Contents

ABS

TALF response mixed

Fed facility could be found wanting

The US Fed’s introduction of the new iteration of the Term Asset-Backed Securities Loan Facility, or TALF 2.0 (SCI 23 March), was one of the measures that contributed to some steadying of broader markets yesterday. However, the facility could meet with a mixed response from securitisation market participants and there are already calls for it to be expanded.

ABS investors at least will be attracted to TALF 2.0 thanks to the leverage it provides, according to JPMorgan US ABS research analysts. They explain that, for example, an eligible triple-A private student loan ABS would enable investors to fund their investment with a TALF loan at a 13% haircut (e.g., for US$100m par order, US$13m investor equity and US$87m in TALF loan) at a cost of swaps plus 100bp.

They continue: “We note that most of the triple-A new issue ABS (including subprime auto) that priced in early March, before COVID-19 became pandemic, would not be in the money as pricing were inside of the swaps plus 100bp TALF funding cost. Of course, ABS spreads have gapped out materially since. Our indicative three-year triple-A credit card ABS was last reported at swaps plus 200bp on Friday.”

However, the JPMorgan analysts do not see the same attraction for issuers with TALF 2.0 as there was with TALF 1.0. “Top tier ABS sponsors (e.g., well capitalised, liquid, investment grade companies) may want to offer small TALF-eligible ABS as a show of support, but wait for market conditions to improve for heavier issuance at more attractive pricing. In addition, loan originations (consumer demand) are likely to decline, maybe sharply, likely temporarily, with COVID-19 lockdown spreading across the country.”

While the analysts concede that TALF 1.0 did manage to successfully reopen the ABS market and led to steady spread tightening and recovery, with approximately US$110bn of eligible ABS issued during its year of existence, they expect volumes to be different this time. Last year US$84bn in total ABS was issued in March through June, including roughly US$60bn in what would be TALF 2.0-eligible asset classes.

“We anticipated the same ABS issuance pace this year before COVID-19, but that issuance projection will clearly be depressed, at least temporarily,” they say. “We expect ABS issuance will be back-ended this year, as issuers and consumers wait for ‘normal’ life to resume and credit demand rebounds.”

At the same time, the JPMorgan analysts note the facility is still subject to alteration. “The Federal Reserve Board will provide more details, pertaining to TALF, at a later date and reserves the right to change the terms and conditions.”

Certainly, the Commercial Real Estate Finance Council (CREFC) is hopeful that changes will be made. In a statement responding to the launch of TALF 2.0 and following up on a letter the trade association had previously written to US regulators, it says: “Currently, the TALF term sheet does not include private label CMBS, though the original TALF programme during the previous crisis allowed legacy CMBS financing in later iterations after it was originally formed.”

CREFC’s letter submitted to the Federal Reserve, Treasury and FHFA asked for all investment-grade, legacy and new-issue agency and private-label CMBS to be made eligible and also sought relief for credit risk transfer instruments under the TALF. CREFC now says that it will continue to pursue these additions to the facility with the government entities this week and beyond.

Mark Pelham

RMBS

Cloudy outlook

RMBS perseveres amid market volatility

LendInvest last week closed Mortimer BTL 2020-1, a £285m UK buy-to-let RMBS, in the face of unprecedented levels of volatility in credit markets. Virus-related uncertainties are not the only concern for UK RMBS this year, however.

The triple-A rated senior tranche of Mortimer BTL 2020-1 priced at Sonia plus 1.07%, 23bp tighter than LendInvest’s previous deal, Mortimer BTL 2019-1. Rod Lockhart, ceo of LendInvest, says: “Clearly, it is a very difficult and challenging market. When we first announced the investor roadshow some weeks ago, we did not anticipate what was to follow. We are delighted to have got to this point. There was a lot of hard work from the banks who supported us on this deal and investor groups.”

The success of the transaction will help LendInvest maintain a long-term presence in the market. “It allows us to reduce the exposure of a number of loans we have in our warehouse and provides the firepower to continue to lend through this challenging period,” says Lockhart.

The market has been in full price-discovery mode since the coronavirus outbreak escalated. If conditions continue to deteriorate, RMBS calls may be postponed, leading to the prospect of extension risk.

Recent BofA Global Research highlights the extent of RMBS that have calls scheduled in 2020. In the UK, this includes around £1bn in prime non-master trust RMBS calls, £2.7bn in non-conforming RMBS calls and £600m in BTL RMBS calls.

Risk aversion triggered by the virus has also led to uncertainty over issuance volumes and the BTL RMBS sector is no exception. “It is very difficult to say. I expect limited issuance over the next few weeks and months. I do think that at some point this global problem will be solved and things will return to a degree of normality relatively quickly,” notes Lockhart.

Mark Hale, ceo and cio at Prytania Asset Management, adds: “It is not clear if many of the mainstream banks will be issuing material amounts [of UK RMBS], but we do expect a regular stream of supply from the challenger banks/non-bank entities. There should be some refinancing of existing deals, but at a lower level than 2019.’’

Virus-related volatility is not the only concern for RMBS in 2020, however. “Due to the ongoing uncertainties in the transitional period after Brexit, the outlook for UK securitisations remains clouded,” Hale notes. “If the trade talks do not go well by the end of the year, a ‘no deal Brexit’ raises questions around meeting EU risk retention rules and retaining the STS compliance status of UK securitisations for EU investors, which would ‘impede foreign appetites.’’

Meanwhile, although the migration to Sonia has already occurred, the wider migration away from Libor in the underlying mortgages has yet to occur - despite encouragement from the Bank of England. “We are also impeded by the lack of a fully functioning derivative market referencing Sonia at present,” Hale concludes.

Jasleen Mann

CMBS

Forced selling

REITs struggling to meet margin calls

US MBS rallied yesterday (25 March) in the wake of the announcement that Congress has agreed the terms of a US$2trn stimulus package. However, they remain well down on the week, say dealers.

“The Fed announcement has firmed things up. It has stabilised the market but not taken away all the spread widening,” says one. But the market is far from recovered. It is still one dominated by risk-off trading.

The extent of the spread widening depends greatly on the type and condition of the asset in question. But, for example, triple A-rated conduit CMBS started the week at around Treasuries plus 225bp/250bp, widened sharply to plus 325bp/350bp and then have come back to a mid-market of around plus 275bp by the close on 24 March - representing a widening of perhaps 50bp so far this week.

Fannie Mae DUS paper has widened from swaps plus 155bp to 190bp, while, at the other end of the credit spectrum, agency CRT paper is perhaps 8%-9% down on the week.

But these are very much approximate prices. As a dealer stresses: “People don’t know where the market is.”

There is also a certain amount of disagreement about how liquid the market is. Some say that it has become very illiquid, citing the fact that certain assets have begun trading at a dollar price rather than a spread - normally a sign of an illiquid market.

Others say that a lot of paper has changed hands.  A bid list of over US$1bn was circulated last Sunday - normally a day on which no trading is ever done - but on this occasion over US$400m traded.

“If people are forced to sell, they have to sell, right?” says one market watcher.

No class of buyer has had to shed more paper than mortgage REITs, which have been caught in the pincer movement of investors demanding redemption while at the same time being forced to meet margin calls as the value of MBS plummeted. They also are facing increasingly higher refunding costs in the repo market.

It’s a perfect storm and a number of mortgage REITs have, over the last few days, announced that they have become technically insolvent.

Since the end of last week, AG Mortgage Investment Trust, Invesco, ED&F Man Capital and MFA Financial have disclosed that they are unable to meet their margin requirements.  ED&F Man was reportedly asked to put up US$100m on Friday alone.

Two Harbors, a so-called hybrid mortgage REIT, also announced on 23 March that it is suspending both Q1 preferred stock and common stock dividends “to preserve liquidity and long-term stockholder value.”

On the same day, MFA reported that "due to the turmoil in the financial markets resulting from the global pandemic of the COVID-19 virus, the company and its subsidiaries have received an unusually high number of margin calls from financing counterparties, and have also experienced higher funding costs in respect of its repurchase agreements."

It could not meet its margin calls, it added, and further notified counterparties it did not expect to be able to meet forthcoming margin calls at any date in the near future. Chapter 11 bankruptcy protection is the only option.

The market is concerned that the wholesale economic collapse caused by the Covid-19 pandemic means that many mortgage-holders will not be able to pay their loans, rendering billions of dollars of mortgage-backed paper much diminished in value. Although agency-issued MBS is protected by an implicit government guarantee, this paper has also tumbled in price, partly because to meet margin calls mortgage REITs choose to sell the most highly rated paper on which they will take a smaller loss.

“Even triple-A paper is getting sold because people are looking to sell where they will lose the least,” explains one dealer.

AG Mortgage Investment Trust yesterday filed a suit against RBC claiming that the margin calls it received from the firm are subjective and don’t reflect the true value of the CMBS it holds.

Simon Boughey

ABS

Invoice ABS debuts

First trade receivables securitisation for India

Northern Arc Capital and fintech platform CredAble have closed a trade finance securitisation backed by invoice receivables. The transaction is the first rated and listed invoice receivables-backed ABS from India.

Kshama Fernandes, md and ceo of Northern Arc Capital, says: “Banks and non-banking financial companies (NBFCs) have traditionally been present in this space and have been discounting these invoices directly. However, this exposes them to idiosyncratic anchor/vendor risks, since there is a single underlying exposure.”

Under the R150m deal, which was arranged by Northern Arc, 10 vendors on the CredAble platform discounted invoices that were raised to several large anchor buyers by assigning invoice receivables to the securitisation trust. The transaction has a ramp-up feature, whereby cashflows can be reinvested to purchase a fresh set of invoices that meet predefined eligibility criteria.

Rated A1+ by Fitch and listed on the BSE, the transaction has a number of unique features. “Other capital market players - including foreign investors, mutual funds, alternate investment funds and high net-worth individuals - have not been able to access this robust segment, due to lack of a capital market instrument. The product, by providing investors a rated and listed instrument backed by a pool of invoices, provides a solution to both the problem statements. Furthermore, from a structural perspective, this was also India’s first multi-originator ramp-up based structure,” Fernandes adds.

The transaction provides various advantages for sellers and investors. Fernandes says: “With the investor base getting expanded, price discovery for the asset class will improve, making it more efficient and cost-effective for sellers to avail financing. They also get a continuous line of funding by virtue of the replenishment-based nature of the transaction. For the investors, the risks are mitigated due to diversification offered by pooling multiple vendors and anchors.”

The role of a structurer and portfolio assessor like Northern Arc also ensures continuous monitoring of the health of the transaction for the investor. “The credit triggers in the transaction enable the structure to be wound down in case of serious credit issues,” adds Fernandes.

Closing of this transaction was not without challenges, however. Checks were required in order for it to be rated and listed.

“Over the past 20 months, the product went through rigorous checks from legal counsels, rating agencies, trustees, exchange and auditors. However, with the learnings in place, going forward the processes will become streamlined and we look forward to scaling this product. Already we are seeing lot of interest coming from domestic and international investors,” says Fernandes.

In the financial year 2019, the Indian securitisation market reached almost US$30bn, an all-time high. Fernandes notes: “The growth is being driven by non-traditional asset classes like invoice receivables, wholesale loans, lease receivable, personal loans, gold loans etc. Furthermore, innovative products like replenishment-based structures, multi-originator structure variants are seeing good traction with originators and investors.”

Northern Arc has previously been involved in structuring India’s debut covered bond, pooled loan issuance, CLO transaction and replenishment-based structure post the implementation of 2012’s RBI securitisation guidelines.

Jasleen Mann

Structured Finance

SCI Start the Week - 23 March

A review of securitisation activity over the past seven days

SCI NPL Securitisation Awards 2020 - new deadline
SCI NPL Securitisation Awards 2020 - new deadline As a result of COVID-19, the SCI NPL Securitisation seminar has unfortunately had to be postponed until 1 July, along with the NPL Securitisation Awards ceremony. Award nominations remain open and a have a revised deadline of 24 April. Further information and details of how to pitch can be found here.

This week's stories
Close relationship
CRT documentation should evidence intentions
Credit event definitions
UTP category brings less uniformity
Economically efficient
Study supports reduction of PD estimates
Elevated risk
US conduit hotel loans vulnerable
Even playing field?
Reg AB relaxation set to release RMBS
Liquidity concerns
European ABS pipeline coming to a halt
Pandemic response
DNB lowers bank buffers amid outbreak
Risk off
Securitisation markets seize up
Short-term volatility
SRTs on hold, although 2H20 rebound expected

Other deal-related news

• 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) (SCI 16 March).
• 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 (SCI 17 March).
• NewDay Cards has postponed the scheduled redemption date of NewDay Partnership Funding Series 2015-1 by a year (SCI 17 March).
• 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 (SCI 17 March).
• 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 (SCI 18 March).
• 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 (SCI 18 March).
• UK challenger lender Glenhawk has closed a private revolving securitisation of bridging loans, with senior funding provided by JPMorgan (SCI 19 March).
• 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 (SCI 19 March).
• 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) (SCI 19 March).
• 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 (SCI 19 March).
• 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 (SCI 20 March).
• 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 (SCI 20 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
 

Capital Relief Trades

CRT deals disclosed

Intesa publishes capital management strategy

Intesa Sanpaolo has released details of its capital management strategy, following the release of its 2019 annual report on Friday (20 March). The lender has revealed the details of four capital relief trades that were completed last year. 

Intesa Sanpaolo’s 2018-2021 business plan includes initiatives for credit portfolio management that fall within the remit of the active credit portfolio steering unit, led by Biagio Giacalone and within the perimeter of the CFO area. The mission of the unit is to improve the overall risk-return profile of the group's performing and non-performing credit portfolios through targeted credit strategies and risk transfer transactions.

As part of these initiatives, the lender last year printed two transactions from its GARC programme that each reference corporate and SME loans. Both transactions amortise sequentially.

Stefano Del Punta, cfo at the bank, notes: “These transactions allow us to optimise the use of economic and regulatory capital and support the Group's lending activity. In 2019, we released more than €10bn of economic resources that have been made available for new household and corporate financing, while enlarging the global institutional investors base."

The first transaction, dubbed GARC SME 8, was completed in December 2019. The €235m CLN references a €4.1 bn Italian SME portfolio. The deal features a three-year WAL, a time call that can be exercised after the end of the WAL and a legal final maturity in 2041.

The second transaction, dubbed GARC Corp 2, was also completed in December. The €230m ticket references a €3.8bn Italian corporate portfolio.

It features a time call that can be exercised after the end of the three-year WAL and a legal final maturity in 2038. Substitution is allowed in case of loan prepayments without affecting the credit risk profile of the portfolio.

The bank revealed details of a further two transactions that were completed last year. The first is a tranched cover deal sponsored by the Italian Guarantee Fund for SMEs that provides €1.1bn of Italian SME lending, while the second is a groundbreaking first loss residential mortgage SRT.

The deal, dubbed GARC Residential Mortgages-1, is a €44m unfunded insurance policy that references an €800m Italian mortgage portfolio. The transaction features a six-year WAL and a time call that can be exercised after the end of the WAL. The legal final maturity is in 2032.

To date, a total of 11 synthetic securitisation trades with private investors have been finalised under the GARC programme, for a total amount of over €26bn. Banca IMI acted as the arranger for all of these transactions.

Stelios Papadopoulos

NPLs

Liquidity risk

Pandemic pressure on NPL performance

Economic disruption caused by Covid-19 is expected to negatively impact the timing and amount of collections for non-performing loan securitisations from the euro-area periphery. NPL transactions are exposed not only to direct economic shocks, but also to the shutdown of non-essential activities, particularly the legal and real estate industries.

Scope Ratings reports that the progress of NPL work-out strategies in Italy, Portugal and Spain have slowed or stopped. Courts are closed in all three countries, thereby bringing court appraisals, property inspections, auctions, final payments and release of properties to a halt.

“As part of actual court suspensions and the resulting transition period necessary to return to normal activity, we expect a timing shift on all legal procedures, including cash in court - with dynamic monitoring of market developments in order to calibrate the duration of delays as closely as possible,” says Cyrus Mohadjer, an analyst in Scope’s structured finance team. “Lengthy, volatile or unpredictable enforcement frameworks generally erode the amount of expected recovery proceeds.”

With judicial processes unlikely to progress, special servicers might be encouraged to rely more on extra-judicial processes. “However, we expect their ability to realise these types of collections to be limited for now, as debtors - whether individuals or corporates - are not incentivised to settle in such macroeconomic uncertainty, especially as many businesses fear massive contraction of their operational cash flow,” adds Rossella Ghidoni, associate director in Scope’s structured finance team.

Further, Scope anticipates that all sub-asset classes could be exposed to rent payment deferrals, tenant defaults and increasing vacancies. While the impact of the macroeconomic environment on real estate prices will not be immediate, consumer and producer confidence, cost of capital, economic growth and labour market conditions are key drivers of the real estate market and they could deteriorate.

Moratoriums on debt payments and payment holidays are intended to last for six months in some cases, which implies the severity of the impact on servicers’ collection abilities. For situations where servicers expect to reach amicable agreements, Scope expects borrowers’ cashflow generation to come under pressure in the current context.

Indeed, the length of the crisis is unpredictable, which has led to concerns regarding reliance on cash reserves. NPL transactions that have below-average levels of liquidity coverage are expected to be particularly vulnerable.

“Suspension of court proceedings and a sharp drop in economic activity could lead to an increase in the liquidity risk of NPL securitisations,” warns Chirag Shekhar, analyst in Scope’s structured finance team.

Measures taken by the European Commission and the ECB to address Covid-19 related stress - including the temporary framework for state aid and the €750bn Pandemic Emergency Purchase Programme - are expected to only delay the negative impact on NPL ABS performance.

Jasleen Mann

RMBS

PPIP call

CRT and non-agency MBS still in need of purchasing power

Non-agency MBS and CRT deals in particular are still in need of government support, according to securitised product research analysts at JPMorgan. They suggest it could come in the form of a Public Private Investment Programme (PPIP) similar to that introduced in 2009 to support MBS through combining Treasury and private capital to buy legacy assets.

“While the vast majority of the US fixed income market has received government relief, the privately wrapped mortgage market (both residential and commercial) has not received support yet and is facing massive de-leveraging from REITs, originators, hedge funds and other investors, compounding the dislocation,” the JPM analysts say. “There is over US$1.9trn of securitised products debt under liquidity stress.”

They report that valuations have reached distressed levels in those sectors. “For instance: senior triple-A jumbo RMBS trade at spreads of ~200bp or wider, despite our expectation that subordination will keep these securities money good; CRT M1s are trading at DMs of 1500bp; and CMBS LCF triple-A trades near Libor plus 300bp, again these remain risk remote, with no expectation of loss.”

The analysts add: “The widening in CRT is particularly important for managing the credit risk of Fannie and Freddie… The distress in the CRT market threatens the viability of a future CRT market, which policymakers have argued is essential for transference of credit risk to the private sector. Dollar-for-dollar capital requirements make CRT particularly onerous for dealers to position, even in good times, exacerbating the dislocation in this sector. Given the strong fundamentals of the sector even in the current environment, the widening in spreads suggests that this is primarily a liquidity-driven crisis in the sector.”

The JPM analysts conclude: “We believe a PPIP type of programme would help alleviate the stress across the non-agency securitised sectors. A programme structured in a similar manner could be effective at alleviating stress in the current environment…The PDCF programme introduced in the past week has not been sufficient alone to prevent the de-leveraging in non-agency securitised products.”

Mark Pelham

ABS

Testing times

MPL platforms addressing coronavirus impact

As an expansion-era product, marketplace lending securitisation is expected to be tested for the first time by the Covid-19 fallout. Joseph Cioffi, partner and chair of the insolvency, creditors’ rights and financial products practice group at Davis & Gilbert and author of Credit Chronometer, tells SCI how platforms are preparing for a potential recession.

Q: Why and how are MPL securitisation seller/servicers likely to be tested by the current volatility/potential recession?
A: Where to begin? There’s a certain irony to the crisis this time around for originators versus the 2008 crisis.

Back then, with lending and credit markets in tatters, it was fertile ground for MPL to take root and flourish by serving underserved markets in ways that traditional lenders could not. They nibbled away at the banks’ market share, expanding from sector to sector. This time around, I believe the corona-crisis will turn out to be MPL’s greatest challenge yet. 

On one hand, MPL and fintech are perfectly positioned to gain market share, given consumers’ desire for contactless transactions due to the coronavirus. However, the question is whether they will be able to take advantage of the situation if there is a liquidity crunch.

MPL has the advantage of being generally nimbler than banks and with their technology can quickly adapt their lending standards. But the current environment, with the heavy hand from the US government in the largest consumer debt markets, is going to tilt the playing field in favour of large, well-diversified and well-funded originators. They have an advantage in surviving a liquidity crisis.

The government is providing both consumer relief in mortgages and student loans and liquidity to the related ABS markets through the resurrection of the TALF programme. But consumer loans are not currently included and without government intervention in the sector, there will be liquidity issues. 

In addition, current government plans focus on getting banks to offer small-dollar loans to customers with financial hardship, which will only increase competition against MPL. They could pick off the stronger borrowers, leaving marketplace lenders to make higher risk loans, which would only increase costs further. 

A bright spot could be participation in the expanded SBA programme under the stimulus programme, if allowed. The new stimulus bill, while not explicit, opens the door to qualify new lenders if they meet the operational requirements.

Q: Are MPL platforms more vulnerable to underperformance and/or negative rating actions than non-fintech issuers?
A: MPL is not getting the attention that is going to mortgages and student loans. I believe the crisis is going to put enormous pressure on non-banks.

Risk premiums could rise sharply, desired ratings may not be achieved and securitisation may no longer be an option. Winning will not just be about the technology, it will be about liquidity. 

Much depends on the effectiveness of the stimulus programme to keep consumers afloat and for how long, and, in turn, those consumers’ willingness to stay current on their debt beyond mortgages and auto payments.

Q: Does asset class matter; in other words, are refi student loan providers likely to perform better than unsecured consumer loan providers?
A: I would normally say yes, but the economic crisis this time around may be the great equaliser. Even student loan refis, which has been a bright spot, could suffer as a professional degree does not provide immunity to the employment fallout.

Q: Are there any outliers among platforms in terms of being better/worse prepared for a downturn?
A: Platforms that focus on folks with lower credit scores and use alternative data have been able to find opportunities outside the usual FICO range. But even then, they might face a struggle when those borrowers start to lose jobs and default. It really all depends on the effectiveness of the stimulus and the spread of the virus.

Business lending can be a bright spot, given the stimulus package. Small-business focused fintechs could eventually get their wish and be allowed to participate in the SBA programme.  

Q: Could we see tiering emerge between MPL issuers?
A: It’s hard to say at this point. It is possible that the better capitalised, larger issuers will be able to better weather the storm, while the smaller lenders might not make it through the crisis. On the other hand, smaller niche lenders with less exposure to more impacted markets could find themselves outperforming larger platforms.

Q: What can platforms do to strengthen their readiness and liquidity ahead of a recession?
A: Platforms need to reduce costs, reduce costs and reduce costs. They also need to get granular on underwriting to reduce risk and explore their eligibility for government funding to get through the crisis. I don’t expect platforms raising interest rates to raise revenue, if they want to remain competitive.

Q: How are platforms addressing the coronavirus impact on their borrowers and investors, and are they going far enough in their efforts?
A: Things are being done to improve resiliency, such as lowering approvals for higher-risk borrower populations and increasing income and employment verification requirements. Restricting access to credit is going to have to be a by-product of these initiatives. Satisfaction is a function of expectations and they are doing the right thing by lowering expectations among investors and partners.

How long the virus impacts society and the economy will determine whether these efforts go far enough to protect investors. 

Platforms have been asked by the Marketplace Lending Association and various state regulatory agencies to take steps to alleviate borrower stress, including providing impacted borrowers with forbearance, loan extensions and other repayment flexibility that is typically provided to borrowers impacted by natural disasters. State agencies, such as the New York Department of Finance, have also asked all licensed lenders to consider all reasonable and prudent steps to assist businesses that have been adversely impacted.  

It may seem like being asked to accept inordinate risk. But then, if you think about the size and scope of the government’s commitment to maintain employment and keep employers afloat until the virus subsides, it might be the best medicine for those with the liquidity to take advantage of it. Once the virus dissipates and impacted borrowers are able to resume working and making payments, the platform may emerge with a stronger market position and valued portfolio.

Capital Relief Trades

Closing the gap

Audentia Global investor relations head Sophia Vanco and chief of staff Nick Makin answer SCI's questions

Q: How and when did Audentia Global become involved in the capital relief trades market?
NM: Audentia was founded 2.5 years ago by its co-chief investment officers Fasil Nasim and Chris Newman, who had previously worked together in commodity finance at BNP Paribas, in response to the global trade finance market’s US$1.5trn funding gap (as per Asian Development Bank figures). Their idea was to provide investors with access to the commodity trade finance asset class, given that it is the last business line to come out of investment banks, while lowering RWAs on bank balance sheets and creating further economic benefits to the banks through redeployment gains.

RWAs for commodity assets have increased with the roll-out of Basel 4 and the introduction of an output floor. The new risk spectrum doesn’t easily fit the commodities world, which is concentrated in SMEs and frontier markets that are inherently more capital-intensive sectors. Yet banks want to maintain their relationships with clients and many are waking up to capital relief trades as a solution.

Q: What are your key areas of focus today?
SV: Our strategy centres on partnering with banks and providing credit protection on future and existing commodity trade finance loans originated by them to provide regulatory capital relief. We sit above the borrower’s equity and allow the bank to redeploy the released capital.

As far as we know, we’re the only fund doing this in the commodities space - which is uncorrelated and characterised by low default rates (historically 0.2%, which is lower than triple-B corporate debt) and a robust, deep market sized at around US$15trn.

The aim is not to replicate or compete against the banks; instead, our co-investment structure allows us to benefit from what banks do really well – lending – as well as their operational due diligence, infrastructure and origination pipeline. We have our own screening process on top of this, with a bias towards energy products, as well as exposure to metal and agricultural products. Notional values of oil products are higher than other commodities.

There is significant capacity in the market in which to deploy, in either single-name deals or small portfolios. In time, once working relationships/partnerships with banks have been established, we aim to increase our exposure to taking tranches across commodity portfolios. The final aim is to be partner of choice when a bank is considering a new facility and they know they can bring in Audentia when going through the credit committee process.

Q: How do you differentiate yourself from your competitors?
SV: The Audentia team covers the three pillars of what makes a commodities business successful – expertise in physical trading, commodity finance and derivatives. Most commodity financing funds don’t have physical trading or derivatives expertise – they’re comfortable taking naked exposure because they know the counterparty. However, we’ve built risk management into our strategy and this is a value-add for both our bank partners and investors.

NM: Commodity trade finance requires expertise in commodities and boots on the ground to originate deals. Borrowers are typically privately-owned SMEs, which requires specialists in the underlying in order for investors to get comfortable with the credit. Due to our deep expertise across all aspects of physical commodity trading, we have the ability to assess transactions through a lense that can mitigate perceived risk versus actual risk.  

Q: What is your strategy going forward?
NM: Basel 4, which sees capital floors starting in 2022, will lead to banks being penalised even more for lending against the types of collateral that form part of commodity trade finance activities. This greatly increases opportunities for a co-investor, such as Audentia, to introduce third-party capital to these transactions.

We are currently engaged with 15 tier one bank partners based in Asia, France, the Netherlands and the UK. We may grow this network in the future, to include regional banks and specialist commodity banks.

Q: Which challenges/opportunities do you anticipate in the future?
SV: One important factor impacting the industry has been the loss of physical commodity trading knowledge, including how capital can be recovered in the event of default. Audentia’s physical commodity experience allows us to act either as a recovery agent directly or assist the bank in protecting the value of collateral in a default scenario. Again to highlight the robust nature of the asset class, recovery rates in commodity trade finance are 90% plus, due to the deals being well collaterised by the underlying goods.

An additional challenge is to continue to develop investor comfort with the asset class through education. Ultimately, there is a comparatively small pool of experts in the field for a very large market (US$15trn). So, to us, this is not a niche opportunity – rather a niche understanding.

Corinne Smith

Structured Finance

Fed revives the TALF programme

Sector developments and company hires

Return of the TALF
The US Fed announced a slew of new measures to support the credit markets this morning, including the revival of the Term Asset-Backed Securities Loan Facility (TALF), first seen in the wake of the global financial crisis. Under the TALF, the New York Fed will commit to lend to an SPV on a recourse basis and the US Treasury Department will make an equity investment of US$10bn.

The TALF SPV initially will make up to US$100bn of loans available. The loans will have a term of three years; will be non-recourse to the borrower; and will be fully secured by eligible ABS. All US companies that own eligible collateral and maintain an account relationship with a primary dealer are eligible to borrow under the TALF.

Eligible collateral includes US dollar-denominated cash ABS that have a credit rating in the highest long-term or the highest short-term investment-grade rating category from at least two eligible ratings agencies and do not have a credit rating below the highest investment-grade rating category from an eligible agency. All or substantially all of the credit exposures underlying eligible ABS must have been originated by a US company and the ABS must be issued on or after today, 23 March 2020.

In addition, to be eligible, the ABS must have underlying credit exposures that are: auto loans and leases; student loans; credit card receivables (both consumer and corporate); equipment loans; floorplan loans; insurance premium finance loans; certain small business loans that are guaranteed by the Small Business Administration; or eligible servicing advance receivables. Eligible collateral will not include ABS that bear interest payments that step up or step down to predetermined levels on specific dates. In addition, the underlying credit exposures of eligible collateral must not include exposures that are themselves cash ABS or synthetic ABS.

To be eligible collateral, all or substantially all of the underlying credit exposures must be newly issued. The feasibility of adding other asset classes to the facility will be considered in the future, the Fed notes.

The Fed’s other measures today involved increasing the amount of Treasuries and agency MBS the FOMC can purchase, now including agency CMBS, and expanding its recently announced CPFF (SCI 17 March) and MMLF (SCI 19 March) facilities to include municipalities. At the same time, it has established two new programmes to support liquidity in the primary and secondary corporate bond markets.

CBILS guarantee launched
The British Business Bank has launched the Coronavirus Business Interruption Loan Scheme (CBILS), which provides facilities of up to £5m for smaller businesses across the UK that are experiencing lost or deferred revenues, leading to disruptions to their cashflow. Delivered via over 40 accredited lenders and partners, CBILS provides lenders with a government-backed partial (80%) guarantee against the outstanding facility balance, subject to an overall cap per lender. The maximum value of a facility provided under the scheme will be £5m, available on repayment terms of up to six years. There is no fee for SMEs to access the scheme.

Dollar rolls increased
The US FHFA has authorised Fannie Mae and Freddie Mac to enter into additional dollar roll transactions, with the aim of providing increased liquidity to MBS investors. Eligible collateral is limited to agency MBS and the transactions must be undertaken via an auction or similar mechanism to ensure that they occur at a fair market price.

North America
Mehtap Cevher Conti has joined Hogan Lovells in New York as a partner in the firm’s finance practice. With more than 15 years of experience in aviation finance, she joins Hogan Lovells from Arnold & Porter Kay Scholer. Cevher Conti advises banks, export credit agencies, aircraft lessors and airlines on a broad range of transactions for airlines and corporate lessors.

Structured Finance

Research head named

Sector developments and company hires

North America
David Walker has joined CIFC as head of research, responsible for leading the firm’s US credit research platform and overseeing its team of 20 research analysts. Based in New York, he reports to CIFC ceo and cio Steve Vaccaro. With over 30 years of experience in debt and equity research in North America and Europe, Walker previously served as director of corporate credit research at Genworth Financial. Prior to that, he worked at Tricadia Capital Management, UBS and JPMorgan.

Kamakura has appointed Sou-Cheng Choi as chief data scientist, responsible for designing analytical models incorporating big data capabilities, as well as developing best-practice statistical methods for the Kamakura Risk Information Services and Kamakura Risk Manager platforms. Choi previously served as principal data scientist and lead researcher in machine learning for the automotive and life innovation groups at Allstate Corporation. She worked for Kamakura 20 years ago, prior to receiving her PhD in computational and mathematical engineering at Stanford University.

Structured Finance

Call for TALF expansion

Sector developments and company hires

BlackRock hired
The New York Fed has retained BlackRock Financial Markets Advisory as a third-party vendor to operationalise its purchases of agency CMBS and transact with primary dealers on behalf of the SOMA. BlackRock was selected on a short-term basis to serve as an investment manager after considering its expertise in trading and analysing agency CMBS in the secondary market, as well as its robust operational and technological capabilities.

TALF 2.0 recommendations
The CRE Finance Council (CREFC) and 12 other real estate trade organisations have submitted a letter urging the US Fed and Treasury to expand the TALF 2.0 to include agency and private-label CMBS (SCI 24 March) and GSE credit risk transfer securities. Among the recommendations outlined in the letter, the signatories advise: a maximum TALF loan maturity of five years or more for CMBS (which have longer durations than the other assets classes currently accepted by the TALF 2.0); a reduction in haircuts to between 5% and 10%; and the extension of eligibility criteria to super-senior triple-A CMBS rated by one or more of the NRSROs, as these bonds make up around 70% of CMBS issuance. The other signatories are American Council of Life Insurers, American Hotel & Lodging Association, American Seniors Housing Association, Asian American Hotel Owners Association, International Council of Shopping Centers, Mortgage Bankers Association, NAIOP, Nareit, National Multifamily Housing Council, National Apartment Association, The Real Estate Roundtable and Structured Finance Association.

Structured Finance

UK WBS hit expected

Sector developments and company hires

APAC
Frontier Advisors has appointed Joe Clark as senior consultant in its alternatives and derivatives research team, based in Melbourne, Australia. Clark was previously senior portfolio manager in QIC’s global multi-asset team and has also worked at Suncorp Investment Management. He has experience in ILS manager and investment research.

North Dock debuts
Barclays Private Bank has closed North Dock No. 1, its first UK prime RMBS. A 24-month revolving securitisation, the loans have been granted to prime borrowers, high net-worth individuals and their corporate entities, secured over properties predominantly located in London and south-east England. Moody’s notes that the portfolio consists of loans extended to 658 borrowers with a total principal balance of £1.78bn and can ramp up to a total portfolio level of £1.9bn.

PBSA asset exposure identified
With nearly all on-campus activity cancelled or paused and all face-to-face teaching suspended due to social distancing requirements, it is likely that many UK students currently residing in student accommodation will vacate these premises and return home to continue studies online. KBRA has reviewed UK CMBS with exposure to purpose-built student accommodation (PBSA) assets and identified one loan with PBSA exposure, which serves as the collateral for the Taurus 2019-3 UK transaction. The loan is secured by 21 PBSA properties across the UK that are generally operated by Student Roost, an affiliate of the loan sponsor Brookfield Strategic Real Estate Partners II. KBRA says that while it has yet to be apprised of the sponsor’s plan, there is little doubt that the collateral underlying the loan will experience a meaningful decline in occupancy and operating performance. A total of 19 properties (90% of the allocated loan amount) are entirely or partially let to students directly by the sponsor and are operated by Student Roost. Regarding the two remaining properties, one (6.7%) is wholly let to a third party through 2027, who in turn operates the asset on a direct-let basis; the other (3.3%) operates pursuant to a nominations agreement with Bournemouth University through 2027. As of 25 March, Student Roost plans to keep all of its properties open and will continue operating pursuant to its landlord obligations. However, in response to the coronavirus pandemic, it has made an exception to its normal cancellation policy and will allow students to cancel their leases effective 1 May 2020, with students who have paid the entire year upfront being reimbursed for all rent payments due from 1 May onwards. Nearly all (99.6%) of the directly let bed spaces have a lease expiry date beyond 1 May.

Prudential framework clarified
The EBA has issued a statement explaining a number of additional interpretative aspects on the functioning of the prudential framework in relation to the classification of loans in default, the identification of forborne exposures and their accounting treatment. In particular, the EBA clarified that generalised payment delays due to legislative initiatives and addressed to all borrowers do not lead to any automatic classification in default, forborne or unlikeness to pay. It also highlighted that when applying IFRS 9, institutions are expected to use a certain degree of judgement and distinguish between borrowers whose credit standing would not be significantly affected by the current situation in the long term and those who would be unlikely to restore their creditworthiness. Additionally, as part of its decision to support banks’ focus on key operations, the EBA has reviewed all ongoing activities requiring inputs from banks in the next months and decided: to extend the deadlines of ongoing public consultations by two months; to postpone all public hearings already scheduled to a later date and run them remotely; to extend the remittance date for funding plans data; and in coordination with the Basel Committee, to extend the remittance date for the Quantitative Impact Study based on December 2019 data.

UK WBS hit expected
S&P expects the COVID-19 pandemic to result in a material negative turnover impact for many UK whole business securitisation issuers. The UK response to the virus has included a mandatory closure of all pubs, restaurants, cafes and other non-essential businesses, which came into effect on 22 March, with three-week-long restrictions put in place. S&P notes that although it is too early to measure the impact of COVID-19 on transaction cashflows, it has identified transactions that will be directly affected. These include WBS with exposure to the pub sector (Mitchells & Butlers Finance, Greene King Finance, Marston’s Issuer, Spirit Issuer and Unique Pub Finance), holiday accommodation (Center Parcs – CPUK Finance) and sporting events (Arsenal Securities). The ability of the borrowers to withstand the pending liquidity stress will come down to their current level of headroom over their financial covenants and readily available sources of liquidity, the rating agency suggests.

Structured Finance

Euro CLO coronavirus exposure mitigated

Sector developments and company hires

Euro CLO coronavirus exposure mitigated
A portion (15%) of European CLO collateral is derived from the industries most vulnerable to the coronavirus pandemic, according to Moody’s. However, the agency says that the relatively few near-term maturities of affected issuers will help mitigate the negative impact.

The European CLOs that Moody’s rates have a median exposure of 14.7% to the sectors most vulnerable to economic fallout from coronavirus, with a range of 4.2% to 29.2%. Meanwhile, the median exposure of European CLOs' in industries moderately vulnerable to coronavirus fallout is 44%.

Among industries highly vulnerable to coronavirus economic fallout, hotel, gaming and leisure are CLOs' largest exposures, with a median of 5.3%. The next-largest median exposures among highly vulnerable industries is retail at 4% and durable consumer goods at 2.1%.

The average rating for all three high, medium and low exposure categories is B2. Of the highly vulnerable industries in CLO portfolios, just two - automotive and retail - have a weighted average rating of B3, while the others have weighted average ratings of B2 or higher.

Moody’s says: “Very few of the CLO obligors that are highly vulnerable to coronavirus fallout have maturities approaching in the next few years. This distribution of debt maturities will somewhat mitigate the heightened risk in debt from these industries represent, because it limits the need for obligors to refinance during distressed market conditions. That said, companies with already weak liquidity will be more at risk in a prolonged outbreak.”

Just 17.4%, or €18.9bn, of collateral in CLOs it rates matures by 2023. And companies that are both highly vulnerable to coronavirus fallout and whose debt matures in 2020 represent just 0.02% collateral. Such companies whose debt matures in 2021 represents 0.13% of collateral, followed by 1.8% in 2022 and 1.08% in 2023.

Debt maturities for those same years from both highly and moderately vulnerable companies combined represent 0.20%, 1.04%, 4.7% and 5.1% of CLO collateral. Among highly vulnerable industries, retail has the most near-term maturities, with a peak in 2022 of 0.8%.

Nevertheless, Moody’s concludes: “The ultimate impact of the coronavirus-driven decline in economic activity on CLO portfolios will depend on the duration of the pandemic, as well as the CLO manager’s trading activity… We expect that credit quality around the world will continue to deteriorate, especially for those companies in the most vulnerable sectors that are most affected by prospectively reduced revenues, margins and disrupted supply chains.”

Increasing triple-C baskets
An unprecedented 8% of US broadly syndicated loans (totalling around US$45bn) have been downgraded or placed on negative watch by S&P since the SF Vegas conference, according to BofA Global Research. Downgrades have primarily been in Covid-affected sectors, namely entertainment and leisure, gaming and hotels and airlines. Although these sectors had on average a better rating profile before the onset of the pandemic, the share of B-/lower rated issuers has doubled to 28% over the past few weeks. As a result of these downgrades, BofA estimates that pro-forma CCC/Caa1 baskets have increased from 4% to 6% across the sector, while 30% of deals are exceeding the 7.5% threshold.

Manager transfers inked
A number of CDO manager transfers have been inked this week. The collateral management agreements for the Taberna Preferred Funding II and V Trups CDOs have been assigned to Hildene affiliate HCMC III, while those for Taberna Preferred Funding III, IV, VI, VII, VIII and IX have been assigned to HCMC II. Separately, Garrison is set to assign its rights and obligations as collateral manager for Garrison BSL CLO 2016-1 and 2018-1 to Anchorage Capital Group, upon consent from a majority of the controlling class and the subordinated notes.

North America
Colony Credit Real Estate has named Michael Mazzei ceo and president. Concurrently, Andrew Witt will transition to coo, having previously served as interim ceo and president. Mazzei has served as a director of Ladder Capital Corp since June 2017, having previously served as president of the firm from June 2012. Before that, he worked at Bank of America Merrill Lynch, Barclays Capital and Lehman Brothers.

SLABS maturity risk eyed
FFELP student loan ABS are expected to exhibit higher borrower utilisation of forbearance in the short term as a result of the economic effects of coronavirus containment measures. Fitch suggests that there will be increased enrolment in income-based repayment for partial financial hardship (IBRPFH), with existing IBR borrowers potentially also re-adjusting payments lower to reflect reduced income. These trends will further slow loan payment rates, thereby increasing maturity risk and heightening downgrade rating pressure for bonds maturing in the near term, according to the agency. The US Education Department last week announced plans to provide relief to FFELP student loan borrowers, including waiving student loan interest and automatic use of forbearance for any borrower that becomes 31 days delinquent. Privately held FFELP loans are not included in this announcement.

BWIC platform access
Given the current challenges in the marketplace, KopenTech is offering six months of full free access to its BWIC platform, which includes online CLO trading. The platform is 100% web-based and will allow portfolio managers working from home to operate efficiently.