Contents

Structured Finance

Securitisation support

AOFM initiatives to boost volumes

The Australian Office of Financial Management has acted quickly to support the Australian securitisation market amid the coronavirus fallout. Indeed, a boost to both primary and secondary ABS volumes is expected as a result of its A$15bn Structured Finance Support Fund (SFSF) initiative (SCI 30 March) and the proposed Forbearance SPV respectively.

Martin Jacques, director, head of securitisation and covered bond strategy at Westpac Institutional Bank, says: “While I don’t expect 2020 issuance levels will get anywhere near the post-GFC record achieved in 2019, the SFSF is likely to ensure that the non-bank segment of the market can access term securitisation markets. Without the SFSF, term securitisations could potentially be difficult for some issuer subsets.”

Jacques notes that the SFSF is able to target the market on a wide front, which contrasts with the AOFM’s involvement during the financial crisis. “Back then, its investment programme was only open to triple-A rated RMBS backed by mortgage insurable loans in the primary market. This iteration of involvement is open to all securitisation types (RMBS/CMBS/ABS), with the ability to invest down the capital structure to all notes except the first loss tranche,” he explains.

He continues: “Additionally, involvement was initially expected to be in primary term securitisations and warehouse facilities, though the AOFM has recently announced that it is prepared to invest in secondary markets essentially on a switch basis. There has been subsequent talk that the AOFM is prepared to support secondary transactions via an SPV targeting loan forbearance.”

The aim of the Forbearance SPV (FSPV) is to mitigate the impacts on securitisation vehicles of forbearance arrangements arising from Covid-19 hardship. The Australian Securitisation Forum has put together a draft term sheet for the FSPV, while the AOFM has retained Clayton Utz as legal counsel and Eticore SD Services as consultant to assist with guidance on the establishment and oversight of the FSPV.

The SFSF made its first investment – in securities issued by Judo Bank - in late March (SCI 3 April), although this particular transaction is said to have been in the works for some time and the AOFM stepped in to provide support across the structure (accounting for approximately 19% of volume). In terms of the Australian securitisation pipeline, a number of mandates were outstanding before the onset of Covid-19, though as yet these deals have not re-emerged.

The securitisation landscape over the next six months is expected to be dominated by non-bank lenders and the SFSF, with little else happening around the edges. ADIs have been provided with a term funding facility (TFF) that allows them to borrow from the RBA at a rate of 0.25% for a period of three years, thereby reducing the need for them to tap other funding markets, such as senior unsecured and securitisation.

Jacques notes that the TFF creates an interesting dynamic for the small to medium ADI issuer subset that rely on securitisation as a form of capital relief. “Under the terms of the SFSF, issuers that have access to the TFF are not eligible for investment. These issuers will need to either meet the market for a capital relief RMBS trade (i.e. a full deck sell-down) without a subsidy from the AOFM or look to other capital tools, which in current markets are prohibitively expensive. Until funding markets normalise and spreads contract, the likelihood of small-medium ADI capital relief RMBS will be diminished,” he suggests.

Meanwhile, the introduction of the Australian Business Securitisation Fund (ABSF) last year also aims to support the Australian securitisation market. The AOFM appointed Challenger Investment Partners as investment manager of the ABSF, which was established to increase the availability of finance to SMEs.

Jonathan Rochford, portfolio manager at Narrow Road Capital, says: “In doing so, they bring capital at a reasonable price. Lenders can grow and lend more to small businesses. The strategy is helpful for emerging lenders, but the market has dramatically changed in the last two months.”

He concludes: “Originators would be keen to bring transactions, but there is little secondary trading at the moment. We are seeing deals gradually amortise. It might take quite a bit of time to clear up, given the current situation. The support fund could help clear up the backlog; however, there will be a waiting period before additional private sector buyers enter the market.”

Jasleen Mann

CLOs

Manager scrutiny

CLO manager performance on watch

CLO manager scrutiny is growing just as market conditions make their job harder. Nevertheless, differentiation is set to accelerate as investors have to adapt the way they assess management performance.

Jason Merrill, investment specialist at Penn Mutual Asset Management, says: “This pandemic is obviously very unusual and has thrown the market into a downturn. Winners will be those with a strong hand willing to step in and buy cheap assets.”

However he adds: “There is a difference between those who talk about being a strong hand and those who actually do buy cheap assets. It is really important for investors to look at the numbers to see which managers actually did buy cheap assets when they said they were going to. Investor sentiment regarding manager tiering is likely to shift based on how managers perform during this downturn.”

That performance divergence is already happening. Poh-Heng Tan, founder of the CLO Research Group says: “Before, there was already disparity in performance, but it was not as big. For example, in February, when I looked at some performance data across the different managed deals by various managers, I saw a range of around 2-2.5% in terms of performance alpha in the same cohort, but now it is over 4.0% points.”

Historically, there have been a range of factors investors have used to assess managers. These factors often included qualitative assessments such as manager perception within the market, the risk of the platform, consistency in terms of investment strategy and the way that this strategy is communicated to investors. The crisis has already altered what is generally perceived as the most useful or appropriate metrics.

Merrill says: “Market participants are focusing more on the junior OC cushion. A material portion of the market has equity payments that are going to be shut off. For higher-rated tranches, having that equity shut off could be perceived as a positive, due to accelerated paydowns.

“However, deals with PIK’ing equity are likely to experience reduced liquidity across the capital stack. Another credit metric that investors are focusing on is aggregate exposure to industries considered most affected by the coronavirus. Triple-C spikes continue to affect a lot of managers.”

The most commonly used metrics may only show a part of the story in terms of performance. Therefore, some turn to alternative methods for insight.

Tan says: “I look at the gross underlying collateral return on a full month to month basis since inception, stripping away all the structural nuances. One could then assess the entirety of all trades (not only three good trades), unrealised gains and losses, income generated (adjusting for fixed rates), among others.”

He continues: “Some managers consistently outperform the S&P leverage loan index. I look at the collateral performance and compare it to the index.”

The wholesale actions by the rating agencies are also shifting perceptions. Merrill notes: “It is kind of a different feel compared to last year. With all the loan downgrades that are coming through, all the managers out there have some exposure to losers.”

He adds: “It is hitting everybody, so loan downgrade exposure is less of a differentiating factor. Rating agencies are now looking at downgrading CLO tranches, and the largest exposure to CLO downgrade watch activity was with bottom tier managers. If a market participant has an aversion to CLO downgrades it probably behoves them to stick with top tier managers.”

Jasleen Mann

Capital Relief Trades

Landmark guidance

Implicit support guidelines published

The EBA has published landmark implicit support guidelines as part of its post-coronavirus interventions. According to the paper, banks postponing or reducing payments due to payment moratoria wouldn’t automatically be regarded as providing implicit support, since - by definition - such moratoria are not aimed at reducing any actual or potential losses to investors. Nevertheless, banks will still have to comply with traditional implicit support rules, meaning that implementation of the guidance will require considerable judgement.

The guidance is a follow-up to previous guidelines announced last month that clarify the requirements for public and private moratoria (SCI 3 April). The latest guidance includes two important sections on the post-coronavirus capital treatment of securitisation positions and the regulatory treatment of implicit support.

The first section reiterates and confirms similar judgements from other supervisors in regards to payment moratoria. Hence, given that payment moratoria don’t lead to impairments and higher provisions, any automatic hiking of risk weights for securitisation positions is precluded. Nevertheless, banks will still have to monitor the risk of those underlying borrowers subject to a moratorium.

However, the most salient and anticipated aspect of the EBA’s guidelines concerns the implementation of implicit support rules post Covid-19. The guidelines state that banks postponing or reducing payments as part of any payment moratoria won’t automatically be regarded as providing implicit support. This is because, by definition, such moratoria are not aimed at reducing any actual or potential losses to investors.

Nevertheless, the EBA guidance doesn’t affect any contractual terms in regards to credit events. The originator is still at liberty to claim against the protection seller, since the paper doesn’t specify the conditions under which this and other actions can be carried out.

The implicit support guidance just clarifies that not claiming shouldn’t be automatically classified as implicit support. Besides not claiming protection, further actions that would be treated in the same way include restructuring or amending a deal and replacing assets that are under a moratorium with those that are not.

The significance of all this for synthetic securitisations is wide-ranging, although it mostly boils down to the fact that it prevents any automatic triggering of credit events for assets subject to a payment moratorium. “If you guarantee payments to a corporate client under these moratoria, then that could trigger a restructuring event, so we needed clarification from the EBA on this. Overall, we aren’t charging losses to investors we should be charging, since we are taking non-contractual actions to make payment moratoria,” says Steve Gandy, head of private debt mobilisation, notes and structuring at Santander Corporate and Investment Banking.

The term ‘non-contractual’ is key. Article 250 of the CRR precludes the sponsor and the originator of a securitisation from “providing support, directly or indirectly, to the securitisation beyond its contractual obligations with a view to reducing the potential or actual losses to investors.”

The guidelines extend further benefits to cash deals. Gandy explains: “If you defer interest and principal for cash deals, then obviously investors won’t receive any cashflows. The guidance though permits liquidity facilities to support investors, as long as they are repaid on top of the waterfall.”

Santander UK has already utilised this mechanism for its Holmes programme (SCI 24 April).

Nevertheless, implementation of the guidelines will require considerable judgement because SRT issuers still have to report implicit support. In other words, they have to prove that they are helping themselves rather than supporting investors.

Jo Goulbourne Ranero, consultant at Allen & Overy, comments: “The actions referred to in the statement are still capable of constituting implicit support and notifications must be made to regulators in the usual way, so potentially difficult decisions remain, regarding the point at which proposed action ceases to be motivated by compliance with a general payment moratorium and becomes motivated by reputational considerations or reducing losses to investors. Actions motivated by the latter considerations clearly raise moral hazard concerns and risk serious regulatory sanctions.”

Yet again, adhering to contractual obligations is key. Gandy concludes: “I think the key thing is to align the treatment of the loans on a bank’s books with the way it treats the loans in the securitisation. If you don’t classify the loan as impaired on your books, it should not be treated as a restructuring in the securitisation. In that case, you are assuring that you are respecting the contractual obligations of the deal and not taking in extra-contractual actions that may be classified as implicit support. If we do take non-contractual actions, we will have to demonstrate that it is neutral or beneficial to the bank.”

Stelios Papadopoulos

Structured Finance

Targeted action

Wholesale ratings downgrades questioned

The raft of negative rating actions currently hitting the securitisation market is perceived to be driven by the stress created by coronavirus containment efforts. To the extent that some credit ratings were heading for a downgrade before the pandemic, this stress may simply be hastening rating actions. However, there are some who question whether wholesale downgrades are helpful in the current economic environment.

Gene Phillips, director at PF2 Securities Evaluations, notes: “The damage is already done and negative rating actions only exacerbate the price declines – for example, by triggering forced sales, which further supply and hence further price declines, which lead to margin calls and liquidations, which drive a further decline in asset prices. The rating agencies’ heightened downgrade activity during periods of economic stress are part of what becomes a vicious cycle.”

Jim Ahern, md and head of global structured finance at Moody’s, notes that credit ratings are forward-looking opinions that synthesise economic, industry, company and asset-specific risk factors through rating methodologies into a rating scale representing relative risk of expected loss. As these risk factors can change, ratings may change accordingly.

“We’re six to seven weeks into an unprecedented economic shock due to the virus. Moody’s structured finance teams have been coordinating globally to publish research explaining where we see heightened risks and why,” Ahern observes.

He continues: “We have produced a heat map across every asset class and every region identifying sectors of structured finance we think are vulnerable to the current stressed conditions. This heat map is, in turn, a road map for where bonds may be most exposed to potential downward rating actions.”

Through the end of April, Moody’s – for one – had downgraded approximately 350 structured bonds and placed roughly 1,800 more on review for downgrade. Ahern notes that while these are significant numbers, to put them in perspective, they represent less than 1% and 5% respectively of Moody’s universe of over 40,000 outstanding structured bond ratings.

He adds that these actions are concentrated in particularly vulnerable sectors and are typically in low and non-investment grade classes. For example, almost 50% of the bonds that Moody’s has placed on review for downgrade are CLO tranches (representing less than 20% of the CLO securities the agency rates).

The major factor behind the large number of CLO rating reviews to date is the rapid increase in downgrades to the speculative grade borrowers that make up CLO collateral. Indeed, Moody’s now projects that the rate of corporate defaults will jump from 3% to 13% over the next three quarters (SCI 20 April).

CMBS with asset concentrations of hotel and retail properties, as well as aircraft lease ABS are other vulnerable sectors cited by Ahern. These deals are backed by collateral that is highly stressed by coronavirus-driven global social distancing and travel lockdowns.

Ahern clarifies that a bond put on negative review implies the bond is at a heightened risk of downgrade, typically due to higher expected losses on the underlying collateral. “We have been taking a targeted and methodological approach to our review actions, following the script of our heatmaps, as we assess payment and cashflow disruptions against compensating factors such as government stimulus and liquidity support packages,” he explains.

Elsewhere, one of the rating actions that Fitch has implemented is a new mortgage forbearance delinquency cashflow scenario to reflect expected utilisation of consumer payment holidays. The magnitude of the assumption will be a 20-percentage-point increase, effective from last month, to the agency’s current and model-derived delinquency curve.

As a result, it placed 172 classes of US RMBS deals on rating watch negative and downgraded 17 classes (which were rated triple-C or lower). Fitch says it will begin stepping down the stress in October 2020 and remove the stress completely by January 2021. But the agency may raise its assumption above 20% or extend its liquidity stress past payment dates in January 2021, if performance deteriorates or expectations are revised further downward.

Emma-Jane Fulcher, founder of Grovewood Capital Consultancy, suggests that blanket rating downgrades would seem harsh a month or so into consumer payment moratoria. Given that coronavirus-induced stress is expected to only be temporary and deal cashflow will resume, she questions whether downgrades are justifiable in the current environment. In contrast, rating reviews over the moratorium period are more understandable, while rating agencies assess their strategies and potential rating actions.

She points out that noteholder coupons still have to be paid, in spite of debt moratoria being offered to underlying borrowers. “Cashflow haircuts of 30%-40% are already built into rating agency assumptions, so if more than 30%-40% of the book defaults, maybe that’s when ratings should be downgraded. But payment holidays would constitute a technical default rather than a true default and most coupon payments are quarterly, so securitisations are likely to only miss one payment and should have adequate liquidity reserves to cover payment in any case.”

While some deals will likely default, this is not necessarily a real representation of creditworthiness, Fulcher observes. “If there were any pre-existing issues with a deal, they should already have been taken into consideration. If we see blanket downgrades, it’s reasonable to question whether the stresses in the deals were enough to begin with and perhaps the rating agencies should therefore review their methodologies.”

In terms of arriving at particular ratings levels, Phillips agrees that rating agencies should outline the ways in which they’re deviating from their normal processes - or roll out new methodologies that reflect their assumptions more appropriately. “Prepayment rates, recovery rates, default timing and default rates are key inputs for investor valuation frameworks and rating agencies should be transparent about how these inputs have changed from their published methodologies in order to justify the new rating level, upon a downgrade, or in the context of rating new issues,” he explains.

Regarding the timing of rating actions and whether the current scenario will cause rating agencies to reconsider methodologies, Ahern says that Moody’s regularly reviews and back-tests its methodologies. “We would not produce or maintain ratings on bonds unless we were confident our methodologies were fit for purpose. The stresses we are seeing to the economy are readily within the boundaries of our methodologic considerations. That said, we will continue to learn from this shock and the resulting collateral performance we will observe over time can offer further data points to validate and refine our models and credit thinking.”

Fulcher anticipates that reserves are likely to be increased in future deals rather than increasing ratings stresses. “Coronavirus stress is likely to precipitate a ratings blip rather than a ratings recalibration like the industry saw post-financial crisis. Rating agencies are right to be cautious, as the risk has generally increased and it’s difficult to ascertain whether borrowers are taking advantage of payment holidays to save some money or whether they are in real difficulty. The picture might become a bit clearer after the affects of payment holidays begin appearing in cashflow data.”

For the moment, ABS issuers are enhancing the structures of their deals to directly address the uncertainties of credit performance under Covid-19. For example, initial overcollateralisation on a recent US subprime auto loan ABS print was 19.85% versus 6.25% on the last 2019 deal from the same shelf, while target overcollateralisation was 26.15% versus 12.25%.

Corinne Smith

Capital Relief Trades

CRT vol aims for the stars

No longer staid and dependable, the CRT market is at record-breaking volatility

Despite a levelling out in April, volatility in the credit risk transfer market remains extremely elevated, particularly in the context of an asset class that hitherto has demonstrated very little volatility at all.

Annualised vol for the CRT sector was 13.06% at the end of April, according to data produced by Mark Fontanilla and Co, a Charlotte, North Carolina-based bond markets consultancy with particular expertise in the mortgages sector.

This level represents a retrenchment from the staggering surge in volatility to 39% seen in March, as Covid-19 panic swept the market. Historically, the CRT  market has generally traded with vol levels of around 1.5%-2%.

Indeed, it is now higher than most other fixed income sectors, and some high yield assets even trade with a tighter vol than the CRT market.

“CRT vol has never been this high before. In the past it has been generally lower than other fixed income sectors at around 1.50% to 2.00%, but levels seen in recent weeks have approached equity-like volatility territory,” notes Fontanilla.

The total return of the CRTx Aggregate -  the flagship index of a suite of proprietary indices tracking the CRT market - was 896bp for the month of April, taking back some of the mammoth 25% single-month loss seen in March.Yet the YTD total return is still well down, at minus 17.85%.

The April 2020 CRTx RNI - an index which tracks issues priced only in the previous 12 months - has underperformed the broader CRTx. The total return through April was minus 247bp while annualised vol was just shy of 40%. Overall the RNI index is down over 25% YTD, with B-class notes particularly heavily hit.

The M1s and old M2s are down 1.25%, the M2s and old M3 are down 18.25% and the B notes are down 52.21%. The main CRTx shows a loss of 0.75% for the M1s and old M2s, a loss of 12.59% for the M2s and old M3s and a loss of 43.29% for the Bs.

Fixed severity notes, which incorporate what was a common structure to register a credit event before actual loss became the norm from 2015 onwards, are being punished particularly severely. Most are trading with 75-90 handles.

Simon Boughey

Structured Finance

SCI Start the Week - 27 April

A review of securitisation activity over the past seven days

Last week's stories
Accessing liquidity
The role technology plays in securitising trade finance for profit and success
Bright spot?
European logistics gaining momentum
Extension risk
Willingness and ability to call weighed
Non-agency CMBS goes it alone
The non-agency CMBS market is an orphan of the storm
NPL ABS eyed
Greek banks target HAPS, despite virus crisis
Pressured profitability
Building societies sensitive to lockdown
Rating reaction?
Potential shift to non-investment grade drives selling
Recovery boost
Weatherford revolvers fully repay amid negative outlook
Stalwart Canadians
Canadian CMBS better positioned than US
Structural review
New shape of European CLOs examined
Underperformance underlined
Italian NPL ABS ratings hit

Other deal-related news

• Moody's has placed on review for downgrade its ratings on 859 tranches issued by 358 US BSL CLOs (plus another 25 linked US CLO combo notes, secured notes and repacks) and 117 tranches issued by 39 European BSL CLOs (SCI 20 April).
• Moody's has placed 194 classes issued by 50 US conduit CMBS on review for downgrade, affecting approximately US$4.4bn of bonds (SCI 20 April).
• Fitch reports that a cumulative total of 5,420 borrowers, representing 17% of the US$583.8bn US CMBS universe, have so far contacted their loan servicer to explore potential relief (SCI 20 April).
• Following a disagreement between UK HMRC and the Mapeley loan (securitised in the Taurus 4 CMBS) opco regarding the scope of the indemnity to be provided in relation to any residual leasehold property (RLP) according to the services agreement, the parties agreed to a settlement that provides certainty around the provisions of the services agreement in connection with the expiry of the operating period on 2 April 2021 (SCI 20 April).
• The US FHFA has aligned Fannie Mae's and Freddie Mac's policies regarding servicer obligations to advance scheduled monthly principal and interest payments for single-family mortgage loans (SCI 22 April).
• The Dutch tax authorities have provided written confirmation to CLO issuers domiciled in the Netherlands that their recently revised position on the VAT exemption will not apply with retroactive effect (SCI 23 April).
• Moody's has downgraded the ratings of the class A3, A6 and A7 notes issued by Punch Taverns Finance B from Ba3 to B1 (affecting approximately £444.1m of securities), as well as the ratings of the class A1N, A2, A3N and A4 notes issued by Mitchells & Butlers Finance from A1 to A3 (SCI 23 April).
• The three European Supervisory Authorities (EBA, EIOPA and ESMA) have issued a consultation paper seeking input on proposed ESG disclosure standards for financial market participants, advisers and products (SCI 23 April).
• The EBA has provided further clarity on how additional flexibility should guide supervisory approaches in relation to market risk, the Supervisory Review and Evaluation Process (SREP), recovery planning, digital operational resilience and ICT risk and securitisation (SCI 23 April).
• Fintech platform Supply@ME Capital (SYME) has entered into an agreement with StormHarbour Securities for the issue, distribution and placing of a series of ABS that are guaranteed against inventories purchased directly by the platform's SPVs (SCI 24 April).
• Santander has boosted protection for bondholders in its Holmes RMBS master trust programme, TwentyFour Asset Management reports, in the unlikely event mortgage payment holidays cause a shortfall in revenue to pay bond coupons (SCI 24 April).

BWIC volume

Secondary market commentary from SCI PriceABS
24 April 2020
USD CLO
A quiet end to the week with 4 covers - 2 x AA and 2 x A.  The AAs trade 284dm-299dm (2022/2023 RP profiles), we haven't seen AA trade for a week when they traded tighter 266dm-275dm for longer WAL/RP profiles.  KKR's KKR 20 B covers 299dm / 6.1y WAL (neutral manager, deal ADR 0.54, 21.8 sub80 and MVOC 115.3) whilst GSO's GILBT 2017-1A B covers tighter 284dm / 5.8y WAL with better fundamentals (positive manager stats, deal ADR 0.06, 16.98 sub80 and MVOC 117.2).  The single-As trade 352dm-439dm, these (2018/2019 RP profiles have not traded post-vol and carry WALs of c. 3.5y, the shortest dated single-As we have seen recently have traded 459dm-491dm for 5y WAL so these levels appear consistent with the term structure and given the deals are delevering, at the tight end today is Onex's OCP 2015-8A BR 352dm / 3.5y WAL which has a strong MVOC 122.1 and relatively low sub80 13.9 which counteract the high ADR 1.2 which is close to the manager's record across all CLOs.
EUR CLO
Just a couple of BBBs again today. They have both traded around 720dm. This is slightly tighter than the approx. 770dm levels of the day before but both of these bonds have high MVOC (around 104.50%). They also have around 14% sub 80 assets.
SCI proprietary data points on NAV, CPR, Attachment point, Detachment point & Comments are all available via trial, go to APPS SCI + GO on Bloomberg, or contact us for a trial direct via SCI.

Structured Finance

Growth phase

Asian infrastructure loans eyed

Singapore-based Clifford Capital has established a holding company structure under Clifford Capital Holdings (CCH) to drive its next phase of growth. The firm plans to expand into new business lines, including the securitisation of infrastructure loans through Bayfront Infrastructure Management and the provision of private credit and mezzanine financing solutions through Keppel-Pierfront Private Credit Funds (SCI 1 April). 

CCH aims to be an integrated alternative investment platform with complementary companies, offering origination, distribution and investment management capabilities in the real assets sector. As part of this reorganisation, Clifford Capital shareholders have exchanged their existing shares for shares in CCH at a 1:1 exchange ratio. In addition, incremental capital has been committed to CCH by its shareholders, which will be utilised to support further business growth. 

CCH will be run by a senior management team with experience in project, infrastructure and corporate finance, led by group ceo Clive Kerner, who joined Clifford Capital as ceo at its inception. The executive leadership team includes Adrian Teng (group cfo and coo), Richard Desai (group chief risk officer), Audra Low (ceo of Clifford Capital), Premod Thomas (ceo of Bayfront Infrastructure Management) and Stephane Delatte (ceo and cio of Pierfront Capital).

One area the group is targeting is helping to address the substantial infrastructure financing gap in Asia, while closely aligning with Singapore’s economic growth initiatives in the infrastructure and maritime sectors. As part of this effort, Bayfront Infrastructure Management officially commenced operations on 2 April, seeking to build on the issuance of Asia’s first securitisation of project finance and infrastructure loans through Bayfront Infrastructure Capital (BIC) in July 2018 (SCI 18 July 2018).

Bayfront is a 70/30 strategic partnership between CCH and the Asian Infrastructure Investment Bank. The firm is capitalised at US$1.98bn, comprising US$180m in equity capital and US$1.8bn in debt issuance capacity.

Bayfront will acquire predominantly brownfield project and infrastructure loans from financial institutions, warehouse and manage them, with the objective of distributing securitised notes to institutional investors in the public markets. Bayfront will sponsor, structure and manage these issuances, as well as invest in the equity tranches or vertical slices of its securitisations to demonstrate alignment of interest with investors.

The securitisations are expected to benefit from a guarantee provided by the Singapore government.

As part of an engagement strategy with financial institutions, Bayfront has signed MOUs with an initial list of 15 banks, including Santander and Standard Chartered. The MOUs align the understanding between Bayfront and each bank for future collaboration on the takeout mechanism for infrastructure loans, including the key principles and criteria for potential transfers of infrastructure loans from each bank to Bayfront.

The firm says it has already commenced loan acquisitions from a number of these banks and will continue to expand its network of banks going forward.

Corinne Smith

Structured Finance

Income slashed for Fannie and Freddie

Q1 results at the GSEs reflect Covid 19 carnage

Fannie Mae today (May 1) reported that profit plunged in Q1 2020 to $461m compared with $4.4bn in Q4 2019.

The GSE said that the decrease in net income was due to a shift from credit-related income to credit-related expense resulting from the “economic dislocation caused by the Covid 19 outbreak.”

It estimates that  around 7% of its loans in the single family book of business were in forbearance at the end of April, and added that it expects the number of loans in its forbearance plans will continue to increase.

The allowance for loan losses was increased to reflect those it anticipates will occur, including the $4.1bn attributed to the Covid 19 pandemic reflected in the $2.7bn of credit-related expenses for the quarter.

Fannie Mae added that it expects that the impact of Covid 19 will continue to negatively affect its financial results and will contribute to lower net income in 2020 than in 2019.

These results were proportionally worse than those announced by Freddie Mac yesterday (April 30). Freddie Mac reported comprehensive income of $622m in Q1 2020, more than Fannie and also a less dramatic drop from its Q4 income of $2.43bn.

The effects of Covid 19 present the “greatest challenge to the housing market for more than a decade,” said Freddie ceo David Brickman. He added that he expects home prices to fall significantly in Q2.

Simon Boughey

Capital Relief Trades

Risk transfer round-up - 1 May

CRT sector developments and deal news

Deutsche Bank is rumoured to be readying a large corporate capital relief trade for 2Q20. The bank’s last transaction was completed in January. Dubbed CRAFT 2020-1, the US$150m CLN paid Libor plus 9.5% (see SCI’s capital relief trades database).

CLOs

De-risking deluge?

US CLO managers' initial crash response assessed

The current unprecedented trading conditions will only lead to ever-greater CLO manager differentiation. For now, a new report assesses how managers have initially responded to the market and economic volatility seen so far.

JPMorgan CLO research analysts have analysed 173,420 US loan trades for the year-to-date. This adds to their ongoing study of now 2.39 million CLO manager trades of US$2.26trn notional in purchases and sales since 2013.

“Unsurprisingly, the overarching theme is de-risking or increased sales of Caa1/below and B3/B- downgrade candidates (both quadrupled to circa 20% each share of sales volume) with increased purchases of Ba3/above loans (some variation by manager),” the report says. “Activity was more intense earlier as sales declined into April.”

Trading in the first quarter of 2020 was 6.8% (27% annualised) compared to the long-term (20% average annualised since 2013), with style drift in evidence as two-thirds (of 105 managers) increased trading, while one-third decreased relative to long term averages. “CLO positioning will increasingly be challenged by test failure or tranche downgrades (maintain/improve or restricted trading), the difficulty of switch trades (relative price moves between loan rating cohorts), and the lack of new issue loan supply,” the report adds.

The most active period of the first quarter sales was early on in the market stress before loan prices plummeted below US$90. Notably, after loan prices dropped to distressed levels and downgrades picked up, the proportion of Caa1 and less sales surged to 19% from 3% as managers reduced exposures to try to manage WARF and triple-C test limits. Triple-C-related selling remained elevated as pricing began to recover.

The top 20 most sold loans year to date account for 12% of sale volume and span across 13 different industries, the report says, with the top four accounting for 56% of those – healthcare, tech, services and telecoms. By rating, 46% were B2, 27% Ba2, 14% B3 and 7.2% are Caa1 or below.

Of these 20 loans, nine were downgraded this year. Depending on the manager, the individual sales volume of these loans ranges from around US$100m to around US$400m.

Meanwhile, the elevated proportion of Ba3 or above purchases indicates managers shifting up in quality. “As managers de-risk, switch trades (selling single-B to buy double-B) are going to be constrained by relative prices and opportunities to purchase higher-rated loans may be harder to come by, given the decreasing proportion of higher quality in the loan universe,” the JPMorgan analysts say.

They conclude: “Until primary loan origination picks up, it’s likely CLO trades remain at lower levels of activity compared to earlier on as managers become more reliant on access to new collateral than simply trading the existing loan market, especially as loan rating downgrades continue. In total, there were 173,420 trades with US$28bn sale and US$59bn purchase volumes in 2020 YTD (as of 9 April).”

Mark Pelham

CLOs

Cautiousness prevails

European CLO market update

The European CLO market has had a solid run in to month-end this week, with the first post-Covid crash new deals and secondary activity deepening. However, cautiousness prevails.

While the BWIC market remains patchy and the colour released from it even patchier, though the weaker names generally on offer hasn’t helped, overall secondary activity has been strong this week so far. Triple-As have unsurprisingly been the focus with generic spreads still in the 175bp-250bp range.

Such levels were supported with the successful pricing on Monday and Tuesday of the first three European deals since the primary market shut in March – Avoca CLO XXIV, Providus CLO IV and Zinnia Finance. Their seniors printed at Euribor plus 195bp DM, 200bp DM and 225bp spread, respectively.  

At the same time, investor demand has become increasingly strong down to the triple-B level this week, where secondary spreads are in the 650-850 range. Indeed, Sid Chhabra, partner and head of structured credit and CLO management at BlueBay Asset Management, says: “One key area of interest to us is investment grade-rated CLO tranches, where investors can potentially earn a significant yield and benefit from protection against a material pick-up in defaults.”

The story is more mixed in non-investment grade paper, but decent two-way flows have been seen in double-Bs at a 1000-1400 range. “We believe junior mezzanine tranches are pricing in losses slightly more severe than what we observed in the oil and gas crisis of 2015/2016,” explains Chhabra. “While certain junior mezzanine tranches within CLOs can potentially offer an attractive return over a 1–2-year horizon, there are other securities that do not fully reflect the increased risk of future portfolio losses. Therefore, security selection remains essential.”

He continues: “Double-B-rated CLO tranches are trading at wide ranges. Given the dispersion between CLO transactions and portfolio quality, our focus is to be very selective in this part of the capital structure.”

Single-B and equity is considerably more muted with little or no price transparency. Nevertheless, some dealers are circulating requests for paper at the bottom of the stack, increasingly on behalf of clients.

Overall, there is a sense that while opportunities are there to be taken, the CLO market’s recovery is some way away and traders are still waiting for clearer direction.

Meanwhile, the BWIC calendar currently shows four European CLO lists due today. The highlight of which is a three-line equity auction at 15:30 London time, comprising: €2.67m ARMDA 2A SUB, €2m HARVT 15A SUB and €2.1m HARVT 20A SUB.

Mark Pelham

RMBS

Performance pressures

Irish mortgage loan restructurings anticipated

Deteriorating collateral values and higher defaults are expected to impair the performance of Irish re-performing RMBS, even if cash reserves are adequate to cover liquidity shortfalls related to Covid-19 payment holidays. Indeed, Scope Ratings expects an increase in mortgage defaults to drive another wave of loan restructurings, which will – in turn - increase recovery timings.

The top four Irish retail banks have granted or are in the process of granting 475,000 mortgage payment holidays, equivalent to roughly 5% of all mortgages. Furthermore, Banking & Payments Federation Ireland is in discussions with the Central Bank of Ireland to offer longer payment breaks, of up to six months.

“A temporary interruption in collections will have a limited impact on Irish re-performing RMBS, considering their strong liquidity coverage, but transactions will face more long-lasting effects from the Covid-19 outbreak,” says Iris Sie, senior analyst in Scope’s structured finance team.

While cash reserves on Irish transactions generally cover two to six years of senior expenses and interest on senior notes, Sie anticipates that a significant correction in historically volatile Irish real estate will cause a decline in collateral values and an increase in the propensity to default as home equity declines.

In addition, Scope anticipates increasing delinquencies and defaults due to a rise in unemployment and property price readjustments. Around 24% of the workforce in Ireland is currently receiving pandemic unemployment subsidies.

“We expect a rapid deterioration in mortgage defaults as household income significantly shrinks, especially among re-performing loans,” notes Paula Lichtensztein, senior representative of Scope’s structured finance team.

She adds that performance of Irish RMBS between 2013-2018 shows that default rates of restructured loans were two to three times higher than default rates of loans that had not previously been restructured. Restructured loans with negative equity defaulted roughly twice as frequently as those with low LTVs.

Nevertheless, Scope believes that adequate loan security and good historical payment levels of Irish re-performing RMBS should mitigate the increased credit risks. “We expect the increase in defaults will drive another wave of restructuring, increasing recovery timings. We also expect new debt haircuts will decrease lifetime recovery inflows of Irish re-performing loan transactions,” adds Lichtensztein.

The 60%-65% weighted average LTV of securitised Irish re-performing pools is significantly lower than LTV levels of NPL securitisations in other jurisdictions. The proportion of Irish loans with negative equity is also limited, at typically less than 10% of the pools.

Scope concludes: “Recovery values from property disposals will be negatively affected as property prices fall. However, we expect the number of foreclosures on mortgages on primary dwellings will remain limited after Covid-19, as this recovery strategy has been increasingly subject to legal constraints.”

Jasleen Mann

RMBS

Home sales plunge

Over 20% drop in March homes sales bodes ill for MBS

The US March pending home sales report plunged 20.8% compared to February and 16.3% lower than a year ago, the National Association of Realtors (NAR) reported today, showing the calamitous effect of Covid 19 upon the housing market. The Pending Home Sales Index (PHSI) for March is at 88.2, compared to 111.5 in February.

Analysts had predicted a decline of 13.5% but that figure was comfortably exceeded. All regions experienced a significant slump in business. The PHSI in the Northeast fell 14.5% to 82.3%, 11% lower than 12 months ago. In the Midwest the fall was even greater: monthly sales decreased 22% and annually by 12.4%.

Pending home sales dropped 19.5% in the South and 17.8% over the year, while the West was the hardest hit of all with a 26.8% monthly drop to 71.4 and a 21.5% annual decline. The West, moreover, suffered a 26.4% drop in new sales in properties valued from US$100,000-US$250,00, whereas in other regions losses were concentrated in the less than US$100,000 value range.

“The housing market is temporarily grappling with the coronavirus induced shutdown, which pulled down new listing and new contracts,” says NAR’s chief economist Lawrence Yun.

He went on to say that as customers “become accustomed to social distancing protocols” and with the economy “slowly and safely re-opening”, buying should resume, especially given the record low mortgage rates.

However, even if there is a surge in buying later in the year, it will not make up for the loss of the spring season, he conceded, adding that overall home sales will fall 14% for the year.

The impact of these on likely underwriting in the MBS market will be felt next year and beyond.

Simon Boughey

Structured Finance

Unlocking capital

Premod Thomas, ceo of Bayfront Infrastructure Management, answers SCI's questions

Q: Bayfront Infrastructure Management is seeking to help address an infrastructure financing gap in the Asia-Pacific region (SCI 29 April). Can you explain what you mean by this?
A: According to the Asian Development Bank, Asia will need approximately US$1.34trn annually in infrastructure financing between 2016 and 2020 to sustain economic growth. This represents approximately 6% of the region’s GDP from 2016 to 2030.

Investments are needed to sustain the high economic growth in Asia, as well as to address the increasing urgency of infrastructure-related climate change mitigation and adaptation. As there is a strong pipeline of projects expected in the ASEAN transport and energy sectors, developing Asia requires sufficient and affordable financing for future infrastructure development.

Currently, around 70% of infrastructure investment in Asia is financed by the public sector, which is unsustainable if the demand for infrastructure is to be met. As such, there are increasing requirements for private sector funding to address the significant gap in infrastructure financing needs in Asia Pacific. 

Q: Can you provide further detail on how Bayfront will address the infrastructure financing gap?
A: Bayfront’s objective is to address the infrastructure financing gap in the Asia-Pacific region by facilitating the mobilisation of private institutional capital into the infrastructure financing market. It will unlock capital for infrastructure financing by facilitating the recycling of capital and liquidity by banks, which have traditionally been the largest lenders in this sector.

Q: Is there demand for this among investors? What sort of accounts are you hoping to attract?
A: The establishment of Bayfront builds on the successful issuance of Asia’s first securitisation of project finance and infrastructure loans through Bayfront Infrastructure Capital (BIC), which was launched in Singapore in 2018 (SCI 18 July 2018). When BIC issued four classes of notes in July 2018, strong demand was witnessed across a variety of institutional investors, including insurance companies, pension funds, endowment funds, family offices and specialised asset managers, as well as individual sophisticated accredited investors.

Bayfront will acquire predominantly brownfield project and infrastructure loans from financial institutions. Bayfront is looking at a number of industries and sub-categories within the infrastructure sector, with a focus on Asia-Pacific and the Middle East, and to a smaller extent, Australia and Latin America.

Q: Bayfront has executed an MOU with 15 banks. How does the agreement work in practise?
A: Bayfront’s execution of MOUs with 15 banks serves to achieve alignment of understanding for future collaboration on the take-out mechanism for infrastructure loans, including the key principles and criteria for potential transfers of infrastructure loans from each bank to Bayfront. This will facilitate a steady pipeline of infrastructure and project finance loan acquisitions. Bayfront has already commenced loan acquisitions from a number of these banks and will continue to expand its network of banks going forward.

Q: How many more bank partnerships are you targeting?
A: Bayfront is targeting another five MOUs to be added in FY2020.

Q: Will the market see further CLO issuance from Bayfront?
A: Yes, future CLO issuances will be through Bayfront.

Q: What are your expectations regarding Bayfront’s issuance volumes?
A: Subject to market conditions, Bayfront will target to execute an issuance every 12-15 months.

Q: How does Bayfront see the APAC infrastructure financing market developing in the future?
A: Given wider implementation of Basel 3 regulatory requirements, we expect that this will tighten banking liquidity going forward for long-dated infrastructure financing, which necessitates banks to increase their velocity of distribution. We also expected to benefit from the trend that the volume of bankable projects in the region would increase as infrastructure demand ramps up and governments are more familiar with tapping private sector through PPP structures.

There is also a need to develop the capital markets in parallel while the above market transition takes place. BIM believes it is well positioned to bridge the current market gap and benefit from these market transitions in the medium to long term.

Q: Are there any other challenges that need to be addressed in the future from Bayfront’s perspective?
A: We are focused on creating a new asset class for institutional investors through Bayfront. In order to achieve that, we need to deepen the market liquidity, research and pricing benchmarks that investors can suitably use for this asset class.

Jasleen Mann

Structured Finance

European SME ABS struggling

Sector developments and company hires

European SME ABS struggling
Coronavirus-driven disruption is creating financial difficulties for European SMEs that heavily rely on securitisations for funding. Consequently, the crisis and subsequent recession will challenge the asset quality of SME ABS, according to a new report from Moody’s.

“There is a widespread lack of financial strength and fewer financing options among SMEs, relative to large corporate borrowers, so SME obligors are financially vulnerable - especially with a high concentration of underlying businesses in exposed industry sectors, such as tourism and retail,” explains Frank Cerveny, vp-senior research analyst at Moody’s. “Weakening credit profiles among SME obligors are likely to erode the asset quality of securitised transactions.”

The ultimate effect of the coronavirus on underlying asset quality will partly depend on the path of the economic downturn, Moody’s observes. However, structural protections - such as high subordination levels (especially for senior tranches), as well as reserve funds and liquidity facilities - will limit idiosyncratic and recession risks within most securitised transactions.

In other news…

Auto extension rates surge

US auto loan ABS extension rates surged to 3.7% in March, according to Moody’s, compared with 0.7% in both the prior month and March 2019. The year-over-year jump in extension rates was particularly pronounced for certain shelves, ranging from an increase of 0.4 to 6.7 percentage points. The agency reports that servicers are increasingly offering extensions to borrowers affected by the coronavirus, a move that will delay cashflow for several months and slow payments to noteholders.

EMEA
BNP Paribas Asset Management has appointed Christophe Montcerisier as head of real estate debt within its private debt and real assets (PDRA) investment division. Montcerisier has been deputy head of the division since joining BNPP AM in 2019. He was previously at Société Générale, where he held the position of md within the real estate M&A team.

Aurelia Lamorre-Cargill has joined Crédit Agricole as global head of structuring and product development, a role which will involve some joint projects with the firm’s securitisation team. Most recently, she co-founded and was ceo of Argon Capital Management, and has also worked at JPMorgan, Deutsche Bank and Barclays, where she was global head of fixed income structuring. Based in London, Lamorre-Cargill reports to Thomas Spitz, head of hedging and investment solutions, global markets at Crédit Agricole.

Structured Finance

PEFF funds allocated

Sector developments and company hires

PEFF funds allocated
The steering body of the World Bank’s Pandemic Emergency Financing Facility (PEFF) has allocated US$195.84m to 64 of the world’s poorest countries with reported cases of Covid-19 to fund critical lifesaving medical equipment and support for health workers on the frontlines of the crisis. The allocation represents the amount received when the PEFF insurance window triggered for Covid-19 as reported by AIR Worldwide (SCI 14 April). At the time all trigger conditions were met, 4,653 cases - or 0.62% of reported Covid-19 cases globally - were from the world’s poorest countries that are members of the World Bank’s International Development Association. Specific funding allocations will be determined by population size and reported cases, with a minimum of US$1m and maximum of US$15m going to each country, and a heavier weight given to countries classified as fragile or conflict-affected.

RMBS on watch due to stop-advance feature
Moody's has placed 18 class B3 and B4 notes issued by 12 Sequoia Mortgage Trust prime jumbo RMBS on review for downgrade, affecting approximately US$46m of securities. These deals – SEMT 2015-2 through 2017-6 - feature a stop-advance mechanism, whereby the servicer does not advance principal and interest to loans that are 120 days or more delinquent. Moody’s notes that while stop-advance features may lessen potential cashflow disruptions upon advance recoupment and offer greater transparency on actual collections, in the affected transactions principal collections or liquidation proceeds cannot be used to pay interest on the bonds and there is no alternative source of liquidity to pay interest. As a result, in an environment where delinquencies and forbearance activities are expected to rise, this particular stop-advance feature can lead to a reduction in interest payment to these junior tranches. In addition, prepayments - which are a key source of build-up in credit enhancement in the transactions - are expected to slow materially in the next few months, exacerbating the sensitivity of the tranches to interest reductions.

Structured Finance

Prudential flexibility reiterated

Sector developments and company hires

Prudential flexibility reiterated
The European Commission has adopted a package to help facilitate bank lending to households and businesses throughout the European Union that includes an Interpretative Communication on the EU's accounting and prudential frameworks, as well as targeted ‘quick fix’ amendments to the CRR, in order to maximise the ability of banks to lend and absorb losses related to the Coronavirus fallout. Specifically, the Commission proposes to adapt the timeline of the application of international accounting standards on banks' capital, by treating more favourably public guarantees granted during this crisis, by postponing the date of application of the leverage ratio buffer and by modifying the way of excluding certain exposures from the calculation of the leverage ratio. The Communication confirms the recent statements on using flexibility within accounting and prudential rules, such as those made by the Basel Committee, the EBA and the ECB.

In other news…

APAC
CDIB Capital has established a structured credit group with three senior appointments to deliver on its private debt growth strategy across Asia. Tor Trivers will lead the new unit, which includes two of his former investment colleagues - June Yub Chen and Kyu Jung Sim - from the Carlyle Group, where they successfully managed the Carlyle Asia Structured Credit Fund. Chen and Sim join CDIB Capital as svps, having been vps at Carlyle. The former previously worked in the structured finance department at KDB Daewoo Securities, while the latter worked at Morgan Stanley and Macquarie Bank. Prior to heading the Asia Structured Credit Fund at Carlyle, Trivers served in executive positions at Natixis and Nomura in New York. 

Equity investment
Randall & Quilter Investment Holdings has received US$100m of new equity investment into the group by way of a US$80m subscription by Brickell Insurance Holdings (an investment vehicle controlled by 777 Partners) - for a new series of preferred stock issued by Randall & Quilter PS Holdings, which are exchangeable for ordinary shares in the company at a price of £1.35 per share – and a US$20m subscription by funds managed by Hudson Structured Capital Management for 11,902,318 new ordinary shares at a price of £1.35 per share. Aggregate proceeds from these investment total approximately £80.3m and will be utilised primarily to invest in the growth of R&Q’s programme management and legacy businesses.

North America
CRE Finance Council has appointed Sairah Burki as md, regulatory policy, focusing on current and future regulatory issues with a significant impact on the commercial and multifamily real estate finance industry. Burki was previously md and head of policy at the Structured Finance Association (SFA) and before that was a director on Capital One’s securitisation team.

Structured Finance

MBS overvaluation case settled

Sector developments and company hires

Overvaluation case settled
The US SEC has accepted an offer of settlement from Semper Capital Management in connection with administrative and cease-and-desist proceedings against it. On the basis of the offer, the Commission finds that from July 2013 through May 2014, Semper overvalued certain odd lot positions in securities held by the Semper MBS Total Return Fund (SEMMX), which caused the fund’s NAV to be overstated. Additionally, the SEC states that Semper should have disclosed that its valuation practices for odd lot positions were a material contributor to SEMMX’s reported performance. Semper has agreed to pay disgorgement of US$103,228 and prejudgment interest of US$25,000 to the SEC, as well as a civil monetary penalty of US$375,000.

In other news…

North America
Atalaya Capital Management has appointed Rebecca Chia as head of business development and investor relations, overseeing the firm’s capital development efforts. Chia most recently was head of marketing at Third Point Management and spent the majority of her career at Davidson Kempner Capital Management, where she was the head of Asia-Pacific sales and client service. She began her career as an investment banking analyst at Lehman Brothers.

US Bank has recruited Sean Kelley as head of CLO data analytics and research, based in Chicago. He has been tasked with developing new portfolio management and data analytics tools to enhance the bank’s Pivot client portal, as well as expanding its CLO market research offering. Kelley was formerly vp - CLO management at PPM America, which he joined in 2009, having previously worked at Tall Tree Investment Management and Van Kampen Funds.

Second agency downgrades UK CMBS
DBRS Morningstar has downgraded its ratings on the class A, B, C, D and E notes issued by the Elizabeth Finance 2018 CMBS, and changed the trend on the class A notes to negative from stable, in line with the other classes of notes. The move follows S&P’s lowering of these ratings last month, in light of the updated market valuation for the Maroon loan (SCI 30 March). Although DBRS Morningstar initially believed that the revaluation appeared quite conservative, given that the performance of the Maroon loan’s portfolio improved over the past year, the agency notes the revaluation is now more in line with the current deteriorating UK retail sector after the outbreak of Covid-19. The current uncertainty about how the coronavirus outbreak and the UK’s future trading relationship with the EU will affect the UK economy - and in particular, the UK retail property market - is reflected in the negative trend assigned to the notes.