Contents

Capital Relief Trades

EBA reports pending

Trapped excess spread requirement could be dropped

The EBA will finalise its approach to significant risk transfer this year through the publication of the final SRT report and another consultation in the second quarter. The requirement for a trapped excess spread mechanism for synthetic securitisations will most likely be excluded from the final SRT report, although the regulator notes that synthetic excess spread is a form of credit enhancement that needs to be capitalised.

According to Christian Moor, principal policy officer at the EBA: “The trapped excess spread mechanism was included in the SRT discussion paper in 2017 as a way to capitalise the excess spread in synthetics because excess spread is a form of credit enhancement and you need to capitalise it. It’s a question that we are still discussing. Synthetic excess spread could also raise SRT issues for the commensurate risk transfer tests.”

According to the original proposal from the 2017 paper, excess spread not absorbed by losses during a given year should remain trapped in the transaction in the form of a funded reserve account, available to absorb losses in future years. The issue with the trapped mechanism is that it renders SRT transactions less efficient, since it forces issuers to recognise excess spread as a securitisation position that is then subject to a 1250% risk weight.

This effectively means a full capital charge, plus deduction from CET1 ratios. The latter happens to be a requirement of the UK’s PRA, although European supervisors have taken a more conciliatory approach (SCI 1 November 2019).      .

Indeed, at the moment, there is no harmonised treatment for excess spread - which is what the EBA’s final SRT report will try to address, among other issues. The main question from the regulator’s perspective is how to ensure that excess spread isn’t too high for the purposes of meeting the commensurate risk transfer tests.

The final SRT report was delayed following the publication of the discussion paper on significant risk transfer in 2017, due to the introduction of the STS regime. Consequently, the EBA postponed the publication to January 2021. The regulator has been working on it for three months and it features three sections.

The first section will focus on process issues, such as the communication between banks and supervisors, as well as reporting requirements. The second part will address the topic of significant and commensurate risk transfer, where a harmonised approach to excess spread will be proposed. The final part will delve into the structural features of SRT trades, such as pro-rata amortisation, credit event definitions and early termination events.

“The commensurate risk transfer tests will essentially be comparing retained and transferred risk, as well as the formulation and calibration of the tests, along with how excess spread is considered in that test. The tests are very difficult to formulate, but we are working on it and there will be clarity by year-end,” says Moor.

Another question that remains unanswered pertains to ESMA’s securitisation disclosure requirements (SCI 2 December 2019). Moor comments: “Confidentiality shouldn’t be a problem, although we acknowledge the fact that the scope of the application of the rules is a problem, since it’s unclear whether non-EU entities should comply. We’ve never had to deal with cross-sectoral product regulation.”

Looking ahead, he concludes: “When it comes to due diligence, you need information, so what is the reasonable information that third-country originators should provide? Should it have similar information with the ESMA templates, such as loan-by-loan data, or should one take a more principle-based approach if the loans are granular enough? We know that it’s a tough legal and political question, but the Commission is expected to issue a clarification this year.”

Stelios Papadopoulos

Structured Finance

Tightening trend

European ABS market update

Appetite for European ABS paper continues to be strong. The market is currently characterised by a dearth of supply, despite tightening spreads.

“Spreads are tighter than where they were at the start of the year,” one trader says. “Yet primary and BWIC supply seems to be  slowing down.”

Only a couple of deals remain in the pipeline and refinancings – like the recently priced Towd Point Mortgage Funding 2020-Auburn 14 RMBS – continue to account for a portion of the supply.  

The Towd Point UK buy-to-let print was also notable for placing only two (the class B and C notes) out of four of the mezzanine tranches, albeit at tighter spreads than the IPTs. Cerberus retained the class D and E notes, while the senior tranche was pre-placed.

According to the trader, a potential reason behind this decision could be that the seller decided to “keep some of the bonds to earn a decent return”, and not because the levels were not perceived as being good enough. As the coverage levels dropped before pricing, the trader suggests that the IPTs for this deal may have been considered too “ambitious” by some investors.

Jasleen Mann

Structured Finance

SCI Start the Week - 3 February

A review of securitisation activity over the past seven days

Transaction of the week
Goldman Sachs has completed an unusual catastrophe bond that covers the tail risk that State National Insurance Company is exposed to through its insurance agreements with ILS manager Nephila Capital as capacity provider. Principal reduction of the notes under the transaction - dubbed Stratosphere Re Series 2020-1 - can only be triggered after at least two industry insured loss events each greater than US$5bn occur within a single annual risk period. See SCI 27 January for more.

Stories of the week
Equity increase
Aircraft ABS volumes powering rise in growth of equity notes
Grasshopper up
Landmark green SRT finalised
Ramping up
BlueBay bolsters structured credit footprint

Other deal-related news

• The US SEC has obtained a court order authorising the distribution of over US$63m to investors in connection with its action filed against Robert Morgan and two of his entities, Morgan Mezzanine Fund Manager and Morgan Acquisitions, that alleged they engaged in a fraudulent real estate investment scheme (SCI 27 January).
• TCA Fund Management Group is liquidating its main credit hedge fund, TCA Global Credit Master Fund, after the fund received redemption and withdrawal requests in excess of available cash. The redemptions come amid a US SEC probe into the firm's accounting practices (SCI 27 January).
• During its recent 4Q19 earnings call, Sallie Mae announced plans to sell US$3bn of student loan assets to fund US$600m authorised share buyback (SCI 28 January).
• The first-ever CLO applicable margin reset executed online - via KopenTech's auction platform - saw all five tranches of TCW 2019-1 CLO refinanced successfully (SCI 31 January).
• Gedesco Finance and Toro Finance are in the market with Gedesco Trade Receivables 2020-1, a revolving securitisation backed by factoring, promissory note and short-term loan receivables extended to enterprises and self-employed individuals located in Spain (SCI 31 January).
• The CFTC, FDIC, OCC, SEC and US Fed have approved a proposed rule to revise the 'covered funds' provisions of the Volcker Rule. Comments must be received by 1 April (SCI 31 January).

Data

BWIC volume

Secondary market commentary from SCI PriceABS
31 January 2020
USD CLO
A quieter end to the week with 7 reported covers across IG and sub-IG - 2 x AAA, 1 x A, 3 x B and 1 x Equity. The AAAs were both short daters with trading levels 85dm / 1.7y WAL and 90dm / 3y WAL. The single-A ARES 2014-1A BR (Ares) covers 211dm / 3y WAL (2018 RP profile) which is wide to the last 2018 comp GALXY 2018-29A C (Pinebridge) 2 weeks back 174dm despite much better MV metrics, but has a higher ADR 0.58% (v 0.1%), higher sub80 exposure 3.42% (v 1.3%), higher WARF 3225 (v 2863), lower diversity 57 (v 71) and lower par build -1.5 (v -0.53).
The single-Bs are all 2018 RP profiles trading in a 691dm-970dm range - at the tight end is OFSBS 2014-7X F (OFS) 691dm / 4.5y WAL (105.2 MVOC / 4.91 MVAP / 1.17 ADR) whilst at the wide end are CVPC 2014-2A D (Credit Value) and AVERY 2014-1A E (Bain Cap) trading 970dm/922dm / 4y WAL with much weaker MV metrics driving the softer levels (MVOCs 101-102 / MVAPs 1-2) as well as higher ADRs 1.5-1.7% with the latter metrics also having a pronounced effect given their proximity to loss as second loss tranches.
We modelled OCT37 2018-2A SUB (Octagon) to a yield of 9.97% / 4.7y WAL at a cover of 75.5 cash price (NAV 61.3) and to a call of EoRP+24m (EoRP is 2023) and applied asset level haircuts (with the 8 defaulted assets modelled to recover 18m and immediate default - including notably 2 x Constellis Cov-Lite TLs due 2024 $1.7m at MV 27.75. The deal has a relatively high ADR 1.25%, 2.7% sub 80 priced assets exposure and WARF / Diversity are healthy at 2748 and 76 respectively.
In terms of secondary market spread direction week on week, >4y WAL AAAs have tightened 5bps on the week to 107dm. AAs at the shorter end have softened with 2019 RP +5dm (145dm) and 2020 RP +13dm (163dm) on the week, at the longer end, 2022 RP -1dm (169dm) and 2023 RP -1dm (167dm). Single-As have firmed across most RP profiles, eg. 2019 RP -11dm (180dm) at the short end and 2022 RP -28dm (223dm).
Triple-Bs have widened across most maturities, at the short end (2019 RP +24dm to 311dm ) and longer end (2023 RP +25dm to 347dm). Double-Bs have widened across all maturities/RP profiles, at the short end 2019 RP +125dm to 779dm and long end 2023 RP +12dm to 698dm. Single-Bs have also widened across all maturity profiles, 2019 RP +140dm to 935dm and 2022 RP +112dm to 967dm, whilst 2023 RP profiles are relatively stable +4dm to 886dm.
EUR CLO
Quiet end to the week. There are 3 x BB & 1 x equity. The three BBs all have a margin of 566bps to 575bps which is where new issues are pricing. They have all traded around 100.50 which is around 590dm|mat which is about 10bps tighter than new issue DM. None of them have an immediate call risk with the first call coming between 0.5yrs to 1.5yrs. If they did get called the buyer would be getting between 500dm and 580dm for the short WAL.
HARVT 7X SUB traded at 46.50 / 14.99%. Its NAV is 44. It contains Prezzo Restaurants which is in CVA. The deal is refinanceable now and the AAA pays a margin of 92bps so there is some value there, which would mean its yield excluding refi value is even higher.
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 - 7 February

CRT sector developments and deal news

Bank of Scotland (BOS) is in the market with Syon Securities 2020, its second UK mortgage SRT (SCI 25 July 2019). The £550m reference portfolio comprises prime owner-occupied loans with LTV ratios in excess of 90% but less than or equal to 95%, originated between September and December 2019. The rated CLNs are exposed to the first 15% of losses on up to a 95% vertical slice of the reference portfolio, as defined by a financial guarantee between the issuer and BOS.

Meanwhile, Mediobanca is readying a capital relief trade that is expected to close this year. The transaction will be the issuer’s first risk transfer transaction (see SCI’s capital relief trades database).

Capital Relief Trades

Syon Securities priced

Bank of Scotland engineers return

Bank of Scotland has priced a seven-year financial guarantee that references a £550m portfolio of UK owner-occupied residential mortgage loans. Dubbed Syon Securities 2020, the risk transfer transaction is the bank’s second from the programme following the inaugural SRT last year (SCI 25 July 2019).

Rated by Fitch and KBRA, the transaction consists of £18.75m A-/A rated class A notes (which priced at SONIA plus 210bp), £22.50m BBB-/BBB rated class B notes (SONIA plus 260bp), £13.75m BB-/BB rated class C notes (SONIA plus 325bp) and £20m unrated class Z notes. The £425m senior tranche has been retained.

The principal is paid pro rata from closing as the reference pool amortises and sequentially, should the pro rata condition be breached. Pro-rata amortisation ceases if the ratio of the balance of all loans greater than 90 days in arrears to all loans in the reference pool exceeds 1.5%. Losses are allocated in reverse sequential order, commencing with class Z.

According to Fitch, key rating drivers include the high concentration of first-time borrowers, which account for 76.8% of the pool. Furthermore, under the financial guarantee, the issuer provides Bank of Scotland with protection from losses of accrued interest, as well as principal, and the deal is exposed to Bank of Scotland as account bank provider.

Synthetic securitisations of both UK and European mortgages are highly unusual, with the bulk of SRTs consisting of corporate and SME loans (see SCI’s capital relief trades database). The lowest risk weight available in the securitisation regime under the CRR is typically higher than mortgage risk weights, so capital relief is generally not available at an acceptable cost of capital, if that is the primary motivation.

Consequently, banks would normally aim for accounting de-recognition through the sale of a mortgage portfolio, when seeking to manage capital or leverage. However, for Syon Securities, the primary motivation is prudent risk management within the context of providing support for first-time buyers - thereby rendering regulatory capital considerations less relevant in the decision-making process.

The transaction was originated under the Halifax brand and is secured over properties located in England, Wales and Scotland. It includes loans with LTVs higher than 90% but less than or equal to 95% (SCI 7 February).

Fixed-rate loans account for 99% of the pool, all of which revert to Halifax’s Homeowner SVR on expiry of the fixed-rate period. The rest of the pool pays a floating interest rate at a margin above the Bank of England base rate. Loan reversions are concentrated in 2021, which reflects the predominance of the two-year fixed product in this pool.

Lloyds acted as the arranger on the transaction.

Stelios Papadopoulos

CMBS

Investment grade debut

Landmark post-crisis CMBS announced

Citi, Deutsche Bank and JPMorgan are prepping a post-crisis ‘first of its kind’ US CMBS. Dubbed Benchmark 2020-IG1, the US$660m transaction is collateralised by 13 non-controlling pari passu participations of fixed rate loans, secured by 45 properties. When analysed separately, each participation demonstrates investment grade credit characteristics.

KBRA notes that all loans will be serviced outside of the trust by the related master servicer under a separate PSA for other securitisations. None of the loans will be primary serviced under the PSA, aside from a servicing shift mortgage loan, which is being serviced by the master servicer prior to the servicing shift securitisation date.

Unlike most conduit CMBS, this transaction does not contain an operating advisor or directing holder (aside from directing holders for the non-serviced PSAs). In addition, the master servicer is not required to make property protection advances.

Property protection advances will be made by the master servicer for the transaction that the loan is being serviced under. However, the special servicer can make these advances in an emergency.

Rated by Fitch and KBRA, the transaction comprises US$42.75m AAA/AAA rated class A1 notes, US$47.5m AAA/AAA rated class A2 notes, US$348.65m AAA/AAA rated class A3 notes, US$122.55m AAA/AAA rated class AS notes, US$35.72m AA-/AA- rated class B notes, US$14.63m A-/A- rated class C notes, US$15.2m NR/BBB- rated class D notes, US$561.45m AAA/AAA rated class XA notes and US$35.72m AA-/AAA rated class XB notes.

Though the collateral properties are located in eight states, New York (accounting for 48.5%), Washington (16%) and California (13.6%) represent the top three. The top three major property types include office (48.9%), retail (15.9%) and mixed use (14.1%).

The principal balances of the loans range between US$37.9m and US$64.7m. The largest loan in the pool is 1633 Broadway (9.8%), which is secured by a US$2.6m class A CBS office building in the Midtown neighbourhood of Manhattan.

Altogether, the five largest loans represent 43.2% of the initial pool balance. This includes F5 Tower (8.4%), Bellagio Hotel and Casino (8.3%), Kings Plaza (8.3%) and 1501 Broadway (8.3%).

Eleven of the loans (85.6%) have a 10-year term and the remaining two loans have a five- and seven-year term.

Arrangers on the transaction were Academy Securities, Citi, Deutsche Bank, Drexel Hamilton and JPMorgan.

Jasleen Mann

NPLs

HAPS flurry

Greek NPL ABS pipeline grows

Piraeus Bank is set to securitise €7bn of non-performing loans in 2020. The lender is the latest to announce its intention to take advantage of Greece’s recently approved Hercules asset protection scheme (HAPS).

According to Piraeus: “The Hellenic Asset Protection Scheme ‘Hercules’ is a tool that will provide additional support to Greek banks to speed up our de-risking initiatives. It’s a bolt-on tool aligned with our NPE reduction plan. In this context, Piraeus Bank will frontload its inorganic NPE reduction effort to 2020 and proceed with circa €7bn of securitisations.”

HAPS is similar to Italy’s GACS, in that the Greek state provides a guarantee for securitised NPLs but will be remunerated in line with market conditions for the risk it assumes. The European Commission approved the scheme last year (SCI 11 October 2019). 

Piraeus intends to frontload its NPE reduction by €11bn in 2020 from €7bn previously on the back of HAPS. The lender aims to cut its NPE ratio to 15% of its total loan book in 2022, from 49% last year, and to a single digit by 2023.

The strategic partnership with Intrum Hellas that was sealed in June 2019 is expected to enhance Piraeus’ NPE recovery prospects. According to the terms of that agreement, Intrum purchases the bank’s servicing platform, which is then hived-off into a separate €410m legal entity dubbed NewCo. Intrum then fully consolidates the entity and owns 80% of it (SCI 4 June 2019).

National Bank of Greece (NBG) last year kick-started the trend for large Greek lenders to announce NPL securitisations in anticipation of the Commission’s approval of HAPS and following revelations of a government programme for subsidising mortgage NPL payments (SCI 22 February 2019). NBG disclosed in May 2019 that it would securitise €3bn of non-performing mortgage loans by 2022 (SCI 20 May 2019).

Eurobank followed later in the same month with a €2bn secured residential mortgage portfolio, dubbed Pillar Finance (SCI 31 May 2019). Alpha Bank’s announcement of its €12bn Project Galaxy ensued in November (SCI 20 November 2019).    

Stelios Papadopoulos

Structured Finance

Crestline Denali CLO interests acquired

Sector developments and company hires

Additional CLOs for Ares
An Ares Management Corporation subsidiary is set to acquire a managing interest in a restructured Crestline Denali Capital that will result in the addition of seven CLOs totalling US$2.6bn of assets under management to the Ares portfolio. Crestline Denali will retain its equity interest in its CLOs. Ares believes that the all-cash transaction will strengthen its leading global CLO franchise and increase its CLO assets under management by US$2.6bn without the assumption of any debt or headcount. The transaction is expected to close in 1Q20 and is subject to customary closing conditions.

North America
Bernard Van der Stichele has joined Healthcare of Ontario Pension Plan (HOOP) as ILS portfolio manager, based in Toronto, Canada. He previously founded Whitebox Analytics and before that had senior roles at AlphaCat Managers, Guy Carpenter and AQR Capital Management. He began his career as assistant portfolio manager at Ontario Teachers’ Pension Plan, where he established its first ILS investment portfolio.

SCOR case to proceed
In a judgment delivered on 30 January, the London High Court of Justice dismissed Barclays’ application to stay proceedings brought by SCOR, which can now progress. SCOR last year initiated criminal and civil proceedings in France against Thierry Derez and Covéa, as well as civil proceedings in the UK against Barclays, to remedy the alleged misconduct resulting from the unlawful misappropriation and use of SCOR's confidential documents and information, which Derez had access to as a director of SCOR. The SCOR group considers that this misconduct was committed with the aim of wrongfully favouring the preparation and submission by Covéa of its unsolicited takeover proposal for SCOR. In the UK proceedings initiated by SCOR against Barclays for breach of confidence and trade secrets, SCOR claims that Barclays obtained from Covéa information that was highly confidential and sensitive to SCOR and demands that Barclays stop using the documents and hand them over. Barclays had asked the Court for a stay until the judgment of the Paris Criminal Court in the criminal proceedings initiated by SCOR against Derez and Covéa. The judgment of the London High Court points out that there would have been "substantial prejudice to SCOR" if these proceedings had been stayed, as SCOR would have been "deprived by a stay of disclosure and potentially witness evidence”, which will enable them to determine the extent of any breach of confidence by Barclays and Derez. The criminal trial in connection with Covéa's unsolicited takeover proposal for SCOR – respectively for breach of trust and concealment of breach of trust – is scheduled to take place on 5 and 6 May before the Paris Criminal Court.

Structured Finance

Advisor picked to help end GSE conservatorship

Sector developments and company hires

Acquisition
Link Group has signed an agreement to acquire Pepper European Servicing from Pepper Group for an upfront consideration of €165m. The meeting of AUM thresholds and growth milestones could trigger an additional consideration of €35m. The acquisition will deliver immediate scale for Link Group’s banking and credit management division in existing and new jurisdictions, and does not impact on the services provided to residential or commercial customers serviced by PES whose terms, conditions and contact points all remain the same. The acquisition is subject to regulatory approvals and is expected to be completed in 2H20. Combined, the businesses will have approximately €130bn of AUM and employ over 1,800 people.

GSE advisor named
The FHFA has selected Houlihan Lokey Capital as a financial advisor to assist in the development and implementation of a roadmap to responsibly end the conservatorships of Fannie Mae and Freddie Mac. While developing the roadmap, Houlihan Lokey will consider business and capital structures, market impacts and timing, and available capital raising alternatives. The contract amount for the first year is US$9m and the FHFA has options to extend for an additional 4.5 years, with the total contract not to exceed US$45m.

North America
Sound Point Capital Management has appointed Francis McCullough as global head of CLO capital markets and structuring. McCullough joins Sound Point from Deutsche Bank, where he spent the past 16 years, most recently as md and global head of new issue CLOs. While at Deutsche Bank, McCullough worked in both New York and London and was responsible for originating, structuring and syndicating CLOs.

Structured Finance

Rating agency shuffles senior US staff

Sector developments and company hires

EMEA
Pan-European special situations and credit trading lawyer Justin Conway has joined McCarthy Denning as a partner in its banking and finance department. Conway, a dual-qualified solicitor in both England and Wales and New Zealand, was previously a partner at Jones Day. He has extensive experience in advising clients on all aspects of debt, investment and loan portfolio trading across key international markets.

Mizuho International has hired nine staffers within its European fixed income business. Among the new recruits are Sara Famouri, who has joined the securitised product sales team and will focus on developing the global franchise for the EMEA client base. Famouri was most recently at Wells Fargo, where she worked in the ABS sales team. Mikey Nguyen has also joined Mizuho as a trader in the structured trading and financing team. He will be focusing on growing the bank’s structured financing activity, in collaboration with other Mizuho entities. Nguyen joins from Deutsche Bank, where he was responsible for credit solutions and liquid asset financing.

North America
Fitch has appointed Kevin Kendra as its new head of US RMBS and Derek Miller as its new head of US structured credit. Both analysts will report to North American structured finance and covered bond group head Rui Pereira. Concurrently, former US RMBS head Grant Bailey steps into a new global role building on Fitch's agenda for thematic research, enhanced analytics and criteria that cut across securitised asset classes and regions. Bailey will report to global head of structured finance and covered bonds Marjan van der Weijden.

Structured Finance

GSE Libor transition deadlines released

Sector developments and company hires

ECOWAS prepping ABS
The Commission of the of the Economic Community of West African States (ECOWAS) and the World Bank are developing a securitisation of payments related to the cross-border power trade in West Africa. In order to address the low access of the West African population to electricity, ECOWAS member states are pooling efforts through the development of an integrated regional electricity market. The ECOWAS Directive C/DIR/2/12/18 sets out the requisite measures, which were approved in December 2018 and became effective from 1 January 2020. To support this process, the World Bank is examining two options: the development of a liquidity enhancing revolving fund, focused on electricity trade in the region; and a World Bank regional budget support programme, focused on advancing the reforms needed to implement the new ECOWAS Directive.

GSE transition underway
Fannie Mae and Freddie Mac have disclosed the additional steps they’re taking as they transition from Libor. These steps include: new language for single-family Uniform ARM instruments closed on or after 1 June 2020; all Libor-based single-family and multifamily ARMs must have loan application dates on or before 30 September 2020 to be eligible for acquisition; and acquisitions of single-family and multifamily Libor ARMs will cease on or before 31 December 2020.

Millennium Health case eyed
A federal district court in New York is currently hearing a case to determine if syndicated term loans are securities under US federal and state Blue Sky securities laws. The case (Marc Kirschner vs JPMorgan Chase Bank) came about when borrower Millennium Health in a widely syndicated loan went into bankruptcy. The bankruptcy trustee to certain trusts formed as part of the bankruptcy restructuring brought suit against the lending syndicate - including JPMorgan, as one of the lead arrangers - alleging the lenders misrepresented the information provided to the trust’s beneficiaries to determine if they wanted to participate in the Millennium syndicate. The trustee asserts that JPMorgan sold its participation of a loan to Millennium, which they were aware was having substantial economic and legal difficulty. A Reed Smith memo notes that should the court rule in the trustee’s favour and declare that loans are securities, Volcker Rule restrictions would prevent banks from purchasing notes from the CLOs that hold such participations.

North America
Basis Investment Group founder and ceo Tammy Jones has been appointment chair of the Real Estate Executive Council (REEC), a trade association formed to promote the interests of minority executives doing business in the commercial real estate industry. She is the first female chair of the association and succeeds Accordia Partners managing partner Kirk Sykes. Since its inception in 2003, REEC has grown to include over 110 members with careers allied to investment, management, leasing, financing and property development. James Simmons, ceo and managing partner of Asland Capital Partners, will serve as vice-chair.