Contents

Structured Finance

Tough approach continues

RTS leaves disclosure challenges unresolved

The European Commission’s long-awaited regulatory technical standards on securitisation disclosures (SCI 18 October) fail to address challenges around confidentiality. Further, the ‘no data’ options that were initially posed by ESMA’s RTS on securitisation disclosures (SCI 22 February) have not been clarified. 

According to David Saunders, structurer at Santander: “[The Commission’s RTS is] essentially identical to the ESMA RTS. Issues with the large corporates template remain since it has been based on the ECB templates; these work for cash deals, but don’t really work for synthetics.”

He continues: “One of the main challenges that persists for us is squaring the circle between confidentiality provisions and regulatory compliance, since the RTS demands that we disclose borrower information, or information that could allow investors to figure out the underlying names.”

Addressing this during the initial period of implementation means that banks will have to input information manually before the process can be further automated. But in a worst-case scenario, assets could be removed from the portfolio if the confidentiality issue isn’t resolved.

Banks have attempted to partially deal with the issue through non-disclosure agreements (NDAs). However, what allows the preservation of confidentiality through NDAs is the fact that transactions are not listed on a regulated market in the EU.

If the securitisation is not listed on a regulated market in the EU, it will not be a ‘public’ securitisation, according to the EU’s Securitisation Regulation. Hence, there is no requirement to send the reporting data to a securitisation repository (SCI 19 July).

However, legal opinions differ over the viability of this option. “This doesn’t really change the issue with large corporate deals, since the regulation states that you have to disclose significant underlying borrower details. According to our internal legal advice, we would have to comply with the ESMA templates irrespective of where the deal was listed,” says Saunders.

The only difference with a deal listed outside the EU is that the information would be limited to investors and potential investors in the deal who are under an NDA.

These concerns are further heightened by the fact that the European Supervisory Authorities’ November 2018 statement regarding the need for a “proportional and risk based” enforcement of the transparency regime will expire with the entry into force of the ESMA templates next year (SCI 4 December 2018). Jo Goulbourne Ranero, consultant at Allen & Overy, explains: “Significant compliance concerns remain in terms of readiness. ESMA itself originally acknowledged the need for a 15- to 18-month transitional period and, critically, protections for client confidentiality. It would be very helpful if the ESAs were able to bring down the statement for a period post entry into force of the new requirements, as well as confirming the primacy of the confidentiality protections in the level 1 regulation over the template requirements.”

Another challenge that persists is the lack of any legislative guidance around the use of the ND5 or 'not applicable' option. Andrew Traynor, partner at Walkers, states: “The RTS says that banks will have to provide details of the circumstances that justify the use of those ND options upon request from the relevant authorities. As such, the ND options should be narrowly construed and not used to circumvent the Article 7 disclosure requirements.”

The RTS stipulates no transition period, so it will now be presented to the European Council and the European Parliament for a three-month objection period. Once this period has run its course without any objections, it will then be published in the Official Journal and become law 20 days later. The new data requirements are expected to come into force in early February 2020.

Stelios Papadopoulos

NPLs

Cautious optimism

NPL ABS opinion welcomed, although challenges remain

The EBA’s recent opinion on non-performing loan securitisations (SCI 24 October) has been welcomed by market participants, given that it represents recognition by the authority that existing rules lead to punitive capital charges for NPL securitisation positions. Nevertheless, its impact will depend on the legal regimes of EU countries and the effect of the new Securitisation Regulation’s tough transparency requirements. 

The opinion explains that the regulatory framework imposes certain constraints on credit institutions that wish to use securitisations to dispose of non-performing exposures. Such constraints include onerous capital requirements on investor credit institutions, thanks to the pre-eminent SEC-IRBA, SEC-SA and look-through approaches.

As a result, these higher capital charges tend to overstate the actual risk embedded in the portfolio and lead to higher funding and transaction costs, depress the price of assets, increase the originating institution’s losses and make securitisations an unattractive funding tool for reducing NPL stocks.

According to Christian Moor, principal policy officer at the EBA: “The focus until now has been on the asset side, rather than the liability side, such as the NPL backstop, disclosure templates and credit servicing. In the current CRR, the capital requirements under the securitisation framework have been mis-calibrated for NPL securitisation, since the framework doesn’t take into account the discounted price of NPLs.”

He continues: “Typically, NPLs are sold at a discount and for cases of mis-calibration, the CRR provides for a look-through approach in order to ensure that bank investors hold representative capital for their investments. However, what is unclear at the moment with the look-through approach is if the ‘net’ exposure value and ‘net’ losses, or ‘gross’ value and ‘net’ losses should apply. In our view, the net value gives a more realistic reflection of the actual risk and if this interpretation is used, it can impact how much capital banks should hold.”

The current CRR doesn’t make clear whether exposures should be calculated on a net or gross value basis, with gross value calculations resulting in disproportionately higher capital charges compared to net value calculations. The EBA believes that a net value calculation offers a more realistic appraisal of the actual risk, since it factors in the discounted value of the NPLs once they have been transferred to the SPV.

Market participants have welcomed the publication of the opinion, although its impact will depend on the workability of legal infrastructures in EU countries. According to David Shearer, partner at Norton Rose Fulbright: “It represents a recognition from the EBA that existing rules lead to punitive capital charges and the fact that securitisation can help unwind non-performing exposures.”

He continues: “It will have an impact, but the biggest NPL balances reside in Greece and Hungary. Greece has an established securitisation framework that works, but Hungary lacks one and the same is true for other European jurisdictions, such as Croatia. Therefore, there is a question whether you can transfer loans in an economically viable manner. So the paper isn’t in itself definitive.”

Existing securitisation transparency requirements under the new Securitisation Regulation add further complications, since for many servicers, much of the information stipulated by the templates cannot be provided.

The recommendations should be viewed as preliminary and subject to additional analytical work, namely the amendments to the CRR that may require limited calibration. The opinion coincides with an upcoming review of CRR 2: the revised rules on capital were published in the EU’s Official Journal on 7 June, following a legislative process that began at end-2016, although most changes will start to apply from mid-2021.

CRR² includes provisions designed to facilitate the management of NPLs by EU banks. In particular, it adjusts credit risk provisions of the CRR to mitigate the capital impact of ‘massive disposals’ of non-performing loans.

Looking ahead, Jochen Vester, senior associate financial services at Norton Rose Fulbright, concludes: “It’s now up to the Commission to decide, but the process may take some time. If approved though, the Commission would recommend it to the European Parliament and the Council.”

Stelios Papadopoulos

ABS

Untapped potential?

New style reinsurance vehicles yet to take off

Almost a year since launch risk-remote reinsurance capacity vehicle Vermeer Re is yet to have any direct imitators. However, other similar structures across a wide variety of insurance risks could potentially still follow suit.

Vermeer was created by Renaissance Re and sole investor PGGM (SCI 19 December) to provide up to US$1bn of US property catastrophe capacity. The vehicle was hailed as innovative at the time, as - unlike catastrophe bonds and traditional reinsurance sidecars, where there is a short tail timeframe and collateral is immediately on risk - Vermeer is not fully collateralised and focuses much higher up the reinsurance tower on high intensity low probability events.

“This is a really exciting area and could really open up the possibility of more insurance risk transfer to the capital markets and could take that beyond the property catastrophe risks that are the current cornerstone of the ILS market,” says Will Wilson, senior manager, audit and assurance at Deloitte. “We know that a lot of reinsurers are looking at it and therefore anticipate more structures to be set up in a similar vein, but I’m not aware of anything launched yet.”

Wilson goes on to argue that the attraction for both reinsurers and investors is clear.

“Like a sidecar, these take a reinsurance or retrocession from a ‘host’ cedant, which is also responsible for the administration of the new entity. However, as they use a regulatory solvency model to set capital requirements (which recognises diversification and the differing volatility of various business classes), the capital requirements of these vehicles can be considerably lower.”

For investors, he continues: “It’s easy to see the attraction of more capital efficient vehicles. As well as improved IRRs, this opens up the possibility of supporting other lines of business, including lower volatility, longer tail lines with a greater reserve component, or higher layers of Cat XL treaties where the rate on line doesn’t provide sufficient return on collateral for a typical ILS transaction.”

Nevertheless, there are some challenges that need to be overcome to get such a structure up and running. “There needs to be a great deal of trust between investor and ceding (re)insurer,” says Wilson. “As the equity of a reinsurance company is fungible, all the investments from underlying investors are commingled, and any new investor into an established vehicle may well be as exposed to reserve risk as they are to prospective insurance risk.”

Consequently, Wilson concludes: “I’d expect new entrants will have investors that have previously been involved in reinsurance in some capacity or other, most likely existing sidecar investors.”

Mark Pelham

Structured Finance

SCI Start the Week - 28 October

A review of securitisation activity over the past seven days

Transaction of the week
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.
See SCI 25 October for more.

Stories of the week
Correlation evolution
Tranche trading continues to gain traction
CRE CRT inked
Innovative financial guarantee debuts
Re-bridging concerns dismissed
Re-bridging loans in CRE CLOs "can offer benefits"
Scalable and repeatable
MSR securitisation on the cards?
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.

Other deal-related news

• 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 (SCI 22 October).
• 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 (SCI 24 October).
• 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 (SCI 24 October).
• 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 (SCI 25 October).

Data

BWIC volume

Capital Relief Trades

SCI Capital Relief Trades Awards 2019

Transaction of the Year: Syon Securities 2019

Lloyds Banking Group’s synthetic UK RMBS Syon Securities 2019 was motivated by prudent risk management as part of the bank’s broader plan to support the UK economy, rather than potential regulatory capital benefits. However, Syon’s innovative use of a capital relief structure to achieve those risk transfer aims, combined with the deal’s scalability for the issuer and repeatability for other UK mortgage lenders gives it potential benchmark status and makes it SCI’s Transaction of the Year.

Lloyds Bank Corporate Markets (LBCM) Securitised Products Group acted as sole arranger and lead manager for Syon, a synthetic securitisation of a UK owner-occupied residential mortgage loan book originated by Bank of Scotland under the Halifax brand. The £1.07bn reference portfolio comprises 5,674 prime repayment mortgages with LTVs greater than 90%, originated between October 2018 and June 2019. The non-replenishing transaction provides credit protection for seven years, with a 2.5-year tail period, subject to a 10% clean-up call.

In aggregate, £150m of credit-linked notes were placed with five investors from both Europe and the US, comprising a mix of those familiar with capital relief trades and those familiar with RMBS and mortgage assets. During marketing, Lloyds had opened its data room to 37 accounts and conducted 17 due diligence sessions.

Overall, the syndication process was very much an educational one, given the array of investors interested. Typical cash RMBS investors were sometimes unfamiliar with synthetic structures, some were able to use GSE credit risk transfer deals as a comparable and regulatory capital investors had typically not considered transactions featuring residential mortgages for some time, so had to re-familiarise themselves with the asset class.

Syon is an economic hedge, including a modified pro-rata amortisation schedule, where the protection is reduced at a rate slower than the amortisation of the portfolio to ensure adequate coverage for the increased loss density expected towards the end of the protection period. Additionally, the transaction allows for the removal of loans that are considered ‘de-risked’, as a result of customer payments and house price inflation, and which no longer contribute to the relevant risk metrics.

As noted above, the transaction does not provide Lloyds with regulatory capital benefits, thanks to the minimum risk weight requirements for securitisation positions. As the lowest risk weight available in the securitisation regime under the CRR is higher than risk weights for low risk mortgage portfolios, such capital relief is generally not available at an acceptable cost of capital using partially funded synthetic securitisation.

Instead, Syon is intended to manage risk to support Lloyds’ ‘Helping Britain Prosper Plan’, which includes UK first-time buyer targets. The UK government’s Help-To-Buy scheme supports the deposit-constrained first-time buyers seen as important to the health of the UK housing market. The Help-to-Buy scheme deposit top-up is only available to new-build house purchases though. 

Syon enables Lloyds to provide similar support to first-time buyers of second-hand homes; collateralised protection on the loans reducing the lender’s risk profile to a level similar to Help-to-Buy loans. Consequently, it is anticipated to be the first in an ongoing risk management initiative relating to higher LTV mortgage lending for both Lloyds and other UK lenders.

The transaction priced on 23 July and settled on 1 August 2019. The Class A to D notes are rated by both Fitch Ratings and Kroll Bond Rating Agency.

Lloyds was advised on the deal by Clifford Chance.

Honourable mention: Santa Fe Synthetic CLO
Santander’s Santa Fe Synthetic CLO was an undoubtedly innovative and stand-out deal in the awards time period. Deal highlights include: 

• First synthetic securitisation transaction ever executed in Mexico
• Referenced a portfolio of Mexican SME loans, providing support to the real economy
• Rating 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 purchased from the International Finance Corporation (IFC) following a competitive auction with several investors, providing strong execution to the issuer
• Santander conducted a competitive auction with several investors, finally agreeing attractive terms with the International Finance Corporation (IFC) on a bilateral basis.

Mayer Brown advised Santander on the transaction, while Clifford Chance advised the IFC.

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

Capital Relief Trades

SCI Capital Relief Trades Awards 2019

Impact Deal of the Year: Room2Run

As the first-ever synthetic impact securitisation with a multilateral development bank (MDB), Room2Run helped to free up vital capital for the African Development Bank (AfDB) to fund infrastructure projects across multiple 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 and so is a worthy winner of SCI’s Impact Deal of the Year award.

Swazi Tshabalala, vp and cfo at the AfDB, comments: “The Room2Run transaction has attracted tremendous interest from institutional investors across the world, and this opens new pathways for the Bank and other MDBs to further explore the possibility of freeing up and recycling their scarce capital resources by unlocking a pool of financing from investors that have previously not considered African risk.”

Clifford Chance was drafting counsel on the transaction, acting for the AfDB.

Mariner Investment Group acted as anchor investor on Room2Run and Molly Whitehouse, director at the firm, says that the transaction “surpassed our expectations”. She adds: “It energised the impact investing arena and the development bank community, sparking a number of conversations with other MDBs. Even a year on, the deal is still top of mind within many MDBs.”

The transaction, Whitehouse says, required perseverance on all sides, “but it takes time to lay such significant new pathways.” The parties, she adds, sought to be mindful of the precedent that Room2Run would set for future MDB securitisations and the tremendous impact this would have for development finance as a whole.

Furthermore, adds Whitehouse, with the foundation now in place, Room2Run has changed the landscape; other MDBs are evaluating similar strategies, looking to build on Room2Run as a proven and replicable model. The deal wasn’t straightforward, of course, and Mariner learnt several lessons.

One was learning “how important it is to get buy-in from senior management and public shareholders within MDBs in order to ensure the success of such a transaction”, says Whitehouse. “As a first-of-its-kind deal, we all came up the learning curve, from investors to bank management to advisors and rating agencies.”

Suzana Sava-Montanari, counsel at Latham and Watkins - which acted as review counsel for Mariner on Room2Run - adds that her firm, too, was “especially pleased to have engaged successfully with a visionary MDB and investors who were inspired and ready to be the first to do such a transaction. It was also certainly a success in that the deal freed up a significant amount in lending capacity to fund African infrastructure and other projects.”

Structurally, the deal can also be seen as an achievement, says Sava-Montanari, because completing the deal with an MDB was similar to creating a hybrid transaction. Due to the adjustments that had to be made, it was not like a typical commercial bank SRT trade.

She explains: “For one thing, there was no regulator involved, which meant we had to incorporate a more flexible structure and to adopt other features in order for the bank to be able to achieve the required capital release benefits.”

Mizuho International acted as financial advisor to AfDB on the transaction. Juan-Carlos Martorell, md, co-head of securitised products and structured finance at Mizuho, comments that his firm was also “very happy” with the transaction. Particularly, he adds, because it pioneered the use of synthetic securitisation for capital relief for the MDB community and also achieved the reduction of RWA under S&P’s rating agency methodology, because MDBs are unregulated banks.

Martorell adds that a number of hurdles also had to be cleared and that “for a first-time issuer there is always the challenge to engage all the stakeholders of the bank” across origination, risk, IT, special situations, legal and accounting. Furthermore, he says that working with S&P to accommodate the transaction to its criteria was also challenging but that, “overall, everybody did a great job and rowed in the same direction.”

In terms of the lasting impact of the transaction, it freed up US$650m in extra lending capacity, which the bank has committed to deploy in renewable energy developments in African countries. Whitehouse says: “Based on the significant due diligence our team conducted on the bank, we perceived their processes to be quite robust, both for extending credit and for measuring the social and environmental impact of a project. The core mandate of AfDB is to help improve infrastructure and boost economies across Africa, so the positive impact of capital liberation is quite direct.”

Whitehouse adds that collaboration was also key for the deal to succeed and that Mizuho International did “a terrific job as AfDB’s financial advisor, especially in its work interfacing with the credit rating agencies.” She notes that this work was an “integral component of the deal, with Room2Run establishing a framework that future deals could also follow. S&P also put in significant intellectual resources and time on the transaction to develop a methodology for incorporating SRT into its MDB capitalisation analysis.”

Pan-African infrastructure investment platform Africa50 also invested in Room2Run. Norton Rose acted as review counsel for the fund.

Looking ahead, all the parties share optimism about the future use of risk transfer methods for impact investment. Whitehouse comments: “Future transactions should have fewer hurdles, now that the model of Room2Run has been established. Although there is certainly room for additional efficiencies, as within any new market, we are proud to have served as the anchor investor in opening the door.”

On a similar note, Martorell says that MDBs are constantly looking to enhance their balance sheet and Room2Run has opened a new market and several MDBs are working on potential transactions, although nothing is imminent. Whitehouse concludes: “The SRT market has expanded significantly over the past few years across new geographies, sectors and issuers. Among these opportunities, we believe that some are more interesting for our Limited Partners, especially in more esoteric investments, such as Room2Run.”

Honourable mention: FCT Jupiter 2019
Societe Generale’s US$3.4bn FCT Jupiter 2019 transaction also stands out for introducing a number of ground-breaking structural innovations in connection with the redeployment of released RWA. The deal not only frees up a dedicated capital envelope, whereby capital can be reallocated in favour of positive impact finance assets, but also debuts a pricing reduction feature incentivising the Bank to participate in new Positive Finance lending. The credit protection is structured as a funded financial guarantee and covers a low mezzanine tranche, which was privately placed with Mariner Investment Group’s International Infrastructure Finance Company Strategy.

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

Capital Relief Trades

SCI Capital Relief Trades Awards 2019

Innovation of the Year: FCT Jupiter 2019

Societe Generale’s US$3.4bn FCT Jupiter 2019 transaction has won SCI’s Innovation of the Year Award for introducing a number of ground-breaking structural innovations in connection with the redeployment of released RWA. The deal not only frees up a dedicated capital envelope, whereby capital can be reallocated in favour of positive impact finance assets, but also debuts a pricing reduction feature incentivising the Bank to participate in new Positive Finance lending.

The credit protection is structured as a funded financial guarantee and covers a low mezzanine tranche, which was privately placed with Mariner Investment Group’s International Infrastructure Finance Company Strategy (IIFC Strategy), while Societe Generale retains unhedged the thin first-loss tranche and the senior tranche. The credit protection is ‘mutualised’ across the obligors, enabling it to cover a wide scope of assets across Societe Generale’s business units.

The portfolio references more than 250 diversified specialised lending assets from both project finance (energy, infrastructure, metals and mining) to asset finance (shipping, aircraft, real estate) and corporate assets in over 40 countries. The transaction features a four-year replenishment period, during which amortisation of the underlying assets can be compensated for by the addition of new eligible assets of the same type.

As well as being one of the largest synthetic risk transfer deals referencing infrastructure assets, Jupiter distinguishes itself through significant innovation in the impact investment arena via embedded conditionality requirements. Through a first-of-its-kind Positive Impact Capital Allocation factor, the Bank has committed to dedicate 25% of the risk-weighted asset reduction within three years to reduce the capital burden for new Positive Impact Finance lending.

The Positive Impact Capital Allocation feature, whereby credit risk transfer effectively frees up a dedicated capital envelope, serves to absorb and offset some of the RWA density of Societe Generale’s impact lending book. This, in turn, enables the Bank to proactively attribute a lower effective risk weight for borrowers whose projects correspond to certain positive impact transactions.

Furthermore, the terms of the transaction introduce a pricing incentive for additional impact allocation. If Societe Generale redeploys 50% of the RWA release towards 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.

By reallocating the released capital from the legacy loan book and dedicating it to enhance the capacity to lend to positive impact sectors, the parties aim to strongly advance the UN Sustainable Development Goals.

This transaction helps Societe Generale increase lending headroom, while also enabling the Bank to pursue its commitments related to positive impact. It is hoped that the framework will also serve as a model for transactions in the future, both for the IIFC Strategy and other investors. 

The transaction is structured in compliance with the new Securitisation Regulations and significant risk transfer rules. 

Honourable mention
ING Bank’s capital relief trade for its German subsidiary ING DiBa was noteworthy for being the first unfunded significant risk transfer transaction executed between a European bank and an insurance counterparty (Arch Mortgage Insurance). Dubbed Simba, the deal referenced a €3bn subset of a German residential mortgage loan portfolio and represented the first mortgage SRT approved by the ECB.

The transaction helps ING future-proof its lending businesses by creating an additional balance sheet management tool that is being considered for other portfolios in the future. By transferring the economic risk on asset portfolios, the tool releases capacity for additional lending.

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

Capital Relief Trades

Risk transfer round-up - 31 October

CRT sector developments and deal news

Santander is rumoured to be readying two synthetic securitisations of consumer loans. The issuer has been active in the asset class this year, having closed thus far one synthetic US auto loan ABS in June and two true sale auto SRTs in October (see SCI’s capital relief trades database).

Capital Relief Trades

SCI Capital Relief Trades Awards 2019

Investor of the Year: European Investment Fund

The European Investment Fund (EIF) provides 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. The multilateral development banks is SCI’s Investor of the Year.

In terms of benchmark deals, one stand-out during the awards period was BCC Grupo Cajamar’s €972.1m significant risk transfer transaction, IM BCC Capital 1, which will provide over €1bn for new investment in SMEs in rural areas and agri-food companies.  This was the first cash SRT issued by a standardised bank and the first risk-sharing transaction by a standardised bank that involved both the EIF and private investors.

The EIF’s securitisation team notes: “It also featured a number of different players, including the EIF, EIB and ICO, which was unusual and it is not always easy to balance the different interests of all the different parties. It was a very important deal for a standardised bank and sets a template that can be imitated by other banks, particularly because it provided funding and capital relief.”

Equally notable, the EIF closed the first-ever synthetic trades in Poland - which, in a non-euro currency, helps to build market confidence in the use of synthetic securitisation across Europe. The fund executed guarantees on senior and mezzanine tranches for Alior Bank and one of the largest Polish banks, thereby enabling both to release regulatory capital and enhance their capacity to provide SME financing with improved terms.

As well as trendsetting transactions, the EIF has helped to broaden the universe of participants involved in the capital relief arena. The team explains: “We have done such a good job that we have now expanded to the point that we are now needing to bring in external credit funds to spread the load, so to speak. As well as this, we are even talking to insurers that are thinking about entering the risk transfer market.”

As part of this process, the EIF will front the whole capital structure and transfer the first loss position - and sub-investment grade tranches - to the credit fund, while the originating bank will hold onto the senior notes. The EIF will still be very much involved with the transaction and the entire process will be very transparent, as per the EIF’s working principles.

The team comments: “We are piloting three such transactions utilising a third-party credit fund, all backed by SME loan collateral from three different jurisdictions. They should be announced before the end of the year.”

The team continues: “There are certain logistical challenges involved in taking on third parties, and we generally have to do reshuffles every so often. Incorporating third-party funding is part of the mandate under Basel 4.”

Internally, the EIF has streamlined the deal timeline through the development of new technology, developed by the legal team. As such, the relevant documentation can now be put together in a matter of minutes through the use of templates, rather than writing everything from scratch.

The EIF’s securitisation team explains: “Now we can put together 80% of the deal almost instantly, leaving just the 20% to do manually. We obviously still get everything checked over carefully before execution, but the technology has certainly sped up the whole process from months, to a matter of weeks.” 

In terms of the future for the EIF, ESG is now a big focus and the fund is working proactively to incorporate this into its business strategy - not only in the risk transfer space, but also in traditional securitisation and in supporting projects across Europe. The fund emphasises that it will generally invest in smaller, more granular portfolios, as opposed to larger, chunkier portfolios, such as in big infrastructure transactions.

The team adds: “On the social side of things, we have done - and continue to do - a lot of work in supporting microfinance firms across Europe, both in synthetic deals and other straightforward securitisations, or through other guarantee mechanisms.”

Finally, the role of educator continues to be a big focus for the EIF. The team concludes: “Generally, too, as an institution that supports securitisation as a crucial funding tool for the European economy, we do a lot of work in dispelling the stigma associated with the mechanism that still lingers from the financial crisis.”

Honourable mention
A major investor in capital relief trades since 2007, D. E. Shaw launched a dedicated regulatory capital optimisation strategy in 2017 and has completed a number of significant transactions, distinguishing itself by focusing on the most innovative structures and ideas across all, or parts, of a bank’s or insurer’s capital structure. The firm has pushed the boundaries across multiple deals in the last 12 months.

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

Capital Relief Trades

SCI Capital Relief Trades Awards 2019

Law Firm of the Year: Clifford Chance

Clifford Chance has been involved in the capital relief trades market from the beginning and the past year has underscored the firm’s dominance and influence across all sectors of the CRT business.

Explaining the firm's dominance in this sector, partner Jessica Littlewood says: "We have always been very active in this market, even before the financial crisis. In the aftermath of the crisis many of the people involved in synthetic securitisation moved on to other things. However, we continued to treat it as a strategic priority, which meant we were perfectly placed to help banks and investors as they have re-entered the market over the past five or six years.”

Both Littlewood and fellow partner Timothy Cleary, also attribute the firm's success to its hands-on approach, and unique ability to combine both transactional and regulatory expertise, as well as diverse geographical coverage, into a single offering to meet clients' needs. As a result, Cleary says: “With our long history in the sector, we have seen pretty much everything. That extensive experience, combined with an in-depth focus and deep resources are what give us the edge.”

More recently, the extent of Clifford Chance’s reach has become very clear. With the exception of France and Italy (where there are a number of local firms who are active acting for originators), the firm has acted as originator and drafting counsel on the vast majority of synthetic securitisation transactions in the market over the past 12 months.

This has included transactions for banks in the UK, Spain, Germany, Singapore, Japan, Canada, Switzerland and the US, as well as the ground-breaking transaction for the African Development Bank. In addition, in cases where Clifford Chance has not acted for the originator, it has often acted for protection sellers, such as EIF and IFC, as well as various hedge funds and pension funds.

The CRT and synthetic securitisation team is anchored by partners Littlewood and Cleary in London, both of whom have been active in the market for many years. They are backed up by key partners in other offices - including Jose Manuel Cuenca (Madrid), Gareth Old and David Felsenthal (New York), Oliver Kronat (Frankfurt), Mark Mehlen and Steve Jacoby (Luxembourg), Francis Edwards (Hong Hong), Paul Landless (Singapore), Lounia Czupper (Brussels), Tanja Svetina (Milan), Jonathan Lewis (Paris) and Leng-Fong Lai (Tokyo) - and a large team of associates across the network with relevant expertise.

Clifford Chance’s primary strategic goal is to “remain the ‘go to’ firm for all market participants looking to execute risk transfer transactions, whatever their jurisdiction, the transaction type or the relevant regulatory framework”. The all-encompassing list of transactions across every asset class it has been involved with indicates that goal has been achieved.

Notably, the firm has worked on all of the key innovative transactions seen in the market over the past year, including:

• Room to Run (African Development Bank) – the first synthetic securitisation by a multilateral development bank
• SSPAIN 2019-1 CLN (Santander) – the first synthetic securitisation of a portfolio of US auto loans
• Syon (Lloyds) – the first full synthetic securitisation of a portfolio of residential mortgages
• All of the significant risk transfer portfolio credit insurance transaction executed in the past year (other than the Agency transactions in the US)
• NASIRA (FMO) – the first microfinance synthetic securitisation
• Santander Mexico’s synthetic securitisation with the International Finance Corporation (acting for IFC).

As issuers have been exploring different transaction structures (such as multi-tranche transactions, greater interest in credit insurance as a form of risk transfer, increased use of credit-linked notes as an alternative to full SPV issuance, etc), Clifford Chance has been at the forefront of documenting and negotiating these transactions. It has also been instrumental in influencing many of these trends, acting as trusted advisors to banks as they search for the most appropriate transaction structure to achieve their particular goals.

As part of this, Clifford Chance has also continued to invest significant time and resources in coming to terms with, and participating in advocacy relating to the implementation of the EU Securitisation Regulation. At the same time, the firm is extensively involved in discussions with all major regulators and works closely with industry bodies such as AFME, IACPM and PCS in relation to the continued evolution of the regulatory landscape. All of which means there is no firm better-placed to advise originators on risk transfer transactions, as reflected by its dominant market position.

That position looks unlikely to change any time soon and Cleary is positive about the future for the market as well. “We appear to be at the end of the rapid growth phase in Europe, but it does now feel that the market is here to stay, and synthetic securitisation has become an important tool used by most large European banks as part of their balance sheet management strategy. The strong performance of the market in recent years also now seems to be leading to a more positive attitude from regulators towards synthetic securitisation, which is a good sign".

Beyond Europe, Cleary is more cautious: “It will be interesting to see in the next year or so whether the hoped-for opening up of the market in the US and Asia will happen. We have spent a lot of time talking to banks in both places about potential transactions, but there is still some reticence from regulators, so whether we’ll see real growth there remains a difficult one to call.”

Honourable mention
While Clifford Chance’s dominance of the CRT market is unquestionable, Latham & Watkins came in for some very high praise for its work on the investor side of the business. The whole team are well thought of from the senior partners to junior associates, but Paris counsel Suzana Sava-Montanari was given particular praise.

Notable among Latham & Watkins’ work over the past year was to act as adviser to Mariner as lead investor on the Room2Run deal. There, the firm saw its role as two-fold: educational and innovative.

First, the Latham team worked to dispel the stigma associated with synthetic securitisations, educating the MDB on the nature of this capital management tool. The team also set out to communicate that CRTs are based on a relationship of mutual trust between the bank and private investors, setting the stage for a long-term risk-sharing programme that transcends the purely transactional.

Second, the firm had to consider how the transaction provided a capital benefit for the MDB and find a unique solution for measuring the capital benefit and determining objective circumstances outside AfDB’s control that would change this benefit, such as rating agency methodology changes. Latham also designed a sophisticated mechanism to address AfDB’s policies while ensuring protection for the investor’s collateral similar to that found in other CRTs.

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

RMBS

Niche programme

Unusual UK BTL RMBS marketing

Goldman Sachs is in the market with an unusual UK buy-to-let RMBS secured by properties owned primarily by residents of the Republic of Ireland. The mortgages backing the £111.82m Banna RMBS transaction were originated by KBC Bank Ireland and its IIB Finance and Premier Homeloans subsidiaries between 1991 and 2009.

The loans were originated under a niche programme that provided commercial and residential real estate BTL financing to residents of Ireland for properties located in the UK. As such, the current place of residency is Ireland for the borrowers of 92.9% of the loans; another 3.6% of loans are to borrowers with addresses within the UK, with the remaining borrowers’ residency either not currently on file or elsewhere around the globe.

The pool – which comprises 1,379 loans – exhibits geographic concentration, with 39% of the underlying collateral located in the North West of the UK. The top three regions (North West, London and Yorkshire & Humber) account for 64.2% of the portfolio.

The portfolio has a weighted average original LTV of 65.5%, a current LTV of 45.3% and an indexed LTV of 49.7%. KBRA notes that this LTV is considerably below recently issued BTL transactions, which exhibited weighted average indexed LTVs between 70% and 80%. The low LTVs are due to the relatively low original LTV and the significant seasoning of the portfolio (99.8% of the pool has a weighted average loan age of over 84 months).

The assets were acquired by the seller, Banna Funding DAC, as part of a larger bulk acquisition from the vendors that completed in November 2018. Approximately 35% of the loans are currently in arrears and 5.4% of the loans are currently in default/foreclosure. Approximately 30% of the pool (300 loans) is subject to a restructuring, including maturity date extensions, interest capitalisation or waiving of amortisation provisions.

The portfolio has seen meaningful changes in performance metrics since the acquisition and transfer of servicing to Pepper. In particular, an improvement of pay rates from 37.7% to 75.4% can be observed between the 24-month observation window to a 12-month window respectively.

In addition to a base fee and legal title holder fee, the servicer is entitled to performance-based fees for success in reducing arrears, converting interest-only loans to fully amortising status or achieving certain accelerated rates of prepayment. KBRA notes that the CPR-based fees appear to already have resulted in meaningful prepayment rates, with an average six-month annualised rate of reduction in balance since acquisition of nearly 15%.

Rated by KBRA and S&P, the transaction comprises £79.9m AAA/AAA rated class A notes, £7.8m AA/AA class Bs, £5m A/A+ class Cs, £5.6m BBB/BB+ class Ds, £3.4m BB-/CCC class Es and £10.1m unrated class Z zero coupon notes. The interest on the notes is indexed to Sonia and steps up following the optional call date on 20 June 2024. Legal final maturity is on 20 December 2063.

The deal is expected to price next week, with the senior tranche syndicated and the class B and C tranches reportedly being sold through a modified Dutch auction. Goldman Sachs International Bank (GSIB) is the retention holder in the transaction.

Corinne Smith

RMBS

Overcoming stigma

Opportunities eyed in land banking

One sector that continues to be underserved by financial institutions post-crisis is land banking. As such, it offers opportunity for investors that can overcome the stigma associated with the space.

“There aren’t many active financing providers in the land banking space,” confirms Craig Bergstrom, cio at Corbin Capital Partners. “Consequently, yields across the sector represent a premium to comparable risk because of the low multiples of investor capital involved.”

He adds: “Pre-crisis horror stories about land banking in Floridian swamps, for example, left a reasonable number of investors scarred. But our focus is different: we provide financing for publicly traded homebuilders that don’t want to have a lot of land on their balance sheets. They want to build homes, not warehouse land.”

Bergstrom’s firm has been involved in one such project in Australia, while the rest have been projects in the US - in places that demonstrate strong GDP and population growth patterns, such as Tampa, Houston and North Carolina.

The strategy benefits from high-quality counterparties, usually publicly traded homebuilders, for off-take and is supported by a market - US housing – with a strong growth trajectory. The homes typically cost US$300,000-US$600,000, so can be comfortably financed with US agency mortgages to borrowers with high FICO scores, generally in the low-700s.

Land banking deals are heavily structured and are usually sized at tens or small hundreds of millions of dollars, typically including 15%-20% equity from the home builders. They frequently target high single-digit/low double-digit returns, with a nine- to 18-month WAL.

Bergstrom notes that the strategy is vulnerable to a severe GDP shock, albeit any subsequent “soft patch” is likely to be cushioned by the ongoing low rate environment.

Corinne Smith

Structured Finance

Abacus case settled

Sector developments and company hires

Abacus case settled
Judge Jennifer Frisch of the Minnesota District Court has terminated the Abacus 2006-10 case (SCI 2 August), after the parties filed a stipulated proposed order resolving Astra Asset Management’s claim against Goldman Sachs. Astra had alleged an EOD and asked the trustee to employ a trust instruction proceeding to confirm Goldman’s violations and to solicit a vote of all investors in the synthetic CDO, who expressed overwhelming support for Astra’s position. Judge Frisch rejected Goldman’s contractual defenses and affirmed the availability of equitable relief. The case was scheduled for a bench trial starting on 22 October.

BUMF 6 claim heard
Business Mortgage Finance 6's claim against Roundstone Technologies (RTL) was heard in the High Court of Justice last week by Justice Nugee, who ruled in the issuer’s favour (SCI 29 August). In particular, he found that the purported sale and purchase agreement between the issuer and RTL was invalid and that Alfred Olutayo Oyekoya had no actual authority to act on behalf of the issuer. RTL was also ordered to pay the issuer's costs of the claim, including an interim payment of £160,000 to be made within 14 days.

Structured Finance

Anti-NSDA provisions welcomed

Sector developments and company hires

Anti-NSDA provisions welcomed
The inclusion of anti-net short debt activism (NSDA) provisions in offering documentation has become more common in recent months, with Sirius Computer Solutions, Nexstar Broadcasting and Allied Universal Holdco deals incorporating such language. The purpose is to prevent net-short participants - whose interests are not aligned with those of other investors - from using their debtholder rights against the borrower to, for example, manufacture defaults. Anti-NSDA provisions include: requiring investors to disclose their net short positions for themselves and their affiliates either at the time of purchase or on an ongoing basis; disenfranchising net short investors by disregarding certain default actions taken by these investors; and causing net short noteholders to transfer their notes - with potentially punitive consequences - upon a misrepresentation or incorrect certification regarding their net short status. Moody’s notes that by reducing or eliminating NSDA-driven defaults, these provisions can be beneficial to CLOs, which haircut the value of all defaulted assets - thereby eliminating technical incentives that could influence managers to take actions contrary to their credit views and preserving value for all noteholders.

North America
Credit Suisse Asset Management has appointed Jason Bolding as md and head of ILS, US. He was previously an md at Aon Benfield Securities, which he joined in April 2005.

Structured Finance

GARC deal expected

Sector developments and company hires

EMEA
Florent Trouiller has joined Norton Rose Fulbright as a partner in its Luxembourg office. Trouiller practises tax law, with a particular focus on cross-border private equity and real estate investments and securitisation transactions. He was previously a partner at Dechert and before that spent 10 years at Allen & Overy in Luxembourg.

GARC deal expected
Intesa Sanpaolo has acquired a portfolio of performing mortgage loans for a nominal value of approximately €900m from the Italian branch of Barclays Bank Ireland. The mortgages, which are mainly for the purchase of first homes, were granted to Italian customers and are secured by residential properties located in Italy. Intesa says that the portfolio has a high potential for self-financing through the ISP OBG covered bond programme and a risk profile that is further limited by the expected purchase of first-loss protection under the GARC synthetic securitisation programme.

Governance issues
Banca IFIS has ended negotiations - which began in August - with Credito Fondiario regarding a partnership in the debt servicing and purchasing sector, due to the difficulties encountered in defining a negotiated agreement satisfactory for both parties in terms of governance. However, the firm stresses that the non-performing loan market continues to be of strategic importance to it and it aims to “maintain the right conditions in order to continue generating value in the future”, investing both in the acquisition of portfolios and in the activity of servicing.

Lotte Card risk eyed
The sale of Lotte Corporation’s majority stake in Korean credit card provider LotteCard Co to MBK Partners and Woori Bank - which control 60% and 20% of Lotte Card respectively – could negatively impact Lotte Card credit card ABS, according to Moody’s latest ‘Structured Thinking: Asia Pacific’ publication. The agency suggests that the Point-Plus Eleventh International securities will become riskier because the likelihood of support from the new majority shareholder to Lotte Card will be lower than from Lotte Corporation, given that MBK Partners is a private equity fund and focused on maximising its return on investment. The reduced parental support marginally increases the risk that Lotte Card will default and therefore cease servicing the credit card receivables backing its ABS deals or close credit card accounts. Commingling risk will also marginally increase if parental support declines.

Structured Finance

RFC issued on disclosures

Sector developments and company hires

CDO transfer
CVP CLO Manager has resigned as investment manager to the CVP Cascade CLO-1 and CLO-2 transactions. It has been replaced by Barings. For more CDO manager transfers, see SCI’s database.

Defeasance surge
US CMBS 2.0 defeasance volume at end-3Q19 totalled US$10.89bn across 694 loans, exceeding the 2018 full-year total of US$10.88bn across 620 loans, according to Fitch. The pace of defeasance has recently surged, following the July Federal Reserve interest rate cut. In Q3, US$3.92bn was defeased across 224 loans, compared to US$2.61bn across 183 loans in 2Q19. By property type, multifamily loans dominated, at 52% of year-to-date defeasance volume. Meanwhile, office defeasance volume spiked in September, due to the defeasance of the US$650m Bank of America Tower at One Bryant Park loan (securitised in OBP 2010-OBP).

RFC on disclosures
The US SEC is seeking feedback on whether its 2014 ABS rules are a significant contributing factor to the absence of SEC-registered RMBS offerings since that time. By contrast, in the five years ended 30 June 2019, Fannie Mae and Freddie Mac have issued an aggregate of approximately US$4.47trn in face amount of RMBS. The Commission notes that potential issuers of SEC-registered RMBS have expressed concerns regarding the scope and interpretation of asset-level disclosure requirements. For example, its rules require 270 data points for each asset in an SEC-registered RMBS offering, while GSE RMBS offerings generally have approximately 100 data points for each asset. The Treasury Department’s recent housing reform plan recommended that the Commission review the RMBS asset-level disclosure requirements to assess the number of required reporting fields and to clarify the defined terms for SEC-registered private-label securitisations.