Contents

Structured Finance

Even playing field?

Reg AB relaxation set to release RMBS

The relaxation of FDIC rules regarding bank compliance with SEC Regulation AB when issuing RMBS (SCI 4 March) evens the playing field between bank and non-bank issuers. The move is expected to clear the way for greater bank-sponsored issuance to emerge.

The FDIC’s decision to drop the requirement for banks to comply with Regulation AB was underpinned by a realisation by regulators that it didn’t work for RMBS issuance. “It was too burdensome, if not impossible, for sponsors to comply with the disclosure requirements,” says Haukur Gudmundsson, a partner and securitisation expert at Mayer Brown.

Hitherto, banks needed to comply with the demands of Regulation AB if they wished to claim FDIC safe harbour treatment for a securitisation in the event of bankruptcy or insolvency. If that were to occur, then the FDIC reclaims the assets that were transferred in a securitisation but then compensates the noteholders with the full amount of the principal and outstanding interest up to a designated termination date.

This bankruptcy-remote treatment was essential if bank issuers were to receive an investment grade rating for RMBS deals. Without it, the rating agencies would not have the confidence to afford the required rating.

Banks may, of course, go ahead and issue unrated RMBS deals, but this was an option only available to the most highly rated banks, like JPMorgan. Smaller banks needed to rely on the FDIC guaranteeing bankruptcy-remote treatment.

Alternatively, banks issued RMBS without the FDIC safe harbour safety net, but these appealed only to investors that were willing to absorb the full risk.

The stipulations of Regulation AB, introduced after the financial crisis, were especially onerous for RMBS deals. They require, for example, asset level data for the loans in the pool - a requirement not made of credit card securitisations.

So, the reporting and disclosure requirements of issuance under the terms of Regulation AB have been burdensome and costly. Indeed, one market source calculates that this could add 75bp to the cost of any securitisation.

“So the relaxation of Reg AB for the banks is a big deal because it allows for more economic execution. It’s a substantial change,” he adds.

The head of another fixed income and securitisation consultancy agrees. “Documentation is painful. If, for example, you’re a firm with a big platform, you have to pay for a Big Four accountancy firm to go through all the third-party Reg AB compliance. This has a very meaningful cost,” he says.

The peak year for RMBS issuance in the US was 2006, when US$1.278trn of new paper was brought to the market. This represented a 30% increase on only two years previously, when US$917.5bn was sold.

Thereafter, issuance fell off a cliff. In 2007, it slumped to US$788bn and then in 2008, the eye of the storm, it collapsed to a mere US$52bn. The worst year was 2012 when not even US$30bn was sold, and volumes have scarcely improved much since.

There was a spike to US$181.4bn in 2018, but last year only US$63.7bn of new RMBS paper saw the light of day.

There are a number of reasons for this, of course. Demand for new RMBS paper has never been anything more than tepid. But the strictures imposed by Regulation AB have played a part too.

“There has been no public private label RMBS since Reg AB. Those sponsors that might be inclined do a public RMBS deal have generally determined that they were not able to comply with Reg AB disclosure requirements,” says Gudmundsson.

It is difficult to say what impact the relaxation of the rules will have and whether it will result in a spike in issuance - particularly as the jet wash of Covid-19 has paralysed markets in the last week. It does, however, remove the inequity of disclosure requirements between bank and non-bank issuers, and is in keeping with the Trump administration’s ambition of having less regulated and “better, smoother markets,” as one source puts it.

Greeting the news of the relaxation of the rules at the end of January, before Covid-19 panic hit, Mayer Brown stated: “The adopted change is great news for future bank sponsors of securitisations and could result in an increase in the amount of bank-sponsored ABS and RMBS because, unlike under the Rule in effect prior to the adopted change, the documents governing a private placement or an issuance not otherwise required to be registered are no longer required to mandate compliance with Regulation AB.”

Simon Boughey

Capital Relief Trades

Short-term volatility

SRTs on hold, although 2H20 rebound expected

Capital relief trade issuance has been postponed until the second half of the year due to the coronavirus crisis, as market participants expect disruption to be relatively short-lived. Nevertheless, more targeted government and central bank action towards consumers and SMEs is desired.

According to one SRT investor: “In the near term, it’s going to be very difficult to issue. Banks that were on track to finalise transactions in 2Q20 have postponed their deals for now. Issuance will be particularly hard for large corporate deals, due to their complexity and the widening of spreads. Nevertheless, we do expect a rebound in the second half of the year.”

The investor continues: “Overall, it’s too early to quantify the impact. Government and central bank action will help boost liquidity, but as investors, we would like to see more aid targeted towards consumers and SMEs. Still, across the capital markets – including CRT, corporate bonds, CLOs and high yield – there will be an opportunity to purchase assets from the primary and secondary markets at attractive levels when market conditions stabilise.”

The premium investors demand to hold high yield corporate debt rose to 904bp over Treasury securities yesterday (18 March), the highest level since October 2011, according to the ICE/BofA US high yield index. The ICE/BofA US investment grade index shows a similar pattern for investment grade corporate debt, which rose to 303bp over Treasuries; its highest level since 2009.

A similar picture has been observed in Europe, with the cost of insuring sub-investment grade European corporate credit jumping 35bp from close on 17 March to 645bp, according to IHS Markit’s iTraxx Europe crossover index. The latest action to try to curb market turmoil is the ECB’s €750bn pandemic emergency purchase programme, which will cover both public and private securities, including non-financial commercial paper.

Typically, under such circumstances and given certain conditions - depending on the structure and portfolio characteristics of a trade - investors can trigger what is called an ‘adverse material change clause’ that would allow them to pull out of a transaction or alternatively renegotiate transaction pricing. However, no such instances are known to have occurred so far.

Overall, the concern has to do more with short-term volatility rather than any long-term challenges. Although SRTs are priced on a through-the-cycle basis - which means that returns will almost certainly drop - they can also benefit from a downturn following a widening of credit spreads, due to downside protections (SCI 4 November 2019).

Capital relief trades perform very well in relative value terms and the product stands out for the quality of the underlying collateral and tight underwriting standards. The performance of synthetic securitisation has been further corroborated by the EBA in its discussion paper on STS synthetic securitisations.

According to the EBA’s findings, the average annual default rate for SMEs is 0.59%, while the maximum reported amount is 1.77%. With respect to average annual default rates for other asset classes, the value is in every case below 1%.

A market correction has been on the cards for most investors as far back as 2018 (SCI 25 April 2018). Indeed, two years ago, investors were expecting higher issuance volumes in the market due to an anticipated correction.

Similarly, banks started taking their own precautions in the same year. Standard Chartered, for instance, initiated the Chakra programme in 2018. The Chakra deals hedge corporate revolvers and they are carried out for both credit risk and capital relief purposes (SCI 21 November 2019).

Stelios Papadopoulos

Capital Relief Trades

Credit event definitions

UTP category brings less uniformity

The EBA’s guidelines on default definitions have brought less uniformity to credit event determinations in synthetic securitisations, despite the benefits of subsequent procedures such as principal adjustments for investors. However, from an issuer perspective, the key concern is maintaining protection for restructured loans.

According to David Wainer, partner at Allen & Overy: “We have observed a shift away from the relative standardisation of Article 216 of the CRR, with credit event definitions in many deals - including financial guarantees - now incorporating concepts such as unlikely to pay, often at the request of the ECB, and others that are guided by the relevant originator’s adoption of the soon-to-be-implemented EBA guidelines on the definition of default.”

The EBA guidelines are part of the credit risk mitigation framework of the CRR and were introduced three years ago, although they will come into effect on 1 January 2021. The guidelines expand on the meaning of default as used in Article 178 of the CRR.

However, they do not qualify the credit event definitions used for credit risk mitigation purposes in Article 216. Consequently, there is some uncertainty as to how the two marry up in practice.

The EBA seemingly favours moving towards a blend of the two, as evidenced by the regulator’s discussion papers on both SRT and STS for synthetics. Both propose to mandate credit events that incorporate aspects of Article 178.

Wainer notes: “The papers don’t distinguish between guarantees and credit derivatives for these purposes. For example, under the DPs, synthetic securitisations should include Restructuring defined to “encompass, as a minimum,” the circumstances defined in Article 178(3)(d) CRR, so would be affected by the ECB guidance. I wouldn’t be surprised if the requirements of the EBA DPs and the guidelines were being pre-figured now by regulators.”

CRT investors have noted that the unlikely to pay category in the guidelines is elusive, having given issuers more leeway in terms of what goes into the internal rating scale, despite the benefits of the follow-up procedure - namely an adjustment of principal and compensation for any foregone interest - because the timing of the cashflows matter.

One investor comments: “The issue with the UTP category is that the loan falls into an internal rating category, as opposed to an objective definition of credit events. If it’s UTP and doesn’t default, you can get some principal adjustment; or if it’s a true-up mechanism, you can get compensated on interest. However, the timing of the cashflows matter from an IRR perspective, otherwise asset owners would be indifferent between receiving one dollar within a day’s time compared to receiving it in 10 years’ time.”

Banks would prefer to avoid the UTP classification because of the additional capital and provisions it causes. According to a structurer at a large European bank: “The purpose of the default definition guidelines was to bring standardisation to the treatment of impaired loans because they observed that some banks were avoiding these classifications, which meant that they were building up a lot of ‘zombie loans’ on their books, while avoiding provisions or additional capital hits that would hurt their profitability and capital ratios.”

He continues: “So banks are not looking for an excuse to make spurious credit claims by using these guidelines. Rather, regulators want to see them recognise their losses - and if they have credit protection on these loans, they want to see that banks can claim under this protection, so that the timing of protection matches the timing of the recognition of impaired loans.”

The key concern is how to maintain protection for restructured loans. “The issue is that some bank systems implement restructurings by cancelling the old loan number and issuing another one that represents on paper a new loan. Consequently, you have to be clear with investors that it’s the same loan and therefore should not be removed from the securitised pool. This then reassures regulators that the bank is not engaging in implicit support by artificially removing troubled loans before they default,” says the structurer.

The typical methodology is to charge the LGD of a loan upon the occurrence of a credit event. Any remaining balance then goes into the workout process to determine the actual loss, after which investors will then be reimbursed or charged an additional amount as a final loss settlement. Since LGDs are based on a downturn scenario, in a benign economic environment, these LGDs may be significantly higher than the ultimate loss.

The common structure for corporate loans is the gross valuation method, where instead of charging the LGD, banks charge the NPV difference in cashflows between the original loan and the restructured loan. In the case of restructured loans, the gross valuation method may be the preferred method versus the LGD method because the expectation is that if the bank adjusted the terms of the loan, borrowers can repay it without the bank experiencing a loss.

The structurer concludes: “Furthermore, the advent of IFRS 9 helps with the transparency of losses, since it offers an objective way to calculate loan provisions. The key thing is to avoid removing troubled loans from the pool if they are restructured.”

Stelios Papadopoulos

Capital Relief Trades

Economically efficient

Study supports reduction of PD estimates

A new study undertaken by Open Source Investor Services (OSIS) suggests that capital relief trades are a good alternative to traditional issuance of new capital in the majority (75%) of cases reviewed and in 40% of cases the instrument works well during a downturn scenario, even if investors are compensated for higher losses. The research investigates whether and when CRTs are economically efficient from the perspective of banks and investors.

“In the current context - where we see a crisis being realised, credit is deteriorating and capital costs are rising - it’s more and more important for banks to identify less costly funding strategies. The OSIS study demonstrates that CRT is one such strategy and hopefully it’ll encourage regulators to promote capital funding via securitisation,” notes Richard Crecel, executive director at Global Credit Data (GCD).

Indeed, the aim of the study is to increase the visibility of CRTs and enable potential issuers to make an educated decision about whether executing a transaction is worth the effort and resources, according to OSIS md Jeroen Batema. “There is a lot of talk among potential new entrants, but limited execution. Undertaking internal feasibility studies can be difficult because CRTs are often politically sensitive. But we hope that especially banks that aren’t active in the market are able to use our research as a catalyst for debate.”

He adds: “By referencing an external study, there is a basis from which to determine whether certain portfolios are suitable candidates for capital management. Then it is possible to have a dialogue with regulators to get an idea of the regulatory impact now and in the future.”

Som-lok Leung, executive director at the International Association of Credit Portfolio Managers (IACPM), concurs that many banks are exploring whether to execute a CRT and would benefit from understanding what their options are. “The IACPM is happy to support the OSIS study, as it provides insight to the IACPM community, especially those that don’t already have expertise in CRTs but are interested in exploring capital management strategies. The OSIS paper creates a framework of assumptions from which banks can identify promising areas within their portfolios in order to jumpstart analysis, as well as a starting point for regulators - particularly those that aren’t familiar with CRTs,” he observes.

The OSIS research was conducted in cooperation with both the IACPM and GCD. GCD is a consortium of 55 banks located across Asia, Australia, Europe, North America and South Africa that was created to share data on low default portfolios. As such, the non-profit firm maintains a large, unique database of bank loans that is representative of global bank lending activity.

The sample studied comprised 17 underlying loan portfolios from France, the UK, Belgium, the Netherlands and Sweden, across the SME, large corporate, commercial real estate, residential mortgages, aircraft finance, shipping finance, trade and commodity finance and project finance asset classes constructed from real data. For the latter four categories, historical data from GCD was used to calibrate specific stress test models. 

For each of the 17 portfolios, OSIS ran six different scenarios accommodating current and future regulations (Basel 3 and Basel 4 IRBA, Basel 4 with output floor, IFRS 9 and STS) and different macro environments (EBA baseline and EBA adverse), resulting in 102 hypothetical CRT transactions. The sample assumed simple transaction structures, with pro rata amortisation, no excess spread and no clean-up calls. In five of the scenarios, the expected IRR for the equity investor remained constant at 7%. 

OSIS classifies CRT transactions as ‘economically interesting’ – in other words, adding value – if the cost of relieved capital (CoRC) is below 15%. The results from running the scenarios show that 70% of the sample transactions meet this objective and, if residential mortgages are excluded, a considerable 80% of transactions add value for the bank.

Even in an adverse scenario – important in light of the covid-19 crisis – where the investor is fully compensated for higher losses, seven out of the 17 portfolios have a CoRC of below 15%. This suggests that CRTs can be an affordable hedge against an economic downturn and can be used to limit concentration risk.

The OSIS study uses regulatory PD estimates of the banks as inputs and translates these into point-in-time PD estimates. For that exercise it has used GCD data.

Crecel suggests that banks could be justified in reducing their PD estimates by about 20% compared to (or from) regulatory PD, using large real observed defaults and losses data that GCD provides, resulting in better adjusted conservatism in their loss assessments. “A back-of-the-envelope calculation based on the assumed inflow for CRT deals to address banks’ capital needs in Europe under the new Basel 4 regime implies that banks could therefore reduce their Core Tier 1 capital costs by another €6bn, which is not immaterial and not taken into account by the OSIS study yet,” he notes.

Batema adds: “The main takeaway is that CRTs remain an interesting option for both issuers and investors across many asset classes, jurisdictions, regulatory environments and macroeconomic scenarios. Specialised lending – consisting of aircraft, shipping and project finance assets - is especially interesting because this sector will be particularly affected by Basel 4, so it is a perfect candidate for synthetic securitisation in the future. More analysis on the impact of covid-19 is required, but more feasible than before with the existence of stress test models.”

According to the EBA, the required CET1 capital of European banks will increase by 19.3% in 2027 due to the implementation of Basel 4. Consequently, banks will need to actively manage their balance sheets, reduce costs or increase interest rates on loan portfolios.

However, Batema warns that the latter option may provide opportunities for alternative lenders. “CRT may limit an undesirable increase of lending margins in markets where there is no alternative to bank lending. The investor base is potentially deep enough to absorb this issuance, but needs to develop further over the next seven years before regulatory capital charges increase materially.”

Against this backdrop, Batema puts the market potential of CRTs at €3trn of loans. However, the risk weight floor on senior tranches will make it very difficult for asset classes such as residential mortgages from this market. 

To make CRT even more of an attractive option, he points out that transactions can be optimised in several ways: by keeping the detachment point of the first loss tranche as low as possible, even if it results in a higher risk weight for the senior tranche at the end of the transaction; using excess spread for portfolios with high expected losses relative to risk weights; including pro rata/sequential triggers to support deal economics in a downturn; and changing the composition of the portfolio (for example, by adding lower rated loans).

“Given the current macroeconomic environment and the fact that there isn’t much information on the market since the deals are all private, the results of our research help to gauge whether CRTs are representative for tomorrow. Equally, while some asset classes – like residential mortgages - aren’t of interest right now in terms of CRT, they could become interesting in the future if banks select the loans with high LTVs and make the transaction STS-compliant,” Batema concludes.

Corinne Smith

Structured Finance

SCI Start the Week - 16 March

A review of securitisation activity over the past seven days

SCI NPL Securitisation Awards 2020
As a result of COVID-19, the SCI NPL Securitisation seminar has unfortunately had to be postponed and along with it the inaugural SCI NPL Securitisation Awards ceremony. Nominations remain open and a revised deadline for them will be announced in due course. Further information and details of how to pitch can be found here.

This week's stories
AMC uncertainty
Trade deal clouded by uncertainties for NPLs
Definition debate
Call for coalescence around ESG standards
Mortgage moratoriums
Impact of payment suspensions to be limited
Multi-tranching?
Investor diversification raises triple-tranche prospects
Regulatory events
Standard Chartered amends Gongga SRT terms

Other deal-related news

• A borrower of a €10m loan securitised in the Alhambra SME Funding 2019-1 transaction has missed its February interest payment (SCI 10 March).
• Toorak Capital Partners has priced a US$400m securitisation of residential bridge loans, the largest ever issuance in the asset class (SCI 10 March).
• The Dutch tax authorities are currently considering the term of a grace period in connection with the VAT due on CLOs domiciled in the Netherlands (SCI 10 March).
• DBRS Morningstar has published its approach to ESG risk factors in credit ratings (SCI 10 March).
• The Technical Expert Group on Sustainable Finance (TEG) has published its final reports and recommendations to the European Commission on the EU Taxonomy (SCI 10 March).
• Moody's is now offering its research and views on the credit and economic impact of COVID-19 via a dedicated website, available to the public free of charge at moodys.com/coronavirus (SCI 11 March).
• Figure Technologies has issued the first-ever securitisation backed by loans originated, serviced, financed and sold on blockchain via a platform dubbed Provenance (SCI 13 March).
• The asset performance of almost 90% of structured finance transactions globally have high or moderate vulnerability to disruptions as a result of the coronavirus and containment efforts, according to a Fitch report (SCI 13 March).

New MRT report
SCI has published a new Special Report on the US Mortgage Risk Transfer sector - it can be downloaded for free here.

Data

BWIC volume

Structured Finance

Pandemic response

DNB lowers bank buffers amid outbreak

Dutch central bank DNB has lowered the capital buffers for Dutch banks and postponed the introduction of the risk weight floor for mortgages, following ECB action on the Coronavirus crisis. Combined, these measures will free up €8bn in capital and will allow banks to continue their lending activities in the face of rising losses. 

According to a DNB statement, the systemic buffers will be lowered from the current 3% of global risk-weighted exposures to 2.5% for ING, 2% for Rabobank and 1.5% for ABN Amro. Further, the postponement of the risk weight floor for mortgage exposures - which was supposed to be implemented this autumn - will affect all banks relying on IRB, not only the biggest lenders.

The measures will remain in force as long as necessary. Once the situation is back to normal, DNB will compensate the systemic buffer reduction by gradually increasing the countercyclical capital buffer to 2% of Dutch risk-weighted exposures, thereby bringing back capital requirements to current levels.

DNB notes that this compensatory arrangement will work out in a more or less capital-neutral manner for the three large banks and the same effect is envisaged for other banks. Pension funds and insurers are also hit by this crisis and DNB is considering measures to limit the impact on these sectors as well – for example, by postponing planned regulatory adjustments.

The measures were announced yesterday (17 March) after the ECB reduced bank capital requirements on a European level last week. The ECB’s supervisory arm provided temporary capital and operational relief for banks as a response to the negative effects of the virus on financial stability. The measures cover pillar two guidance, the capital conservation buffer, the countercyclical capital buffer and pillar two requirements.

According to Rabobank credit analysts, buffer relaxations for pillar two and the capital conservation buffer should free up respectively 1.5% and 2.5% of CET1 capital. The analysts add though that the capital impact from the relaxation of the countercyclical capital buffer will be relatively small and country specific. On the pillar two requirement, banks are allowed to partially use AT1/T2 bonds to meet P2R.

Overall, Rabobank believes that the capital relief that would be provided is relatively significant; approximately 5% of CET1 capital could be freed up, which is a relatively large chunk of CET1 capital requirements. “Given the broad measures, all banks could benefit from this, irrespective of size - although larger banks will probably be the relative winners, as they can generally be more flexible when filling the pillar two requirement bucket with T2 and AT1 securities,” the analysts suggest.

The analysts continue: “Still, it remains to be seen if and how these measures encourage banks to provide support to the real economy, given that there are currently no state guarantees in place for SME exposures, for example. Until that changes, the appetite of banks to continue lending will remain low, in our view.”

The capital relief was part of a broader package of measures from the ECB that included credit easing, such as expanding QE and almost unlimited liquidity support for the financial sector through a new LTRO. The ECB’s focus is on liquidity and potential future solvency issues in the financial sector. The corporate sector is targeted as well, but as only large corporations benefit directly from the ECB’s CSPP - for corporate bonds - the measures will have no direct effect on the looming liquidity issues for SMEs and households.

Nevertheless, there was a strong call by ECB president Christine Lagarde for further coordinated fiscal measures and the newly announced measures are still significant for specific areas - notably the markets for corporate and covered bonds, and European financials in general.

Stelios Papadopoulos

Structured Finance

Risk off

Securitisation markets seize up

Amid a global sell-off, securitised asset classes where liquidity is scarce and asymmetry of positions particularly acute have suffered grievously. The FOMC decision to increase TBA purchases has so far eased only the agency RMBS sector (SCI 17 March).

“I spoke to an executive committee about a month ago and you know what I told them? I said, I know you think you are well-positioned, but there is a lot of risk in this market. And the biggest risks are asymmetry and liquidity,” says an independent US securitisation strategist.

Those words, spoken only four weeks ago but yet in a different world, have proved prophetic.

Markets are being pulverised as the Covid-19 virus spreads its insidious net wider, but illiquidity and asymmetry of positions exacerbate what are already terrible conditions. Spreads in all sectors are a lot wider, but where liquidity is worse, they are wider still.

Bid/offer spreads are flimsy and even some triple-A rated asset classes were 50bp-100bp wider yesterday (18 March). The most acutely affected sectors are those where liquidity is scarcer, such as small RMBS and CLO issues.

Short-dated credit card securitised issues and some auto deals are not as badly affected. But “anything that hasn’t got a very big float or a small sponsorship is a lot wider than it was,” says another source.

This is not as bad as in some asset classes; both high yield and investment grade corporate bonds have been decimated by the risk-off trade, and most maturities closed yesterday at least 100bp wider than where they started.

The decision by the FOMC, announced amid a whole package of market stimulus measures, to increase its holdings of agency MBS paper by at least US$200bn has had very little spill-over into the wider MBS markets. “All this does is give liquidity to an already liquid product. It might lower yields and agency loan rates, but that’s about it,” says another market participant.

The FOMC purchases are to be concentrated in the 15-year and 30-year fixed rate paper in the TBA market. For the monthly period to 13 April, the FOMC expected to purchase around US$80bn in agency MBS, which will include reinvestment of around US$23bn of principal payments from agency debt and agency MBS received in the month of March.

Even in the most liquid agency issues, spreads are around 10bp-20bp wider since the start of the week, say dealers.

Simon Boughey

Capital Relief Trades

Close relationship

CRT documentation should evidence intentions

When structuring a capital relief trade, the documentation should evidence the intentions of the parties. Given the risk-sharing nature of such transactions, investors benefit from forming a close relationship with the originating bank and being comfortable with its governance, risk management and flow of assets.

“To really share the risks of the underlying assets’ and the overall bank’s risk profile, investors need to spend a considerable amount of time with the origination, risk management and product teams, as the origination bank needs to retain/have skin in the game. For instance, some investors require originating banks to retain up to 20% of each loan, so the bank continues to be invested in the assets,” notes Paul Petkov, coo and head of securitisation advisory at Qbera Capital.

Ingrid York, partner at White & Case, says that one important lesson learnt from her involvement with trades such as Societe Generale’s Jupiter SRT (SCI 16 October 2019) was to have an open, constructive dialogue with the investor. “During the documentation negotiations, we discussed what the investor’s goals were and what the issuer would like to achieve to identify where the common ground is. This then allowed us to put these aims in writing, so that the issuer’s commitment is clear and defined. Given that these trades are risk-sharing transactions, their execution should be a collaborative process,” she observes.

In Societe Generale’s case, under the Jupiter transaction, the reallocation of capital to positive impact assets is discretionary. The bank’s ESG team identifies at the origination phase which specific social and development impacts it would like to support.

To determine suitable partners for SRT deals, Mariner Investment Group, for one, keeps an eye on bank policy, provides feedback where appropriate and determines whether there is a suitable opportunity to explore. “There is usually a positive feedback loop: for many banks, impact SRT adds value from a regulatory and public relations perspective. Our partners tend to have robust ESG divisions,” notes Andrew Hohns, md at the firm.

He continues: “It’s not just a verbal commitment. Our counterparties take their responsibilities seriously and have brought groups on board with mandates for reporting.”

For Mariner, focusing on the quarterly reports of its risk-sharing partners is crucial. “If banks are forced to quantify impact, they tend to manage it better,” Hohns concludes.

Corinne Smith

CMBS

Elevated risk

US conduit hotel loans vulnerable

Hotel loans securitised in US conduit CMBS are more vulnerable to coronavirus disruption than hotel loans in single-borrower CMBS, according to DBRS Morningstar. The agency estimates that the impact of the virus threatens to increase the overall CMBS delinquency rate to 1.38% from 1.13%.

The potential for a decrease in hotel revenue means that US$2.58bn in securitised conduit loans have elevated risk. The threat to conduit hotel loans is greater than the threat to SASB hotel loans because of the level of competition and higher leverage with lower DSCRs in the former.

The hotel industry has suffered a significant impact already in terms of demand, due to cancellations and fewer people going on holiday, travelling for business and attending events. DBRS Morningstar notes that California, New York and Washington DC have been affected the most by the virus. Since 12 March, these locations accounted for over half of the US’ coronavirus cases.

DBRS Morningstar states that California and New York rank first and fourth in terms of conduit CMBS hotel loans exposure and Washington is eleventh. In California, US$274.8m of around US$7.40bn conduit hotel loans is at risk, while in New York, US$647.8mn of US$3.14bn is at risk. In Washington, two loans totalling US$31.3mn are at elevated risk.

Over US$1bn in conduit hotel loans is due from April to December. DBRS Morningstar warns that these maturing CMBS loans may experience a lack of financing if investors avoid the hotel sector.

Jasleen Mann

Structured Finance

Greencoat liquidator appointed

Sector developments and company hires

EMEA
Ocorian has appointed Abigail Holladay as director of transaction management. Based in London, Holladay will manage restructuring transactions across Europe. She has previously held senior positions at Law Debenture and Deutsche Bank. Holladay has experience covering waivers, defaults, delegate/successor trusteeships and complex debt restructurings.

Greencoat winding up
In connection with the BUMF 4, 5, 6 and 7 CMBS, the high court of justice of the Isle of Man has issued sealed orders for the winding-up of Greencoat Investments (GIL) and Greencoat Holdings (GHL). Furthermore, Gordon Wilson of CW Consulting has been appointed as provisional liquidator of the companies.

North America
Annaly Capital Management has elected David Finkelstein as ceo and a member of the board, while remaining cio. Finkelstein joined Annaly in 2013 from the New York Fed, where he was an officer in the markets group for four years and the primary strategist and policy advisor for the MBS purchase programme. He succeeds Glenn Votek, who has acted as interim ceo and president since November 2019. Votek has been named as senior advisor to the company for an interim period and will support the company thereafter as a continuing member of the board.

Technical assistance facility
ResponsAbility Investments has launched a US$3m Technical Assistance Facility linked to its climate finance fund targeting the financing gap in the effort to provide universal access to clean power in developing countries (SCI 23 January). Initial funding for the facility is provided by Good Energies Foundation and the Swiss State Secretariat for Economic Affairs. Over the five years of its existence, the facility expects its projects to reach 66% of the fund’s portfolio companies while also addressing companies in the investment pipeline at large.

Structured Finance

Fed rolls out CPFF

Sector developments and company hires

CMB purchase programme
The Bank of Canada has announced that it stands ready, as a proactive measure, to provide support to the Canada Mortgage Bond (CMB) market to ensure that it continues to function well. This would include, as required, purchases of CMBs in the secondary market through a competitive tender process. As a starting point, the bank will target purchases of up to C$500m per week. Operations will be conducted twice weekly and will continue for as long as market conditions warrant. Purchases will be conducted through primary dealers.

Delayed call
NewDay Cards has postponed the scheduled redemption date of NewDay Partnership Funding Series 2015-1 by a year. The lender now plans to call the transaction on the distribution date falling in April 2021.

Fed support increased
The US Fed is set to establish a commercial paper funding facility (CPFF) to provide a liquidity backstop via an SPV that will purchase unsecured and asset-backed commercial paper rated A1/P1 directly from eligible companies. By eliminating much of the risk that eligible issuers will not be able to repay investors by rolling over their maturing CP obligations, the facility should encourage investors to engage in term lending in the CP market. The US Treasury will provide US$10bn of credit protection to the Fed in connection with the CPFF. The move follows the FOMC’s decision to increase SOMA holdings of Treasury securities and agency MBS by at least US$500bn and US$200bn respectively. Principal payments from agency debt and MBS holdings will also be reinvested in agency MBS. Agency MBS purchases will generally be concentrated in recently produced coupons in 30-year and 15-year fixed rate agency MBS in the TBA market. Around US$80bn in agency MBS is expected to be purchased for the monthly period that runs through 13 April. 

North America
SFA has appointed Jen Earyes head of policy. Earyes joins from Navient, where she served in a number of roles, including most recently as director of corporate development and head of the LIBOR transition office. Prior to joining Navient, she served as manager of corporate finance operations and in various corporate finance analyst roles at Sallie Mae.

Structured Finance

EIB mulls SME ABS purchase plan

Sector developments and company hires

Dealer credit facility launched
The US Fed has established a Primary Dealer Credit Facility (PDCF) available from 20 March, which will offer overnight and term funding with maturities up to 90 days. The facility will be in place for at least six months and may be extended as conditions warrant. Credit extended to primary dealers under the facility may be collateralised by a broad range of securities, including triple-A rated CLO and CMBS paper, as well as investment grade tranches of other ABS products. The interest rate charged will be the primary credit rate, or discount rate, at the New York Fed.

SME support plan proposed
The EIB Group has proposed a plan to mobilise up to €40bn of financing to support bridging loans, credit holidays and other measures designed to alleviate liquidity and working capital constraints for European SMEs and mid-caps amid the coronavirus outbreak. The measures will be undertaken through financial intermediaries in the member states and in partnership with national promotional banks. The proposed financing package consists of: dedicated guarantee schemes to banks based on existing programmes for immediate deployment, mobilising up to €20bn of financing; dedicated liquidity lines to banks to ensure additional working capital support for SMEs and mid-caps of €10bn; and dedicated ABS purchasing programmes to allow banks to transfer risk on portfolios of SME loans, mobilising another €10bn of support. Member states will determine where the funds for the guarantee would come from, but they could be drawn from the European Financial Stability Mechanism or could be pooled by member states themselves into a temporary new fund. In addition, the EIB Group will use existing financial instruments shared with the European Commission - primarily the InnovFin ‘Infectious Disease Finance Facility’ - to finance projects that work towards halting the spread of, finding a cure for and developing a vaccine against coronavirus.

Structured Finance

Further central bank support unveiled

Sector developments and company hires

Bridging loan deal inked
UK challenger lender Glenhawk has closed a private revolving securitisation of bridging loans, with senior funding provided by JPMorgan. Glenhawk offers short-term property development and homeowner loans, and has recently been authorised by the FCA. The new capital will support Glenhawk’s growth into the UK homeowner market. The facility represents the first time that JPMorgan has invested in a private securitisation backed by UK bridging loans.

MMLF launched
The US Fed has established a Money Market Mutual Fund Liquidity Facility (MMLF), whereby loans will be made available to eligible financial institutions secured by high-quality assets purchased by the financial institution from money market mutual funds. The MMLF aims to assist money market funds in meeting demands for redemptions by households and other investors, enhancing overall market functioning and credit provision to the broader economy. Although the MMLF programme will purchase a broader range of assets, its structure is very similar to the ABCP Money Market Mutual Fund Liquidity Facility that operated from late 2008 to early 2010. The US Treasury will provide US$10bn of credit protection to the Fed in connection with the MMLF from its Exchange Stabilisation Fund. Federal bank regulatory agencies have announced an interim final rule that modifies capital rules so that financial institutions receive credit for the low risk of their MMLF activities.

PEPP rolled out
The ECB has launched a new temporary asset purchase programme of private and public sector securities dubbed the Pandemic Emergency Purchase Programme (PEPP), which will have an overall envelope of €750bn. Purchases will be conducted until the end of 2020 and will include all the asset categories eligible under the existing asset purchase programme (APP). Additionally, the range of eligible assets under the corporate sector purchase programme (CSPP) has been expanded to non-financial commercial paper, making all commercial paper of sufficient credit quality eligible for purchase under CSPP. Finally, collateral standards have been eased by adjusting the main risk parameters of the collateral framework to ensure that counterparties can continue to make full use of the Eurosystem’s refinancing operations.

UK CP facility prepped
HM Treasury and the Bank of England are set to launch on 23 March a Covid Commercial Financing Facility (CCFF), which will provide funding to businesses by purchasing commercial paper of up to one-year maturity, issued by firms making a material contribution to the UK economy. The facility will offer financing on terms comparable to those prevailing in markets in the period before the Covid-19 economic shock and will be open to firms that can demonstrate they were in sound financial health prior to the shock. The scheme will operate for at least 12 months and for as long as steps are needed to relieve cashflow pressures on firms that make a material contribution to the UK economy.

Structured Finance

NPL supervisory flexibility introduced

Sector developments and company hires

Canadian purchase programme
The Canadian government has launched a revised Insured Mortgage Purchase Program (IMPP), under which it will purchase up to US$50bn of insured mortgage pools through the Canada Mortgage and Housing Corporation. The move aims to provide stable funding to banks and mortgage lenders in order to ensure continued lending to Canadian consumers and businesses. The first purchase operation will be conducted on 24 March up to a total of US$5bn. In addition to the access to liquidity provided through the IMPP, CMHC is also ready to expand the issuance of Canada Mortgage Bonds, depending on market conditions and investor demand. Eligibility rules for portfolio insurance are also being temporarily relaxed to assist mortgage lenders with access to the IMPP.

NPL treatment reviewed
The ECB has introduced supervisory flexibility regarding the treatment of non-performing loans; in particular, to allow banks to fully benefit from guarantees and moratoriums put in place by public authorities to tackle current distress caused by the coronavirus. First, within their remit and on a temporary basis, supervisors will exercise flexibility regarding the classification of debtors as unlikely to pay when banks call on public guarantees granted in the context of coronavirus. The supervisor will also exercise certain flexibilities regarding loans under Covid-19 related public moratoriums. Second, loans which become non-performing and are under public guarantees will benefit from preferential prudential treatment in terms of supervisory expectations about loss provisioning. Finally, supervisors will deploy full flexibility when discussing with banks the implementation of NPL reduction strategies, taking into account the extraordinary nature of current market conditions. In addition, the bank notes that excessive volatility of loan loss provisioning should be tackled at this juncture to avoid excessive procyclicality of regulatory capital and published financial statements. Within its prudential remit, the ECB recommends that all banks avoid procyclical assumptions in their models to determine provisions and that those banks that have not done this so far opt for the IFRS 9 transitional rules.