Contents

ABS

Alhambra priced

SME ABS gets over the line at last

The long-awaited Spanish SME ABS Alhambra SME Funding 2019-1 has priced. The closest Europe has yet seen to a public middle market CLO came in broadly in line with updated guidance.

Originally called Alhambra SME Funding 2018-1, the deal was first announced in June last year and expected to price that December (SCI 21 November 2018). It consists of a static portfolio of non-investment grade, senior unsecured Spanish SME loans originated by Be-Spoke Capital Ireland since September 2017.

Alhambra comprises seven tranches: €132.5m class As, €16.5m class Bs, €61m pre-placed class Cs, €23.6m class Ds and €13.8m class Es; as well as retained Z1s and Z2s of €19.3m and €13.8m respectively. The non-retained tranches saw initial price talk at the end of October of one-month Euribor plus: 175-200bp, 250bp, 525bp, 950bp and 1500bp.

Guidance yesterday saw spreads on the class As and Bs shifted up to plus 225bp and 300bp where they were covered at 1.0x (later increased to 1.1x) and 1.2x, respectively, though coupons were set at 200bp and 250bp. Pricing today confirmed prints for all tranches at the revised expected spread levels, except the class Ds that narrowed this morning to plus 925bp. Cash prices for the two senior tranches were 99.31 and 98.34.

Classes A, B and C are expected to be rated by both DBRS Morningstar and Axesor at triple-A; double-A and double-A-plus; and double-B (low) and double-B plus respectively. The other tranches will be unrated.

DBRS Morningstar’s presale report says that as of 17 October 2019, the transaction’s portfolio included 52 loans to 48 borrowers, totalling €274.98m. All the loans are amortising and are primarily unsecured, though a number of them are supported by corporate guarantees and pledges.

The rating agency notes: “The portfolio is well diversified in both borrower size and different industries. The ‘building and development’ and ‘surface transport’ sectors have the highest concentrations in the pool, representing 15.3% and 13.1% each of the outstanding balance respectively. The ‘lodging & casinos’ (10.9%) sector has the third-largest exposure based on the DBRS Morningstar industry classification. The largest obligor and smallest obligor groups represent 3.6% and 0.7% of the outstanding balance respectively.”

The transaction incorporates both an interest and principal waterfall. The interest waterfall includes principal deficiency ledgers (PDLs) for each class of notes, which - according to DBRS Morningstar’s cashflow analysis and the terms of the transaction documents - results in its ratings addressing the timely payment of interest for the class A Notes and ultimate payment of interest for the class B and class C notes. Except for the senior-most class of notes, the transaction documents permit the deferral of interest and this mechanism is not considered an event of default.

The transaction is structured to initially provide 51.8% of credit enhancement to the class A Notes. This includes subordination of the class B to class Z2 notes (part of the Z2 notes are not collateralised, to cover the upfront costs). The transaction also benefits from an unfunded reserve fund which, once topped up to its required level of €4m from excess spread, will be available to cover any shortfalls in interest payments for the rated notes and the PDLs.

Mark Pelham

ABS

Landmark ABS inked

UniCredit completes large corporate ABS

UniCredit has completed what is believed to be the largest European ABS transaction post-crisis. Dubbed Impresa Two, the deal is a departure from previous securitisations, given the inclusion of large corporate loans in the portfolio.    

The two-year revolving cash securitisation is backed by a €11.05bn portfolio of secured and unsecured loans granted by UniCredit to SMEs, mid-cap and large companies located in Italy. The previous ABS SME transaction originated by the bank - Impresa One - closed in 2011 and included only SME loans.

Rated by Moody’s, the €7.746bn Aa3 rated class A note is due in 2061. Roughly one-third of the underlying portfolio comprises loans to mid-cap and large companies.

The only other transaction to have approached a similar size was Esmee Master Issuer series 0-2009-I, which closed in December 2009 and was backed by a €7.55bn portfolio of small business loans. Monica Curti, vp and senior credit officer at Moody’s, notes: “Esmee was the only deal to have approached this size. However, the inclusion of large corporates has amortisation repercussions. Typically, we see a linear or French amortisation profile, where the SMEs pay in fixed instalments with a variable interest rate. Large corporates, by contrast, have loans with an amortisation that features a balloon payment at the end, exposing them to refinancing risk.”

The portfolio is granular, with the top one and 10 debtors representing 1.09% and 8.85% of the total initial portfolio respectively and the top region (Lombardy) accounting for 25.57%. As of 30 September 2019, it consists of 103,340 loans made to 655 obligors. The assets were originated mainly between 2003 and 2019 and have a weighted average seasoning of 2.62 years.

The relatively limited exposure to the real estate sector is another positive driver, with the construction and building sector accounting for 26.8% of the initial portfolio and a maximum of 27% of the total portfolio after replenishment.

Furthermore, the deal includes early amortisation triggers designed to terminate the revolving period, should the performance of the portfolio deteriorate, including a cumulated default trigger starting from 1.5% and increasing to 6% during the two-year revolving period. However, Moody’s states that the inclusion of a replenishment period could expose the portfolio to potential deterioration and macroeconomic cyclical volatility.

Nevertheless, the deal benefits from healthy subordination levels, with class A subordination representing 29.9% of total assets (excluding loans with principal in arrears) and a cash reserve of 1.05% of total assets to be funded with excess spread.

Stelios Papadopoulos

Structured Finance

SCI Start the Week - 11 November

A review of securitisation activity over the past seven days

Stories of the week
Pursuing illiquidity premia
Corbin Capital answers SCI's questions
Risk transfer return
Bank of Ireland issues mezzanine tranche
Tactical opportunity?
Downturn could spur CRT secondary activity

Other deal-related news

• To address the heightened risk to borrowers and investors of a multifamily property located in King County being taken by eminent domain, 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 (SCI 5 November).
• 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 would reduce the harm caused by unaffordable borrowing and that it expected lenders to adapt their origination processes quickly (SCI 5 November).
• 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 (SCI 5 November).
• 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 (SCI 5 November).
• 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 (SCI 5 November).
• A pair of UK RMBS are set to be redeemed this month - RMS 26 and TPMF 2016-GR3 (SCI 5 November).
• 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 (SCI 7 November).
• 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 (SCI 7 November).
• 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 (SCI 8 November).
• 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% (SCI 8 November).

Data

BWIC volume

Secondary market commentary from SCI PriceABS
7 November 2019
US CLO
An active day with 33 covers observed across the capital stack - 10 x AAA, 8 x AA, 3 x BBB and 12 x BB.  The >4y WAL AAAs traded in a 116dm-144dm range, with a RP 2023 profile SNDPT 2013-3RA A (Sound Point Capital) cover at the wide end of this range 144dm / 5.2y WAL, this has a lo-MVOC 144.63, lo-MV AP 30.86 (34.31 AP) whilst the deal has challenges with 128bps of defaults, par build of -0.74, lo-diversity 72 and almost 7% of sub 80 priced assets. The MM CLO AAs trade in a 262dm-268dm range whilst the 6 x BSL AAs trade in a 191dm-223dm range for predominantly 2023 RP profiles.
The BBBs trade in a 370dm-409dm range (WALs 6.8y-7.5y) for 2022 and 2023 RP profiles, as a comp we modelled FILPK 2018-1A D yesterday (RP 2023) to 373dm / 8.3y WAL which is tight to todays levels.  Since a number of BBs trading today with a variety of RP profiles we split up by RP profile - 2024 RP covers 778dm / 9.3y WAL, 2023 RPs trade in a 759dm-1035dm range (high volatility amongst deals) whilst the 2020/2022 RP profiles trade in a 759dm-904dm range (hi-vol too).
Taking a closer look at an outlier in the 2023 RP profiles, WINDR 2014-3KRA E (THL Credit Senior Loan Strategies) covers at 1035dm / 8.8y WAL - lo-MVOC 103.39, lo-MV AP 3.28 (AP 8.39), hi-sub 80 assets 6.3%, lo-diversity 68, hi-CCC 8.25%, par build -0.27 and 77bps of defaults on this deal accounting for the basis.

EUR/GBP ABS/RMBS
CAR 2018-F1V A (French autos - AAA) traded at 21dm / 1.22yr. There are 5 x Spanish RMBS, all of them original AAA but they include the original whole AAA, middle pay out of 3 and slow pay out of 2. The whole AAA have spreads between 15dm to 30dm. Middle pays are around 40dm and the junior AAA around 60dm. There are 4 x UK non-conforming pre-crisis deals. Running them all to maturity spreads range from around 50dm to 110dm. There is a French Prime RMBS at 19dm and a UK auto deal at 58dm.

EUR CLO
3 x AAA, 5 x AA & 4 x BBB today. In the AAA first JUBIL 2014-14X A2R (fixed rate AAA) traded at S+167bps at close to par. The Class X of DRYD 2014-32X traded at 92dm / 0.41yr. CORDA 4X ARR traded at 100.20 which is 126dm to mat / 3.06yr or 94dm to call / 0.46yr. We are shortly going to be introducing DM to call and DM to worst fields for easier analysis of call/refi risk.
The AAs traded between 155dm and 193dm. The tight end of the range is TIKEH 2015-1X BR at 155dm / 4.22yr which the RP Date has passed at 5/8/2019. The wide end of the range is SPAUL 3RX B1R at 193dm / 5.48yr. Apart from the short WAL TIKEH 2015-1X BR trade all the others have priced between approx. 180dm and 190dm. The BBBs priced between 351dm / 5.96yr and 390dm / 7.03yr.

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

Risk transfer round-up - 15 November

CRT sector developments and deal news

Santander is rumoured to be prepping a synthetic securitisation of German consumer loans. This is one of two synthetic consumer ABS deals it is said to be readying this quarter, following a slew of consumer SRTs issued by the bank this year (see SCI’s capital relief trades database).  

Capital Relief Trades

Full-stack trend continues

FCA completes Italian auto SRT

Fiat Chrysler Automobiles (FCA) has completed a €912.6m true sale significant risk transfer securitisation backed by Italian auto loans. Dubbed A-BEST 17, the full-stack ABS differs from previous transactions from the same programme, given the inclusion of pro-rata amortisation and a deferred purchase price mechanism.

Rated by Fitch and DBRS, the transaction consists of €810m class A notes (which priced at one-month Euribor plus 48bp), €27m class B notes (plus 125bp), €18m class C notes (plus 180bp) €23.4m class D notes (plus 285bp), €9.9m class E notes (plus 3.85bp) and €24.3m class M notes (6.875%).

The deal features a 3.8-year portfolio weighted average life and pro-rata amortisation with triggers to sequential, a one-year replenishment period and a ‘use it or lose it’ excess spread mechanism. The excess spread is accompanied by a deferred purchase price mechanism, following the example of other full-stack SRT deals, such as BNP Paribas’ AutoFlorence transaction (SCI 22 July).

Further features include a liquidity reserve equal to €12.6m, which is available to cover any senior expenses and interest shortfalls on the rated notes and may also be used on the final maturity date to fully repay principal on the rated notes.

The trade was priced close to initial guidance and attracted interest from over 10 investors, mostly hedge funds. Unicredit, Banca IMI and Credit Agricole acted as joint arrangers and Santander took on the role of joint lead manager. Investors were drawn to the deal, given high granularity levels, the short-dated nature of the assets and lack of Italian supply.

The deal features a regulatory call that can be exercised without unwinding the transaction, given that it’s carried out for both funding and capital relief purposes. If the regulatory call is eventually exercised, the issuer can disperse subordinated loans to redeem the mezzanine and junior tranches, but retain the senior tranche. The senior tranche has been priced at tight levels, so retaining it would allow FCA to continue benefiting in terms of funding and keep the transaction outstanding.

FCA followed a similarly flexible distribution strategy with A-BEST 15, the bank’s first full-stack SRT. The auto lender completed the transaction in December 2015 by selling the junior and mezzanine tranches, but sold the senior tranche three months later in order to take advantage of better market conditions.

As of October 2019, the latest portfolio comprises 92,294 loans. Loans granted for the purchase of new vehicles total 82.6% of the NPV balance. The remaining 17.4% was granted for the purchase of used vehicles and the pool includes 10.6% of loans granted to VAT borrowers for the purchase of new cars.

The pool is well distributed across Italy - the top region is Lombardy (with 18.1% of the NPV balance) and the top province is Rome (7.2%) - and shows no significant single-borrower concentration, given that the largest borrower has a total share of 0.01%.

The capital relief trade is riding a wave of full-stack SRT issuance, following the implementation of the STS regime this year and the ECB’s guidance on excess spread (SCI 27 September). Santander, BNP Paribas, Sabadell and Opel Bank have all completed such transactions so far this year (see SCI’s capital relief trades database).

Stelios Papadopoulos

NPLs

Performance tracked

Peripheral NPL ABS compared

JPMorgan has launched respective performance trackers for Italian and Iberian non-performing loan securitisations, summarising high-level transaction details and dynamic performance metrics. The data highlights a number of notable differences between the two sectors.

First, original deal size as a percentage of total GBV securitised averages 33% for Iberian NPL ABS, compared to an average of around 28% for Italian NPL ABS. Second, the size of the senior tranche across Iberian NPL ABS deals averages about 70%, compared to an average of about 83% across Italian NPL ABS.

“Unlike in Italy, where the senior bonds of most NPL securitisations have been retained by the issuing/originating banks, the senior bonds on [the] Portuguese and Spanish NPL ABS deals have been distributed to investors,” JPMorgan European securitised products analysts observe.

Third, the proportion of secured loans in the portfolio averages 46% (based on percentage of original GBV) - with a range of 41% to 49% - across the three Portuguese transactions included in the analysis versus 94% for the sole Spanish deal. In comparison, secured loans comprise 65% of Italian NPL collateral on average, with a range of 38% to 95%.

To date, 21 Italian NPL ABS totalling €14.8bn have been issued under the GACS scheme, representing a cumulative original GBV of €63.3bn. The issuance of one additional non-GACS NPL deal - the €485m BLVDR 1 - brings the total original GBV of securitised NPLs in the country to €64.7bn, according to JPMorgan figures.

Across these 22 transactions, the total original GBV of NPLs securitised averages €2.9bn, with a significant range - between €320m for BPBNP 2017-1 to €24.1bn for SIENA NPL 2018. Original transaction size averages €694m, but ranges from €97.5m for IBLA 1 to €4.3bn for SIENA NPL 2018. Original deal size as a percentage of total GBV securitised therefore averages around 28%, with a range of 14.3% to 37.5%.

Following the most recent reporting period, the current outstanding volume of these 22 NPL securitisations stands at €13.3bn, implying an aggregate factor of 0.87.

No transaction included in JPMorgan’s Italian NPL ABS Performance Tracker has any outstanding interest shortfalls on the class A notes, but two - BLVDR 1 and ARAGN 2018-1 - currently have interest shortfalls on the class B tranches. Cumulative collection ratios (CCRs) range between 73% and 194%, with all deals – except ARAGN 2018-1 - exceeding their CCR triggers.

Meanwhile, JPMorgan’s Portuguese & Spanish NPL ABS Performance Tracker shows that the Iberian NPL securitisation market remains nascent, with a total of circa €600m issued since November 2017. The combined cumulative original GBV of the four deals included in the tracker is €1.8bn.

Average original transaction size is about €150m, ranging between €70m for ARESL GAIA and €231m for DUERO 1. The total original GBV of NPLs securitised averages about €450m, with a range of €234mm for ARESL GAIA to €581mm for EVORA 1, implying that original deal size as a percentage of total GBV securitised averages 33%.

Current outstanding volume of these four securitisations totals €505m, representing an aggregate factor of 0.85.

At present, only three deals in the Iberian tracker have reported updated cashflow and performance metrics, as ARESL GAIA’s first reporting period is at end-November. CCRs stand at 101% for DUERO 1, 179% for EVORA 1 and 344% for GNCHO 1 – with all of them exceeding their CCR triggers for an interest subordination event.

Corinne Smith

RMBS

ERLS returns

Lone Star prints Irish NPL RMBS

Lone Star has priced its latest Irish non-performing loan RMBS at the same levels as its previous ERLS deal from July. Dubbed European Residential Loan Securitisation 2019-NPL2, the deal is backed by mortgages from the €1.34bn Project Glas portfolio acquired from Permanent TSB in 2018.

Rated by DBRS and Moody’s, the transaction consists of A/A2 rated class A notes (which priced at a DM of one-month Euribor plus 230bp), BBB/Baa3 rated class B notes (plus 450bp) and BBB/B2 rated class C notes (plus 800bp). The unrated class P and D notes are retained by Lone Star affiliate LSF XI Glas Investments.

The collateral comprises first-charge performing and non-performing mortgage loans, a portion of which the issuer may sell, subject to sale covenants. The sale price must be at least 80% of the aggregate current balance of the mortgage loans that are subject to a sale, net of any portfolio sale costs.  

Any sale proceeds representing above 80% of the current balance of the loans sold will be used to pay down the principal on the class P notes and thereby boost credit enhancement. Alessio Pignataro, svp at DBRS Morningstar, comments: “A key structural feature is the leakage of class P notes. If the performance triggers aren’t breached, then cashflow is diverted to pay down the principal balance of class P notes.”

He continues: “It’s a fully sequential amortisation structure, so this type of credit enhancement is justified. The transaction also features a cash reserve and the portfolio is quite granular.”

Indeed, the largest borrower accounts for 1.1% of the mortgage portfolio. The top five borrowers account for 2.3% and the top 10 borrowers account for 3.6% of the mortgage portfolio. Furthermore, 30.9% of the portfolio consists of buy-to-let loans, which tend to feature more efficient recovery processes, compared to primary dwelling housing (PDH) loans.

However, in terms of portfolio composition, the majority (73.1%) of properties in the pool are located outside Dublin - which is a less liquid market, although ultimately the recoveries on those exposures will depend on the servicer’s resolution strategy, says Pignataro.

The bulk (96.3%) of the portfolio is in various stages of arrears and litigation procedures. In particular, 66.8% is currently in some stage of the litigation process and 10.7% of the loans are in the modification pipeline. An additional 20.6% of the portfolio is composed of loans that are greater than three-months in arrears, where the servicer is in the process of establishing contact with the borrower.

Looking ahead, S&P expects a strong pipeline of Irish NPL ABS issuance, with an increased focus on re-performing loans, given the regulatory focus on offering sustainable forbearance solutions to borrowers and Irish banks' work-out strategies. However, the agency qualifies that if the Irish Parliament’s ‘No Consent, No Sale’ bill passes, both Irish NPL and RPL RMBS issuance could be potentially constrained. The bill aims to ensure that no mortgage can be sold without the borrower's explicit consent.

Stelios Papadopoulos

RMBS

Spanish RPL RMBS prepped

Transaction resecuritises paid-off SRF loans

Barclays and Natwest are lead managers on a €518m reperforming Spanish RMBS, featuring legacy mortgages previously securitised under the recently paid-off SRF RMBS transactions and other loans owned by CarVal, bought from Blackstone earlier this year. Dubbed Miravet 2019-1, the transaction is being sold by Odiel Asset Co and comprises 10,171 residential mortgages originated by Catalunya Banc, Caixa Catalunya, Caixa Tarragona  and Caixa  Manresa, all now owned by BBVA.

The transaction has received provisional ratings from DBRS Morningstar and Fitch of triple-A/triple-A on the €384.4m class A notes, single-A/single-A on the €58.9m class Bs, triple-B/triple-B minus on the €21m class Cs, double-B (high)/double-B minus on the €7.2m class D notes and double-B (low)/single-B minus on the €6.5m class Es. There is an unrated €75.9m class Z note and pricing is expected next week.

Around 76.7% of the mortgage portfolio consists of restructured loans to borrowers facing financial difficulty and who have received assistance from the originators such as principal grace periods and parallel financing. Fitch suggests that these strategies are inadequate, but mitigated by the portfolio’s average clean payment history of 7.8 years and significant portfolio seasoning of 11.8 years.

Fitch comments that the average lifetime foreclosure frequency on the portfolio - under a single-B rating stress scenario - is 19.7%.The rating agency adds that the default rate on the re-performing loans is derived from the assessment of the payment track record since the most recent date that they were last in arrears and the restructuring end-date.

BBVA is master servicer but delegates servicing duties to Anticipa Real Estate, with servicing migrating to Pepper Asset Services in 2020. Fitch comments that the risks involved in servicer migration are mitigated by Pepper’s on-boarding expertise internationally, and in Spain, and BBVA’s required approval as master servicer.

The portfolio is also subject to significant geographical concentration, with 72.5% of the loans going to borrowers in Catalonia. Fitch suggests that political uncertainty in the region doesn’t, however, pose a major risk.

DBRS Morningstar adds that following the FORD in November 2024, the margin payable on the rated notes increases and on the step-up date, the Class Z noteholders have the call option to redeem the notes in full. However, should this option not be exercised, the sponsor can sell the portfolio in the market with help from a third party, but any such portfolio sale must be at a minimum price which ensures that all notes outstanding, together with accrued interest and senior costs, are paid in full.

In terms of the originating banks, Caixa d’Estalvis de Catalunya, Caixa d’Estalvis de Tarragona and Caixa d’Estalvis de Manresa were eventually merged and subsequently transferred to Catalunya Banc (CX), on 27 September 2011. During 2011 and 2012, CX received a capital investment from the Fund for Orderly Bank Restructuring (FROB), effectively nationalising the bank.

DBRS Morningstar notes that, as part of its divestment in CX, the FROB sold a portfolio of loans that was transferred to a securitisation fund, FTA 2015, Fondo de Titulizacion de Activos (the 2015 fund) via the issuance of mortgage participation and mortgage transfer certificates, which represent the legal and economic interest in the mortgage loans.

Following the sale of the mortgage loans in 2015, BBVA acquired CX on 24 April 2015. And during the course of 2016 and 2017, the 2015 fund sold the mortgage loans to the SRF sellers (SRF 2016-1, SRF 2017-1, SRF 2017- 2, together SRF) by means of SRF’s acquisition of mortgage certificates. On 26 July 2019, the SRF sellers repurchased the mortgage certificates from their relevant securitisations and sold it to the seller.

Richard Budden

Capital Relief Trades

Choose risk

Richard Robb, ceo of Christofferson, Robb & Company (CRC), an investment manager in New York and London, and professor at Columbia's School of International & Public Affairs, answers SCI's questions

Q: How is CRC involved in the capital relief trade or risk sharing market?
A: We continue to invest in bilateral risk sharing transactions with European banks, as we have since 2003. Eighty-five percent of our deals are synthetic. Our AUM is around US$5bn, covering around US$80bn in reference assets.

Q: Anything new?
A: Three years ago, we launched a liquid fund, the CRC Bond Opportunity Trading Fund, that trades financials globally. It’s run by Brad Golding. Brad and his team take advantage of CRC’s knowledge of banks to invest in the fragmented market for bank capital instruments with an active short book.

Q: CRC has always focused on SMEs. Why is that?
A: There’s an old joke about a high school reunion, where alumni are prospering to various degrees – doctors, lawyers and the like. But one shows up in his private jet, to the astonishment of the others.

They wonder why their dumbest classmate is the richest. “It’s simple,” he explains, “I buy goods for US$1, sell them for US$1.50 and so I earn a 200% profit.”

In business, you don’t have to understand why something works in order to succeed – just let the invisible hand guide you via price signals.

Over the years, though, we’ve figured out why we’re drawn to SMEs. According to our research, family businesses really do form the backbone of European economies. Synthetic risk sharing transactions bridge the gap between banks straining for capital and investors who are underweighted in Europe.

Investing in deals tied to SMEs, we’ve come to appreciate that, unlike large corporates, SMEs are relatively detached from the overall economy. They usually default when the firm or its owners are struck by some idiosyncratic misfortune, such as an acrimonious divorce among the founders.

Q: Do you think the risk sharing market has room to grow?
A: Bank lending to German SMEs is around €4trn, one-quarter the size of the entire US banking system. While the term may be grating, European SMEs truly are an “asset class.”

Packaging the risk of bank exposures to SMEs and midcaps and transferring it to end investors is a big, long-term project. FHLMC and FNMA transfer most of their credit risk to capital markets through STACRs and CAS – why can’t European banks follow that model? Maybe in 20 years, if our market grows to its potential, people will look back and say, “core Europe used to be un-investible, there used to be a hole in capital markets.”

Q: Tell us about the book you’ve written.
A: This week, Yale University Press is publishing my book, Willful: How We Choose What We Do. It draws on economics and philosophy to explore decision making. I hope it will interest readers, including my peers in structured finance.

The classical view of economics is of rational individuals optimising efficiently. Behaviourists, on the other hand, see us as relying on mental shortcuts and conforming to pre-existing biases. But either way, we act “purposefully,” trying to gratify our preferences the best we can in light of our resources.

I argue that neither explanation accounts for the things that we do for their own sake, and that overlooking these actions leaves our picture of decision making incomplete. Choices made seemingly without reason belong to a second realm, which I identify as “for-itself.” This theory explains a lot of phenomena that can’t be shoehorned into models of purposeful choice, with or without behavioural bias.

Q: What’s an example?
A: In 2010, my colleague Andrew Robertson and I were trying to raise money for CRC’s new post-crisis risk sharing fund. The deals on offer from banks at the time seemed incredible – at least to us. But nothing we could say and no analysis we could present would convince some investors.

After a meeting with the managers of one endowment fund, Andrew said to me, “We could have levitated over the conference table and asked, ‘How’d you like to tap into these powers?’ We could have pointed at a chair and turned it into gold. They still wouldn’t have invested.”

Everyone on the sell-side or who raises money on the buy-side can relate to that frustration. I’ve come to believe that the investors’ reluctance had little to do with the usual factors: aversion to risk, information asymmetries, principal-agent problems, aversion to blame, aversion to ambiguity, herd mentality, or irrational fear. I simply couldn’t beam my beliefs into the investors’ heads, and the investors couldn’t act on a hunch that I (and others) might just be right.

The essential appeal of the opportunity we were pitching was unique, so it couldn’t be compared to opportunities that had come before. It stood for itself. There was no set of rules or data I could invoke to justify my belief.

Even if I could have persuaded the managers, they would’ve had to convince an investment committee up the chain. Then they might’ve had to wait for years before my beliefs were proven right.

The limits to the transmission of private beliefs are most burdensome when we deal with one-time events. There’s money to be made in these murky, anxiety-filled circumstances, when valid rules conflict and experience and judgment are key. It has to be like that: any rule that led to easy profits would get arbitraged away before you could act on it.

Faced with such contexts, how can institutions incorporate private beliefs in an investment process? This isn’t a problem rational choice can explain or solve, nor can it be ascribed to behavioural bias. To me, it’s a gigantic neglected topic in finance.

Q: So you’re contrarian?
A: No. The advice “zig when others zag” is useless. It’s become so conventional that it’s impossible to follow. If everyone decides to be contrarian, then everyone’s the same, and no one is contrarian.

Rather than contrarian, thinking has to be independent. Since everyone has a provisional hold on their capital to some degree, you need an institutional setting that lets you hang on.

Q: How did you come to write Willful?
A: Most nonfiction books apparently originate through “reverse inquiry”, to use a term that will be familiar to SCI readers. I wrote a paper in an academic journal in 2009 called “Nietzsche and the Economics of Becoming.” Seth Ditchik, now the editorial director at Yale, read the paper, contacted me from out of the blue, and said, “Besides rational choice and behavioural economics, there’s a third thing – acting on the world – and I think that’s a book.” Seth and his team stuck with me for the 10 years I needed to write it.

Q: Who is the audience for Willful?
A: At the start, I was writing mostly for academic economists and perhaps philosophers. But with each draft, equations migrated to footnotes and an online technical appendix, and the message became simpler. The book now targets a general audience. There’s even an audiobook.

The audience I’m most eager to reach is the teachers, students, and practitioners of economics and finance. Some of us are so steeped in rational choice theory that we become disoriented trying to reconcile it with actions that don’t quite fit.

Recognising the two realms – purposeful and for-itself – can serve as a therapy and demonstrate that behaviour can be something besides either successful optimising or a pathological failure to optimise. For instance, maybe procrastination isn’t so terrible, since life is at least partly a sport, and dull tasks become more exciting up against a deadline. Accepting such behaviour as intrinsically human can help us make better choices and be comfortable with the choices we already make.

Structured Finance

First RMBS tied to AONIA marketing

Company hires and sector developments

AONIA debut

Commonwealth Bank of Australia’s new A$1bn Medallion Trust Series 2019-1 is set to become the first Australian RMBS linked to the Australian Overnight Index Average (AONIA) instead of one-month BBSW. The issuer is understood to be marketing classes A1, A2 and B, while classes C to F will not be offered to investors. The collateral backing the transaction includes owner-occupied (76.2%) and buy-to-let (23.8%) mortgages, with an average CLTV of 59.7% after 43 months of seasoning.

EBRD supports Egyptian ABS

The European Bank for Reconstruction and Development (EBRD) is providing up to EGP1bn billion (€55m) in a securitised local currency multi-tranche bond issuance totaling EGP6bn, issued by El Taamir for Securitisation Company. The issuer, an SPV established by the New Urban Communities Authority (the sponsor), purchased receivables from the sponsor, and the proceeds of the issuance will be used to refinance existing short-term loans of NUCA advanced by commercial lenders under a bridge facility. The transaction will allow NUCA to restructure its balance sheet and strengthen its financial capacity. The EBRD’s participation will help to build the necessary institutional capacity and procedures to develop a sustainable and efficient infrastructure asset management and investment plan for NUCA.

Further Sears closures

Sears parent company Transformco intends to close an additional 96 stores by February 2020, including 51 Sears and 45 Kmart stores located in 28 US states and Puerto Rico. In less than nine months following its US$5.2bn bankruptcy acquisition of Sears Holdings Corporation, the ESL Investments affiliate has put into motion the closure of a total of 243 stores, or approximately 57% of the 425 locations it acquired. KBRA has identified 19 properties across 25 CMBS transactions, totalling US$1.26bn, with collateral or non-collateral/shadow exposure to a Sears or Kmart that is included in the latest round of closures. Of these 19 properties, 12 (accounting for 69% by ALA) generated net cashflow in their most recent financial period that was below the originator’s underwritten estimate. Three – University Mall (securitised in LBCMT 2007-C30), McKinley Mall (COMM 2014-CR14 and COMM 2014-LC15) and Fort Roc Portfolio - Kmart Plaza (B) (MSC 2006-HQ10) – collateralise loans that were in special servicing, as of the October 2019 remittance.

Structured Finance

ESG initiative launched

Sector developments and company hires

Alt heads named test

Allianz Global Investors has unveiled leadership changes that will take effect on 1 January 2020. Global head of distribution Tobias Pross and global head of alternatives Deborah Zurkow will succeed Andreas Utermann as ceo and global head of investments respectively. Utermann will remain at the firm on an advisory basis for the first half of next year.

Dual-originator MPL ABS prepped

Funding Circle is marketing its first STS-compliant and SONIA-linked SME securitisation. The £195m Small Business Origination Loan Trust 2019-3 deal also features a dual-originator structure, with Funding Circle providing 51% of the loans and Glencar Investments XI (Waterfall Asset Management) the remaining 49%, according to Rabobank credit analysts. Both originators will act as retention holders as well. Pricing is targeted for later this week.

ESG initiative

The SFA has launched an industry initiative to facilitate the application of ESG principles to the structured finance market. The association notes that advancing the integration of ESG factors into business practices and reporting will require industry-wide collaboration. As such, it is holding an ESG Symposium on 5 December in New York to address a number of topics, including what the securitisation market can and should apply from ESG frameworks in other sectors, data reporting and standardisation, and rating agency and investing approaches. Following the symposium, SFA says its next step would be to determine a path forward.

Reinsurance vet promoted

Munich Reinsurance America has named Oliver Horbelt as cfo. He will report to Tony Kuczinski, president and ceo, Munich Re America and will be a member of the US operations executive board. Since 2015 Horbelt has served as head of Munich Reinsurance America’s capital partners Americas business unit where he has led a group of experts dedicated to supporting clients in addressing complex risk and capital management challenges.

Structured Finance

Morgan loan prepays

Sector developments and company hires

Coupon swaps planned

The New York Fed's open market trading desk plans to conduct four small value agency RMBS coupon swap operations on 19 and 21 November. On these days, the desk intends to swap out of three unsettled December TBA positions – 30-year UMBS 3% coupon, 15-year UMBS 2.5% coupon and 30-year Ginnie Mae II 3.5% coupon – for other readily available RMBS. Each operation will have a face value of US$5m, for a total current face value of US$20m across four operations. The purpose of the exercise is to test operational readiness to implement existing and potential policy directives from the FOMC.

Lending head appointed

Greystone has added Scott Chisholm as head of commercial and business development for its lending platform, based in Greystone’s New York office. In this newly created role, Chisholm will expand Greystone’s capital solutions reach within asset classes such as industrial, office, hospitality, and retail, complementing the firm’s leading multifamily and healthcare lending platforms. With CMBS, bridge, mezzanine, and proprietary lending capabilities, Greystone is now poised to offer commercial real estate investors a range of solutions for their capital needs. Chisholm joins Greystone from Ackman Ziff, where he served as senior md specialising in commercial real estate debt and equity. 

Morgan loan prepays

The US$25.3m Raintree Apartments loan, securitised in COMM 2013-CR9, prepaid prior to its 1 June 2023 maturity date with a US$2.5m penalty. The loan was previously sponsored by Robert Morgan and only defeasance was permitted, according to Morgan Stanley CMBS analysts. The loan was transferred to special servicing in December 2018 for imminent default and was subsequently foreclosed, ahead of Morgan’s indictment for fraud. The property was included in the recent Morgan Properties acquisition (SCI 24 September).

Minority stake acquired

Owl Rock has sold a passive, non-voting minority stake to Dyal Capital Partners, a division of Neuberger Berman. Owl Rock plans to use all proceeds from the transaction to invest in Owl Rock products, which are expected to include complementary product launches and strategies in 2020. There will be no changes in the management, strategy, investment process, or day-to-day operations of Owl Rock or any Owl Rock managed products, including Owl Rock Capital Corporation, a publicly-traded BDC that is externally managed by an affiliate of Owl Rock.