News Analysis
ABS
Under pressure
US student loan ABS holding firm so far
US student loan ABS faces a difficult year from both technical and political pressures. However, there is room for a little cautious optimism and for now at least spreads are holding up reasonably well.
BofA global research analysts underline the broadly held market view, stating: “Libor transition will continue to pressure spreads for student loan ABS, especially for longer-dated and subordinated tranches. Also, we expect the basis between transactions with and without Libor replacement language will continue to widen.”
However, they add: “The combination likely means there could be more attractive opportunities to enter the student loan market in the future.”
This year so far at least the sector remains stable, according to one trader. “As of last week, there was US$175m in current face of SLABS seniors offered by the Street at 100DM or wider. So, there’s clearly not a great deal of concern yet.”
Further, the trader says: “SLABS spreads have actually tightened this year – people got lifted out of a bunch of paper last week, which brought things in a bit. But that said, the tightening is nothing in comparison to what we’re seeing in other markets.”
Moody’s analysts suggest that ABS market participants will increase their focus on the potential end of Libor benchmarks in 2021. “Developments will include stakeholders probing benchmark transition paths for pre-2018 FFELP ABS. A few successful conversions of legacy fall-back language will likely occur in individual transactions. Transitions to the Secured Overnight Funding Rate (SOFR) and its use as an initial benchmark in new transactions likely will be extremely limited, but potentially increase toward the latter part of the year.”
The trader concurs: “Some deals have replacement language, but it’s not that many so far. We know that some people are working on smaller deals with the theory that it will be easier to get consent from all parties involved. But when you look at some of the Sallie Mae deals, which are over US$1bn, it seems unlikely that any kind of consensus can be reached there.”
Consequently, a potential workaround is being considered, the trader reports. “We’re hearing that people are asking New York State to pass some legislation to automatically override all the indentures (which are predominantly under New York law) with new language. But that is at a very early stage and it will obviously take some time to see whether such a solution will become viable.”
Meanwhile, the BofA analysts argue: “As market participants consider potential solutions, we feel a good first step would be the addition of an asset replacement percentage trigger in the benchmark transition events (i.e. the percent of the trust student loans with special allowance payments indexed to the benchmark replacement meets a specified threshold).”
While Libor transition is undoubtedly the major focus, market participants also have to consider the potential impact of political moves in the run-up to the US election at the end of this year. Debate around student loan forgiveness - a key issue for some Democratic presidential candidates - in particular, may weigh on SLABS spreads and issuance volumes in future.
The trader says that currently there are still too many hurdles to be overcome – such as selection of a candidate, firming-up of policy, the election result and so on - before there is any kind of clarity and the issue becomes a priority for the market. “Right now, when loans are forgiven, they are simply paid off - which amounts to a couple of million here and there, and that’s just a blip in the Department of Education budget. But when talking about widespread forgiveness, that’s billions - which would impact the whole government’s budget, and no one is even pretending they know what will happen then.”
Mark Pelham
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News
Structured Finance
SCI Start the Week - 13 January
A review of securitisation activity over the past seven days
Transaction of the week
Goldman Sachs is marketing River Green Finance 2020, which is expected to be the first green European CMBS. The deal comprises four tranches totalling €186.39m, plus two as yet unsized X classes and is set to close on 29 January.
River Green Finance 2020 is a true sale transaction backed by a single loan secured by a single property located in Bezons, France – the River Ouest building. The office property is let predominantly to one tenant (Atos) and serves as the tenant's headquarters under a lease with approximately 10 years remaining until maturity. See SCI 8 January for more.
Stories of the week
Auto debut
Further credit union issuance anticipated
Landmark CLN finalised
Santander completes undrawn RCF trade
Leasing guarantee
EFL completes capital relief trade
US CRT webinar
SCI's webinar on the outlook for the US capital relief trades market is available to download. Click here to listen to Kaelyn Abrell of ArrowMark Partners, Mark Fontanilla of Mark Fontanilla & Co, Steve Gandy of Santander and Julie Gillespie of Mayer Brown discuss the structuring and regulatory implications of JPMorgan's Chase 2019-CL1 synthetic RMBS, and whether it could spur further risk transfer activity across a broader range of originators and asset classes.
Other deal-related news
- The Theatre (Hospitals) No. 1 and No. 2 CMBS deals are expected to be repaid in full on the January note payment date, following the sale of BMI Healthcare and related securitisation Propcos to Alabama-based REIT Medical Properties Trust (MPT). The transaction involves the acquisition of 30 acute care hospital facilities located throughout the UK for an aggregate purchase price of approximately £1.5bn (SCI 7 January).
- The US$44m Reserve At Southpointe loan, securitised in the FREMF 2016-K57 CMBS, was removed from special servicing last month. The property was one of the 20 Morgan Communities properties cited in the recent fraud case and was included in the JV between Morgan Properties and Morgan Communities (SCI 7 January).
- Moody's warns that, at current prices, Constellis Holdings' limited default could result in significant losses - realised or unrealised - for some CLOs. Over 200 CLOs the agency rates hold about US$600m of the firm's debt, including 20 deals that have exposure of over 1% and are expected to report an average par loss of 88bp (SCI 10 January).
- Oxalis Holding has transferred its role as master servicer in respect of the Pillar Finance non-performing loan ABS to Celidoria (SCI 10 January).
Data
BWIC volume
Secondary market commentary from SCI PriceABS
10 January 2020
USD CLO
Today saw 25 covers, mostly mezz – 1 x AAA, 3 x A, 8 x BBB, 12 x BB and 1 x B rated. The single-As traded 179dm-226dm with the tight end of the range the 2020 RP profile CIFC managed CIFC 2012-2RX B at 179dm / 4.3y WAL - trades tight to similar profiles in mid-200s area around year end. The 2023 RP profiles trade in a 216dm-226dm range which trade a shade tight to similar profiles around year end in a 226dm-236dm range.
With regards to BBB trades today, the 2023 RP profiles trade in a 304dm-347dm range which are tight to year end levels in mid 360s area. The 2022 RP profiles trade in wide dispersion 327dm-433dm range, with VENTR 2017-26A D (MJX) cover 433dm (lo-MVOC 109.46 and lo-MVAP 8.64, 5.8% sub 80 assets, -0.24 par build, 84bps ADR) with year end levels in 378dm context. The 2021 RP profile today trades 281dm.
In BB trading, 2024 RP profiles trade 629dm-763dm with another MJX bond propping up the wide end of a range, this time VENTR 2019-36A E at 763dm (lo-MVOC 104.75, lo-MVAP 4.53, -0.42 par build, 1.17% ADR) versus year end levels of 716dm for similar profiles, so today's tight end trades tight in this context. The 2023 RP profiles trade 584dm-640dm which are tight to year end levels of 657dm for similar profiles. The 2022 profiles trade 590dm-707dm versus year end levels of 683dm for similar profiles.
The single-B trade today is a 2022 RP profile OCT31 2017-1A F (Octagon) covers 999dm / 7.6y WAL, with similar profiles few and far between but recent liquidity has been in mid-late 900s context so this trade is in similar context.
With regards to generic levels, we observed 3bp tightening this week in >4y WAL AAAs to 115dm. In AAs there have been very few trades since Christmas but we have seen modest tightening of 11bps to 171dm. In single-As, mostly covered above but we have seen a significant amount of tightening with trading in early-mid 200s context versus 264dm around year end. BBB generic levels we have seen 36bps of tightening to 349dm. BB generic levels have tightened 3bps to 666dm since year end with a significant amount of liquidity ($210m) seen at this rating level since year end.
EUR/GBP ABS/RMBS
A few interesting trades in RMBS today. Two AAA Dutch Prime RMBS between 11dm and 14dm. Also two subordinate 1.0 RMBS trades. These are quite rare beasts, at least by public auction. ALBA 2007-1 F is a UK NC RMBS from 2007 originated by Oakwood Homeloans. It is an original BB which is single B now. At the moment the tranche paying down is the A3 which was the slow pay AAA!! We have calculated a spread for this trade, but really these type of deals need a deep dive to do them justice. Contact us for more details. Superficially however the spread is coming out at 345dm / 9.45yrs for the traded price of 98.38. The last record we have of this bond trading was in L50s in 2012.
BCJAF 7 D is also an original BB which is single B now. These mortgages were originated by Bankia. We calculate a spread of 100.42 / 246dm / 13.67yrs. This bond also traded in 50s in 2013 but it also traded at 99.13 in June 2018.
EUR CLO
Today we have 6 x BB, 2 x B & 2 x Equity. Most of the BBs traded in a range from 607dm to 634dm, but with a couple of outliers. The outlier on the tight side is ALME 4X ER (Apollo) which traded at 97.07 / 541dm / 6.39yrs. This deal is performing well; the WARF is low at 2859 and the CCC bucket is low at 1.23%. The outlier on the wide side is CRNCL 2016-7X E (Cairn) which traded at 99.75 / 662dm / 5.85yr. This deal is also performing well actually; WARF is 2937 and CCC bucket is 1.02%. OZLME 1X ER (Sculptor) traded at a premium (100.20) which is 607dm to mat or 604dm to first call in Dec 2020.
The single Bs traded LM800s DM. CLRPK 1X E is advertised as a 100h trade but it was probably in the L100h area. These spreads are a tightening from recent trades observed in the L900s DM area.
In equity OHECP 2017-6X SUB traded at 63.50 / 16.84% / 3.97yrs. This deal is just about to become callable but the AAA is paying a margin of 73bps so we haven't assumed any uplift due to refi. The collateral pool contains Lecta (Lux – paper supplier) which has defaulted. The junior OC cushion is quite low at 3.69%. CORDA 6X SUB traded at M50s / 13.42% / 4.2yr. This deal was reset in Apr 2018 and becomes callable in Apr 2020. Again the AAA margin is only 76bps. This deal also contains Lecta. This equity piece looks slightly lower levered than normal. Its thickness is about 13.8% whereas for OHECP 2017-6X SUB it is 10.3%. The equity has returned about 21% pa since its close in 2016. The yield on CORDA 6X SUB at 13.4% is certainly in line with recent EUR CLO equity yields but the yield on OHECP 2017-6X SUB at 16.8% is on the high side.
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
News
Capital Relief Trades
Consumer boost
Santander completes innovative SRTs
Santander has completed two synthetic securitisations of consumer loans. The transactions are the bank’s final consumer SRTs from 2019 and feature a number of innovations.
One of the transactions is a mezzanine trade consisting of a €66m senior mezzanine tranche (10.5%-16.5%) and an €88m junior mezzanine tranche (2.5%-10.5%). Dubbed SC Germany Consumer Synthetic 2019, the financial guarantee references a €1.1bn German portfolio. Both tranches have been structured with an average coupon feature.
According to Jeremy Hermant, structurer at Santander: “The stable average coupon feature for both placed tranches makes it an innovative transaction. Initially marketed as a single mezzanine tranche, it was ultimately split between a senior and junior mezzanine tranche, following investor feedback.”
He continues: “The tranches amortise on a pro-rata basis, but are subject to different subordination triggers, which could result in the senior mezzanine switching to sequential amortisation sooner. In order to prevent the cost of protection from increasing in that scenario, the coupons were structured in such a way so as to maintain stable weighted average levels, in line with regulatory requirements.”
Credit enhancement is present in the German deal in the form of a retained 2.5% first loss tranche. The portfolio weighted average life is equal to 3.2 years and there are triggers to sequential amortisation and a three-year replenishment period. Investors were drawn to the deal thanks to the low loss characteristics of the portfolio, the splitting of the mezzanine tranches and the ability to use financing.
The other transaction is a Skr768m CLN that references a portfolio of Swedish auto loans. Dubbed Svensk Autofinans Syn 1, the deal is Santander’s first capital relief trade to be denominated in Swedish krona. The transaction includes a 2.9-year weighted average life and a one-year replenishment period, as well as a time call. The tranches amortise pro-rata, with triggers to sequential.
Cash collateral is deposited with Santander’s consumer bank in Sweden. The deal’s structure incorporates collateral triggers, such as rating triggers that shift the collateral to a third-party account under a stress scenario.
The two transactions bring Santander’s total consumer SRT issuance for 2019 to approximately €700m, according to SCI data (see SCI’s capital relief trades database). This represents the largest consumer SRT issuance volume from any issuer in 2019 and a nearly €500m boost in Santander’s consumer SRT origination, compared to 2018 levels.
Market Moves
Structured Finance
Landmark quake bond closed
Sector developments and company hires
DLT legal analysis published
ISDA, Clifford Chance, R3 and the Singapore Academy of Law have published a new whitepaper that provides analysis on the legal issues relating to the use of smart derivatives contracts on distributed ledger technology (DLT). Given the inherent uncertainty about where data, assets and even counterparties are located in a DLT environment, a key question is how to determine which law applies to these relationships and assets, and what should happen when there are conflicts of governing law. The paper therefore explores choice of law and enforceability, as well as the use of digital assets. Overall, it recommends that parties are permitted to agree on a common ‘law of the platform’ – a uniform choice of law that the parties agree will govern all transactions conducted on the DLT platform.
EMEA
Funding Circle has appointed James Crispin director, capital markets - ABS and institutional sales. He was previously head of European structured products group (SPG) syndicate at JPMorgan and before that was vp - European SPG syndicate at Merrill Lynch and head of European SPG research at Credit Suisse.
Mortgage quake bond closed
Swiss Re has closed Sierra 2020-1 on behalf of Bayview's MSR Opportunity Fund. The US$225m catastrophe bond is the first to be issued under Rule 144A with a parametric trigger that is designed to cover mortgage default risk caused by earthquakes in California, Oregon, Washington and South Carolina. The two-tranche transaction issued by Sierra, a Bermudan SPV, has a three-year risk period and provides protection using data provided by the US Geological Survey.
Jean-Louis Monnier, head of retro & ILS structuring of Swiss Re's Alternative Capital Partners, says: “Parametric solutions help speed up the claims process, while offering greater transparency to investors. This landmark transaction underscores the potential of the capital markets in helping to reduce the hedging gap and build resilience against uninsured risks prevalent in the US mortgage markets.”
Swiss Re Capital Markets acted as the sole structuring agent on the transaction and was also joint-bookrunner alongside Goldman Sachs.
Market Moves
Structured Finance
Hong Kong ABS recommendations released
Sector developments and company hires
Alternative risk transfer
Arthur J Gallagher has increased its interest in Capsicum Reinsurance Brokers from 33% to 100%. Capsicum Re launched in December 2013 through a strategic partnership with Gallagher. There are no management changes as a result of the deal.
Gilles Dellaert, former co-president and cio of Global Atlantic, has been appointed global head of Blackstone Insurance Solutions (BIS) effective 1 April. The BIS platform will operate under David Blitzer, global head of Blackstone’s tactical opportunities business. Dellaert served as Global Atlantic’s chairman of the investment committee, with responsibility for investment and reinsurance activity across the life and annuity businesses. He previously worked in Goldman Sachs’ credit trading and reinsurance businesses, and spent two years with JPMorgan in Brussels, London and New York.
APAC
ING has named Jordan Batchelor director, Asia Pacific, within its global securitisation business. Batchelor was previously a director, structured capital markets at ANZ in Sydney, where he’d been employed since November 2009.
Hong Kong report released
The Asia-Pacific Structured Finance Association, the Hong Kong Institute of Bankers and the Asian Academy of International Law have jointly published a report offering specific recommendations on how to enhance Hong Kong's financial ecosystem to deliver institutional investment capital through securitisation to key sectors of the economy, such as infrastructure and SMEs. Entitled ‘Hong Kong - a Securitisation Financing Hub for Infrastructure and Small and Medium Enterprises’, the report suggests that the city needs to focus on three core areas in order to establish itself as an international securitisation hub: making available data and information about prior successful securitisation transactions; creating a marketplace for professionals; and implementing laws, regulations, tax rules and market infrastructure to support a robust securitisation market. It also stresses that the path towards establishing Hong Kong as a securitisation financing hub requires the collaboration of multiple stakeholders, including policymakers, regulators and professionals from the finance, legal, accounting, engineering, management and investment sectors.
Market Moves
Structured Finance
Aircraft equity investment disclosed
Sector developments and company hires
Aircraft equity investment
Floreat has disclosed that it invested US$25m in the equity certificates of Air Lease Corporation’s recent Thunderbolt III aircraft ABS. The securitisation is secured by a portfolio of 19 commercial aircraft on operating lease to 18 airlines in 15 countries. The airlines are diversified globally and over half are national flag carriers, including Vueling, Air France, China Airlines and Aerolineas Argentinas. The structure includes two series of fixed rate notes, as well as equity certificates. Mizuho Securities USA acted as global coordinator and joint lead structuring agent and bookrunner on the deal.
Legal moves
Carey Olsen Bermuda has named Michael Frith senior counsel - md within its corporate practice. Formerly a director of Conyers, he specialises in all aspects of Bermuda corporate law, with a particular focus on insurance/reinsurance regulatory and transactional matters, including ILS.
Together Financial Services has recruited Sam Krivinskas as senior legal counsel - treasury, initially based in London before relocating to the group’s head office in Cheadle, Cheshire. Krivinskas joins from Credit Agricole, where she was senior legal counsel and director in the structured products and derivatives legal group. Prior to this, she was vp in Credit Suisse’s structured financing and securities legal team.
Market Moves
Structured Finance
FFELP transition legislation mooted
Sector developments and company hires
Call for FFELP solution
The SFA has joined the Education Finance Council (EFC) in calling for wholesale legislation to smoothly transition FFELP student loans and the related subsidy away from Libor, to avoid potential disruption to over US$277bn of loans spread across 13 million borrowers. The EFC is working on a legislative solution that would transition the subsidy - called the Special Allowance Payment - paid to lenders on student loans originated under FFELP away from Libor. EFC has two main concerns: the impact of the Libor replacement on legacy FFELP ABS bonds that pay a Libor-based floating rate coupon; and the impact on cashflow generated by Libor-based FFELP Special Allowance Payments.
Libor transition at different speeds
A new Moody’s report suggests that structured finance markets are transitioning from Libor to a new set of global reference rates, which are less volatile in stressed credit environments but can be affected by the supply of and demand for collateral. However, it notes that markets are moving at different speeds. Most UK issuance in 2020 will be based on Sonia, for example, while the transition to Sofr in US securitisations has been limited so far.
North America
Christopher Giancarlo, former chairman of the US CFTC, has been appointed independent, non-executive chairman of Common Securitization Solutions (CSS). Concurrently, CSS will amend the structure of its board to provide Anthony Renzi – who was appointed CSS ceo last month - a seat on the board and allow FHFA to appoint up to three additional independent directors. Fannie Mae and Freddie Mac will each retain their two current board seats. Giancarlo is senior counsel to Willkie Farr & Gallagher and serves as a board member of the American Financial Exchange (AFX) and a member of the advisory board to the Chamber of Digital Commerce.
Market Moves
Structured Finance
'No Data' threshold consultation underway
Sector developments and company hires
C-PACE partnership
Eyzenberg & Company and Greenworks Lending have formed Eyzenberg Green Capital, a partnership dedicated to funding commercial real estate transactions through commercial PACE. Eyzenberg Green Capital is a direct balance sheet provider, with significant lending capacity. The aim is to achieve a low cost of capital for C-PACE financing, supported by permanent capital and multiple funding outlets.
‘No Data’ consultation
ESMA has published a consultation paper that aims to help market participants and securitisation repositories understand its expected maximum use of ‘No Data’
options contained within a securitisation data submission. The ‘Guidelines on securitisation repository data completeness and consistency thresholds’ outline an initial calibration of thresholds to be applied by securitisation repositories when verifying the completeness and consistency of disclosure templates submitted to them under the technical standards (TS), recently published by the European Commission, that set out the key elements of the disclosure obligations for securitisation transactions and the operational standards of securitisation repositories. The consultation is open until 16 March and ESMA aims to publish a final report on the guidelines as close as possible to the publication of the TS in the Official Journal.
North America
Cassin & Cassin has bolstered its agency lending, CMBS and balance sheet lending practices with the hiring of four associate attorneys. Jeremy Doster, Jordi Kushner and Alison Mackenzie will be based in the firm’s New York City office, while David Hall joins its Purchase, New York office. Doster rejoins Cassin’s CMBS and balance sheet lending practices, having previously worked at the firm from 2013 to 2015. Kushner joins the agency lending practice from Platzer, Swergold, Levine, Goldberg, Katz & Jaslow, while Mackenzie joins the CMBS and balance sheet lending practices from Cerberus Capital Management. Hall joins Cassin’s CMBS and balance sheet lending practices, having previously worked at Hughes, Hubbard & Reed and Rosenberg & Estis.
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