Contents

Asset-Backed Finance

Moving into the mainstream

Booming aviation ABS sector shakes off esoteric label?

Aviation ABS issuance has seen strong growth, with 2019 set to be a bumper year and investors also drawn to the asset class due its long term, stable nature, prompting some market participants to suggest it has shaken off its esoteric label. The asset class isn't without any concerns, however, with a small number of issuers lacking skin in the game and broader uncertainty about how the sector will fare in a downturn scenario.

One reason aviation ABS has grown in recent years is that aviation firms utilise it as alternative debt financing method to banks, but the overriding factor is the growth of operating lessors. Rob Morris, global head of consultancy at Ascend by Cirium, says that 46-47% of the existing fleet of 27,000 aircraft are now managed by operating lessors.

Securitisation, he says, is well suited to operating lessors' business model as it can be used as an exit strategy for aircraft which lessors may otherwise have to sell - with the lease contract attached - to competitors. Miran Bastajian, head of non-bank financial institutions (NBFIs) at Cirium, says that securitisation is also attractive to operating lessors because of the flexibility it offers.

Bastajian adds: "Likewise, in an ABS they can finance a mixture of less attractive aircraft by commingling them into a mixed pool, with some more attractive names. Also, without ABS they would need to sell the aircraft at the end of the lease, potentially to the competition – which is counterproductive. ABS gives lessors the ability to simply refinance at the end of the lease term and so keep hold of the aircraft and earn management fees."

With the growth in issuance, investor comfort has also grown and the asset class has stepped outside of the esoteric bracket, says Bastajian. He suggests that a major reason for this is the depth of performance data - such as that compiled by Cirium - which now goes back 30 years.

In fact, investors are a lot further up the learning curve than might be expected. He says: "There is now a strong appetite for aviation ABS from a broad range of investors, particularly as part of a well-balanced broader asset portfolio, which has the added benefit of having a low correlation to other asset classes."

Investors in aviation ABS are typically longer term, institutional investors ranging from hedge funds and private equity firms to pension funds and insurers.  Bastajian says that these firms see aviation ABS as a very stable asset class, with proven performance over a number of years.

One of the appealing elements of aviation ABS for investors is that the lease terms are typically very long and – once the lease is signed – cashflows have some certainty for the term of the lease. This is typically multiple years, unless there is a credit default and, even then, the security deposit is in place to mitigate loss of cashflow while the asset is remarketed.

Several new issuers have come to market in recent years, but Morris suggests there needn't be too much cause for concern other than with regard to the quality of the lease servicer. He adds that investors typically ask questions about the ability of these issuers/servicers to asset manage the aircraft accordingly, should the airlines become bankrupt and cease to perform.

He continues: "A key part of this is therefore the ability of these firms to remarket aircraft and switch them out of the transaction quickly, without affecting cash flows. So far this hasn't been an issue and of transactions with featuring two, three or even more defaulted aircraft, these have been remarketed without delay and cashflows to investors protected...The asset class is so stable now that it's regarded pretty much as investment grade."

In terms of concerns around the sector, the main one related to transactions is that there are a small number of issuers that don't hold any equity in the deal and, therefore, any skin in the game. Otherwise, concerns centre around the broader economic picture.

"The aircraft cycle has probably already peaked," says Morris, "and it wouldn't be surprising if it were to soften slightly". While it has experienced good performance, there is less certainty about how it will perform in a downturn scenario, he adds.

Bastajian suggests, however, that any softening is unlikely to be as deep and long as 2008 and the strong presence of lessors and yield requirements from investors should mean that securitisation continues to suit both sides very well. In terms of assessing the performance of these deals, he adds that ABS prospectuses can be overly optimistic regarding residual values but Cirium's depth of data it can provide a more realistic picture of aircraft values.

In terms of the future of the industry, Morris says that there will be more aircraft supply next year as demand will "likely soften", which may impact ABS pricing, but suggests that deals will refinance and investors will still have appetite to buy a product with a very attractive risk-return profile. Bastajian concurs and concludes that investors will continue to participate in aviation, drawn in by the ease of access to the asset class that securitisation provides.

Richard Budden

ABS

ABS focus

Music, sports, entertainment firm grows securitisation capabilities

23 Capital recently made a number of hires to boost their securitisation capabilities, signalling the firm’s commitment to securitisation as a key part of its funding strategy. After an inaugural securitisation backed by football royalties successfully closed in 2016, it may also look to offer deals backed by different collateral in the future.

Sreesha Vaman, hired to the role of head of capital markets, came from Guggenheim where he was working in the New York office most recently as md, co-head of ABS/CLO syndicate. Additionally, the firm hired Alex Kraemer to the role of head of structuring in October, hiring him from JPMorgan where he was vp, debt capital markets.

Jason Traub, co-founder and ceo at 23 Capital comments that the hire of Vaman, comes at a time when the firm wants to continue to diversify its capital base across the spectrum of investors, markets and formats. He adds that Vaman’s experience, “in a number of markets and geographies will allow us to identify, define, and execute across the breadth of our capital markets strategy, which aligns to the growth of our borrower base within the wider sports, music, and entertainment universe.”

The company launched an inaugural US$72.9m securitisation backed by European football receivables three years ago, dubbed XXIII 2016-I, which Traub says allowed the firm to diversify its funding base whilst maintaining close relationships with the firm’s borrower clients. He adds that - since it closed - the deal has experienced no losses or defaults and the rated notes were paid off in accordance with the deal terms in November 2017.

Traub also points out that a number of his firm’s existing funding lines – such as warehouse funding – follow a securitisation methodology, although they’re not necessarily public, or rated securitisations. Moving ahead, the firm now views securitisations as being “being one of the key parts of our overall capital markets strategy and will continue to engage with the wider capital markets community as we drive our balance sheet strategy,” Traub says.

Notably, after the success of its first securitisation backed by European football receivables, the firm is considering future deals that may monetise other types of receivables originated by 23 Capital across jurisdictions within the sports, music and entertainment sectors.

Traub adds: “Our pace in the securitisation market will ultimately be a function of market conditions. As a general principle, our strategy is not reliant on just one source of funding.” Additionally the firm is continuing to look for more expertise, and Traub concludes that those that have “familiarity with the capital markets, including securitisations, will always be well-received.

Richard Budden

ABS

Cigarette slump?

Dispute revenue to offset declining MSA cashflows

US cigarette shipments have declined by an average of 3.2% per year since 2000 and are expected to decrease by 4%-5% over the next 12-18 months, hitting the cashflow available to pay down tobacco ABS bonds. However, revenue from future potential settlements and other special payments could partially offset the risk from slowing tobacco sales.

Moody’s notes that some US states that have yet to settle disputes over past sales years are likely to agree to settlements with the tobacco companies, thereby providing lump sums of cash to ABS transactions. For example, Alaska reached a settlement last year that resulted in its tobacco ABS receiving several million dollars in additional cashflow, contributing to the paydown of the bonds by approximately US$26m (representing a 73% decrease in outstanding balance).

“This deleveraging minimises the risk that the bonds face from future declines in cigarette shipments, and benefits front-pay bonds most,” Moody’s observes.

For states that have never settled payment disputes with the tobacco companies, an arbitration panel of judges is anticipated to conclude in 2020, increasing the likelihood of additional sums for affected bonds under certain conditions. Arbitration proceedings for the 2003 sales year, for instance, led to some tobacco ABS receiving additional funds in April 2014 because the arbitrator found that some of the issuing states diligently enforced their tobacco laws.

Arbitration hearings for the 2004 sales year concluded with most of the states in July 2019. However, as of October, the arbitration panel had yet to reach a decision.

Indeed, the slow pace of arbitration proceedings could spur some states to approve new settlements. Moody’s notes that a number of states that had already settled disputes over pre-2015 sales years entered into new settlements with the tobacco companies for the 2016 and 2017 sales years. Bonds issued by these states received additional revenue this year and are expected to benefit from approximately the same amount of additional revenue next year.

Transactions with turbo features will benefit the most from new settlements, as well as additional future funds from arbitration, according to Moody’s. The agency notes that 17 outstanding tobacco transactions employ such structures, representing approximately 77% of all tobacco transactions that it currently rates (by deal count). Any cash remaining after interest, fees and scheduled principal are paid for transactions without turbo structures will return to the sponsor, instead of accelerating the bonds' paydown.

Meanwhile, refundings – whereby a state pays down outstanding bonds with proceeds from the issuance of new bonds in a separate transaction – are also likely to provide tobacco ABS with payments that are independent of cigarette shipment volumes. “Refundings on some outstanding tobacco ABS that we rate will continue because all of the bonds have reached their respective optional redemption dates and municipalities will look to reduce debt burdens, if rates are attractive,” Moody’s confirms.

Since 2016, approximately US$6.4bn of tobacco ABS across eight transactions – including three Golden State Tobacco Securitization Corp (2007 Indenture) deals – rated by Moody’s has been refunded.

Corinne Smith

Structured Finance

SCI Start the Week - 2 December

A review of securitisation activity over the past seven days

Transaction of the week
Credit Agricole is marketing a securitisation of Dutch consumer loans originated via subsidiaries of Credit Agricole Consumer Finance Nederland (CACF NL). Dubbed Magoi, the transaction references a €418m eight-month revolving pool of 23,282 unsecured, fixed-rate personal loans and displays several differences compared to previous transactions from the firm.
This ABS is also structured to meet the STS criteria, marking the first Dutch STS deal that isn't an RMBS, and the full stack is also being offered to investors. The transaction is only the second publically offered deal from the seller with their previous transaction, Matsuba, having launched in October 2016, according to analysts at Rabobank. (See SCI 29 November for more)

Stories of the week
Indian innovation
Diverse Indian ABS market sees growing, global investor base
Italian SRT inked
UBI Banca seals the triple

Other deal-related news

• The World Bank has issued the first cat bond transaction to provide natural disaster cover to the Philippines and the first cat bond listed on the Singapore Exchange. The transaction features two tranches of cat bonds to provide the Philippines with financial protection of up to US$75m for losses from earthquakes and US$150m against losses from tropical cyclones for three years (SCI 25 November).
• Provident Funding Associates, a non-bank mortgage lender, has prepped its inaugural securitisation of residential mortgages, marking the first post-crisis, private label securities (PLS) transaction backed entirely by agency conforming consumer-purpose residential mortgage loans. Dubbed Provident Funding Mortgage Trust 2019-1, the US$338m transaction is the first in which Provident Funding is the sole originator and servicer and is backed by 947 agency-eligible mortgage loans (SCI 27 November).
• Recent market developments in in the Cessione del Quinto (CDQ) and Delegazione di Pagamento (DP) loan market are credit positive for ABS, according to structured finance analysts from Moody's. The analysts add that increasing regulatory scrutiny limits the risk of poor underwriting, while lower capital requirements support further loan growth (SCI 27 November).
• The US OCC and Federal Deposit Insurance Corporation are proposing a rule to clarify the law around interest rates state banks may charge their customers, still unresolved since the Madden vs Midland case. The rule would help to provide clarification when a national bank or savings association sells, assigns or otherwise transfers a loan, interest permissible prior to the transfer continues to be permissible following the transfer (SCI 27 November).
• Following publication of the Delegated Regulation (EU) 2019/1851 in the Official Journal of the European Union on 6 November 2019, it is now entering into force as of 26 November 2019. The overarching objective of the homogeneity requirement is to enable investors to assess the risks of the underlying pool of assets on the basis of common points of comparison (SCI 27 November).
• Nodax Bank subsidiary, Svensk Hypotekspension, has prepared a 48-year, non-call 4-year, SEK-denominated senior secured bond for the purpose of refinancing of Svensk Hypotekspension Fond 3 AB (publ), subject to market conditions. The bond will be backed by a portfolio of equity release mortgages originated by Svensk Hypotekspension (SCI 27 November).
• Fitch has upgraded several tranches of multiple Finsbury Square UK RMBS transactions. The upgrades are a result of new rating criteria, deal deleveraging and the completion of the prefunding period (for FSQ 2019-1) as reasons behind the upgrades (SCI 28 November).

Data

BWIC volume

Secondary market commentary from SCI PriceABS
26 November 2019

US CLO
With markets gearing up for the Thanksgiving break, with no lists expected (as of now) tomorrow we observed 16 covers today – 9 x AAA, 1 x A and 6 x BB rated.  With all but one of today's AAAs with a WAL of >4y, they traded in a 122dm-138dm range (all 2022/2023 RP profiles) which is fairly representative of our latest generic >4y AAA spread levels of 127bps, especially when we omit the obvious outlier from today which is a 2023 RPE MP11 2017-2A A (Marble Point) which covers 138dm / 4.9y WAL – this has a lo-MVOC 145.2, lo-MVAP 31.1 whilst deal metrics are weak (sub80 assets 9%, WARF 2917, diversity 71 and 37bps of defaults). When you compare this to the tight end of the range PLMRS 2018-2A A1A (Palmer Sq) covers 122dm / 5.4y WAL which has a 157.1 MVOC, 36 MVAP and much stronger deal metrics (sub80 asset 2%, WARF 2623, 78 diversity for instance).

The single-A trade of the day was GALXY 2017-23X C1 (PineBridge) which is a 2021 RP profile which covers 269dm / 5.7y WAL (note week MVOC 116.3 / par build -0.37), which is tight to our single-A generic spreads 280bps but interesting to note this is the first single-A 2021 RP profile trade of this month to date, with 2022 RPEs trading 260dm-272dm with a 315dm outlier in VENTR 2017-29A C whilst the only 2020 RP profile trading 230dm 2 days ago.  In a month that we have seen heavy BB supply, especially over the past week, the BB trades today were from 2020-2024 RP profiles.  A less frequent 2024 RP profile BB tranche from a recently closed Oak Tree Capital deal, tight end of this month's 723dm-992dm range covers at 783dm / 10y WAL today.

Today's BBs in aggregate traded in a 200bps range, 639dm-839dm, with an interesting dynamic as the explanation for the 200bps swing.  The 2020 RP profiles traded at the tight and wide end, at the tight end was APID 2015-21A DR (CVC) 639dm / 6.2y WAL (MVOC 104.4, hi-diversity 91, 2828 WARF, 4.9% sub80 assets, par build -0.36, strong Jnr OC cushion 4%) whilst at the wide is SNDPT 2016-1A ER (Sound Point) with a cover of 839dm / 6y WAL (MVOC 104.2, lo-diversity 75, 2506 WARF, 4% sub80 assets, par build -0.34, Jnr OC cushion 4.6%) so not much between the two from a fundamentals point of view, however upon analyses of the managers there are differences in profile – CVC has a better annual default rate (39bps) than peer managers (69bps average), strong par build (+0.08) than the same cohort (-0.18)  and stronger avg interest diversion test 3.8% v 3% cohort.  Sound Point on the other hand has a weaker annual default rate (58bps) than CVC, weaker par build (-0.71) than CVC and weaker avg interest diversion test 2.6% v 3.8% for CVC – careful assessment of Manager metrics at this end of the rating scale certainly have more of a bearing given the proximity to loss and successful management of OC.

EUR/GBP ABS/RMBS
A number of mezzanine trades today. There is a single A, fixed rate, Finnish auto trade at S+94. There are French autos: AA at 88dm & BBB at 136dm. AA Italian auto at 108dm. BB French consumer loan at 136dm. Single A Dutch prime RMBS at 146dm. AA Irish Non-conforming RMBS at 147dm. AA French prime RMBS at 84dm and finally a pre-crisis Spanish RMBS which is now rated AA+ at 78dm.

EUR CLO
3 x AAA, 1 x AA, 2 x A & 2 x B today. All 3 AAAs traded at a discount price and have been priced to maturity. All of them also closed in 2018. There was very consistent pricing with all 3 trading between 124dm and 125dm for WALs around 4.3yrs. This is around the AAA spreads we were seeing before, perhaps a little firmer. ACCUN 3X A traded on 20 Nov at 136dm / 4.23yr for a similar WAL and TIKEH 2X AR traded at 123dm / 2.92yr for a shorter WAL on 8 Nov. The AA trade is BABSE 2018-2X B1A which traded at 197dm / 5.82yr. Again, if anything, this is a very slight firming eg SPAUL 3RX B1R traded at 200dm / 5.45yr on 20 Nov.

In the single As DRYD 2018-66X C traded at 99.52 / 274dm / 6.9yr. HARVT 21X C traded at 100.16dm / 294dm to mat / 6.9yr. This bond is not callable for another 1.4yrs and it's DM to call is around the same as to mat. These spreads are unchanged from previous single A spreads. The single B trades were CORDA 7X FR (CVC) at 965dm / 8.13yr and NEWH 2X FR (Bain) at 971dm / 6.93yr. Both these bonds have similar OC levels.

The equity trade is OHECP 2015-3X SUB (Oak Hill) which traded at 45.00 / 18.84% / 4.17yr. Its NAV is 39. This deal was reset in 2017 and has been callable since July 2019. With the AAA paying a margin of 90bps this is potentially possible. We estimate the refi uplift to be worth around 1.5pts. The deal is performing adequately; WARF is above average at 2986, defaults are higher than average at 0.76%, Junior OC cushion is below average at 3.73% but Return on Equity has been above average at 18%.There are 2 defaulted assets in the pool: New Look (29) and Lecta (41). In addition there are some other distressed names eg L1R HB & La Financiere Atalian.

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

Full-stack debut

BDK completes first auto SRT

Bank Deutsches Kraftfahrzeuggewerbe (BDK) has debuted its first full-stack capital relief trade. Dubbed Red & Black Auto Germany 6, the €1bn German true sale auto ABS differs from previous transactions from the same programme due to the existence of pro-rata amortisation and the fact that it has been undertaken for both capital relief and funding purposes.

According to Laurent Mitaty, deputy global head of asset-backed products at Societe General Corporate and Investment Banking: “The purpose of the transaction was to optimise both regulatory capital and maintain that funding benefit that was achieved with the previous five deals [from the programme].”

Rated by Moody’s, Fitch and Scope, the transaction consists of €930m Aaa/AAA/AAA rated class A notes (which priced at Euribor plus 70bp), €40m A1/AA/AA- rated class B notes (plus 90bp), 15m Baa2/A+/BBB+ rated class C notes (plus 140bp), €10m Ba1/BBB+/BB+ rated class D notes (plus 225bp) and €5m unrated class E notes (fixed 2.50%). The notes were issued at par, with the exception of the class As, whose issue price was 100.929.

Third-party investors bought all the tranches without any preplacement, although the class E notes were retained. Assuming a conditional prepayment rate of 15%, the weighted average life (WAL) of the class A notes is 1.8 years, 2.6 years for classes B, C and D and four years for the class Es.

The deal features a pro-rata amortisation mechanism for tranches A through D, subject to certain performance conditions and the tranche A credit enhancement target being met. Otherwise, liabilities amortise fully sequentially.

Under the terms of the seller agreement, a regulatory call can be exercised, provided that the SPV redeems classes B to D using funds from a mezzanine loan that was granted by BDK to the SPV in its capacity as originator. BDK - a fully owned subsidiary of Societe Generale - is the servicer of the auto loan portfolio and funds a €5m liquidity reserve. Societe Generale acted as the sole arranger and lead manager of the transaction.

Classes A to D are protected from healthy subordination levels - 7%, 3%, 1.5% and 0.5% respectively - significant excess spread equal to over 2.5% per annum and the €5m liquidity reserve. Excess spread has been structured in ‘use it or lose it’ format, as with other recent full-stack deals.  

The transaction features four swaps, one for each distributed tranche. The swap counterparty will pay to the SPV the class A coupon, which will then be floored at zero, since Societe Generale wanted to hedge Euribor in both directions - with the same mechanism repeated for classes B, C and D.

Investors in the mezzanine tranches were for the most part asset managers that were attracted by both the performance of the portfolio and the opportunity to buy lower mezzanine notes. Looking ahead, Mitaty concludes: “We could see more full-stack deals from the same programme. BDK started it in 2012 and, since then, it has done one ABS deal every 1.5 years.”      

Stelios Papadopoulos

Capital Relief Trades

Spanish SRT inked

Banco Cetelem completes full-stack auto ABS

Banco Cetelem has completed the first full-stack Spanish auto significant risk transfer transaction from BNP Paribas’ Autonoria programme. The €1bn Autonoria Spain 2019 true sale ABS differs from previous Autonoria deals in that the class G notes have been assigned a rating.

The deal is the first capital relief trade from the programme that references Spanish auto loans and it was solely arranged by BNP Paribas. Rated by DBRS Morningstar and Moody’s, the transaction consists of €790m AAA/Aa1 rated class A notes (which priced with a coupon of one-month Euribor plus 70bp (equating to a 41bp DM)), €30m AA/Aa1 class B notes (plus 95bp), €55m A/Aa3 rated class C notes (plus 135bp), €55m BBB/Baa2 rated class D notes (plus 185bp), €20m BB(low)/Ba1 rated class E notes (plus 285bp), €25m B(low)/B1 rated class F notes (plus 400bp) and €25m C/B3 rated class G notes (fixed 6%).

Boudewijn Dierick, head of ABS markets at BNP Paribas, notes: “We started with countries where we have significant volumes, such as Spain, and have increased the number of capital relief deals following our acquisition of Opel’s finance operations two years ago. The difference with previous Autonoria deals is the fact that the most junior class G is also rated.”

Investors in the deal benefit from 6% excess spread per annum, although Banco Cetelem will recoup the excess spread over time through a deferred purchase price (DPP) mechanism if it’s not used to cover losses. DPPs have appeared in other recent full-stack capital relief trades, including AutoFlorence 1 (SCI 22 July) and A-BEST 17 (SCI 15 November).

The latest Autonoria transaction also features a liquidity reserve - which could be made available under certain conditions and only for the senior tranches - if principal collections aren’t sufficient to cover shortfalls in senior and other expenses, as well as potential deferrals of subordinated classes. BNP Paribas added these conditions to prevent a situation where the reserve could be considered as credit support, to avoid higher risk weights.

Further features of the securitisation include a one-year replenishment period, which extends the life of the deal and permits the issuer to target a 2.8-year weighted average life. The tranches amortise on a pro-rata basis, although there are triggers to sequential.

The preliminary collateral pool is granular, consisting of 160,835 loans and an aggregate principal balance equal to €1.6bn, with the top-10 borrowers accounting for 0.04% of the portfolio. Approximately 71% of the preliminary receivables have a reservation of title (reserva de dominio) provision, whereby the seller benefits from a right of ownership over the financed vehicle until the loan is repaid in full.

There are no balloon loans or lease contracts within the portfolio and, therefore, the issuer is not directly exposed to residual value risk through a borrower put option or purchase obligation. Just over half of the receivables are associated with the Kia and Hyundai brands and almost three-quarters relate to new vehicle financing. This mix primarily reflects the evolution of commercial agreements that Banco Cetelem has established directly with vehicle manufacturers since 2013.

Stelios Papadopoulos

Capital Relief Trades

Grattan refinanced

Bank of Ireland completes CRT

Bank of Ireland has originated a €265m funded and unfunded financial guarantee that references a partially disclosed €2bn Irish and UK corporate portfolio. Dubbed Vale Securities, the transaction is a refinancing of a 2016 capital relief trade called Grattan Securities (see SCI’s capital relief trades database).

The refinancing follows the exercise of an optional early termination right for Grattan Securities, at the end of the latter’s replenishment period. Vale Securities consists of three tranches: a funded junior mezzanine tranche ranking pari-passu with an unfunded junior mezzanine tranche and a senior mezzanine fully funded tranche sitting above the junior mezzanine tranches. The two funded class A and B notes were respectively priced at three-month Euribor plus 4.75% and plus 9.75%. The pricing of the unfunded class could not be disclosed.

The transaction amortises on a pro-rata basis. Further features include a two-year replenishment period and a time call that can be exercised five years following the deal’s execution. Credit enhancement is present in the form of both retained first loss and synthetic excess spread.

Bank of Ireland and Mizuho acted as joint arrangers.

The latest CRT follows a €68.4m mezzanine trade that was completed last month (SCI 8 November). The mezzanine tranche was added on top of the junior tranche of Mespil Securities, the leveraged acquisition finance CRT that Bank of Ireland finalised two years ago (SCI 29 November 2017).

The bank tapped the market as the end of the one-year grandfathering period for pre-2019 capital relief trades comes to an end this month (SCI 20 September). Bank of Ireland states that both transactions have a broadly neutral impact on its capital ratios.

Stelios Papadopoulos

Capital Relief Trades

Confidentiality issues persist

Disclosure questions unresolved for CRT market

ESMA’s updated questions and answers on the Securitisation Regulation, clarifies different aspects of the European Commission’s draft technical standards on securitisation disclosures (SCI 18 October). However, as with the Commission’s paper, the document doesn’t explain how CRT issuers can comply with the disclosure requirements while preserving client confidentiality.

David Saunders, structurer at Santander, comments: “The confidentiality issues remain, so the only thing we can do at this point is just remove certain assets from a deal. This wouldn’t apply for large syndicated loans given that there’s a lot of public information on them already, but it will be true for bilateral loans.”

The templates force banks to disclose details about the underlying borrowers that would enable investors to figure out the identity of those borrowers. If one of those underlying borrowers, for example, is a Spanish firm in the telecommunications sector, it’s not hard to conclude that the data are in fact referring to Telefonica.

ESMA has confirmed that banks should comply with confidentiality provisions and data protection laws when disclosing information. However, the regulatory authority hasn’t clarified how can banks resolve the tension of complying with both the confidentiality provisions and disclosure requirements of the Securitisation Regulation.   

The ESMA templates also create the risk that banks will not be able to share borrower internal rating and loss given default data with investors. PGGM notes in a recent paper that this data is “so crucial to us that not receiving it, may lead to the conclusion that we are unable to do the necessary analysis to make investment decisions at all” (SCI 22 November).

Consequently, PGGM has proposed a reporting template that is consistent with the private nature of risk transfer transactions and which issuers have welcomed. Saunders notes: “PGGM is one of the largest investors in this market and they have publicly stated that the name and jurisdiction of a borrower is irrelevant for them since all they require are loss estimates such as LGDs.”

PGGM’s solution is to swap non-relevant data such as revenue estimates and deposit amounts for essential one that won’t result in any loss of information value. Indeed, from PGGM’s perspective it’s the internal rating and loss given default metrics that are essential since they already incorporate a lot of different data.

“The bank’s credit officers assess all information they have including a borrower’s financial statement data, business viability and management quality and express their findings in an internal rating for probability of default and expected loss for a particular loan upon default” says PGGM.

However, regulators won’t likely consider PGGM’s proposal in the short to medium term. Looking forward, one legal expert comments, “in order for the transparency requirements of the Securitisation Regulation to work in harmony with the synthetic market as it currently functions in Europe, there would either need to be some sort of exemption for synthetic deals or further consideration given to the form of the reporting templates.”

The expert concludes: “Although the final review process in respect of the RTS for the reporting templates is ongoing at the European level, market participants are uncertain that their concerns will be addressed during this process. So it may be unlikely that there is a solution prior to the RTS coming into effect.”

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 and is expected to come into force in early February 2020.

Stelios Papadopoulos

CLOs

US CLO debuts

Transaction marks first for bank's AM arm

Morgan Stanley’s asset management division is entering the CLO space with a new transaction. Dubbed 522 Funding I, the US$457.25 million transaction is the first CLO to be managed by Morgan Stanley Investment Management.

The transaction is rated by S&P and Fitch as triple-A/triple-A on the US$279m class-A notes (three-month Libor plus 139bp) while just Fitch has rated the US$13.5m class A2s as triple-A (plus 175bp). Just S&P has rated the rest of the notes as double-A on the US$32.5m class B1s (plus 210bp), double-A on the Us$17m class Bs (371bp), single-A on the US$27m class Cs (plus 295bp), triple-B minus on the US$24.75m class Ds (plus 420bp) and double-B minus on US$18m class Es (plus 734bp).

S&P notes that compared to other transactions it has recently rated, 522 Funding I has a number of differences including, lower total leverage and higher subordination and a higher weighted average cost of debt. Additionally, the deal has a lower weighted average spread and a lower available excess spread, which show a weaker underlying portfolio from a cash flow perspective.

Furthermore, the agency says the CLO has a lower scenario default rate at the 'AAA' level and a higher weighted average recovery rate, which show a stronger underlying portfolio from a credit perspective.

Additionally, the transaction will be collateralised by at least 90% senior secured loans, with a maximum of 20% of loan issuers permitted to be from outside the US. Also, a maximum of 65% of the loans in the collateral pool can be covenant-lite.

S&P notes that Morgan Stanley Investment Management, the asset management arm of Morgan Stanley, has been in existence for over 40 years. The firm has approximately US$497bn billion AUM as of 30 June 2019.

Richard Budden

CMBS

Alternative appetite

Euro CMBS specialist property exposure to rise

Appetite for European CMBS secured by specialist or alternative assets is expected to grow in 2020, as the sector becomes less niche. Such properties are characterised by their operating nature, with the availability of alternative operators being a key driver in their assessment.

Stephen Hughes, avp - analyst at Moody’s, notes that there are two main factors driving increased appetite for specialised or alternative assets in the European CMBS market. First, yields on more traditional property types are low and investors are seeking higher-yielding alternatives. Second, investors are becoming more comfortable with these assets, especially the more mature property types like student housing and hotels.

Hotels, pubs, cold storage or any purpose-built facilities are typically higher yielding than standard offices, shops or industrial sheds. But some investors appear to be increasingly comfortable moving further up the risk curve and acquiring assets like care homes and data centres, as opposed to more mature types of operating assets, such as city centre hotels or student housing.

Specialist assets - such as hotels, care homes and purpose-built premises for utilities like telecom providers - require intensive management. In contrast, alternative assets involve employing an operator to manage or lease the properties.

“Both asset types require a lot more work than purchasing an office with a 15-year lease and an investment grade tenant, for example. The properties are also riskier, with high fixed costs, limited alternative use and often short-term cashflows,” Hughes observes.

As such, a number of risk mitigants are included in the loan documents. These typically comprise low day-one leverage, scheduled amortisation, robust cash sweep triggers and high property release premiums, as well as stronger covenants around income coverage and debt yield.

CMBS backed by specialist or alternative assets are often structured as corporate-style secured bond transactions, which tend to be secured by a single fixed rate loan, with a longer duration than standard floating rate transactions. Similar to a whole business securitisation, the cashflow is dependent on the underlying performance of the business, with the operator having a business plan in place to increase both cost efficiency and net operating income. Indeed, rather than using traditional real estate methods, appraisers typically factor in the history of the sponsor, the sponsor's propensity to deliver on its business plan and the long-term NOI that the operating business can generate. 

“The similarity between hybrid corporate CMBS and whole business ABS is their exposure to operator risk and the extent to which the business is isolated from the wider group. With specialist deals, the analysis involves assessing how many other operators can step in,” explains Hughes.

He continues: “For example, there are many alternative operators in the student housing sector. But the analysis becomes more difficult when a less mature asset type is involved, such as cold storage, which is a fragmented sector and there are only a few operators in the UK.”

Hybrid corporate CMBS also often incorporate a greater degree of permitted flexibility than traditional CMBS. The recent Logicor 2019-1 UK transaction, for instance, provides for assets to be added to or taken out of the pool in order to manage the group’s other outstanding liabilities and assets outside of the securitisation.

Corinne Smith

Structured Finance

Euro AM promotes three

Sector developments and company hires

AM promotes three

Alcentra has promoted Daniel Fabian to president and coo. In this role, he will manage the company’s growth strategy and oversee day-to-day operations in order to continue to drive value for clients and employees. Fabian has spent the past 12 years at Alcentra, of which the last four years have been as coo and cfo, bringing the ideal skillset and experience to help run the company.

Joining the senior leadership team are two newly appointed co-cios: Graham Rainbow (previously head of European loans) and Leland Hart (previously head of US loans and high yield).  Both Rainbow, based in London, and Hart, based in New York, will retain their current portfolio management responsibilities and together will oversee and manage the company’s investment portfolios.  The dual role has been created to accommodate the growth of Alcentra across its product strategies and allows the company to effectively deal with growing investor demand for debt capabilities globally.

Following this reorganisation, global cio Vijay Rajguru will also be leaving the firm to pursue other opportunities.  

Disclosure errors eyed

Moody's has placed a number of Mexican RMBS originated and serviced by the Instituto del Fondo Nacional de la Vivienda para los Trabajadores (Infonavit) on review for possible downgrade, following the disclosure of errors in the classification and reporting of the non-performing loans ratio. The action reflects the credit negative implications of Infonavit's misreporting of key transaction performance data, the magnitude of which remains uncertain, according to the rating agency. The issuances placed on review comprise: CDVITOT 11U, 11-2U, 11-3U, 12-2U, 14U and 14-2U, as well as CEDEVIS 12U and 13U. Infonavit announced it misreported the delinquency status of up to 116,705 residential mortgage loans and estimates that the re-stated proportion of NPL loans in its portfolio may rise to as high as 11%. Corrected servicer statements for the identified transactions are expected to be published on 15 December, after which Moody’s will analyse the credit impact on the affected deals.

Lending partnership proclaimed

Citadele Bank is partnering with Fellow Finance, and CrossLend whereby Citadele Bank will make investments utilising Fellow Finance’s lending platform, headquartered in Finland, which provides consumer and SME loans in the Nordic countries and Central Europe, while the digital debt marketplace CrossLend is providing its securitisation solution to transform the platform’s loans into securities held by Citadele. The initial investment is €15m. International co-operation will enable Citadele to expand its range of services and offer new products. Citadele is the first bank in the Baltic states, and one of the first in Europe, to issue consumer loans through a peer-to-peer lending platform.

Securitisation platform launched

Perpetual Corporate Trust has launched two new capabilities under its Perpetual Business Intelligence digital platform – Securitisation Intelligence and Treasury Intelligence. The new solutions are aimed at supporting the firm’s clients and industry to automate processes and digitise deal execution and trust management, optimise funding and improve the investor experience.

SF partner hired

Latham & Watkins has hired Steve Curtis to its London office as a partner in the finance department. Curtis’ practice focuses on a broad range of structured finance transactions, with particular expertise in the regulated utility, infrastructure and real estate sectors and in complex corporate securitisations. Curtis was previously at Clifford Chance.

Structured Finance

Credit analysts poached

Sector developments and company hires

Credit analysts poached

Cairn Capital has appointed José Ferrero and Vihren Jordanov as senior credit analysts, focusing on loans and reporting to credit research head Mark Stieler. Ferrero was previously a credit analyst at Partners Group, where he was responsible for European coverage of the business and consumer services, chemicals and healthcare sectors. Jordanov joins from Alcentra, where he was a vp covering the European cable and telecoms and entertainment/media sectors, as well as CLO portfolio analysis, construction and optimisation.

CRE CLO debut announced

Amherst has prepared a debut CRE CLO. Dubbed ACAM 2019-FL1, it is a typical cash-flow commercial real estate (CRE) collateralized loan obligation (CLO) transaction, backed by a US$400.3m portfolio of commercial mortgage assets. Both Moody’s and DBRS Morningstar have assigned provisional ratings of triple-A on the US$206.5m class A notes.

Partner announced

Kennedy Lewis Investment Management has hired Doug Logigian as a partner and its president, effective in early 2020. Logigian joins from Blackstone, where he was a senior md. Most recently, he was the head of capital markets and a portfolio manager for GSO Capital Partners, sitting on the firm's investment committee for several of its opportunistic credit funds.

PF md appointed

KBRA has appointed Michele Patterson as md of business development for project finance and infrastructure. Patterson joined KBRA in May 2013 as a senior director and head of RMBS ratings. 

Whole biz debut

Restaurant chain, Jersey Mike’s, is marketing an inaugural whole business securitisation. Dubbed Jersey Mike’s Funding 2019-1, the US$500m ABS is backed by existing and future franchise and license agreements, existing and future company operated restaurant royalties, certain technology and franchise-related fees, vendor program payments and intellectual property tied to its 1,599 franchise locations and 16 company-operated restaurants, representing approximately 99% and 1% of total systemwide locations, respectively. 

All of the restaurant locations are located within the US, Canada and Australia.  KBRA has assigned a provisional rating of triple-B on the US$500m class A2 notes.

Structured Finance

ABS head retired

Sector developments and company hires

ABS head retires

Janus Henderson’s head of ABS investment Ed Panek has now retired from the company and the industry. Colin Fleury, the head of secured credit will assume direct responsibility for the ABS team. Fleury has extensive experience working with ABS, having previously fulfilled the head of ABS investment role. A more junior securitisation expert is being recruited to support Fleury and the existing team of two other experienced ABS portfolio managers.

Apulia guarantee agreed

The EIF has agreed with Banca Popolare di Puglia e Basilicata (BPPB) the first SME Initiative operation with the objective of freeing up the Italian confidi regional guarantee consortia. Implemented through an EIF guarantee, the initiative will also be supported by the EIB, COSME funds and by the Italian Ministry for Economic Development (MISE), which has made available European ESIF funds for this purpose. The project represents an innovative risk transfer, whereby funds managed on a national (or regional) level can be combined with resources from the European programme. The deal represents a synthetic securitisation referencing a portfolio of existing financing, which is currently guaranteed by various confidi from the region of Apulia, whose resources can now be freed up for new operations. Under the agreement, BPPB has committed to extending new, advantageously priced financing to SMEs in Southern Italy for around €120m over the course of 36 months. The €11m of ESIF funds made available by MISE will cover the first and second loss tranches.

IG Italian NPL ABS inked

Hoist Finance has completed its securitisation of Italian unsecured non-performing loans with a gross book value of €5bn (SCI 7 November) via Deutsche Bank and UBS. The transaction represents the first-ever Italian investment grade rated securitisation backed by a portfolio comprising only unsecured NPLs and involves the issuance of €337m notes across three tranches issued by Marathon SPV, with the senior notes - representing 85% of the issued amount - retained by Hoist and rated BBB/Baa2/BBB+ by DBRS, Moody's and Scope. The majority (95%) of the mezzanine (rated B(high)/B1/BB) and junior notes - representing the remaining 15% of the issued amount - have been subscribed to by CarVal Investors, with 5% retained by Hoist to comply with risk retention requirements. The senior notes carry an interest rate equal to 1.8%, while the subordinated notes have a combined capped IRR of 15%. Excess collections from the assets will serve as credit support to all outstanding notes and thereafter be paid to Hoist, as a deferred purchase price. Costs in relation to the establishment of the securitisation - including effects from unwinding the August €225m securitisation - are estimated at €6m, some of which is expected to be accounted for as amortised costs over the life of the transaction.

New manager entity

GSO/Blackstone Debt Funds Management has established a new manager entity – called Blackstone/GSO CLO Management - designed to facilitate the opportunistic investment by Blackstone/GSO Corporate Funding DAC in certain US CLOs that are expected to be structured to comply with the European risk retention regulation. The new entity expects to serve the multiple functions of acting as collateral manager to the firm’s US CLOs and warehouses, acting as ‘originator’ for a portion of the US CLO assets at closing, retaining a portion of CLO equity and providing funding for US CLO warehouse first-loss positions. To assist it in fulfilling these roles, it has entered into a shared services agreement with DFM, pursuant to which it has agreed to share certain professionals with the new entity, undertake credit reviews of the loans for which it intends to be the ‘originator’ for purposes of satisfying the European risk retention regulation and provide certain other related services.