Contents

ABS

2020 vision

Looking for relative value in European securitisation

Next year seems likely to present structured finance investors with even greater challenges in the search for yield. Nevertheless, relative value is to be found in 2020 for those looking in the right places.

Macro and geopolitical factors should always inform asset allocation strategies. But for 2020, their importance is even greater, according to Rob Ford, partner and portfolio manager at TwentyFour Asset Management. Most pressing among those concerns are tomorrow’s UK election and its knock-on effects on Brexit, alongside the latest China-US trade war deadline of 15 December and the noise around it.

“These will impact initially the short term (though how Brexit actually plays out will take longer) and their outcomes will determine in a pretty binary way the asset allocation process at the start of the year at least,” says Ford. “They will determine whether we will have a ‘let’s go again’ type approach or a ‘hunker down and prepare for a contraction’ approach.”

In addition, Ford points to central bank policy in the UK, Europe and US and how that will drive the direction of interest rates for the next few years. “Generally, it appears there will be downward pressure on rates. But investors need to be aware that if the UK election and a subsequent Brexit goes or looks to be going smoothly, a lot of UK investors who have been sitting on the side-lines for years could jump back into the market. If they do put all that money to work quickly, it could cause a pop in the economy in the short term and generate inflation, which could encourage the Bank of England to think about raising rates.”

At the same time, investors should be aware of the wider economy. “It’s not 100% clear exactly where we are in the cycle, but we are certainly nearer the end than the beginning, so expect to see end-of-the-cycle type behaviours,” Ford says. “So, overall, it suggests to us that investors should be focused on more-liquid shorter-duration paper – not necessarily higher credit, but the implication of more liquidity does typically send you up the credit curve.”

With all the above in mind, Ford continues: “We then need to take securitisation asset class by asset class, but now we also have to find relative value. Are we going to just be looking at triple-A 1.2-year auto deals? No we’re not, because they are still only returning a negative yield, but am I going to be buying more? Yes, I probably am.”

Such bonds make an investment strategy more robust, but, Ford observes, also provide additional benefits. “There’s no obvious relative value in say, a BMW deal that’s paying one-month Euribor plus 11bp, but it still yields more than cash and consequently such deals can provide real value as a cash and liquidity management tool.”

For the broader mixture of assets in a portfolio, Ford suggests there are a variety of opportunities, dependent on what a manager is trying to achieve. For example, he says: “At the top of the stack, prime RMBS and top-end auto and consumers make sense. STS helps here too and such deals will continue to grow rapidly – these are the most liquid of assets, so will get a liberal allocation from most investors.”

JPMorgan European credit (ABS and structured products) analysts argue that UK prime RMBS seniors are cheap versus Dutch and Spanish RMBS in a recent research report. “UK prime RMBS seniors have clearly underperformed comparable Continental opportunities, such as Dutch RMBS and ECB-eligible Spanish RMBS, since the beginning of 2018. In fact, the enduring likelihood of a no-deal Brexit throughout 2019, which has simply been kicked further down the road through the end of 2020, has weighed on UK prime RMBS spreads to such an extent that the differential between the sector and Dutch/ECB-eligible Spanish RMBS have touched, or reached close to, their five-year wides on an absolute and cross-currency adjusted basis.”

Thus, they continue: “Notwithstanding the lingering uncertainties of Brexit and potentially higher new issue (traditional) supply as TFS starts rolling off in 4Q20, we recognise better relative value in senior UK prime RMBS compared to its Continental peers. However, despite not being overly concerned with the impact of a potential no-deal Brexit on UK RMBS fundamentals, we remain defensive and prefer allocating capital to comparatively short-dated senior bonds within the sector to weather any Brexit-induced volatility in the coming months.”

However, the JPMorgan analysts find even greater relative value in consumer paper. “On a generic basis, consumer ABS seniors at one-month Euribor plus 52bp have recovered only 44% of their spread repricing (plus 75bp) since reaching their tights of one-month Euribor plus 23bp in early 2018. By contrast, senior notes of auto ABS (one-month Euribor plus 15bp) and Dutch RMBS (three-month Euribor plus 16bp) have nearly reached their post-crisis record tights of 12bp over the relevant benchmarks.”

They also highlight consumer ABS as a sector that offers full-stack opportunities for investors to venture further down the credit curve in search of yield, with Italian primary prints appearing particularly attractive, at least at the top of the capital structure.

Beyond that, Ford says: “For additional value, you could then move to the middle of the mezz cap stack in RMBS. There, we will be looking for the major non-prime issuers – Kensington, Charter Court and so on – to help with liquidity by keeping to the mainstream. There are opportunities in the broader non-conforming and buy-to-let mezz deals as well, and again I would be looking at specialists – Together in the UK and RNHB in Holland, for example.”

The JPMorgan analysts concur, noting that UK buy-to-let and non-conforming RMBS have mirrored the relative underperformance of UK prime RMBS and have remained relatively rangebound since May. However, they add: “While we acknowledge that UK buy-to-let and non-conforming RMBS – with a relatively diverse set of transactions backed by new and legacy collateral – undoubtedly remain the yieldier alternatives in European ABS, European CLOs presently offer more compelling investment opportunities for accounts capable of looking beyond RMBS, in our view.”

“Yield pick-up in CLOs across the board has been excellent,” says Ford. “But it’s worth bearing in mind that triple-As aren’t as liquid as they might appear, as they mainly go to buy-and-hold investors.”

He adds: “If anything, the triple-Bs offer more liquidity because dealers are more active at this level, as they get the most beneficial capital treatment here. However, the attractions of these instruments are highly manager-specific and require strong due diligence.”

Below investment grade, Ford suggests allocations should be even more investor-specific. “We find that double-Bs are the most suitable for our multi-sector credit funds, as we can build liquidity round a core holding by selecting the right mix of ABS, CLOs and corporates to enable credit adjustments – if not wholesale changes – to be made quickly and seamlessly. Single-Bs are really only suitable for closed-end funds, but CLOs in particular offer some cracking value for the right investor.”

Whatever asset allocation decisions are made for 2020 and how much relative value is ultimately found, there will be growth in an additional investment consideration. As Ford concludes: “One other thing that we have to bear in mind is the increasing importance of ESG. We are still at the early stages, but it was encouraging to see North Westerly VI utilising a positive evaluation model – rather than a negative one – and that ties in with the way Green STORM 2019 was structured as well. However it evolves, one thing is for sure – ESG has a much bigger role to play in what we do and provides its own kind of relative value.”

Mark Pelham

Structured Finance

CET1 ratios eyed

Disposals, securitisations to protect bank capital

European bank CET1 ratios have stabilised over recent years, as Basel 3 capital requirements and other supervisory measures have been fully phased in. However, further RWA inflation could result from the ECB’s TRIM exercise or the Basel 4 output floors.

Banks have adapted to the post-crisis regulatory environment by lowering RWAs and/or by retaining more earnings. Indeed, for over a decade, the capital base of European banks has been increasing.

According to Scope Ratings, the median CET1 ratio for European banks stood at over 15% as of 2Q19, compared to 10% at the beginning of the decade. The same data note that median CET1 ratios have stabilised at approximately 16%.

The gradual phasing-in of CRD 4 capital buffers and Pillar 2 supervisory requirements has played a key role. Furthermore, banks have built additional managerial buffers on top of the requirements to provide comfort to equity and AT1 investors.

Marco Troiano, executive director at Scope, notes: “If you look at what’s happened this year, CET1 requirements stabilised for most banks since Basel 3 buffers have been fully phased in. However, we may see more RWA inflation due to TRIM and the Basel 4 output floors, although the effects of the floors won’t kick in until 2022 and will be phased in through 2027. We think that RWA inflation can be managed through earnings retention.”

The targeted review of internal models (TRIM) was initiated two years ago to review banks' internal models in terms of their consistency with regulatory requirements, as well as their reliability and comparability. It is a response to Basel requirements in the sense that it attempts to replace direct interventions in IRB modelling - such as output floors - with a regulatory assessment of the assumptions behind a bank's PD calculations.

However, some analysts note the lack of information regarding the impact of TRIM. According to Alain Laurin, associate managing director at Moody’s: “The execution of TRIM started in 2017 and was due to be completed by end-2019, but not all banks have publicly communicated the results of the exercise, so you can’t precisely gauge the impact of it on bank RWAs.”

He continues: “Similarly, the impact of Basel 4 is still unknown, despite the EBA’s exercise. The transposition process could result in material variations from the Basel text. The EBA’s assessment based on the ‘loyal’ implementation of Basel 4 pointed to a 23.6% rise in Tier 1 minimum capital requirements, whereas the impact of the output floor represents more than a third of the overall impact (8.6%), although we can reasonably assume that the results differ between banks.”

This increase is critical and dealing with it means either boosting retained earnings and/or reducing RWAs. However, boosting retained earnings is challenging, given the interest rate environment.

Nevertheless, “banks have built up buffers above their SREP requirements, so they are able to cope with the implications of Basel 4 and they are in a position to pay dividends under the scrutiny of supervisors,” says Laurin. “Overall, we believe that CET1 ratios will remain at rather stable levels for many banks in the foreseeable future. Against the backdrop of a more difficult economic environment, banks will continue to restructure their activities where needed, cut costs and will resort to disposals of problem loans, securitisations and other measures to protect their capital.”

Another source of RWA inflation is volume growth, although that is expected to remain muted. However, analysts differ in their views over the importance of volume growth.

Looking ahead, Scope states: “Volume growth will generally remain muted: the eurozone economy is slowing down, while liquidity remains abundant. Such an environment is hardly stimulating for credit demand. Banks with decent-to-good organic capital generation but limited room to profitably deploy capital will, in our view, either look at increasing dividend pay-outs or share buybacks, subject to regulatory approvals.”

DNB, Credit Suisse, HSBC and UBS were running or completed share buybacks in 2019, and other banks have pointed to the possibility of initiating them. 

On the other hand, “there are currently 12 countries across Europe - such as Belgium and France, among others - that have put in place countercyclical capital buffers, given their concerns around excess lending or debt levels. This means that supervisors are eager to tackle the associated risks sooner rather than later,” concludes Laurin.  

Stelios Papadopoulos

Structured Finance

SCI Start the Week - 9 December

A review of securitisation activity over the past seven days

Transaction of the week
NIBC recently priced the first fully-compliant ESG CLO, North Westerly VI, utilising a wholly exclusionary loan section process. The €410m transaction is expected to be the first of many ESG-compliant transactions from the firm, which also plans to bring North Westerly V onto the same reporting platform and in line with ESG best practices next year.
North Westerly VI is the first CLO to completely exclude loans from firms that derive any revenue from a non-ESG compliant source. Other CLOs have employed a partially exclusionary method for selecting loans and might, for example, exclude loans from firms that derive over 50% of their revenues from a non-sustainable source, says Robin Willing, head of sustainability at NIBC.
See SCI 3 December for more

Stories of the week
Alternative appetite
Euro CMBS specialist property exposure to rise
Grattan refinanced
Bank of Ireland completes CRT
Moving into the mainstream
Booming aviation ABS sector shakes off esoteric label?

Other deal-related news

• 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 (SCI 2 December).
• 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 (SCI 4 December).
• 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. 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 (SCI 6 December).
• Hoist Finance has completed its securitisation of Italian unsecured non-performing loans with a gross book value of €5bn via Deutsche Bank and UBS. The transaction represents the first-ever Italian investment grade rated securitisation backed by a portfolio comprising only unsecured NPLs (SCI 6 December).
• 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 in certain US CLOs that are expected to be structured to comply with the European risk retention regulation (SCI 6 December).

Data

BWIC volume

Secondary market commentary from SCI PriceABS
6 December 2019
US CLO
A quieter end to the week with 8 covers, all BB rated today.  The RP profiles were 2022-2024 and the trading range is 670dm-761dm, with the 2024 RP profiles trading with the tightest basis 718dm-739dm.  At the wide end of the BB trades today is TIA 2016-1A ER (TIAA) 761dm / 8.5y WAL, the metrics on this bond are as follows – MVOC 104.3, MVAP 4.1 (both in line with peers), 5.2% sub80 assets, annualised equity return 10.9% (low), lo-diversity 73 whilst other metrics are sound.
We have run DMs on 27 double-Bs this week which trade in generic terms 726dm across almost $70m of supply, we have seen almost 40bps of tightening from the prior week.  Breaking these BBs down further, given the generic levels include an array of RP profiles, the 2019/2020 RPEs traded this week 615dm, 2021 RPEs traded 720dm, 2022 RPEs trade 711dm, 2023 RPEs trade 769dm and 2024 RPEs trade 718dm so we are seeing some inversion amongst the 2022 and 2024 RP profiles which have outperformed other profiles in the term structure.
In AAAs this week we observed significant supply with $161m of liquidity of AAAs / >4y WAL which traded 2bps wider week on week with a generic 128dm. For single-A, BBB and single-Bs there was far less liquidity this week so based off those we ran DMs on this week we have the following traded levels: single-A 267dm (vs 269dm last week), triple-B 399dm (vs 468dm last week) and single-B 958dm (no observations last week). However, we observed $74.4m of liquidity in AAs this week versus none last week and only $20m the week before, we calculate generic level of 192dm for AAs this week across 2020 to 2023 RP profiles.
EUR/GBP ABS/RMBS
GAPPL 2019-1 A (Green Apple – Dutch RMBS) traded at 19dm for the AAA. SAPPA 2019-1 A (Sapphire One – French autos) traded at 7dm for the AAA. SCGC 2015-1 D (German consumer loans originated by Santander) traded at 326dm for the BB.
EUR CLO
3 x AA, 1 x A, 1 x BBB & 1 x BB today. All the AAs traded at a premium price.
Because of the upward sloping yield curve the spreads to call are greater than the spread to mat for a par price. Thus, even with the amortisation of the premium price taking place more quickly if priced to call, still the DMs to call and mat are not that different. All three AAs closed in Apr 2019 and callable around Apr 2021. All three are potentially refinanceable especially BILB 2X A2A (Guggenheim) in which the AAA pays a margin of 114bps. We will be recording the DM to call as an enhancement to the Archive but for now we can say here that the DMs to maturity range from 197dm to 203dm and the DMs to call are 189dm to 216dm. ARESE 11X B1 DMs have been calculated using a price of 100.50 because all that was disclosed was a CVR of 100h. These spreads are not a noticeable change on previous AA levels.
The single A is BABSE 2016-1X CR which traded at 98.27 / 237dm / 5.05yr. Even allowing for the fact this is quite a short WAL bond (it was refi'd in July 2018 and RP End Date is July 2020) this is a tight level. Recent single As have been in the 270dm to 290dm area for 6.5yr to 6.9yr trades. The BBB is from the same deal and traded at 97.95 / 336dm / 5.36yr. Again this is a strong level with other recent trades being in the 370dm to 380dm region.
The BB is ARBR 4X E which traded at 99.63 / 590dm / 6yr. This is also a tight level with recent trades having been in the 630dm to 680dm range for WALs in the 5.9yr to 7.8yr range. The deal is performing well and from a good manager. The deal could be being managed for debt since the equity return has been quite low at 9.7% pa.

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

Mutual agreement

BPPB SRT debuts

Further details have emerged about the EIF and Banca Popolare di Puglia e Basilicata’s (BPPB) €60m financial guarantee under the SME Initiative Italy (SCI 6 December). Referencing a €120m Italian SME portfolio, the transaction is BPPB’s first risk transfer trade and is the first under the SME Initiative Italy to free up mutual guarantees known as confidi.

“This is BPPB’s first risk transfer trade under the SME Initiative Italy that frees up confidi regional guarantees,” confirms Giovanni Inglisa, structured finance manager at the EIF.

The confidi are mutual guarantee schemes that typically operate among groups of interconnected SMEs in particular sectors in Italy. The schemes resemble financial cooperatives, in which SMEs participate as members and shareholders and are both eligible to apply for loan guarantees and contribute to the capital put up for the guarantees.

Under the terms of the latest agreement, the underlying loans won’t be guaranteed by confide, given that the EIF has taken on the role of guarantor. Hence, the guarantee with the confidi is terminated, although the scheme can be used to guarantee new SME lending.      

The initiative will be supported by the EIB, COSME funds and by the Italian Ministry for Economic Development (MISE). COSME - the EU programme for the Competitiveness of Enterprises and Small and Medium-sized Enterprises - runs from 2014 to 2020, with a total budget of €2.3bn, including support provided by the European Fund for Strategic Investments (EFSI).

Under the transaction, BPPB has made a commitment to extend new SME lending at attractive pricing levels in Southern Italy for €120m over the course of 36 months. The bank is using €11m of European structural funds made available through MISE to cover the first and second loss pieces. As with other SME Initiative deals, the guarantee covers both expected and unexpected losses with tranches that amortise on a sequential basis.

The EIB Group SME Initiative for Italy was launched in October 2016 and is co-financed by the Republic of Italy, the European Commission and the EIB Group, with the EIF managing the scheme on behalf of the different contributors. The initiative aims to boost SME lending in the southern Italian Mezzogiorno region, which includes Abruzzo, Basilicata, Calabria, Campania, Molise, Puglia, Sardinia and Sicily.

Banks that have completed such transactions under the programme include Banca di Credito Popolare, Banca Popolare di Bari, Banca di Napoli, UBI Banca and Unicredit (see SCI’s capital relief trades database). Looking ahead, Inglisa concludes: “We are planning an additional €250m to cover first and second losses for next year. The initial mandate was €200m and we are about to upsize, thanks to additional funds made available through MISE.”

Stelios Papadopoulos

Capital Relief Trades

Mixed motivations

THRP sets stage for US bank CRT

A combination of macro and micro factors are understood to have influenced the issuance of JPMorgan’s recent Chase 2019-CL1 synthetic RMBS (SCI 10 October). Notably, the US Treasury’s aim of harmonising regulatory frameworks across the mortgage market – as outlined in its Housing Reform Plan (SCI 6 September) – arguably helped create the right conditions for the bank to test appetite for the deal.

In particular, the Treasury Housing Reform Plan (THRP) calls for “similar credit risks…[to] have similar credit risk capital charges across market participants”. Further, the report states that to “achieve a level playing field between the GSEs and other private sector competition, the regulatory frameworks governing the GSEs and other market participants should be harmonised”.

JPMorgan’s previous attempt to issue a risk transfer RMBS was denied by the OCC in February 2017, due to the regulator’s belief that because the bank serviced the portfolio, it retained control and therefore didn’t qualify for capital relief. However, while acknowledging that the latest transaction is yet to be formally signed off by the regulators, Michael Shemi of Moelis & Co.’s Financial Institutions Advisory group suggests that future bank CRT may benefit from the US Treasury’s objective of more consistent regulatory capital treatment of these transactions. 

“The THRP has set the stage for the GSEs to rebuild capital. Importantly, while acknowledging the importance of the GSEs CRT programmes, the report calls for greater harmonisation between the GSEs and banks in terms of the regulatory capital treatment of securitisations and transfer of credit risk to third parties,” he observes.

Meanwhile, on a recent shareholder call, JPMorgan stated that regulatory capital constraints and standardised risk weightings are hurting profitability on the mortgage side of its business and that not all lending relationships meet its ROE expectations. As such, the bank said it would seek to manage its lending and RWAs more actively going forward.

The existence of a regulatory call option suggests that JPMorgan views the deal through a capital relief lens, but the desire to manage internal concentration limits and transfer risk is also apparent. “I think a mix of motivations are the drivers behind bank CRT,” Shemi notes. “In pursuing synthetic deals, achieving regulatory capital relief alone is not typically enough for banks – they also have to demonstrate that they’re improving profitability and expanding capacity.”

He indicates that if the transaction is signed off by the regulators, other banks may potentially bring similar structures. “We may see other large banks pursue synthetic RMBS, as they – like JPMorgan – originate jumbo mortgages that aren’t sold to the GSEs. In that respect, other asset classes may be more appropriate for capital relief trades in the US; for example, C&I portfolios, which have higher risk weights than mortgages.”

Corinne Smith

CLOs

Ratings volatility?

CLO single-B minus scenarios tested

Single-B minus rated obligors currently constitute a record high of nearly 19% of US broadly-syndicated loan CLO exposure, according to S&P figures. To address concern over the credit stability of these companies and the potential for downgrades to inflate triple-C buckets, the rating agency has published a scenario analysis that explores the possible impact of such ratings volatility on the CLO market.

The average triple-C category exposure in US CLOs stood at around 4.7% at end-3Q19, close to historical levels during benign periods. While a downgrade to triple-C from single-B minus may represent a fairly mild event, in aggregate, such downgrades can have an amplified impact on the cashflow mechanics and ratings of a CLO.

Most US BSL CLOs have a 7.5% bucket for triple-C rated loans, with any excess seeing their par value haircut for purposes of calculating the overcollateralisation ratio tests. This can divert interest payments away from the equity or junior tranches.

The S&P study comprises three scenarios of increasing severity, based on broad hypothetical outcomes. Given that CLO loan exposures currently have less than 5% maturing over the next two years, corporate interest coverage ratios are strong and the majority of loans are covenant-lite, the agency assumed in its first two scenarios that there would be credit deterioration on the single-B minus exposure, but no defaults. In the third scenario, it overlaid defaults on the single-B minus deterioration and - given the negative correlation in the supply and price of triple-C assets - also assumes incremental declines in the average price of assets rated triple-C for each of the scenarios in determining the impact to the OC ratio test cushions.

Under the first scenario – where single-B minus exposures on outlook negative or trading below 90 are downgraded to triple-C – the triple-C exposure across S&P’s sample increases to 9.4%, the average junior OC cushion declines to 3.5% and 2% of the pool fails the junior OC test. The model-determined ratings impact is minimal, even at the single-B tranche level.

Under the second scenario – where all single-B minus exposures are downgraded to triple-C – the triple-C exposure across the sample increases to 23.3%, the average junior OC cushion declines to -1.8% and 86% of the pool fails the junior OC test. The average downgrade was one notch at the double-B level and 1.5 notches at the single-B level.

Finally, the third scenario involves all single-B minus exposures being downgraded to triple-C and all current triple-C exposures defaulting with 45% recoveries. As a result, triple-C exposure increases to 19.1%, the average junior OC cushion declines to -3.5% and 97% of the sample fails the junior OC test. The average downgrade in this instance was just over one notch at the triple-B tranche level, just under two notches at the double-B level and three notches at the single-B level.

S&P points out that manager style has a significant impact on the rating distribution of a CLO collateral pool during benign times, with some CLOs having less than 10% exposure to single-B minus collateral, while others have over 30%. Unsurprisingly, CLO portfolios with weaker credit rating distributions fared worse under all three of the agency’s scenarios.

Equally, the older CLOs in its sample were more likely to have higher single-B minus and triple-C buckets, and also had less time to maturity - meaning these deals had less time to benefit from excess spread capture within S&P’s hypothetical scenario. Nevertheless, expected senior note paydowns in the near future for vintage CLOs will significantly alter the notes' resilience to further downgrades and defaults.

“One key aspect that is difficult to predict, however, is the impact of the manager intervention during a downturn,” the agency concludes. “We have seen that CLO managers have been able to preserve value during stressed periods. Perhaps deals with more time left in their reinvestment periods may be able to benefit from this intervention, while deals that amortise in the middle of a downturn are exposed to more relative risk for the junior CLO notes.”

Corinne Smith

NPLs

Riding the wave

NBG offloads secured NPL exposures

The National Bank of Greece has completed its first secured non-performing loan transaction. Dubbed Project Symbol, the €900m portfolio is riding a wave of secured NPL transactions in Greece.

The portfolio references 12,800 borrowers and is backed by a variety of collateral types, including land, industrials, residential and commercial real estate. Bidding as a percentage of the portfolio totalled 28%. Centerbridge and Elliott bought the portfolio and Mount Street acted as advisor.    

George Generalis, head of Mount Street for Greece and Cyprus, notes: “We ran borrower and real estate underwriting work. Since the first secured transaction by Piraeus Bank, we have seen more transactions with higher bids.”

He continues: “As with Italy, doing unsecured deals allows banks to build a track record and infrastructure before they are in a position to do secured transactions. Furthermore, Greece’s servicing capacity was sub-optimal two years ago.”

Piraeus Bank’s Project Amoeba was completed last year and, since then, more secured transactions have followed - such as Alpha Bank’s Project Neptune and Piraeus’s shipping NPL deal called Project Nemo. Mount Street acted as advisor for all three of these deals.

Unsecured volumes formed the bulk of the Greek NPL market for two years, but this year the trend has shifted in favour of secured asset classes. According to Deloitte data, secured transactions have exceeded unsecured deals this year in terms of deal numbers, with nine completed and pending secured NPL deals versus three completed and pending unsecured ones.    

Generalis notes: “Currently there are three large players in the Greek market, but we are the only ones with real estate expertise in-house. We built it two years ago and we are also the only large independent servicer in the market, as well as one of the largest in Europe, with €85bn of assets under management.”

On the firm’s approach to recoveries, he concludes: “Normally we go with consensual agreements, in the form of extrajudicial proceedings. During the underwriting phase, we deploy solutions based on borrower status and collateral. Overall, we try to avoid enforcement proceedings, due to potential legal injunctions by borrowers - this remains a challenge in Greece.”

Stelios Papadopoulos

Regulation

Sticking with the programme

ABSPP hits new high, but total volumes remain low

Latest figures from the ECB show that its ABSPP holdings are at an all-time high. However, the programme remains far from the market moving purchaser it was once expected to be.

Bank of America European structured finance analysts report that ECB net purchases under the ABSPP in October and November were €1.16bn and €1.266bn respectively, representing the highest monthly net purchases since November 2016. Those purchases brought the total holdings under ABSPP to €28.191bn – the highest level since the November 2014 launch of the programme. However, the analysts note: “Despite that, the net increase in ECB ABS holdings in 11 months in 2019 is barely €680m.”

Nevertheless, the BofA analysts observe that the programme has caused interest in some quarters. “Given the previous take-up by ECB of Dutch RMBS and German auto ABS in its ABSPP, as revealed by the publication of ECB holdings under ABSPP, some market participants saw the hand of ECB in recent pricing of German auto ABS - allegedly very short maturity, with spread below zero. That may be a realisation of the dream of some issuers to see negative spreads in ABS, similar to covered bonds. Whether Dutch RMBS will follow – or rather, whether ECB can replicate eventually that in the RMBS space – remains to be seen.”

Rob Ford, partner and portfolio manager at TwentyFour Asset Management, is more sanguine about ABSPP. “It’s great that the ECB is still involved – they could have easily dropped ABS from the broader Asset Purchase Programme. Instead, they are continuing to buy the bonds that are attractive to them, but the volumes involved are low.”

He continues: “My sense is that when the ECB has its daily or weekly allocation meeting where it’s decided what to buy that day or week, they have a fairly easy choice when it comes to allocating to Bunds or OATs etc and also with covered bonds or corporates, where they can look at almost the entirety of both the secondary or primary markets, as there are relatively few restrictions on what they can buy and how they go about it. But when they get to ABS, there’s a lot more reticence because the process is much more onerous, and they have to write a lengthy credit report to support any recommendation in the sector. That pretty much restricts them to the new issue market or secondary pieces of deals they’ve already bought in primary, and so, we’re lucky if we see €50m of ABS a week.”

Ultimately, Ford does not see ABSPP as a major market mover. “It has helped to keep spreads in because the ECB bid sits behind the market and it is nice to have it bubbling along in the background. But were it to disappear, no one would really mind.”

Mark Pelham

Structured Finance

Core qualities

Caroline Chen, svp and research analyst at Income Research & Management, answers SCI's questions

Q: How and when did Income Research & Management become involved in the securitisation market?
A: Income Research & Management is a privately-owned fixed income investment manager that serves institutional and private clients. The firm is headquartered in Boston and was founded in 1987 by managing principals John Sommers and Jack Sommers. Originally a credit-oriented manager, IR+M has been involved in the securitised markets for over 20 years.

The firm has approximately US$77bn in assets under management, of which securitisation bonds account for US$12bn. The securitised market represents a stable business for us and most of the products we offer to our clients include a securitised allocation in some form.

Q: What are your key areas of focus today?
A: The product offerings we manage include Core, Core Plus and Short-duration Crossover funds. We’re also currently offering a Securitized-Only portfolio, which should provide stability in today’s volatile market.

IR+M invests in RMBS, CMBS and ABS, generally at the senior tranche level. Within ABS, we’ll selectively invest further down the capital structure, if we’re comfortable with the issuer. We undertake due diligence on each issuer 2-3 times a year and prefer public listed companies because there is lots of financial transparency, helping ensure they have skin in the game.

Within RMBS, we invest in both the agency and non-agency spaces. Our strategic positioning is in prime quality collateral, with FICO scores of over 700, a 20%-30% down payment and DTIs below 43%. Given current uncertainties and where we are in the credit cycle, these borrowers can be expected to perform better.

I also cover the single-family rental space. Over the years, SFR securitisation issuers have proved that they are not simply trading platforms from which to flip properties, but they have truly become landlords. SFR is a stable business model and is supported by demand, as there isn’t enough starter home stock available in the US.

Q: How does IR+M differentiate itself from its competitors?
A: ESG is an extremely important consideration for us: almost all new issues are analysed via our screening framework and it forms part of our due diligence on issuers. We don’t have a specific ESG fund, but the screening provides an insight into how well issuers run their businesses. For example, it highlights how secure their IT infrastructure and operations are, and the potential for data breaches.

ESG considerations can contribute to the bottom line. Take marketplace lending platforms, for example – several recent investigations have been red flags for us and we have offloaded our exposure before returns were hit. Most of the first-generation fintech ceos have moved on now.

Q: What is your strategy going forward?
A: We’ve seen tremendous volumes in whole business securitisations this year, with around US$8bn issued year-to-date and another US$500m deal marketing. Typically, the sector is dominated by restaurant names, but this year a number of other businesses – massage parlours and fitness centres, for instance – have tapped the market.

We like the asset class because of the wider spreads on offer at the triple-B rating level and they are good bonds for long-duration mandates, given their five- to 10-year maturities. But it’s important to be selective, as private equity firms are moving into the space, adding lots of debt to businesses and using securitisations as cash-outs to pay themselves dividends with.

Again, we focus on public companies with well-established brands and hundreds of franchisees. Ideally, we want to see securitisation being used as a capital management tool and funding channel, with staggered maturity profiles.

Q: Which challenges/opportunities do you anticipate in the future?
A: Supply is robust and there is a strong pipeline for the rest of the year, with issuers taking advantage of the low interest rates. However, as investors, it’s important to pay attention when issuance is abundant and stick to our core qualities and underwriting standards.

The securitisation market is at an interesting time: the US economy is relatively strong – especially on the consumer side – and the credit environment is benign, but we’re in the late stages of the cycle and 2020 is an election year. Moreover, there are significant uncertainties around the Hong Kong protests, the Chinese economic slowdown, Brexit and trade wars – which all may ultimately have ripple effects on the securitisation market. There are certainly headwinds to be aware of in terms of the macro environment.

Corinne Smith

Structured Finance

Turbo feature for CLO reset

Sector developments and company hires

Early upgrade
DBRS Morningstar has taken the unusual step of upgrading from double-B (low) to double-B the class E notes issued by Autonoria Spain 2019 a week after the transaction priced (SCI 2 December). The move follows the final pricing of the coupons on the notes and the three interest rate swaps, which resulted in an overall reduction in costs to the transaction of approximately 0.4%, compared with the initial assumptions used within the rating agency’s cashflow analysis at the time of assigning the provisional ratings.

Eminent domain clarification
Freddie Mac has clarified its multifamily loan documents to address investor concerns on the non-traditional use of eminent domain to preserve rental affordability (SCI 14 October). The documents will continue to provide for prepayment relief when a traditional condemnation proceeding is undertaken by a governmental agency, but the clarification specifies that the GSE will continue the historical treatment of not requiring a prepayment premium in connection with traditional exercise of the power of eminent domain. It also ensures compliance with applicable laws and uninterrupted provision of cost-competitive and reliable liquidity to the multifamily housing market. The revisions will be effective as of 1 January, apart from those located in King County, Washington, which will incorporate the clarification immediately.

ILS fund launched
Brit has launched Sussex Specialty Insurance Fund (SIF), which offers institutional investors direct access to Lloyd’s-underwritten specialty insurance and reinsurance through an ILS fund structure. The fund will access a diversified basket of risks from across the Lloyd’s market by providing capital to support Syndicate 2988, Brit’s third-party capital-backed syndicate, which is moving into its fourth year of operation. Syndicate 2988 has nearly US$200m of stamp capacity for 2020 and writes business alongside Brit’s main syndicate. The SIF will sit as part of Brit’s Sussex Capital ILS platform.

Turbo amortisation
The recent OCP Euro 2017-1 reset is noteworthy for a turbo amortisation feature, whereby part of the remaining equity cashflows are diverted to amortise the single-B rated class F principal. BofA Global Research notes that the aim is to reduce the tranche WAL as a means of lowering its funding cost and facilitate its placement. The tranche printed on 2 December with a tight DM of three-month Euribor plus 935bp.

Structured Finance

Alternative credit platform expands

Sector developments and company hires

CFO appointed
Annaly Capital Management has appointed Serena Wolfe as cfo and a member of its operating committee. Glenn Votek, the company’s cfo and interim ceo and president (SCI 21 November), has stepped down from his role as cfo. Wolfe most recently served as a partner at Ernst & Young since 2011 and as its Central Region Real Estate Hospitality & Construction leader from 2017 to November 2019, managing the go-to-market efforts and client relationships across the sector. She has practiced with EY for over 20 years, working in a variety of industries, including real estate, manufacturing and technology.

CLO manager acquisition
First Eagle Investment Management has acquired THL Credit Advisors, complementing its alternative credit platform across both tradable credit and middle-market direct lending. THL Credit had approximately US$17bn in assets under management (as of 30 September) and, upon completion of the acquisition, First Eagle’s alternative credit platform will represent approximately US$23bn in assets under management and advisement. THL Credit ceo Chris Flynn will become president of the combined platform, reporting to First Eagle ceo Mehdi Mahmud, with THL Credit’s cio Jim Fellows becoming cio of the combined platform. Tim Conway, founder of the business that ultimately became First Eagle Private Credit, will remain with the combined platform as vice chairman.