Contents

NPLs

Rollover prepped

NPL CRT to be refinanced

Hoist Finance is readying a rated securitisation backed by Italian unsecured non-performing loans with a gross book value of €5bn, as of end-September. The capital relief trade is the firm’s first public securitisation of NPLs consisting solely of unsecured consumer and SME loans and follows an unrated NPL securitisation that was completed in August (SCI 1 August).    

The transaction will feature an 85% senior tranche and 15% subordinated notes. Hoist Finance will retain the senior notes in full and 5% of the subordinated notes, as stipulated by risk retention rules. CarVal has undertaken to subscribe to the rest of the subordinated notes.

This is the second securitisation backed by Italian non-performing assets issued by Hoist Finance for capital relief purposes. The firm closed an unrated NPL ABS in August, which will be redeemed in full and the assets refinanced via this latest transaction.

According to Stephan Ohlmeyer, cio at Hoist Finance: “The assets of the first transaction are being rolled over into the second deal in order to utilise our low cost of deposit funding to finance the acquisition of the rated senior tranche, but both transactions allow us to achieve capital relief in different ways. The RWA reduction in the first is achieved by placing the entire senior tranche with the investor and deducting the retained junior tranche from the CET1. In the second one, capital relief is achieved via significant risk transfer and the investment grade rating that is expected on the retained senior tranche.”

Securitisation is being used to address higher capital requirements for unsecured NPLs. The Swedish Financial Supervisory Authority (SFSA) confirmed in December last year that it supports an EBA interpretation regarding higher risk weights for purchased defaulted assets. The changes required Hoist to apply a 150% risk weight for purchased unsecured NPLs, compared to the previous practice of applying a 100% risk weight (SCI 16 May).  

Unlike other collection firms, Hoist holds a banking license that provides the firm with many advantages, such as the ability to finance acquisitions with deposits. But it also means that it’s subject to the bulk of banking regulations.

The rated senior notes will carry a 1.8% interest rate and the subordinated notes will have a combined capped IRR of 15%. Excess collection from the assets will serve as credit enhancement to all outstanding notes and thereafter paid to Hoist Finance in the form of a deferred purchase price.

Francesco di Costanzo, investment manager at Hoist Finance, explains: “Compared to a GACS transaction, where the upside is transferred to investors, excess collections from the assets following the repayment of all the notes will flow back to Hoist Finance.”

The transaction is expected to achieve significant risk transfer as stipulated by Article 244 of Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms. The new rated securitisation will likely close in November and is expected to result in a CET1 improvement of approximately 20bp on top of the 60bp released in August.

Looking forward, Ohlmeyer concludes: “Securitisation will continue to play an important role in our business model. We have started with Italy, given the size of our presence in the market. But we will be looking at other markets, including the UK.”

Stelios Papadopoulos

NPLs

Liquidation challenges

Greek economy precludes enforcement option

An improvement in economic fundamentals and reform efforts has boosted both the deal flow and prospects of the Greek non-performing loan market. However, recovery prospects on Greek NPLs remain low, mainly because debtors are in negative equity. Consequently, investors will likely focus on restructurings rather than collateral liquidations going forward.         

According to Antonio Casado, executive director at Scope: “The oversupply of stock is an issue for investors who want to opt for the enforcement route. Local demand is still impaired and debt levels are still too high, which all means large haircuts in properties. Servicers will use both enforcement and restructurings for mortgages – although, given the economic fundamentals, restructurings will be more prevalent.”

Indeed, according to a recent Scope report, house prices in Greece declined by 43% between 2008 and 2017. The rating agency estimates that the median current loan-to-value on NPL loans lies between 115% and 120%.

It notes that collateral liquidation has severe drawbacks that will strongly erode the present value of NPLs for several reasons. First, massive over-supply of stock - as evidenced by the amount of residential mortgage NPLs in relation to the size of the economy - would necessitate high disposal discounts.

The mortgage NPL exposure of the four systemic Greek banks amounts to approximately €26.5bn, or almost 15% of GDP. The property market would need to absorb hundreds of thousands of underlying properties if enforcement of collateral becomes the main workout route.

Against this backdrop, the early signs of recovery shown by property price indices offer little comfort. As of 1Q19, average house prices have grown by about 9.5% from 2017 trough levels.

Yet the number of real estate transactions remains muted relative to pre-crisis levels. The number of transactions - across all types of assets - was 70,000 in 2017 versus 168,000 in 2007, according to Hellenic Statistical Authority figures.  

Second, lengthy enforcement procedures further impair recovery prospects. According to the findings of the 2019 EU Justice Scoreboard, Greece is one of the European countries with the longest litigious civil and commercial cases, after Italy, Malta and Spain. Until recently, the estimated average duration of mortgage foreclosures on individual borrowers was about seven years, because the defendant was entitled to raise counter-claims during all stages of the process.

A new law limits the stages through which a debtor may raise objections against enforcement proceedings to a maximum of three; two before the auction and one after. However, if borrowers use all legal avenues available to them, the enforcement process can be delayed by approximately six years - considering persistent court backlog issues, technical legal defects and the still-low penetration of IT in the Greek judicial system.

Finally, enforcement costs may exacerbate the leakage of auction proceeds to non-first-ranking secured creditors. Allocation rules for the distribution of auction proceeds under Greek law may constrain the amounts received by first ranking secured creditors by up to 65%.

Scope estimates that the average leakage to preferred and unsecured creditors currently represents around 10% of auction proceeds. The agency concludes: “A recent change in the allocation rules has improved the position of first-lien secured creditors for any claims arising after January 2018, but NPL creditors are still better off under restructuring solutions in most cases.”

Stelios Papadopoulos

Structured Finance

SCI Start the Week - 4 November

A review of securitisation activity over the past seven days

Transaction of the week
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. See SCI 31 October for more

Stories of the week
Overcoming stigma
Opportunities eyed in land banking
SRT report pending
EBA to propose harmonised excess spread treatment
Untapped potential?
New style reinsurance vehicles yet to take off

Other deal-related news

• Judge Jennifer Frisch of the Minnesota District Court has terminated the Abacus 2006-10 case, after the parties filed a stipulated proposed order resolving Astra Asset Management's claim against Goldman Sachs (SCI 29 October).
• 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 Sachs (SCI 29 October).
• The inclusion of anti-net short debt activism (NSDA) provisions in offering documentation has become more common in recent months. 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. Moody's notes that these provisions can also be beneficial to CLOs (SCI 30 October).
• 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 (SCI 31 October).
• 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 (SCI 31 October).
• 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 (SCI 1 November).
• 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 (SCI 1 November).

Data

BWIC volume

Secondary market commentary from SCI PriceABS
1 November 2019
US CLO
A quieter end to the week and first day of November was greeted with 3 covers observed in the BB rated space.  The BBs traded in a tight 736dm-760dm range for later RP profiles 2023 and 2024 (WALS c.9y).  The managers on today's lists were Ares Management, LLC, Voya Investment Management (ING) and Octagon Credit Investors, LLC.  Similar WAL BBs over the past couple of weeks have traded in a wide 729dm-829dm range whilst we have seen one notable BSL CLO outlier in LCM 14A ER (LCM AM) 929dm / 8.6y WAL (weak performance metrics to date).
We have observed >4y WAL AAAs are flat to last week's levels at 135bps absorbing 5x the supply of last week, AAs have widened 4bps to 200bps absorbing 4x supply of last week, single-As are 37bps tighter at 256bps with half the supply of last week, BBBs saw a significant increase in supply (almost 4x $86m) with spreads widening 32bps to 425bps.  BBs outperformed this week with spreads tightening 4bps with almost double the supply of last week ($34m) including today's firmer trades.

EUR CLO
Today we have 3 x AAA and 2 x AA. The AAAs traded between 120dm and 122dm for WALs between 3.7yrs to 3.9yrs. This is probably around 3 to 4 bps tighter than AAA trades at the beginning of the week. The AAs traded at 184dm / 3.93yr (PENTA 2015-2X BR - Partners Group) and 191dm / 4.63yr (CADOG 8X B1 - CSAM). These levels are in line with the trades in the week commencing 21 Oct. On the 31 Oct there were a couple of tighter levels but they have not been maintained.

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

Capital Relief Trades

SCI Capital Relief Trades Awards 2019

Credit Insurer of the Year: Arch Capital Group

Arch Capital Group Ltd (ACGL) is SCI’s Credit Insurer of the Year in recognition of its position as global leader in mortgage credit risk transfer and the completion of a first-of-its-kind transaction with ING. With US$300bn of assets under cover already, the firm has significant capacity in place to grow its presence further.

Based in Bermuda, ACGL had approximately US$12.49bn in capital at 30 June 2019 and provides insurance, reinsurance and mortgage insurance on a worldwide basis through its wholly owned subsidiaries in Australia, Europe, Hong Kong and the US. It has a single-A plus rating from S&P, Fitch and AM Best and an A2 rating from Moody’s.

ACGL’s Global Mortgage Group has a track record of consistently delivering both traditional and innovative mortgage risk transfer products that provide meaningful and affordable capacity to the global housing sector. Beyond traditional flow mortgage insurance, Arch is able to meet the unique needs of industry participants, including portfolio lenders, government agencies and institutional investors.

For example, in October 2018, Arch Insurance (EU) DAC (previously Arch Mortgage Insurance DAC) completed a unique capital relief transaction on a €3bn subset of a residential mortgage loan portfolio originated by ING in Germany. Dubbed Simba, the deal was ground-breaking in that it was the first unfunded significant risk transfer trade executed between a European bank and an insurance counterparty and the first mortgage SRT approved by the ECB.

“Arch feels that the transaction can be replicated in other geographies and, as such, represents a valuable new tool for financial institutions in managing their regulatory capital. The transaction also demonstrates our commitment to supporting mortgage lending in Germany and highlights our focus on bringing innovative products to market,” observes Ruairi Neville, chief underwriting officer at Arch Insurance (EU) DAC.

Also in 2018, Arch formed Arch MRT, designed in collaboration with Fannie Mae and Freddie Mac to address key risk issues and reduce costs related to procuring and managing certain forms of credit protection. The structure was developed specifically to: allow the GSEs to select and manage their exposure to counterparties; broaden the sources of first-loss credit protection to include more highly rated and diversified counterparties; bolster counterparty strength with collateralised agreements; and eliminate the cost of obtaining third-party credit protection that meets GSE origination and servicing guidelines.

As such, Arch MRT encourages more reinsurers to participate in the US housing finance industry, providing the GSEs with access to additional private capital totalling approximately US$565bn of proven, permanent, entity-based, equity capital globally.

Arch was a participant in the first GSE credit risk transfer transaction placed in 2013 and has remained actively engaged in CRT transactions since then. Major reinsurers and other interested parties have also tapped Arch Credit Risk Services’ deep understanding of the US mortgage market, as well as existing systems and professionals to expedite their entry into the growing CRT field, without having to build out analytics and processes or hire staff.

For instance, Arch Credit Risk Services last year entered into a multi-year agreement with Munich Re to provide mortgage credit assessment and underwriting advisory services related to Munich Re’s involvement in CRT programmes offered by Fannie Mae and Freddie Mac.

A further example of Arch’s leading presence in mortgage risk transfer is its Bellemeade issuances, which allow the firm to programmatically transfer risk through a fully funded insurance-linked note (ILN) structure. Under the Bellemeade programme, Arch’s mortgage insurance subsidiaries enter into a reinsurance contract with a special-purpose insurer that issues ILNs to fund its obligation to Arch.

As of 31 July 2019, the Bellemeade programme has completed nine transactions with international capital markets investors totalling more than US$4.1bn in issued securities and has provided protection on US$333bn of insured mortgages.

Looking ahead, Neville anticipates that increasing bank capital requirements under Basel 3 will lead to significant future growth in the risk transfer market. “Insurers will be important participants in this space. At Arch, we have both the capacity and appetite to participate in well-structured risk transfer transactions and see this sector as an area of growth going forward,” he concludes.

Honourable mention
Liberty Specialty Markets’ Structured Risk Solutions team has made significant risk transfer a core part of its strategy and since 2015 has worked on over 15 complex structured portfolio transactions. The team closed its first SRT transaction this year and has more deals in negotiation, providing unfunded protection on an excess basis, focusing on senior mezzanine layers. Combined with Liberty’s ability to consider a wide range of asset classes – including emerging asset classes, such as trade finance and project finance - and geographies, this has enabled the team to make a significant contribution to the market in a relatively short period of time.

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

Capital Relief Trades

SCI Capital Relief Trades Awards 2019

Advisor/Service Provider of the Year: Scope Ratings

Scope Ratings has been selected as SCI’s Advisor/Service Provider of the Year, thanks to its involvement in innovative risk transfer transactions in unusual asset classes, such as project finance, and standardised bank deals. The rating agency’s work has been aided by a multidisciplinary approach to ratings.

According to Guillaume Jolivet, head of Scope Ratings: “The rating of these transactions requires not only structured credit expertise, but also a deep understanding of the risks at asset level. It’s not easy to combine the two.”

He continues: “However, Scope analysts don’t work in silos, thanks to our ability to deploy the right skills. The focus on diverse expertise has been reflected at governance level, through our use of multidisciplinary rating committees since the very beginning.”

An example of the application of this approach is project finance, where Scope has been particularly active. Very few project finance deals have been rated, due to idiosyncratic risks, which increase the complexity of the analysis. However, a deep dive analysis of the specific assets can prove fruitful in this case.   

Scope was also one of the few rating agencies to have rated a dual-tranche transaction, such as Santander’s York 2019-1 CLO. Rating analyses of senior mezzanine tranches aim to render the deals more comparable to public transactions.

Jolivet notes: “SRT investors who conduct the due diligence are often sophisticated and such structures are generally non-standard, meaning they are not exactly comparable with flow transactions. Even so, we assess these transactions using a comparable expected loss approach, which is the core of our rating methodology.”

Indeed, Scope applies a consistent rating methodology across transactions, including those originated by standardised banks. Jolivet states: “Our analysis of a deal incorporates the quality of the structure and the risk profile of the assets. Whether a bank is under a standardised or IRB approach may result in different constraints on our analysis. But this makes no difference, as long as the quality of data available to analyse the assets meets our standards and standardised banks have shown they can meet those standards.”

He concludes: “Standardised banks may indeed demonstrate strong underwriting standards. These banks may actually sometimes share less sophisticated but more detailed information about their assessment of risks. What remains a key driver of asset quality, however, is the quality of asset origination.”

Honourable mention
Aon has raised awareness of risk transfer technology through education and training initiatives with global institutional clients that resulted in over US$600m of commitments to risk transfer strategies over the awards period. Aon has positioned capital relief trades as an alternative private debt solution that fits with its clients’ broader strategic allocation to private debt, either to meet income requirements or provide a higher and more attractive return on a risk-adjusted basis, compared to other illiquid credit strategies.

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

Capital Relief Trades

SCI Capital Relief Trades Awards 2019

Personal Contribution to the Industry: Mascha Canio, Head of Credit & Insurance Linked Investments at PGGM

Heading up a team responsible for one of the largest investment portfolios in the sector that has driven market growth while setting a benchmark that others follow would perhaps be enough. But Mascha Canio’s personal contribution extends further as one of the most long-standing and visible investors and an advocate for a focus on risk-sharing and transparency to ensure the capital relief trade market’s future sustainability.

PGGM typically invests in first-loss tranches and calls these ‘risk-sharing transactions’ (see 'PGGM in numbers' section below), to highlight the fundamental principle of sharing of the credit risk with the originating bank. By classifying capital relief trades as such, the aim is also to avoid the negative connotation created by the harmful practices of arbitrage synthetic deals in the past.

“We feel strongly that the ethos of risk-sharing is important, both in terms of the numbers and the relationship behind them,” says Canio. “While regulations have stipulated 5% since 2017, we have always required the risk-sharing bank to retain a minimum 20% of each loan referenced in the transaction and have done deals at even higher levels.”

She continues: “We would regard it as very odd if the issuer cannot hold more than 5% of their portfolio and it would certainly raise a red flag. Usually, we are only dealing with a proportion of the bank’s overall loan book and so it isn’t an issue. Again, if it was the whole book, that would be a concern.”

In any event, the risk-sharing relationship is constructed so that there is no danger of adverse selection from either side. Canio explains: “Typically we work with issuers who have already understood and believe in alignment of interest on carving their portfolio from outset. That is done on a blindfold (i.e. non-discretionary) basis and is restricted to the bank’s core activities, as they are most likely to receive full attention to ensure ongoing high quality and successful risk management.”

While risk-sharing is an immediately logical approach, Canio’s public support of transparency in a highly private market initially appears counterintuitive. However, she argues that transparency shouldn’t be all-encompassing; instead, there is a good balance to be found.

She explains: “It is a question of determining where there is value in a deal remaining private and where there is value in a deal becoming public. For the market to continue to grow, it needs to show soundness and that requires transparency.”

Canio says there are multiple themes underlying her belief in transparency. First, there is the relationship with regulators.

“If there is no transparency, it makes it difficult for regulators to work with the market, which benefits both them and issuers,” she continues. “It’s logical to know what deals are being done and what they have achieved; it is illogical that passing this information on is not yet an automatic process. If such information continues to be collated at the highest level, as it was for the EBA, surely no-one could object and the proprietary aspects of deals would be safeguarded.”

Second, there is the information provided to investors. “The EBA is looking at the standardisation of information, which will be useful if it ensures the right type of data is shown to investors. At the same time, it must also consider the ability of investors to check that data.”

Third, there are the ramifications of the increasing number of market participants and the need to attract more. “Deals are now often syndicated or subject to central bidding, so many more people know about deals than in the past. The wider the array of participants there are, the greater the need for the education of new entrants. With transparency, it is easier for people to learn lessons from deals in terms of what can and can’t be done in practical terms.”

Last, but not least, are the benefits of passing on details of deal structures. “If issuers were more open about structures, it would help other issuers and encourage investors. You can show that there are so many buttons you can push to effect the risk/return profile of a deal.”

As Canio concludes: “It’s not about telling people what they should do; rather, it is showing them what they can do. That will only continue growth and ensure the market remains sustainable going forward.”

PGGM in numbers
PGGM has had a dedicated mandate to invest in balance sheet synthetic securitisations since 2006, on behalf of its client, Stichting Pensioenfonds Zorg & Welzijn (PFZW), the €200bn pension fund for the Dutch healthcare sector. As at year-end 2018, PGGM had around €5.5bn invested in credit risk-sharing transactions referencing around €70bn of loan portfolios related to a diverse group of geographies (more than 90 countries) and asset types across the world.

In 2018 alone, PFZW invested €1.5bn spread over six credit risk-sharing transactions with four different banks, referencing over €19bn in global loan exposures, ranging from developed market large corporate loans to emerging market trade finance. All of these transactions were entered into with long-term partners of PFZW, with several of the relationships dating back more than 10 years.

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

Capital Relief Trades

Risk transfer round-up - 8 November

CRT sector developments and deal news

BMO will call a capital relief trade dubbed Muskoka Series 2017-1 in December. The senior secured and senior unsecured US and Canadian corporate loan deal is due in 2022. The lender’s last capital relief trade was completed in July and was called Manitoulin USD Algonquin 2019-1 (SCI’s capital relief trades database).

Capital Relief Trades

Risk transfer return

Bank of Ireland issues mezzanine tranche

Bank of Ireland has issued an additional mezzanine tranche on top of the junior tranche of a 2017 capital relief trade dubbed Mespil Securities (SCI 29 November 2017). The bank issued the note as the one-year grandfathering period for pre-2019 capital relief trades comes to an end in December (SCI 20 September).  

The US$68.4m CLN is due in 2027, pays three-month Libor plus 4.99% and features a one-year non-call period. Legacy capital relief trades that were completed before January 2019 have received a one-year grandfathering period that ends on 31 December. Once the grandfathering period ends, legacy trades will have to comply with the thicker tranche requirements of the revised CRR.

CRTs that were completed after January 2019 have addressed these regulatory challenges through the application of structuring techniques, such as the dual-tranche technique (SCI 14 November 2018). However, such tweaks may not solve the issue for all legacy transactions, given the specificities of each deal. Consequently, banks can either call and restructure a transaction or issue additional mezzanine tranches.

Mespil Securities was issued a year after Bank of Ireland closed another risk transfer trade from its business banking and corporate banking divisions in Ireland. The €186.5m CLN was called Grattan Securities (see SCI’s capital relief trades database).

Stelios Papadopoulos

Structured Finance

Pursuing illiquidity premia

Corbin Capital ceo Tracy McHale Stuart and cio Craig Bergstrom answer SCI's questions

Q: How and when did Corbin Capital become involved in the securitisation market?
TMS: We’ve been involved in the securitised markets for roughly 13 years.

In the early 2000s, the returns in structured credit were so compressed and we didn’t like the leverage profile required to generate our expected return targets, so we kept away. Then in 2007, we started to see managers in our fund of funds business significantly expand their exposure to short subprime residential mortgages, which piqued our interest.

Our first more granular foray into the space was at the end of 2008 in a portfolio of auto loans, which was a material driver of our returns that year on the short side in our multi-strategy portfolios.

Securitised markets became our primary research focus around 2008 and we’ve been active in them since. In 2009-2010, we were active in non-agency RMBS. In 2012, we added exposure to vintage CLO 1.0 risk. And, as the CLO market reopened, we started participating actively in CLO 2.0.

Q: What are your key areas of focus today?
CB: Today, our key areas of focus within the securitisation market are CLOs (we own about US$550m of CLO equity and mezzanine debt), new issue non-QM RMBS and CMBS.

We also have smaller exposure to some more niche parts of the market, like unsecured consumer lending, student loan refinancing and land banking.

Q: How do you differentiate yourself from your competitors?
TMS: One of our key differentiators is our hybrid model. We have significant experience, analytical and execution capabilities to trade in-house, but also a long history identifying talent and a willingness to partner with external managers. That hybrid model allows us to work with other managers on interesting opportunities and creates a broad and differentiated sourcing network.

Q: What is your strategy going forward?
TMS: Unlike many market participants, we aren’t running daily liquidity vehicles and we aren’t ratings-constrained. Because we don’t need to supply daily liquidity, a significant part of our strategy is to pursue meaningfully complex and illiquidity premia available in some less liquid assets, though we tend to focus on shorter WAL situations.

Q: Which challenges/opportunities do you anticipate in the future?
CB: Although we see better value in structured credit than other parts of the credit markets, the current risk and reward for investment in many corners of the credit market looks poor. Right now, many parts of the credit market are priced richly; quantitative easing and a hyper-extended credit cycle have driven up credit asset values, making it challenging to generate riskadjusted returns.

However, we think complexity and illiquidity premia are relatively rich in the current credit market because much of the bid comes from strongly on-the-run assets, which can produce a meaningful return premia for the smaller, more complicated and less liquid assets.

An often overlooked example of this is land banking. There aren’t many active financing providers in the space, but we believe yields across the sector represent a premium to comparable risk because of the low multiples of investor capital involved (SCI 28 October).

Corinne Smith

Structured Finance

NPL ABS inked

Sector developments and company hires

Eminent domain mods introduced
To address the heightened risk to borrowers and investors of a multifamily property located in King County being taken by eminent domain (SCI 14 October), Fannie Mae has introduced a prospective modification to its multifamily loan and security agreement and its MBS prospectus for new transactions with properties located in the county. These modifications provide that: if state law requires the acquiring agency to reimburse the property owner for any prepayment premium, that prepayment premium is due; and if no such law exists at the time of a taking, a prepayment premium is due to the extent that the amount received exceeds the UPB, accrued interest and any other amounts due under the loan documents, other than the prepayment premium. For any MBS issued backed by properties in King County, additional disclosure will be provided to explain how prepayment premiums will be handled in cases of eminent domain.

Mortgage prisoner rule change
The UK FCA last week implemented rules that allow lenders to disapply certain minimum affordability assessment requirements introduced in 2014, stating that a “more proportionate affordability assessment” for 'mortgage prisoners' who have been unable to refinance (SCI 2 April) would reduce the harm caused by unaffordable borrowing and that it expected lenders to adapt their origination processes quickly. Fitch expects the move to increase prepayment rates in some RMBS, particularly pre-2014 owner-occupied mortgage pools with non-active lenders, high interest reversion rates (such as standard variable rates or equivalents) and capital repayment mortgages. However, immediate rating actions are not anticipated, given that higher prepayment rates may contribute to increased credit enhancement levels over time - albeit the positive effect may be offset by the larger concentration of residual loans with relatively weaker characteristics. The rule changes require non-active lenders to notify existing borrowers by 1 September 2020 of the option to seek refinancing with a different lender.

Non-core CMBS record
The record 23.3% share of esoteric collateral backing large loan/single-asset/single-borrower CMBS this year is largely attributable to the cold storage and life science sectors, which accounted for 66.2% of such non-core assets, according to Moody's. Although non-core commercial property types are often considered to be riskier than core ones - such as multifamily, office and retail - cold storage and life science properties are an exception, since they have structural qualities that foster performance stability. Both draw cashflow from tenants in industries with a high level of durable, inelastic demand, and have high barriers to entry that limit competition.

North America
AmWINS Group has named Alex Kaplan evp for alternative risk, responsible for leading a new strategy around the development of parametric solutions and other bespoke coverages, on both a stand-alone basis and in conjunction with other traditional and non-traditional solutions for client risk transfer. Prior to joining AmWINS, Kaplan spent 11 years at Swiss Re, where he most recently served as head of North America for the company’s public sector solutions unit.

NPL ABS inked
The Cassa Centrale Group, through Centrale Credit Solutions, has sold a €345m portfolio of non-performing, mortgage or unsecured, receivables transferred from 35 credit institutions via a vehicle dubbed Etna SPV. Arrow Global subscribed to the single class of ABS notes issued under the securitisation. Zenith Service is arranger, corporate servicer, master servicer, calculation agent and bondholder representative on the transaction. WhiteStar Asset Solutions Italia will perform portfolio management services. Banca IMI acted as advisor to Centrale Credit Solutions.

RFI on pooling practices
The FHFA has issued a request for input (RFI) regarding Fannie Mae and Freddie Mac’s pooling practices for the formation of TBA-eligible Uniform MBS to help determine whether further action is necessary to ensure consistent security cashflows and continued fungibility of UMBS. The RFI includes a proposal for GSE pooling practices that seeks to channel the majority of the enterprises’ production into larger, multi-lender pools to ensure more uniform cashflows for TBA investors, continue to allow issuance of specified pools under appropriate circumstances and align enterprise policies around the actions to be taken when a specific seller/servicer exhibits prepayment behaviour outside acceptable norms that may adversely impact UMBS. FHFA is also seeking input on whether more aligned pooling practices would facilitate the issuance of UMBS by market participants beyond Fannie Mae and Freddie Mac. Feedback is invited by 19 December.

UK RMBS redemptions
A pair of UK RMBS are set to be redeemed this month. The RMS 26 issuer has accepted a bid for the purchase of the loans and will redeem all of the outstanding notes in full on the 14 November IPD. Additionally, the TPMF 2016-GR3 portfolio option holder currently expects to exercise its portfolio purchase option in advance of the transaction’s first optional redemption date, which falls in November.

Structured Finance

CMBS md recruited

Sector developments and company hires

North America
Incapital has appointed William White as md, CMBS. Based in Boca Raton, he will report to co-heads of fixed income George Holstead and Laura Elliot. White was previously md and head of CMBS trading at Raymond James, and before that worked at Wachovia Capital Markets and Bank of America Securities.

Ropes & Gray has promoted 16 attorneys to become partners of the firm and eight attorneys to counsel. Among the new partners in New York is Christopher Capuzzi, who guides clients on capital markets transactions. He has extensive experience with special purpose acquisition companies, business development companies and mortgage REITs.

Structured Finance

MPL ABS breaches liquidity covenant

Sector developments and company hires

EMEA
BTIG has established a fixed income credit division in London to service clients across EMEA. The team is led by Michael Carley, md and head of European fixed income credit, who joined BTIG in New York last year. Bobby Dziedziech (director and senior high-yield and distressed trader), Laurent Jastrow (director and senior distressed sales trader and sourcing specialist), Noah Postyn (director and senior high-yield sales trader) and Amreetpal Summan (director and senior financials trader) have also joined BTIG in London in the last few months. Dziedziech joins BTIG from Jefferies, Jastrow joins from Blantyre Capital, Postyn joins from Société Généralé and Summan joins from Goldenberg Hehmeyer.

Leadenhall Capital Partners has appointed Phil Kane as senior credit officer, based in London and responsible for credit management and structuring. He was previously senior advisor at Alantra, responsible for Greek NPL securitisation advisory projects, and has also worked at Deutsche Bank, Cantor Fitzgerald and ICAP.

Liquidation call
Clear Harbor Asset Management, a significant stockholder of Garrison Capital, has delivered a letter to the latter’s board expressing its concerns with the company's persistent underperformance. Despite considerable effort to work constructively with Garrison to address these concerns, the board has failed to take substantive steps to improve performance and refuses to hold management accountable for its repeated failures, according to Clear Harbor. Since 2015, book value per share has fallen from US$13.98 to US$10.30 and Garrison has failed to cover its dividend payments from operating income. The letter states that the logical path for Garrison is an orderly liquidation, with a highly qualified independent investment advisor appointed to oversee this process.  

Liquidity covenant breach
Funding Circle’s Small Business Origination Loan Trust 2018-1 SME securitisation has breached its liquidity covenant, with the burn rate above the amount permitted by approximately 20%. The issuer notes that the liquidity covenant did not contemplate future capital increases of the servicing and collection agent's parent company or the subsequent use of corporate cash in the normal course of business for the purposes of funding the asset-backed finance programmes where it is the subordinated lender. Further, compliance with the liquidity covenant is unlikely for at least a year. Accordingly, the issuer intends to seek approval to amend the servicing agreement to remove the liquidity covenant in due course.

Management internalisation
Colony Capital is seeking to explore with Colony Credit Real Estate the possible internalisation of the management of Colony Credit Real Estate and a transfer of Colony Capital’s credit management business to Colony Credit Real Estate. The move may include the internalisation of Colony Capital’s credit management business into Colony Credit Real Estate via cancellation of Colony Credit Real Estate’s management agreement and the possible contribution to Colony Credit Real Estate of the management contracts of some of Colony Capital’s existing direct credit funds. It follows the execution of a strategic plan to bifurcate the company’s assets into a core portfolio - which it plans to grow - and a legacy non-strategic portfolio, which it plans to monetise and reinvest into the core portfolio.

RMBS

Counter suit filed over servicing system

Sector developments and company hires

Servicing system suit
PennyMac Financial Services has filed a counter suit against Black Knight, alleging that Black Knight uses its market-dominating LoanSphere MSP mortgage servicing system to engage in unfair business tactics that both entrap its licensees and create barriers to entry that stifle competition. PennyMac is seeking to enjoin Black Knight’s wrongful practices and recover actual and statutory damages. The firm had been a customer of Black Knight’s mortgage software products since 2008, but due to the perceived limitations of the MSP product, PennyMac has invested - with Black Knight’s knowledge and as disclosed to its public stockholders - substantial resources to develop custom architecture in order to enhance its servicing capabilities. The move follows Black Knight Servicing Technologies filing suit, demanding that PennyMac transfer ownership of its own systems to Black Knight, having materially breached its contractual obligations and undertaken trade secret misappropriation. PennyMac says that Black Knight’s lawsuit is without merit and it intends to defend itself vigorously in these proceedings.

STS notifications
Bank of Scotland has submitted STS notifications in respect of its Permanent Master Issuer 2011-2, 2015-1, 2016-1 and 2018-1 RMBS notes to ESMA and the UK FCA. Prime Collateralised Securities UK was the authorised verification agent.