the fact that his team is based in the corporate bank is a significant differentiator in terms of structuring capital relief trades. “Often we’re executing risk transfer transactions for our commercial bank: the core difference is that the deals reflect how the business works and the products being offered. It’s a bottom-up approach in that we construct the CDS to fit the credit risk management and recovery processes of the underlying portfolios,” he concludes.

Honourable mention
Banca IMI is the leader in the Italian CRT market, demonstrating significant capacity for innovation, development and execution.

From September 2018, the bank’s Global Markets Solutions & Financing team acted as financial advisor and structurer on capital relief trades referencing €14bn of underlying portfolios across SME, midcap, large corporate and residential mortgage assets. Around €5.5bn of total RWA was released at closing of these deals, which involved six investors for a total of circa €850m of junior tranches sold.

As well as placing two synthetic securitisations for Intesa Sanpaolo, the bank executed two landmark deals for Banca Popolare di Bari and UBI Banca’s second CRT during the awards period, with a handful of transactions in the pipeline.

For complete coverage of SCI’s Capital Relief Trades Awards, click here.

Capital Relief Trades

CRE CRT inked

Innovative financial guarantee debuts

Raiffeisen has completed an approximately €95m unfunded financial guarantee that references a €1.2bn portfolio of Austrian, German, Czech and Slovak commercial real estate loans. Dubbed Roof CRE 2019, the significant risk transfer trade differs from previous Roof transactions, given that it combines assets booked in different units of the bank.

Oliver Fuerst, head of active credit management at Raiffeisen, notes: “We completed another commercial real estate transaction in 2015, although what’s novel about this one is the fact that we combine assets booked in different units. It offers a portfolio composition with sufficient granularity that is attractive to investors.”

According to SCI data, the Austrian lender’s last CRE CRT was closed in July 2015 and was called Roof Real Estate 2015 (see SCI’s capital relief trades database).

The latest Raiffeisen deal features a 10% clean-up call and tax call, and has a weighted average life that is equal to three years. The portfolio is a blind pool comprising 300 loans, consisting of mostly drawn commitments. Credit enhancement is present only in the form of first loss protection, so there is no excess spread.

Fuerst explains: “It’s a long-standing practice of ours, given the complexity of excess spread, the process of getting regulatory approval as well as the capital deduction that would follow the recognition of an excess spread position.”

The greatest challenge from the bank’s perspective was the introduction of the new Securitisation Regulation and the associated thicker tranche requirements. In many cases, banks have split the junior tranche into two thinner tranches to address these requirements (SCI 26 January 2018). However, in this case, Raiffeisen simply sold one mezzanine tranche.  

At group level, the transaction will strengthen the common equity tier 1 ratio by approximately 10bp. 

Stelios Papadopoulos

Capital Relief Trades

SCI Capital Relief Trades Awards 2019

Issuer of the Year: Santander

Santander was one of the banks that actively participated in efforts to extend the STS designation to synthetic securitisations, which culminated in the EBA consultation paper on STS synthetics that was published in September. However, it is the Spanish lender’s prolific issuance and innovative structural achievements that render it SCI’s Issuer of the Year.  

According to Steve Gandy, md and head of private debt mobilisation, notes and structuring at Santander Corporate and Investment Banking: “We’ve participated in working groups bilaterally and with AFME to provide our views on the merits of extending STS to synthetics, as well as providing our views on the EBA’s SRT discussion paper as they prepare to formalise the paper into a formal consultation paper. Furthermore, the ECB has asked for our views on the workings of the STS framework.”

Indeed, Santander has helped to develop the securitisation market more broadly. It is a founding shareholder of the European DataWarehouse and continues to have a representative on the board, as well as a founding member of PCS, with a representative on the market committee.

As one of the market’s most prolific issuers, Santander 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. In the first half of this year alone, the bank printed €940.6m of SME tranche notional, representing Santander’s largest annual SME synthetic securitisation placement to date.

Gandy notes: “Santander has a federal structure, with subsidiaries being responsible for their own funding and capital management in coordination with the group. Hence the wide variety of assets and geographic scope of the bank’s SRT transactions. Nevertheless, the experience we’ve gained in one region or asset class can be applied elsewhere, so you don’t need to reinvent the wheel.”

Such significant issuance activity mirrors the bank’s wide distribution strategy and prevalence of publicly syndicated deals. “We are committed to transparency and want to improve liquidity in the market through listing. Furthermore, some of our transactions - such as the consumer SRTs - have a funding component, so we’re not just selling the first loss.”

In particular, Santander has placed €3.5bn of first loss and mezzanine tranches with 40 different investors, including asset managers, hedge funds, pension funds, insurers and global multilateral development banks.

The bank strives equally for both size and innovation. For example, Santander veered into unknown territory when it completed Santa Fe Synthetic CLO, the first synthetic securitisation transaction ever executed in Mexico, and the first synthetic securitisation of auto loans - dubbed FT Santander Consumer Spain Synthetic Auto 2018-1.

The bank continued its breakthroughs in the auto space with the execution of SSPAIN 2019-A, which features an unusual CLN structure, whereby notes are issued directly by Santander rather than through an SPV. The structure achieves two goals at once, given that it’s a format that is both tax efficient and enables the bank to broaden its investor base to US Reg S investors.

Innovation has also been reflected in the cash market. Kimi VII, Santander’s true sale securitisation of Finnish auto loans, provided both senior funding and capital relief to the issuer and was uniquely structured to suit investors across the capital structure while also satisfying regulatory requirements on significant risk transfer. The key structural feature involved the removal of excess spread below the class A note, as stipulated by regulatory guidance.

Honourable mention:

Lloyds is another CRT issuer that stood out for its innovation and deal flow during the awards time period. Highlights include:

• Multi-asset class approach targeting risk transfer in core portfolios to support new business activity and returns.
• Risk transfer transactions supporting Lloyds Bank’s commitments to the ‘Help Britain Prosper’ initiative, supporting customer lending in key segments such as SMEs and first-time buyers.
• Securitisation management teams with over £45bn under management across 20 live transactions, of which £14bn across 11 transactions relates to risk transfer activities.

For complete coverage of SCI's Capital Relief Trades Awards, click here.

CMBS

Multifamily CRT debuts

DUS, MCIRT programmes complemented

Fannie Mae has priced its first credit risk transfer transaction referencing a pool of multifamily loans. Dubbed Multifamily Connecticut Avenue Securities (MCAS) Series 2019-01, the landmark US$472.7m securitisation complements the GSE’s Delegated Underwriting and Servicing (DUS) and Multifamily Credit Insurance Risk Transfer (MCIRT) programmes. 

The reference pool for MCAS 2019-01 consists of approximately 340 multifamily mortgage loans with an outstanding unpaid principal balance of US$17.1bn, as of the cut-off date. The pool includes first-lien multifamily loans comprised of collateral underwritten according to Fannie Mae’s standards and acquired by Fannie Mae from April 2018 through December 2018.

The loans included in this inaugural transaction are a combination of fixed-rate and adjustable-rate multifamily mortgages with unpaid principal balances equal to or greater than US$30m. They have terms less than or equal to 12 years, in addition to other select eligibility requirements.

The transaction comprises four tranches of offered notes: US$80.7m class M7s (which priced at one-month Libor plus 170bp); US$327.1m class M10s (plus 325bp); US$41.3m class B10s (plus 550bp); and US$23.6m class CE notes (875bp). Credit Suisse is lead structuring manager and bookrunner on the deal, while Bank of America Merrill Lynch is the non-structuring lead manager. The selling group member is Ramirez & Co.

Jonathan Gross, vp, multifamily at Fannie Mae, comments: “This deal leverages our existing credit risk transfer structures to create another sustainable, scalable avenue to manage capital and overall taxpayer risk in our multifamily book of business. We were pleased with the broad market participation in the deal.”

Fannie Mae will retain a portion of the M7, M10, B10 and CE reference tranches in order to align its interests with investors throughout the life of the offering. It will also retain the first-loss tranche.

The DUS programme requires lenders to retain a portion of credit risk on the multifamily loans delivered to Fannie Mae. The MCIRT programme was introduced in June 2016 to transfer post-acquisition a portion of the credit risk on multifamily mortgages to reinsurer and insurer counterparties.

Fannie Mae’s existing Connecticut Avenue Securities platform transfers credit risk on single-family mortgage loans.

Corinne Smith

NPLs

GACS structured

Mortgage NPL ABS prepped

UniCredit is in the market with a non-performing loan securitisation that references €6bn - in gross book value terms - of secured and unsecured residential mortgages. Dubbed Prisma SPV, the transaction is an unusual NPL ABS, given the underlying assets and is the first transaction to be completed following the most recent renewal of GACS.

Rated by Moody’s and Scope, the transaction consists of €1.2bn Baa1/BBB+ rated class A notes, €80m B3/B- rated class B notes and €30m unrated class J notes.

Francesca Pilu, vp at Moody’s, confirms: “It’s an unusual NPL ABS because of the underlying assets and it’s the first deal that was completed following the renewal of GACS. The bulk of the portfolio consists of secured residential assets that are in general both more granular and liquid than other real estate assets.”

Some of the provisions of the renewed GACS scheme are particularly pertinent for this transaction. In particular, once actual cumulative net recoveries are lower than 90% of the projected amount, interest on the mezzanine notes will have to be paid after any reimbursement of the senior notes. This is a novel feature of the GACS scheme, but reflects current market practice.

The pool is highly granular, with the top 10 borrowers representing around 0.4% of total gross book value. This is lower than the average concentration of Italian NPL transactions rated by Scope.

The legal framework is an important driver behind the recoveries. Pilu notes: “We assume it for the secured portion of the pool, which references individual borrowers as opposed to corporate borrowers. Consequently, there are no bankruptcy proceedings, but faster foreclosures procedures.”

Additionally, the servicer is already managing most of the portfolio and has therefore performed most of portfolio take-over activities, including the set-up of servicing strategies. However, the unsecured component consists of residual unsecured claims following security enforcement (i.e. shortfalls) rather than pure original unsecured exposures.

Rossella Ghidoni, associate director at Scope Ratings, explains: “The transaction includes an unsecured portion that was originated as secured. It consists of unsecured residual claims following asset enforcements. These exposures are more seasoned, compared to those we have once rated and - along with recovery strategy costs - result in lower recoveries.”

Furthermore, Scope notes that 37.1% of the pool’s first-lien collateral has been evaluated using statistical revaluations or based on open market value valuations (33.1%). However, the rating agency has not received any detailed information regarding the valuation technique used. Therefore, it applied a higher haircut to account for the risk of overstated valuations.

The pool is composed of both senior secured (64%) and unsecured (36%) loans (including junior secured loans). The loans were extended only to individuals.

Secured loans are backed mostly by first-lien mortgages on residential properties (90.2% of property values), while the remaining collateral (9.8%) is composed of commercial, land and other types of properties. Properties are well distributed across Italy, with similar shares in the north (37.1%), centre (24.2%) and south (38.6%) of the country.

The UniCredit deal coincides with the conclusion of another €300m NPL ABS by Banca del Fucino. Italy’s state controlled bad loan manager AMCO, formerly known as SGA, has taken on Banca del Fucino’s problem loans to clean up its balance sheet as the lender prepares to merge with another Rome-based bank - Igea Banca - in a rescue deal. 

Stelios Papadopoulos

RMBS

Scalable and repeatable

MSR securitisation on the cards?

A securitisation at some point in the future - and given market conditions conducive to such a securitisation, which do not exist today - is part of BSI Financial Services’ game plan. The firm recently expanded its GSE MSR operations to include purchasing MSRs for newly originated Ginnie Mae-eligible performing loans.

“We have created a scalable and repeatable structure by partnering with several capital partners and raising over US$100m of capital,” confirms Larry Goldstone, evp at BSI Financial Services. “We service the loans, take a small interest in the excess spread and sell the remainder to our structured finance counterparties. By way of an example, a servicing strip on a Fannie Mae loan generates around 25bp, but it typically costs us approximately 4bp to 6bp to service a typical Fannie Mae loan and earn a reasonable profit.”

So far, the firm has purchased US$35m-US$40m in servicing rights, representing about US$4.25bn in unpaid principal balance. “We need US$150m-US$300m to make the securitisation economic. I anticipate reaching the US$125m-US$150m neighbourhood within a year and US$300m within two years, depending on interest rates, origination volumes and seller appetite,” Goldstone suggests.

He says that BSI has two advantages in this regard: the firm is licensed to service loans; and it is approved to own servicing rights. “However, the biggest impediment to a potential securitisation issuance is likely to be GSE buy-in to the deal. Part of pursuing the strategy is to figure out where there are niches of opportunity for us.”

Indeed, servicing Ginnie Mae loans is a particular area of opportunity for the firm, given its history of special servicing non-performing and re-performing loans. “VA and FHFA loans tend to be more marginal and have higher delinquencies, but we have the high-touch skill-set for such collateral,” notes Goldstone.

A further area of opportunity is servicing business purpose loans; for example, loans to partnerships that fix-and-flip property or that are active in the single-family rental market.

Looking ahead over the next year, assuming interest rates remain low, Goldstone expects mortgage origination volumes – and consequently MSR purchasing opportunities - to increase. However, the flip side to this scenario is a rise in prepayments as borrowers refinance their mortgages.

“If the refinancing is undertaken at unanticipatedly low rates, it can impact MSR returns. Fortunately, our portfolio has performed well and we have made substantial acquisitions that are reflective of the current interest rate environment,” Goldstone concludes.

Corinne Smith

Structured Finance

Firm files Chapter 11

Company hires and sector developments

Chapter 11 filing

Highland Capital Management LP (HCMLP) has commenced voluntary Chapter 11 proceedings, citing a judgment that is being sought against it in connection with the defunct Crusader fund. Although Highland Capital Management disputes the underlying claims and believes it acted in the interest of investors, entry of the judgment in its maximum potential amount could result in a judgment against HCMLP greater than the entity’s liquid assets. Highland Capital Management notes that HCMLP is the only entity on its investment platform that has filed for Chapter 11 protection. HCMLP does not expect the filing to negatively impact any of its advised accounts or to lead to any employment or management changes. Crusade was a crisis-era fund and has been in liquidation since 2011. The liquidation plan established a committee of fund investor representatives to coordinate the liquidation process. Between 2011 and 2016, HCMLP distributed over US$1.55bn of the original account balance of approximately US$1.7bn. At that point, the committee filed a complaint against HCMLP resulting from a contract dispute over the timing of management fees and other related claims.

Eligibility requirements

The Bank of England recently published a market notice stating that to be eligible for its operations, ABS and covered bond issuers must both fulfil a number of transparency requirements, including completing its ABS-CERT template. As such, loan-level information and standardised monthly investor reports should be made publicly available at least quarterly and within one month after the relevant interest payment date. The prospectus for a deal, together with the closing transaction documents (excluding legal opinions), are also required to be dislosed. Additionally, for securitisations, a cashflow model should be made freely available by or on behalf of the originator/issuer. All of this information is expected to be placed on a website maintained by the issuer/originator (or by another party on their behalf). 

Structured Finance

CRR amendments for NPEs recommended

Sector developments and company hires

CRR amendment opinion published

The EBA has published an opinion on the regulatory treatment of securitisations of non-performing exposures (NPEs), recommending various amendments to the Capital Requirements Regulation (CRR) as well as to the Securitisation Regulation to remove the identified constraints. The opinion is addressed at the European Commission and contributes to the objectives of the Council of the EU’s action plan to tackle NPLs in Europe and a copy of the opinion has been sent to the European Parliament and the Council.

The opinion explains that the regulatory framework imposes certain constraints on credit institutions using securitisation technology to dispose of NPE holdings. Namely this involves very high capital requirements on investor credit institutions under the CRR: the pre-eminent securitisation capital methods (the SEC-IRBA and the SEC-SA) and the look-through approach has caused disproportionately high capital charges on NPE securitisation positions when compared to relevant benchmarks and, as a result, tend to overstate the actual risk embedded in the portfolio. Other constraints include compliance challenges as regard to certain risk retention and due diligence requirements under the Securitisation Regulation.

As such, the opinion recommends that the Commission consider a number of targeted amendments to the CRR and the Securitisation Regulation to remove these constraints, whilst maintaining the integrity of the prudential framework. The recommendations should be viewed as preliminary and subject to additional analytical work, namely the amendments to the CRR that may require limited calibration. Furthermore, the potential amendments to the CRR should be, to the extent possible, consistent with comparable international standards.  

The opinion has been drafted in accordance with Article 34(1) of Regulation (EU) No 1093/2010, by virtue of which the EBA may, on its own initiative, provide opinions to the European Parliament, the Council and the Commission on all issues related to its area of competence.

Legacy RMBS repackaged

Barclays has structured two new UK RMBS transactions backed by loans from legacy Northern Rock and Bradford and Bingley portfolios. Dubbed Kentmere 1, sized at £752m and Kentmere 2, £171m, the portfolios consist of mortgages currently securitised in Slate No.1 and Slate No.2, respectively.

Both Kentmere 1 and 2 are rated triple-A/Aaa by S&P and Moody’s on the £672.77m and the £153.24m floating rate class A notes, respectively. The class A notes in both transactions are priced at SONIA plus 80bp and all tranches are privately placed.

With regard to Kentmere 1, the legal title to the mortgages is initially held by Tulip Mortgages Limited, Chaconia Mortgages Limited and Rose Mortgages Limited; following an interim period that is expected to end in January 2020, the legal title to the mortgages will be transferred to Cartmel Mortgages Limited, Grasmere Mortgages Limited and Lindale Mortgages Limited.

With regard to Kentmere 2, the legal title to the mortgages is initially held by Trillium Mortgages Limited; following an interim period that is expected to end in January 2020, the legal title to the mortgages will be transferred to Kendal Mortgages Limited.

Structured Finance

CMBS refi inked

Sector developments and company hires

CLO firm names IR head

Pemberton has hired Cary Gibson to the role of director and head of investor relations. Gibson was previously head of business development at Sand Grove Capital Management.

CMBS refi inked

Sabal Capital Partners has closed a US$70m refinancing of 17 low-LTV multifamily assets located in the Bronx borough of New York, 15 of which were originally serviced and funded by Sabal through Freddie Mac’s Small Balance Loan programme. The portfolio represents five loans secured by a total of 477 rental units and was completed by Sabal’s New York-based CMBS team through the lender’s S-CRE programme in just 32 days. Jack Miller, founder and principal of Platinum Capital Group, worked with the undisclosed sponsor and Sabal to facilitate the deal.

Digital partnership

Ginnie Mae has selected eOriginal as its provider for eVault software and services under its commitment to modernising its MBS platform. The firm will serve as a key business partner in Ginnie Mae’s implementation of its digital collateral pilot programme and ultimate adoption of electronic notes as acceptable collateral for Ginnie Mae MBS.