Contents

ABS

Brand value

WBS issuer differentiation highlighted

In an unsolicited comment, Fitch last week suggested that the overall benefits of US whole business securitisation are often overstated, especially considering the increase in market activity and sectoral breadth seen this year (SCI 9 December). However, with the understanding that not every issuer is created equal, good relative value opportunities can still be found across the sector.

While not rating any WBS deals itself, Fitch states in its analysis that – based on the ratings assigned by certain other rating agencies - companies that would typically belong to the single-B rating category seem to be able to issue investment-grade debt, which it describes as “a concerning trend”. In the agency’s view, many of the new sponsors emanate from industries that are questionable candidates with relatively low barriers to entry, and the mere layering on of securitisation technology shouldn't allow such differentiation.

“While it may be possible to improve the position of debtholders by adding contractual provisions that allow bondholders a say in the future of distressed companies and protect their position, it is important to consider the company's credit quality as a relevant starting point. Any cashflow-based approach will ultimately remain dependent on the brand value and other intangible assets, as well as the overall leverage - all of which are closely intertwined with the original sponsor's underlying credit quality,” it observes.

Fitch highlights a pair of pre-crisis WBS transactions - KCD IP (a securitisation of trademark royalty rights from small household goods) and Local Insight Media Finance (a securitisation of royalties from a small group of telephone registry publishers) - that faced difficulties because they did not meet minimum thresholds relating to sustainability of the brand, high barriers to entry and supportable debt levels. Caroline Chen, svp and research analyst at Income Research & Management, agrees that the primary differentiator between WBS issuers is that the business itself has to be viable for the long run.

“This year, we’ve seen that investor concern over a secular change impacting business demand has caused the securitisation market to give a particular issuer the cold shoulder. Issuers need to prove to investors that their business models cannot be killed by Amazon,” she says.

Meanwhile, overall leverage levels seem to be excessive in several outstanding transactions relative to the assigned ratings, according to Fitch. It notes that the median leverage (measured as securitised debt over adjusted EBITDA) of the US programmes rated by S&P in the triple-B category is 6x, which is twice as high relative to adjusted debt/EBITDAR that Fitch's Restaurant Ratings Navigator Companion indicates is consistent with triple-B category ratings. Recent securitisations rated in the triple-B category have seen leverage multiples of up to 8x under certain circumstances.

To mitigate such credit risks, Income Research & Management always picks issuers that have a mature brand value and long business track record, as well as those that have dropped leverage a full turn or two over the past few years. “We also prefer issuers to refinance their debt in the securitisation market for better rate and term, as opposed to doing a cash-out, lever-up deal, which is purely for dividend and equity buy-backs,” Chen notes.

Finally, Fitch suggests that the basis of US WBS - the belief that the sponsor (or manager) can be replaced during financial distress, without a significant deterioration in net cashflows - is based on a largely untested assumption. Chen concurs that today’s whole business ABS lacks sufficient evidence about the timeliness and effectiveness of manager replacement.

“This is one of the reasons why we prefer issuers that are publicly listed companies,” she concludes. “These issuers often provide better transparency in terms of business strategies and operations. As a result, investors don’t have to wait until a trigger breach to determine whether a manager is doing a good job or not.”

Corinne Smith

Structured Finance

SCI Start the Week - 16 December

A review of securitisation activity over the past seven days

Transaction of the week
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%. (See SCI 13 December for more).

Stories of the week
2020 vision
Looking for relative value in European securitisation
Mixed motivations
THRP sets stage for US bank CRT
Mutual agreement
BPPB SRT debuts

Other deal-related news

• Infrastructure ABS could hold the key to a brighter future for Europe's banks, which are struggling under the burden of shrinking profits and growing costs, yet benefit from consistent regulatory support and an entrenched role within the continent's broader economy (SCI 9 December).
• 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 9 December).
• 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 9 December).
• 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 (SCI 9 December).
• 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 (SCI 10 December).
• 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 (SCI 12 December).
• 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. (SCI 13 December).

Data

BWIC volume

Secondary market commentary from SCI PriceABS
12 December 2019
US CLO
Another active day with 20 observed covers across the liability structure which we ran DMs on – 7 x AAA, 1 x BBB, 11 x BB and 1 x B. The >4y WAL AAAs (23/24 RP profiles) traded in a 119dm-134dm range split as follows : 2023 RP profiles trade 119dm-126dm (note in line with a recent comp this month GLM 2017-2A A 121dm / 4.9y WAL) and the 2024 RP profiles trade today 133dm-134dm (tight to a recent comp this month OCP 2019-17A A1 at 136dm / 6.3y WAL).
The BBB trade today is ATCLO 2019-15A D (Crescent Cap) covers at 466dm / 8.7y WAL, this is a 2024 RP profile, closed 5 weeks ago – there has been one 2024 RP profile BBB comp this month to date MDPK 2018-31A D at 341dm / 8.5y WAL, todays ATCLO 2019-15A D has a very low MVOC 108.9 but once again this deal is pending its first remittance report to be able to comment accurately on its performance metrics.
The BBs today are from 5 different RP profiles (2020-2024 RPEs) – the 2024s trade 911dm – 1039dm, 2023s 649dm, 2022s range 654dm-705dm with 2 outliers LCM 23A D (895dm / 7.5y WAL) and HLA 2017-2A D (841dm / 6.95y WAL), note however that similar 2022 RPE bonds this month trading tighter 670dm-718dm. The LCM 23A D has a very low MVOC 102.48, 7% sub 80 priced assets, par build negative -0.28 and a low annualized equity return of 9.4% which is very low versus peers, whilst the HLA has a lo-MVOC 103.71. The 2021 BB RPE bonds traded with a wide basis 703dm-801dm with TRNTS 2017-6A E (Trinitas Cap) at the wide end 801dm / 6.2y WAL – this deal has >5% of sub 80 priced assets and weak performance metrics (WARF 2944, 43bps of defaults, annualized equity returns of 12% lower than peers. 2021 RPEs have traded 683dm-703dm so today's TIA 2017-1A E (TIAA) 703dm / 6.2y WAL is at the wide end of month to date comps. Finally the 2020 RPE profiles trade in a 601dm-644dm range, with month to date comps 541dm-697dm right in the middle of this zone with no significant outliers to note.
The sole single-B tranche today was ARES 2016-40A ER (Ares Management), a 2021 RP profile that trades 982dm / 7.45WAL with the only market observed single-B this month TCW 2019-1A F 958dm / 6.8y WAL so today's ARES trade fits this 'term structure' for an illiquid bond rating level nicely.
EUR/GBP ABS/RMBS
AAA Dutch prime RMBS at 12dm. AAA French autos at 19dm and AA Spanish autos at 39dm.
EUR CLO
2 x AAA, 1 x AA & 1 x BBB today. The AAAs are paying 85bps and 86bps margin. One is callable now and the other in Feb 2020. They have both traded at small premiums which is around 120dm to mat for around 3.5yr WAL or around 100dm to call for 0.15yr WAL. The AA is from a deal where the AAA pays 82bps margin. This is also traded at a small premium and the deal is callable now. It traded at 188dm to mat or 163dm to call. The BBB traded at 96.55 / 341dm to mat / 6.09yrs.
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 - 16 December

CRT sector developments and deal news

Deutsche Bank is rumoured to be readying a capital relief trade from the CRAFT programme. The last CRAFT significant risk transfer deal - a US$382.5m CLN that references corporate loans - was completed in March. It remains the only CRAFT transaction of the year (see SCI’s capital relief trades database).

Capital Relief Trades

UK auto SRT finalised

Santander completes retained first-loss deal

Santander has completed a synthetic securitisation of UK auto loans. Dubbed Motor Securities 2018-1, the financial guarantee is the lender’s first UK synthetic securitisation that features a retained first-loss tranche.

According to Steve Gandy, md and head of private debt mobilisation, notes and structuring at Santander Corporate and Investment Banking: “The transaction doesn’t feature any excess spread, so the only other way we could achieve both better pricing and significant risk transfer was by retaining a small first-loss tranche.”

Santander achieves significant risk transfer in this transaction by selling both an upper and a lower mezzanine tranche. CRR rules stipulate that in order to achieve SRT, banks must sell at least 50% of the mezzanine tranches or at least 80% of the first-loss tranche, if no mezzanine tranches are present. The mezzanine tranches generally cover unexpected losses, whereas the first-loss tranche generally covers expected losses.

The lender began prepping the transaction in 2018. But due to regulatory reservations over excess spread that were communicated last year, it shifted to a synthetic format for the transaction to make sense from a capital optimisation perspective.

Rated by Moody’s and KBRA, the deal consists of £660m NR/AAA rated class A notes, £22.5m NR/AA rated class B notes, £18.75m A2/A rated class C notes (priced at SONIA plus 3.25%), £30m Ba3/BB- rated class D1 notes (SONIA plus 8.25%), £11.25m unrated class D2 notes (SONIA plus 11%) and £7.5m unrated class E notes. Santander sold classes D2, D1 and C to asset manager investors.

Class C has a 3.48-year WAL, class D1 has a 3.86-year WAL and class D2 has a 3.8-year WAL. The tranches amortise on a sequential basis.  

The £750m portfolio is static, although Santander considered a revolving one. However, inclusion of a replenishment period for a rated transaction could lead to thicker tranches and thus reduce the economic efficiency of the transaction.

The underlying assets consist of monthly paying auto finance agreements granted by either independent dealerships or brokers with whom Santander UK entertains partnership agreements. The agreements are granted to private individual borrowers resident in the UK.

The portfolio contains only conditional sale agreements, totalling 79,293. Personal contract purchase agreements are not included, unlike previous Motor transactions. Consequently, there is no residual value risk to consider.

The portfolio features a 1.9-year weighted average life and it is highly granular, with the largest and 20 largest borrowers representing respectively 0.06% and 0.46% of the pool. It is collateralised by 16.6% new cars and 83.4% used cars, with the largest exposure pertaining to the Volvo brand.

Stelios Papadopoulos

Capital Relief Trades

SCI's latest podcast is now live!

The editorial team discuss key issues in securitisation today...

In this episode of the SCI podcast, Mark Pelham and Corinne Smith discuss our new research report on standardised banks' capital relief trades and where European securitisation investors are looking to find relative value in the year ahead.

This podcast and previous episodes can be accessed via the SCI site, online here as well as wherever you usually get your podcasts, including Spotify and iTunes (just search for Structured Credit Investor).

Capital Relief Trades

Nordic SRT inked

Nordea returns with capital relief trade

Nordea has priced a €5.1bn synthetic securitisation of Nordic corporate and SME loans. Dubbed Matador, the funded financial guarantee is the issuer’s first capital relief trade following the bank’s entry into the EU’s banking union in October 2018.

According to Mark Kandborg, head of group treasury and ALM at Nordea: “We priced the transaction and freed up capital at an attractive cost, so we are now in a position to redeploy it for further growth and lending opportunities. Synthetic risk-sharing is a tool that we may tap into from time to time as our growth opportunities expand.”

Jonas Backlund, head of group structuring, treasury and ALM at Nordea, adds: “We have opted for a simple and conservative structure that we feel fits with how we run the bank and explain the absence of excess spread or call features.”

The size of the tranches could not be disclosed, although Nordea confirms that they amortise sequentially. The portfolio features a seven-year expected maturity and references 2000 borrowers - mostly drawn commitments.

The lender went through a transition period from October 2018 to October 2019, following the relocation of its headquarters to Finland that precluded any CRT issuance. “We were in a significant transition period until we received clarity from the ECB over our SREP requirements. We were then in a position to present our new capital and dividend policy by the end of October,” says Kandborg.

Nordea’s new capital and dividend policy is fully operational from January 2020. The capital policy stipulates a 150bp-200bp CET1 management buffer above the regulatory CET1 requirement.

Excess capital will be used for dividends and share buybacks. From 2020, Nordea is aiming for a 60%-70% dividend pay-out ratio.

The bank hasn’t indicated what future issuance volumes could look like following its relocation to the banking union, although the relocation itself does free it up from Swedish regulatory constraints regarding flow-back risk that raises the outlook going forward. Over two years ago, Sweden’s financial supervisory authority published securitisation guidelines in an attempt to tackle flow-back risk, or the possibility of credit risk flowing back onto bank balance sheets (SCI 20 July 2017).

In a synthetic securitisation, when a transaction matures, some assets may not have fully amortised. Consequently, an issuer's balance sheet could see higher capital requirements, since the credit risk flows back on the balance sheet. The best way to deal with such a risk is through a replacement transaction.

However, from the Swedish supervisor’s perspective, a sudden increase in capital requirements due to credit risk flowing back on the balance sheet could lead to a reduction of lending to the real economy. Addressing that scenario meant limiting the volume of securitisations through a number of ways, including a cap on securitised amounts.

“We formally don’t have to comply anymore with those guidelines, although it should be emphasised that Nordea sympathises with the underlying principle and it’s embedded in our internal guidelines,” says Backlund.

Matador was jointly arranged by JPMorgan and Nordea, and will close in January.

Stelios Papadopoulos

CMBS

Canadian restructuring

Alberta energy market stress hits CMBS

Calgary-based real estate investment firm Strategic Group last week submitted an initial application filing under Canada’s Companies’ Creditors Arrangement Act (CCAA), citing 50 named entities and associated commercial properties within its portfolio. Of the affected office properties, five secure loans securitised in four Canadian CMBS within DBRS Morningstar’s rated book.

According to Strategic Group, prolonged stress in the Alberta economy has been particularly hard on its Calgary office portfolio, where overall vacancy rates hover near 25% amid sustained energy market declines over the last several years. Under the CCAA filing, the company plans to sell off real estate assets and restructure its debt. As such, it will sell the properties under a sale and investment solicitation process that, if approved, should be completed by mid-2020.

The affected CMBS loans are the C$8.69m 550 - 11^th Avenue Office Building (securitised in ML 2007-CAN21), C$9.9m Centre 1000 (IMSCI 2012-2), C$8.61m Deerfoot Court (IMSCI 2013-3), C$5.78m Airways Business Plaza (IMSCI 2013-3) and C$9.35m 1121 Centre Street NW (MCAP 2014-1). The loans’ respective maturity dates are December 2016 (extended to September 2020), June 2020, January 2023, February 2023 and October 2019. DSCRs stood at 0.34x, 0.16x, 1.46x, 1.29x and 1.24x as at year-end 2018, according to DBRS Morningstar, with occupancy at 95%, 62%, 96%, 89% and 94%.

The servicers for each transaction have confirmed their receipt of the filing notices and are determining next steps. With the CCAA filing, loan payments to creditors will not be made and therefore master servicers will advance payments for the five affected CMBS loans.

“We believe that all five loans will be transferred to special servicing and that a valuation analysis will be completed over the near term to determine the appropriate advance thresholds, as the CCAA filing and accompanying restructuring proposals move forward,” DBRS Morningstar notes.

Strategic Group has been a relatively frequent CMBS borrower and has repaid several 2006 and 2007 legacy CMBS loans and one 2013 loan, all secured by Calgary properties, in recent years. Loans sponsored by the company have not experienced significant losses to date, albeit Dominion Place (MLFA 2006-Canada 18) and Sundance Pooled Interest (Real-T 2007-1 and Real-T 2007-2) incurred relatively small losses at disposition.

DBRS Morningstar notes that several properties have received upgrades to attract new tenants and the sponsor contributed significant equity when loan modifications were required to buy time to secure a replacement loan. Of the five loans affected by the CCAA filing, all but the Airways Business Plaza loan have some recourse to Strategic Group ceo Riaz Mamdani.

The rating agency highlights an additional Strategic Group loan, Kennedale Plaza (IMSCI 2015-6), that is not included in the CCAA filing but is likely to be affected by it. It currently has negative trends on at least one of the lowest-rated bonds in each affected CMBS 2.0 transaction because of their exposure to cashflow declines and will determine appropriate rating actions once it has received information from the servicers.

Corinne Smith

NPLs

NPL ABS pair inked

Guber, UBI Banca hit the market

A pair of Italian non-performing loan securitisations – dubbed Futura 2019 and Iseo SPV – have closed. The former is notable for being only the second Italian NPL ABS to not benefit from a GACS guarantee, following the issuance of Belvedere SPV in December 2018.

Futura 2019 is the first issuance sponsored by Guber Banca and securitises assets with a gross book value of €1.256bn originated by 53 different local cooperative banks. The pool includes cash at closing of around €6.5m resulting from collections between 30 June and 22 November, as well as around €15.6m of cash in court ready for distribution.

Of the portfolio, 51.8% by GBV is secured loans benefitting from a mortgage (47% of which are residential) and 48.2% is unsecured loans with an average seasoning of around seven years. The top one, top 10 and top 20 obligors respectively represent around 0.7%, 4.8% and 7.6% of the pool in GBV terms. First-lien secured loans located in the North of Italy and, in particular, in the Veneto region account for approximately 68.4% and 18% of the GBV respectively.

Of the secured loans, 40% by GBV is expected to undergo a bankruptcy process (which usually takes significantly longer than a foreclosure). Secured loans in foreclosure represent 60% of the GBV.

Guber acts as master servicer and special servicer on the transaction, while the monitoring agent is Zenith Service. Centotrenta Servicing has been appointed as back-up servicer.

To align the interests of the special servicer and the noteholders, the servicing fees have been constructed so that Guber is incentivised to maximise recoveries, as a result of triggers related to their performance against the business plan. Futura MM is obligated to indemnify the issuer in case the representation and warranties regarding the receivables are proven incorrect.

Rated by Moody’s and Scope, the transaction comprises €158m Baa2/BBB rated class A notes (which pay six-month Euribor plus 300bp), as well as €37m unrated class Bs (which pay a fixed rate of 6%) and €8m unrated class Js.

Meanwhile, the €857m Iseo SPV is originated by UBI Banca and has been structured in line with the requirements of the 2019-updated GACS scheme. The transaction securitises senior secured (92.2% in terms of GBV) and unsecured, as well as junior secured (7.8%) NPLs.

The majority (94.8%) of the secured loans are backed by residential properties, with the remainder composed of commercial, land and industrial properties. Borrowers are mostly concentrated in the northern part of Italy (52.8%), followed by the southern (30.5%) and central (16.7%) regions.

Scope has assigned triple-B ratings to the deal’s €335m class A notes (which pay six-month Euribor plus 50bp), while the €25m class Bs (plus 600bp) and €13.46m class Js are unrated. The final maturity of the notes is July 2039.

Corinne Smith

NPLs

NPL boost?

Hoist Finance acquires landmark French portfolio

Hoist Finance has acquired a French non-performing mortgage portfolio with more than 3,500 claims and an outstanding balance of approximately €375m. This is the largest-ever portfolio investment for Hoist Finance into a relatively untapped NPL jurisdiction with positive prospects.

According to Stephan Ohlmeyer, cio at Hoist Finance: “Two years ago, we set up a servicing platform for secured NPLs from scratch in France. The French market has the second largest NPL stock after Italy, so it is a market with prospects.”

He continues: “This is a secured portfolio that forms part of our strategy to expand into other asset classes beyond unsecured consumer NPLs. However, we retain a preference for very granular loans, which explains the choice of residential mortgages.”

According to Deloitte data, France has the second highest NPL stock in Europe - at €124bn - following Italy and more NPL sales are expected. Indeed, Deloitte notes: “Recent EU-wide regulatory guidelines will undoubtedly have an impact on the provisioning ratio, as banks are directed to provision unsecured NPLs at 100% three years after default. With NPL resolution strategies targeting a rapid clean-up of banks’ balance sheets, an acceleration of NPL disposals is forecast, despite the overall low NPL ratio in France.”

Historically, Hoist Finance has been an unsecured consumer NPL buyer, with an average annual investment volume of €300m-€400m. However, the firm stepped this up to €800m last year.

From this figure, €500m was invested in unsecured consumer NPLs, which is the bulk of the firm’s investment activity. The remaining €200m was diverted for the first time to secured NPLs, such as distressed residential mortgages.

However, €100m was channelled into performing asset classes. The latter isn’t typical of other investors in the same league, such as Intrum and Axactor, although Hoist Finance is in a different position since it is regulated as a bank. “Changes in regulation are the main reason our investment volume has been reduced to €600m and also one of the drivers behind our expansion into secured exposures,” says Ohlmeyer.

The Swedish Financial Supervisory Authority (SFSA) confirmed in December last year that it supports an EBA interpretation regarding higher risk weights for purchased defaulted assets. This led to a 150% risk weight for purchased unsecured NPLs, compared to the previous practice of applying a 100% risk weight. Hoist Finance carried out two NPL securitisations this year to address the higher capital requirements and another regulation commonly referred to as the NPL backstop (SCI 7 November).

Ohlmeyer notes: “The impact of the backstop is less pronounced for secured exposures, with an implementation timeframe that stretches over nine years, compared to three for unsecured exposures; performing loans are unaffected.”

Looking forward, he states: “France is one of the markets that we have prioritised and where we already have a presence, due to the secured NPL servicing platform we set up two years ago and another distressed mortgage transaction we completed last year. The track record and the experience we have built are reflected in the large size of this transaction.”

Stelios Papadopoulos

RMBS

Year-end melee

UMBS pooling proposal under scrutiny

US securitisation market participants are having to address a melee of important issues ahead of year-end. The one that appears to be causing the most ire, however, is the FHFA’s recent request for input (RFI) regarding GSE pooling practices for the formation of TBA-eligible UMBS (SCI 5 November).

“There are many issues that the market is having to deal with right now that have nothing to do with traditional investment decisions,” confirms Walt Schmidt, svp at FHN Financial. “Among them are the Libor transition, the FHFA’s UMBS RFI and the SEC’s request for feedback on asset-level disclosure requirements under Reg AB [SCI 1 November]. These are significant issues to deal with all at once; it’s certainly a confusing time in the marketplace at the moment.”

The backdrop to this melee is the worsening performance of agency RMBS from a convexity perspective – as rates have fallen, more loans are being refinanced and some seller/servicer prepayment speeds are too fast. BofA Global Research analysts note that Fannie Mae has been excluding a substantial portion of non-specified origination from its major pools, which is disproportionately representative of the fastest originators. In contrast, Freddie Mac has been pooling the bulk of production into its multi-lender pools.

Consequently, Freddie Mac multi-lender pools prepay materially faster than Fannie majors. Fannie majors will, in turn, likely experience better execution in production coupons.

“As the two GSEs compete on pooling by eliminating the fastest lenders from the majors, there is a distinct possibility of multi-lender pools trading at a pay-up, while the TBA deliverable shifts to the new faster smaller pools. This new deliverability risk will be priced accordingly, raising borrowing costs and potentially reducing MBS liquidity,” the BofA analysts suggest.

The FHFA's proposed solution, as per its RFI, is to incentivise 70%-80% of production to be channelled into multi-lender pools. The remainder - consisting of specified pools and single-issuer pools with market pay-ups - would continue to be pooled separately, effectively forcing Fannie to pool in a manner similar to Freddie. However, the proposal faces criticism for being too blunt an approach and potentially masking the extent of poor origination.

The analysts indicate that such an approach, as it stands, is too restrictive and there is some room for middle ground between Fannie and Freddie. “GSEs are sophisticated market players and can generally discern when pools trade at pay-ups and when they do not. So, for example, in our view, there is no reason the GSEs can't limit separate pooling of faster loans, but also continue to allow those that manage to command pay-ups away from the major. This way, originators can continue to test the markets with new specified stories.”

Further, forcing the bulk of production into the major would remove the GSEs’ ability to exclude originators. As such, the analysts anticipate that the FHFA’s request for input on the conditions for allowing faster prepaying loans into, or excluding them from, multi-lender pools will raise controversial issues in approaches and measurement – especially in terms of separating and identifying ‘good’ versus ‘bad’ actors.

The FHFA recently extended the deadline for feedback to be submitted on the RFI from 19 December to 21 January 2020.

Corinne Smith

Structured Finance

Structured credit pro returns to the buy-side

Sector developments and company hires

EMEA
Kingswood Holdings has appointed Lindsey McMurray and Howard Garland to its board from Pollen Street Capital. The move is as per the terms of the investment completed in September, which saw up to £80m committed by way of an issue of irredeemable convertible preference shares to certain investors and funds managed or advised by Pollen Street.  McMurray founded Pollen Street in 2013 and is the managing partner, as well as chair of its investment committee, while Garland is a partner of Pollen Street and focuses on investing in financial services businesses and credit opportunities.

Niels Bodenheim has been appointed as head of alternative credit at NN Investment Partners, as of 13 January 2020, overseeing assets under management of €40bn. He will report to Valentijn van Nieuwenhuijzen, cio at NN IP. Bodenheim joins from bfinance, where he held the role of senior director - private markets. Prior to this, he spent 14 years at GE in various executive roles.

North America
BMS Capital Advisory has appointed Alex Orloff as director of capital markets analytics, reporting to its ceo Romulo Braga. Orloff will lead the development of qualitative investment diligence and quantitative market analytics for issuers and institutional investors. He was previously founder of Sybella Research and before that held a variety of positions as a senior analyst and portfolio manager, including in ILS at Twelve Capital.

Megan Messina has joined Symphony Asset Management as director, portfolio strategist - structured credit in New York. Messina was previously md, co-head of global structured credit products at Bank of America Merrill Lynch, which she left in 2016. Prior to her nine-year stint at the bank, she was a director at Citi in global structured credit products and before that credit derivatives trading.

Structured Finance

GSE price-fixing lawsuit settled

Sector developments and company hires

CLO manager transfer
Hunt Investment Management has assigned collateral manager duties for the Hunt CRE 2017-FL1 and Hunt CRE 2018-FL2 CRE CLOs to OREC Investment Management. Moody's has confirmed that the move will not result in any adverse rating action. For more CDO manager transfers, see SCI’s database.

Credit opportunity fund
Arrow Global’s new Arrow Credit Opportunities SCSp fund has raised €628.5m of third-party capital commitments into an eight-year closed-end fund structure, with €838m achieved in total capital commitments so far. The fund is targeting €2bn of total AUM in selective European credit opportunities before end-2020, including commitments from Arrow Global, which will invest at least either 24.9% of the final commitment made to the fund or €500m as a co-investor. The firm says the fund is central to its strategy to accelerate towards a more capital-light model. AGG Capital Management, a Jersey-incorporated and wholly-owned subsidiary of Arrow Global, will serve as portfolio manager to the fund.

Fairhold restructuring proposed
Proposed restructuring terms have been agreed for the Fairhold Securitisation CMBS, which would - if implemented - deliver between 57% to 73% recovery for the class A notes on a sale of the underlying assets, based on an illustrative £700m-£800m enterprise value for the group at December 2019. Key terms of the restructuring include: the establishment of a new group of companies, ultimately owned by the class A noteholders and the issuer swap counterparties in circa 66%/34% split respectively; the transfer of the property owners to the NewCo Group; and the exchange of existing indebtedness of the issuer for £369m new senior secured notes for the benefit of the swap counterparties and £341m junior secured notes, of which £227.7m are for the benefit of the class A noteholders and £113.3m for the benefit of the swap counterparties.

North America
Mark Gruber is set to retire from his role as ARMOUR Residential REIT cio and coo on 31 March 2020, in order to pursue outside interests. The company’s current co-ceo, co-vice chairman and chief risk officer Scott Ulm and David Sayles, the md for portfolio and risk analysis for ARMOUR Capital Management, will act as co-cios on Gruber’s retirement. Jeffrey Zimmer, the company’s current co-ceo, co-vice chairman and president, will assume the responsibilities of coo while it conducts a search for a permanent replacement.

Assured Guaranty Corp has recruited Steven Kahn as senior md, structured finance. The group will be led by Kahn, along with md Dan Bevill, who has been part of Assured Guaranty’s structured finance team for 15 years. The pair will report to Nick Proud, senior md of Assured Guaranty’s international and structured finance businesses. Kahn was previously an md in the structured products group at Mizuho Securities and, before that, worked at Invicta Capital, Financial Security Assurance and Ernst & Young.

Price-fixing settlement
Pennsylvania Treasurer Joe Torsella has announced that a proposed stipulation of settlement has been filed to resolve outstanding claims against all remaining defendant banks in a lawsuit alleging price-fixing of GSE bonds. The case is presently before the US District Judge for the Southern District of New York. The remaining defendants will pay US$250m in damages, meaning that in total - including earlier settlements - the monetary settlement recovery on behalf of the class of investors harmed by the 16 original defendants will be US$386.5m (representing approximately 58.4% of their proportionate share of single damages). As part of the settlement, all defendant banks have agreed to establish and maintain an effective antitrust compliance programme. Settlement agreements were previously reached with Deutsche Bank, First Tennessee Bank, Goldman Sachs and Barclays; the 12 remaining defendants are BNP Paribas, Cantor Fitzgerald, Citi, Credit Suisse, HSBC, JPMorgan, Merrill Lynch, Morgan Stanley, Nomura, SG, TD Securities and UBS.

Structured Finance

Risk participation programme agreed

Sector developments and company hires

CLO vulnerabilities eyed
The Financial Stability Board has published a report assessing the financial stability implications of developments in the global leveraged loan and CLO markets. Based on a combination of available data and analyses from FSB members, the report concludes that vulnerabilities in the sector have grown since the financial crisis. Specifically, it notes that: borrower leverage has increased; changes in loan documentation have weakened creditor protection; and shifts in the composition of creditors of non-banks may have increased the complexity of these markets. Further, exposures are concentrated among a limited number of large global banks and have “a significant cross-border dimension”. The FSB says it will consider whether there is scope to close data gaps, will continue to analyse the financial stability risks and will discuss the regulatory and supervisory implications associated with leveraged loans and CLOs.

Risk participation programme
FMO and Munich Re have established a new unfunded risk participation programme, which will allow Munich Re to invest in the UN sustainable development goals by participating in FMO transactions for a total amount up to US$500m over the next three years via its risk-sharing framework agreement. By allowing Munich Re to participate in its underwriting process, the agreement supports FMO’s ambition to scale up private sector mobilisation and maximise funding towards developing countries in the financial institutions, energy and agribusiness sectors. By creating an efficient way of credit risk underwriting via portfolio solutions, the agreement also serves as a blueprint for further public-private partnerships.