Contents

CLOs

Equity issue

Loan repricing expectations weigh heavy on CLOs

The widely expected wave of loan repricing is weighing heavily on the CLO market. Equity investors and managers alike are having to face up to harder times ahead.

“Loan repricing matters a lot in equity, but it’s not a huge issue further up the stack,” says Craig Bergstrom, managing partner and cio at Corbin Capital. “It’s potentially negative for equity returns, but it’s surprising to us that it would be a major cause for concern for investors at the bottom of the debt stack.”

He explains: “For the last year and a half, equity has continued to have high cash-on-cash returns, but the arb is challenging. Nevertheless, with brief interludes, new CLO issuance continues and reduces it further. So, the interest in equity is particularly puzzling at a time when there is idiosyncratic risk in evidence across the market and even down to the individual deal level, making for a pretty tough environment for CLO equity and selectively junior mezz.”

As a result, Bergstrom says: “We are seeing weaker returns, at least compared to historic levels – we’re talking mid-to-high single digits, which is a far less attractive proposition than it was a year or so ago. And now if there is a big loan repricing, that would make it that much less attractive again.”

Miguel Ramos Fuentenebro, co-founder of Fair Oaks Capital, agrees and adds: “It’s even more difficult with older transactions, where a repricing wave is going to have two major impacts. First, weighted average spreads will go down, compromising the arb and any remaining future cashflows. Second, weighted average price and residual NAV will also fall just by refinancing the loans back to par.”

Consequently, Ramos Fuentenebro believes a stricter fundamental approach from managers is necessary. “Base case analysis has to add repricing risk to the traditional credit risk analysis,” he says.

While extensive loan repricing is cause for concern for equity investors, it could be positive for debt tranche holders. That, in turn, might offer equity a glimmer of hope – albeit an unlikely one, according to Bergstrom.

“If the CLO debt stack were to tighten materially, that could make equity more attractive again,” he says. “However, I doubt we’ll see that from internal market drivers alone, because there is so much dedicated CLO equity money still available. Less likely is some kind of exogenous credit event which impacts the market, but we’ve not seen a hint of anything of late of such magnitude to sufficiently impact CLOs.”

Mark Pelham

Capital Relief Trades

Risk transfer boost

CRT issuance breaks record

Capital relief trade issuance broke a record in 2019, with volumes reaching €7.5bn. This marks the highest total tranche notional volume in the post-crisis period, surpassing the previous record set in 2017.

According to SCI data, total tranche notional volumes for 2019 reached €7.5bn, compared to €6.6bn and €6.7bn for 2018 and 2017 respectively. Multiple CRT investors though estimate the figure at €9bn-€11bn, once the more private bilateral deals are taken into account.

Last year’s issuance received a boost in the second and third quarters, as banks needed time to adapt to ESMA’s securitisation disclosure requirements in 1Q19 (SCI 2 December 2019). “The updated regulatory requirements dampened activity somewhat in 1Q19, as issuers where in the process of adaptation, but the market had largely done so by the second quarter. On top of that, the credit environment remains supportive of junior credit risk,” says Robert Bradbury, head of structuring and advisory at StormHarbour.

The ever-higher capital requirements of the post-crisis period remain the dominant driver. Kaikobad Kakalia, cio at Chorus Capital, remarks: “Several reasons explain the growth in issuance. Basel 4 is two years away, so many banks are expecting significant RWA uplifts, regulatory approval processes are now more streamlined and there is regulatory support for risk-sharing transactions.”

He continues: “Additionally, European banks’ profitability issues due to negative rates remain a challenge, so organic capital growth is weak – and, with shares trading below book value, raising equity becomes difficult. Risk-sharing therefore remains an interesting option for capital management, especially when you factor in marginal dilution and an attractive cost of capital.”

However, the growth in issuance hasn’t been matched by any significant changes in pricing. Credit spreads have tightened a bit further - partly due to a flurry of predominantly full-stack consumer deals - but investors still point to a 7%-11% range over a two-year period.

Bradbury explains: “This is partly due to the market remaining relatively private with a relatively small investor base, resulting in pricing which is less sensitive to spread movements than the broader credit market for equivalent risk. The typical funded investors in this space have specific return requirements and this is a major driver of pricing. Unless the wider market changes materially, the effect on pricing is generally more subdued.” 

Indeed, “capital relief trades are a bespoke market that offers an illiquidity and complexity premium; they don’t tend to move with the broader market,” comments Kaelyn Abrell, partner and portfolio manager at Arrowmark Partners.

Similarly, Brandon Kufrin, senior portfolio manager at Cairn Capital, notes: “Regulatory clarity and attractive pricing have driven SRT volumes. Pricing has been generally stable for bilateral transactions and those referencing lumpy portfolios, but pricing on syndicated deals and those referencing granular portfolios have tightened over the past 12-18 months.”

Arguably, the most important structural development of 2019 was thicker tranches for CRT deals, following the introduction of the new Securitisation Regulation last year. According to Integer Advisors, the average ratio of placed tranches to portfolio notionals in Europe was around 7%. More recently though, the ratio has risen to the 10-11% region, which is different from the IACPM data for the global synthetic market (7.2% in 2018 versus 8.1% in 2017).

However, the firm notes that the impact of thicker tranches differs between asset classes - although analysing what type of portfolios have been impacted the most is challenging, given the various transaction-specific parameters that also drive tranching. Overall, “with thicker tranches, protection cost efficiency has clearly deteriorated for CRT issuers, mitigated to some extent by more dual-tranche deals,” states Integer.     

One major theme from last year has been the growing use of the unfunded format as more insurance firms enter the market. Nevertheless, insurers remain a fraction of the investor base. IACPM data note that they account for less than 1% of cumulative synthetic deal flow since 2008, although the data do point to an uptick in participation since 2017, thanks in part to the growing use of dual-tranche structures (SCI 22 March 2019).

A third important trend has been the growth in full-stack issuance. Most capital relief trades continue to be executed in synthetic format, although full-stack true sale securitisations became more prominent last year in the case of auto and consumer portfolios (see SCI’s capital relief trades database).

This has been driven by new ECB guidelines on excess spread, which require issuers to sell the full capital stack in order to achieve market pricing and prevent the possibility of excess spread being used to artificially support the junior tranches (SCI 27 September 2019). The new rules allow banks to retain the benefit of excess spread - a marked difference to 2018, when excess spread had to be diverted back to originators.  

The CRT market is expected to continue to grow and broaden, with some emphasising further future consumer issuance due to Basel 4. Martin Neisen, partner at PwC, explains that the new LGD floors can lead to higher RWAs both for the secured and unsecured part of a loan under the IRB approach.

Under the SA, only mortgages can be considered as eligible collateral, while consumer loans are in most cases fully unsecured and receive a risk weight of 75%. This leads to relatively high differences between IRB and SA risk weights and therefore a high impact for the capital floors of IRB banks.

The more banks wait, the worse the pricing will get. Hence, Neisen expects that a bank that examined Basel 4 will take action this year or the next.

Looking ahead, James Parsons, portfolio manager at PAG, concludes: “While it is still early in the year, we see a healthy pipeline of CRT transactions developing for 2020. I anticipate that the financial environment will remain supportive as major central banks continue their expansionary policies. Having said that, I believe there will be an increased risk of idiosyncratic credit events, since although central banks are supporting the market in general, with overall high debt levels and some strong secular currents there is not a lot of room for error.”

Stelios Papadopoulos

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NPLs

Positive outlook

Spanish REO boost expected

The outlook for Spanish non-performing loan transactions backed by repossessed real estate appears positive for this year, thanks to new mortgage regulations that reduce bank litigation risk. However, the illiquidity of the asset class remains a challenge that can hinder recoveries and delay the foreclosure process.

Spain’s Supreme Court ruled last year that Spanish banks are obliged to wait until at least 12 missed monthly instalments before initiating foreclosure proceedings on consumer mortgage contracts. The ruling should reassure NPL investors by allowing lenders to foreclose on troubled home loans (SCI 20 September 2019).

The guidance concerns procedures which have been lingering after early-termination clauses were declared abusive by previous rulings of lower level courts, casting a shadow over the sector by potentially forcing creditors to turn to more time-consuming and costly ordinary foreclosure proceedings. The clauses allowed Spanish banks to terminate the contract following non-repayments of one to three months.

Antonio Casado, executive director at Scope Ratings, notes: “New mortgage regulations and case-law precedents regarding the effects of the nullity of abusive mortgage clauses will have a positive impact on existing and future NPL transactions. Clearer rules will strongly reduce litigation with regard to new NPLs, even though the new regulation has extended the waiting period for initiating mortgage foreclosures to 12-15 months. The main challenges for investors are managing late-cycle conditions in the real estate sector, significant variance in regional performance and new regulatory risks, especially in Catalonia.”

He continues: “Property prices are high in certain regions, but remain relatively depressed in others. Investors concerned about medium to long-term residential price dynamics should favour foreclosed estate portfolios (REOs), because they have shorter duration risk than traditional NPL portfolios. In any case, valuations should capture sizable haircuts relative to average market price indices to reflect the below-average liquidity and quality of these kinds of assets. Scope expects both NPL and REO securitisations to accelerate in Spain in 2020, mainly driven by hedge fund divestment strategies.”

Nevertheless, some analysts emphasise that the illiquidity of repossessed assets should not be understated. According to Alberto Barbachano, senior credit officer at Moody’s: “The foreclosure process ends in Italy once you sell the collateral at a public auction; however, in Spain the situation is a bit different. Only the highest quality properties are sold during the foreclosure process and repossessed properties are often less liquid or of lower quality. The majority of REOs come from real estate developments rather than loans to individuals and may include unfinished properties or ones with no occupancy licenses or certificates confirming the finalisation of the construction of the property.”

He continues: “Furthermore, REOs from real estate developments are typically concentrated in illiquid areas outside the metropolitan cities, where demand for houses is not sufficient to absorb the supply of properties. Investors will also have to consider maintenance costs, taxes and how to deal with illegal occupation.”

Nevertheless, Moody’s admits that Spain's real estate market has improved, making it easier to sell residential property. This means it will take banks less time to sell repossessed properties, partially offsetting the costs that come from the delayed foreclosure process.

Furthermore, banks can change their payment recovery strategy by encouraging customers to settle disputes out of court. This will be easier when mortgages have a low loan-to-value (LTV) ratio because borrowers will be more likely to pay their debt in full by selling their property.

However, the impact of the law remains to be seen. Moody’s expects it to have a moderate impact on the credit quality of bank mortgage portfolios.

Moody’s notes: “The longer foreclosure process will lead to an increase in the overall stock of arrears, as the flow of doubtful loans worked out through foreclosures will slow. Moreover, it will reduce borrower's willingness to cooperate and creditor rights during the early arrears stage, making loan servicing less effective. We nevertheless expect the increase in arrears to be limited because loans affected will only be those in late-stage arrears and, in relative terms, the increase in the length of the whole foreclosure process is moderate.”

The agency concludes: “Moreover, the rest of the new law's amendments are unlikely to increase mortgage arrears levels. In our view, the main driver of default for benchmark mortgages is LTV ratios. Although the law may push banks to lend at lower LTV ratios to favour out-of-court default settlements, we believe that banks' risk appetite will continue to be the main driver of average LTVs.”

Stelios Papadopoulos

ABS

Futura placed

European ABS market update

JPMorgan has placed the re-offered Futura 2019 NPL ABS at a wider print than some market participants had been expecting. The transaction is notable for not benefitting from the Italian GACS guarantee and was retained by the sponsor Guber Banca in December (SCI 17 December 2019).

The senior tranche of the deal priced at six-month Euribor plus 320bp yesterday, following final terms the day before. One trader says: ‘‘It seems to me it took some time to get the buyer base comfortable with the deal. I was expecting it to price slightly tighter - maybe in the 300bp region - versus the 320bp of the final print.”

He continues: “I believe the decision to go for the placement was determined by timing. The end of the year has never been a good time to sell riskier paper or to achieve successful prints in the primary market.’’

The trader refers to the long and detailed analysis process which is required for this asset class. He also highlights one of the potential concerns with the deal as being the high number of loans in the pool that have not begun their judicial procedure.

The transaction securitises assets with a gross book value of €1.256bn originated by 53 local cooperative banks. ‘‘At the end of the day, JPMorgan benefitted from good timing, with structured finance markets rallying - the CLO and CMBS sectors have tightened significantly,’’ the trader adds.

Jasleen Mann

Structured Finance

Doubling up

European ABS market update

A pair of deals in the pipeline have captured the interest of European ABS market participants. Skipton Building Society’s Darrowby No. 5 RMBS marks the lender’s return to the market after four years, while DTGO Corp’s Magenta 2020 transaction is the first CMBS linked to SONIA.

One portfolio manager points to the maturing of its TFS funding as a potential reason for Skipton’s return. Backed by a £813m granular pool of UK prime mortgages, the deal is expected to offer £350m-£400m of class A notes, with the class Bs retained. Skipton may opt to hold a percentage of the class A notes.

The transaction features a five-year revolving period, during which the class A notes will amortise in line with a target amortisation schedule and any excess principal can be used to purchase additional loans. The notes are also ‘STS+’ compliant, according to Rabobank credit analysts, in that they are LCR-eligible and qualify for favourable treatment under Solvency II.

JPMorgan and Lloyds are joint arrangers and lead managers on the deal. IPTs of SONIA plus high-50s for the class A notes were released today (13 February).

Meanwhile, the Magenta CMBS features an interest rate cap to hedge the mismatch between the three-month Libor of the underlying loan and the coupons linked to SONIA.

The £270.9m loan is backed by 17 UK hotel properties valued at around £435m that have been acquired by DTGO from Marathon Asset Management. The portfolio comprises seven Crowne Plaza, three Doubletree by Hilton, three Hilton Garden Inn, one Holiday Inn, one Hotel Indigo and two AC Hotel by Marriott branded properties.

The portfolio manager suggests that the lag between the residential and commercial real estate market up-take of SONIA reflects the relative complexity of CRE loans.

Goldman Sachs is currently roadshowing the transaction, which is expected to price next week.

Jasleen Mann

ABS

Secured versus unsecured

Early-stage MPL delinquencies predictive of charge-offs

Given that a secured loan lender has the right to seize the collateral securing the loan to recoup borrowed funds, logically the borrower should be should incentivised to repay the loan. To gauge how significant a motivating factor this is, KBRA analysed loan-level performance data on 8.7 million auto loans and 7.2 million marketplace consumer loans from multiple originators, as the former is typically secured by the financed vehicle and the latter is usually unsecured. 

The KBRA study shows that marketplace consumer loan borrowers default at a higher rate than comparable auto loan borrowers. For example, marketplace loan borrowers with a credit score between 550 and 599, on average default at a 1.8x higher rate than auto loan borrowers in the same credit score range after 24 months - with a cumulative gross loss (CGL) of 24% versus 13.3% respectively. The gap climbs moving up the credit spectrum, as marketplace loan borrowers with the most pristine credit scores default at a 15x higher rate than comparable auto loan borrowers (3% versus 0.2%).

The difference in loss rates between the two loan types is even wider once recoveries are taken into consideration. Auto loan lenders can typically recover 40%-60% of the outstanding loan balance by repossessing a vehicle and re-selling it. However, with no collateral to seize, unsecured consumer loan lenders have typically seen recoveries ranging from 5% to 15% of the unpaid balance.

Default rates decline as credit scores rise for both loan types; however, so does the difference between the two. KBRA suggests that this implies loan security is less meaningful in preventing defaults for subprime borrowers than it is for prime borrowers.

“We do not have a definitive answer for the underlying cause of this. But one plausible explanation could be that subprime borrowers are generally in a more precarious financial situation than their prime counterparts, meaning that given any adverse financial event, subprime borrowers will not have the savings to continue paying off their loans - whether they want to or not,” the agency observes. 

Additionally, the study shows that not only does the threat of repossession reduce default rates, but it also appears to have a profound effect on a borrower’s behaviour once they have become delinquent. For instance, when an auto loan borrower becomes 30 days delinquent, the person will either cure the delinquency or remain 30 days delinquent around 75%-80% of the time - with the cure and churn rates having some correlation to credit score. The remaining 20%-25% of this cohort will miss the next monthly payment and become 60 days delinquent.

Once 60 days delinquent, around 65%-70% of borrowers will either begin to catch up on their payments or continue to churn at 60 days, while 30%-35% roll further into delinquency and become 90 days delinquent the following month. Once 90 days delinquent, only around 35%-45% of auto loan borrowers will avoid imminent default, while the majority - 55%-65% - will be charged-off the following month.

In contrast, when a marketplace consumer loan borrower becomes 30 days delinquent, there is a high probability that the person will cease to make any more payments at all. Marketplace consumer loans either cure or remain 30 days delinquent around 20%-30% of the time, while the remaining 70%-80% will roll into 60-day delinquency the following month.

Once 60 days delinquent, approximately 15%-20% of borrowers will either begin to catch up on their payments or continue to churn, while 75%-80% continue to roll further into delinquency and become 90 days delinquent the following month. Once at 90 days delinquent, the vast majority of loan borrowers (around 75%-85%) will default and be charged-off one month later.

KBRA concludes that early-stage delinquencies in marketplace consumer loan pools are fairly predictive of near-term charge-offs, but only marginally predictive for securitised auto loan pools. The agency notes that it also highlights a consumer’s greater willingness to default on an unsecured loan - where the primary repercussion is a hit to their credit score - versus a secured loan, where a valued asset can be repossessed.

“To compensate for the higher loss profile and increased uncertainty in performance through a full credit cycle, marketplace loan securitisations with a comparable mix of borrower credits will typically have 10x-20x greater credit enhancement than an auto loan securitisation at a given rating level,” KBRA notes. 

Corinne Smith

Structured Finance

SCI Start the Week - 10 February

A review of securitisation activity over the past seven days

SCI NPL Securitisation Awards 2020
Nominations have now opened for the inaugural SCI NPL Securitisation Awards and have a deadline of 20 March.
Further information and details of how to pitch can be found here.

Transaction of the week
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. See SCI 5 February for more.

Stories of the week
EBA reports pending
Trapped excess spread requirement could be dropped
Hong Kong landmark
First-of-a-kind deal could herald broader securitisation market return
Syon Securities priced
Bank of Scotland engineers return
Tightening trend
European ABS market update

Other deal-related news

• 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 (SCI 3 February).
• 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 (SCI 4 February).
• Fannie Mae and Freddie Mac have disclosed the additional steps they're taking as they transition from Libor (SCI 6 February).
• 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 (SCI 6 February).

Data

BWIC volume

Secondary market commentary from SCI PriceABS
7 February 2020
USD CLO
10 Reported covers today - 8 x AA and 2 x BB rated.The AAs trade 130dm-178dm given the different maturity/RP profiles.The 2022 RP profiles trade 146dm-178dm with the outlier at the tight end being Blackrock's MAGNE 2014-8A BR² 146dm / 5.8y WAL - performance and MV metrics are both slightly above average (MVOC 130.2 / ADR 0.3% / sub 80 assets 1.7%) but the manager's exemplary record seeming to drive the DM tighter on this bond versus Onex, KKR and GSO which trade in a 163dm-178dm range for this cohort.This profile has traded in 170dm context recently so today's trades are by and large tighter to this generic level.The 2021 RP profile AA trade today is also from Blackrock MAGNE 2016-18A BR 145dm / 5.1y WAL - this trades tight to 155dm recent context, once again the manager's record an influence with performance metrics also good.The 2020 RP profiles trade 145dm-164dm - at the tight end is BLUEM 2012-2A BR² (BlueMountain) 145dm / 4.3y WAL - strong MV metrics (MVOC 129.3 / MVAP 22.7) with mixed performance (par build -0.82 / ADR 1.4% / sub 80 assets 2.2% / WARD 3036) and a weaker than average manager record.At the short end of the curve a 2019 RP profile from Neuberger Berman (NEUB 2015-19A A2R²) covers 130dm / 3.2y WAL - strong performance record with the deal now post RP end.The double-Bs, both 2021 RP profiles trade 688dm-742dm / 6y WAL - with generic trading recently in 720dm context for this profile, at the wide end is CATLK 2015-3A ER (Carlson Cap)742dm / 6.3y WAL with reasonably good performance aside from a low diversity 68 and high WARF 3009, whilst at the tight end is PGIM's DRSLF 2014-36A ER² 688dm / 6y WAL with a very slightly lower MVOC (-0.8%) but has a high diversity 97 and a lower WARF 2896 with other metrics similar.
In terms of generic secondary spread movement on the week - AAAs are typically a little wider on the week : +12dm to 124dm at the long end (2024 RP), +8dm to 92dm at the short end 2019/2020 RP profiles.AAs are tighter at the short end, eg. 2020 RP profiles -7dm to 156dm with marginal widening at the longer end +3dm to 170dm for 2023 RP profiles.Single-As wider on the week in all profiles aside from 2022 RP which is -6 tighter to 217dm.BBBs have a mixed delta on the week, wider at the shorter end, +41 to 352dm for 2019 RP profile and tighter in 2024 RP profile -12 to 379dm with tightening in 2022 RP profile to 345dm and widening in 2023 RP +13 to 359dm.BBs -105 tighter in 2019 RP to 674dm and wider in 2023 RP +103 to 801dm but either side of this 2022/2024 profiles are tighter -30/-44 respectively.In single-Bs some tightening in the short end, 2019 profile -230 to 704dm and widening in 2023 RP +78 to 964dm.

EUR CLO
Just 1 x BBB, 2 x B & 2 x equity today. The BBB is NWDSE 2019-19X D (Northwoods - Angelo Gordon) which traded at 101.52. It has a high margin of 400bps and isn't callable until Nov 2021. It traded at 398dm|mat or 356dm|call.
The single Bs from Natixis and Anchorage traded at 790dm|mat and 890dm|mat dependent on their margins.
In equity EGLXY 2019-7X SUB (Euro Galaxy - Pinebridge) traded at 72.00 / 14.3%. Its NAV is 78 and it has traded below NAV. This could be because the deal is not callable until Apr 2021 and so far has only been paying 5% to equity. If you take in the NAV + the 5% return but discount at a required return of 15% for holding the equity to the call date you do get back to around 72. The AAA is paying a margin of 114bps so equity should be able to change to better financing rates at the call date.
ANCHE 1X SUB (Anchorage) traded at 76.55 / 12.45%. Nav is 78. It becomes callable in Jul 2020 but the AAA pays 85bps which mean there would only be a small refi benefit.
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 - 13 February

CRT sector developments and deal news

Mediobanca is readying another capital relief trade in addition to its inaugural SRT that will close this year (SCI 7 February). The second transaction is expected to close in 2021.

Insurance-linked securities

Diversified play

Rate improvements driving ILS pick-up

Reinsurance rate improvements are precipitating new investor interest in and fund reallocations to the ILS market, which is expected to drive a pick-up in volume this year. One key trend is the search for diversified exposure – not only in terms of property catastrophe risk, but also across other perils and different geographies.

According to Dominik Hagedorn, partner and chief operating officer at Tangency Capital, the ILS market currently comprises two camps of investors. One camp consists of those that have found the ILS market “underwhelming” over the last few years and are simply observing it for the moment, while still recognising the value of the diversifying nature of the investment.

The other camp consists of those who recognise that the ILS market has seen two years of high catastrophe activity in 2017 and 2018, followed by an “OK” year in 2019, which saw some adverse developments from the aftermath of prior years’ loss events. As such, there are pockets of dislocation, which provide opportunity for investment.

Indeed, differences in reinsurance rate improvements across geographies and sectors offer a variety of ways to access the market. For instance, a significant jump in rates in Japan is anticipated, rates for Florida are likely to rise as well, while rate improvements in Europe may be less pronounced. Equally, cat bond pricing has risen, retrocession market rates have increased by 15% and there is even more dispersion across the specialty market.

By partnering with reinsurers in quota share agreements, Tangency Capital, for one, believes it has created a levered diversified play on the entire market. “Through increasing our exposure where our reinsurance partners see the greatest opportunities, we’re benefiting from a levered impact of rate improvements, which has a multiplied effect on our median/mean modeled returns,” Hagedorn says.

When investing in quota shares, Tangency pays reinsurers for leverage and access to their balance sheets in return for a pro-rata portion of the premiums they earn. While traditional excess of loss agreements are an expense for reinsurers, quota shares enable them to bolster their ROE by writing more business and having third-party capital contribute to the reinsurers’ expenses.

Corinne Smith

Structured Finance

CMBS trustee assumption refuted

Sector developments and company hires

EMEA
Michael Newell has joined Cadwalader, Wickersham & Taft as a partner in London. A member of INREV’s Public Affairs Committee, Newell was previously a partner at Norton Rose Fulbright. His focus is the formation of real asset funds, credit funds and hedge funds, as well as technology and emerging market focused private equity funds.

North America
KBRA has named Eric Thompson global head of structured finance ratings. He will now oversee the ABS, RMBS, CMBS, structured credit and REIT areas of the business.

Strategic JV
Former Macquarie Group senior investment specialist Teiki Benveniste has been appointed head of the newly-formed Ares Australia Management (AAM), which was formed as a strategic joint venture between Ares Management Corporation and Fidante Partners in October 2019. Based in Sydney, Australia, Benveniste will be responsible for building strong investor interest in the specialist asset manager and for increasing assets under management. He will also serve as a liaison with Fidante Partners, which will provide product distribution, local fund reporting and back office administration. AAM expects to launch its first credit fund in the coming months, with further strategies to follow.

Trustee confirmed
The Business Mortgage Finance 4, 5, 6 and 7 issuers have informed noteholders that on 22 January they received a letter from Alfred Olutayo Oyekoya, in which he claimed that he had assumed the position of trustee in relation to the charged property. The purported assumption of position follows a series of similar steps taken by Oyekoya and others in relation to the BUMF 6 CMBS, which led to the Order of Justice Zacaroli dated 31 July 2019 (SCI passim). Oyekoya is a debtor of BUMF 6, as he failed to discharge his obligations owed to the transaction under the 31 July Order, and is the subject of a bankruptcy petition to be heard on 29 June. The issuers inform noteholders that it considers the purported assumption of position to be of no effect and that BNY Mellon remains the sole trustee.

Structured Finance

Italian private market JV inked

Sector developments and company hires

EMEA
Oxane Partners has appointed Andrew Tisdall as director, portfolio management solutions. Tisdall will report to Sumit Gupta, co-founder of Oxane, and will focus on expanding the firm’s portfolio management business in Europe. Tisdall has more than 22 years of experience in loan operations at Mount Street, Morgan Stanley and Barclays. He joins Oxane from Mount Street, where he was head of loan administration. Oxane recently secured a MOR CS3 rating from DBRS Morningstar as a commercial mortgage servicer (SCI 23 January).

Internalisation agreed
Annaly Capital Management is set to acquire its external manager, Annaly Management Company, and transition from an externally-managed REIT to an internally-managed REIT. Pursuant to the agreement – which is expected to close in 2Q20 - the company will acquire the equity interests of the manager and its affiliates for a nominal cash purchase price (US$1), as well as all of its assets and liabilities. The move is designed to further align the interests of management and shareholders and strengthen the company’s governance practices. It is also expected to create cost savings from economies of scale and provide for incremental cost control and operating flexibility. All employees of the manager at closing will become employees of Annaly.

Private market JV
Further details have emerged about Eurizon Capital Real Asset, a joint venture 51% owned by Eurizon Capital (the asset management company of the Intesa Sanpaolo Group) and 49% by Intesa Sanpaolo Vita. The firm specialises in alternative asset and private market investments focused on the real economy. It has assets of €3.4bn, received under delegated management from Intesa Sanpaolo Vita, and a team consisting of 10 professionals specialising in private equity, private debt, infrastructure and real estate.

Structured Finance

ArrowMark acquires investment platform

Sector developments and company hires

Acquisition
ArrowMark Partners has acquired the bank investment platform and assets of StoneCastle Asset Management. As a closing condition of the transaction, stockholders approved a new investment management agreement between the company and StoneCastle-ArrowMark Asset Management - a subsidiary of ArrowMark - and elected eight directors, constituting its board. Sanjai Bhonsle has been elected as the company’s ceo and chairman.   

Social housing decree
The Parliament of Catalonia has validated Decree Law 17/2019, which increases the amount of social housing for people on low incomes or with particular needs. Moody’s suggests that the law is credit negative for Spanish RMBS because social rent will have to be offered to vulnerable borrowers, delaying the realisation of property sales. The credit implications for NPL securitisations are “even worse”, as the extension of social rent rights to illegal occupants will weaken owners' legal security, thereby limiting the realisation of repossessed property values.

Capital Relief Trades

CRT upgraded due to 'substantial' increase in CE

Sector developments and company hires

Canadian MBS ETF
BMO Asset Management has launched a new stable of ETFs trading on the TSX, including the first MBS ETF in Canada. Dubbed BMO Canadian MBS Index ETF, the offering aims to provide unique exposure to a segment of the MBS market fully guaranteed by the Canada Mortgage and Housing Corporation (CMHC). The pools each have a term to maturity greater than one year and a minimum amount outstanding of C$100m.

C-PACE ABS rated
Petros PACE Finance has completed its seventh privately rated C-PACE securitisation, marking the first time a C-PACE ABS has been rated under DBRS Morningstar’s new methodology. Petros PACE Finance served as its own placement and structuring agent on the transaction, using T-REX software for the structuring and reporting, along with a capital call line from ING.

CRT upgraded on CE increase
Moody's has upgraded four tranches of the credit protection deed between Santander UK and the Red 1 Finance CLO 2017-1 synthetic CMBS, affecting approximately £158m of securities. The risk transfer transaction’s class C, D, E and F notes were respectively upgraded from Aa3, A2, Baa2 and Ba2 to Aaa, Aa2, A2 and Ba1. The class B notes were also affirmed at Aaa. The actions reflect the further substantial increase in credit enhancement for the senior tranches, following the sequential allocation of principal proceeds from loan repayments and the stable loan performance. Moody’s notes that only one loan remains on the servicer's watchlist from three at the previous rating action in August 2019.

EMEA
HIG Bayside Capital has promoted Andrew Scotland to co-head its European special situations debt activities, alongside Bayside md Duncan Priston. Scotland joined the firm in 2013, having previously worked as an md in RBS’s special situations group, focusing on European distressed investments.

Standard Chartered is recruiting for a London-based CLO trader at the director level. The new hire will help deliver the strategic direction and performance of CLO secondary markets at the bank, by working with the asset-backed solutions desk to create a best-in-class global CLO trading offering.

North America
Incapital has strengthened its fixed income platform with the hiring of md David Petrosinelli and svps Thomas Hofacker, Scott McGowan and Larry Meding. Based in New York, Petrosinelli joins Incapital from Brean Capital, where he was md specialising in ABS and non-agency RMBS. Based in Florida, Hofacker joined from D.A. Davidson and will focus on corporates, agency and non-agency RMBS, CMBS and ABS. Based in Oklahoma, McGowan specialises in mortgage-related products and previously worked for Penserra Securities, BB&T, Mountainview Securities, Advest and Coastal Securities. Based in Chicago, Meding joins from Ramirez & Co and has experience working with financial institutions to manage risk and improve performance. The new hires will report to George Holstead and Laura Elliott, co-heads of fixed income at Incapital.