Contents

CLOs

Long road ahead

CLO secondary pricing action premature?

Sentiment in the CLO secondary market is overwhelmingly positive, which is showing up in recent pricing levels. While such sentiment is hopefully not misplaced, it is perhaps somewhat premature.

“Markets are priced to perfection, which is reflected in the rally, particularly at the top of the stack,” says Laila Kollmorgen, md and CLO tranche portfolio manager at PineBridge Investments. “Clearly the feeling is that there will be a robust economic recovery once there is some kind of return to normality.”

Indeed, there are already some signs of normality with the bulk of CLO secondary market activity returning to a burgeoning BWIC calendar from its shift to bilateral trading in the weeks following the Covid-19 driven volatility spike. At the same time, auctions are once again seeing moves toward pre-crisis levels of buy-side participation.

While not direct benefactors, CLOs are being bolstered by global government support. “One of the positives has been that central bank intervention has been highly successful and brought sustained liquidity to credit markets,” notes Kollmorgen.

However, she adds: “The question now is does central bank support need to continue if we really do experience a v-shaped recovery? If that happens, we expect that support and other financial stimulus will fall away, which will lead to second-order effects, such as higher interest rates, which will, in turn, slow the recovery.”

In any event, Kollmorgen notes: “We’re already seeing defaults. In loans the default rate is up to 3.2% and it’s 4.5% in high yield. We expect defaults to rise and continue through into 2021. Investors will, of course, be looking very closely at Q2 earnings announcements and projections to try to gauge expectations. Equally, while the leveraged loan market has recovered to an extent, it is still trading at more distressed levels than pre-crisis."

She continues: “This will undoubtedly feed into CLOs, though it will depend on where they are in their reinvestment periods as to how exposed they are. Undoubtedly, the rating agencies are not done yet and the overall story is still unfolding.”

For now, Kollmorgen suggests: “That is not reflected in the secondary market pricing action we’re seeing, which seems overly strong. For the most part, investment grade paper is trading in the 90s; double-Bs are now back to somewhere between the high-60s and the low-80s; and while there’s not been such a big move in single-Bs, they are still back to the 40s and 50s. We’ve also started to see some equity on BWIC.”

Furthermore, Kollmorgen reports: “Yesterday we saw some triple-Bs that we are sure are going to be downgraded, print as if they were solid at that level. It goes to show that some buyers are rating agnostic and not pricing in any expected agency moves, which we find a little odd. In fact, such behaviour is to us a clear indicator that something is not right with the market.”

Mark Pelham

Capital Relief Trades

Repricing of risk?

Funded, unfunded investor collaboration to rise

The outlook for the significant risk transfer market appears to be positive, at least in the short term. Not only is the instrument likely to play a role in the post-coronavirus economic recovery, but it could also help bridge a gap left by the repricing of risk.

Perceptions of risk have changed following the coronavirus outbreak, with CRT players expecting higher returns and banks reassessing their risk/return profiles. “Bank capital and risk management models take into account the economic environment, meaning that a more challenging environment for financing translates into credit becoming more expensive,” notes Roberto Savina, head of structured risk solutions at AmTrust International.

He says that coronavirus-induced volatility represents a good opportunity for specialised insurance companies to increase their participation in the CRT space, given their expertise in managing exposures through the cycle. “Insurance companies and investment funds can address different needs of originators and in some occasions can partner, offering very effective, tailor-made and cost-effective solutions,” he says.

Indeed, Fabio Paone, head of mortgage & credit, Italy at AmTrust International, anticipates increased collaboration to emerge between funded and unfunded investors to facilitate their different risk/return objectives. “In a post-coronavirus world, the problem isn’t pricing, but cost of capital for insurers – which has increased due to unexpected losses caused by pandemic containment efforts. We expect this to have an impact, but not a massive one. It’s a question of applying the same increase to pricing scenarios to maintain the same risk/return profile.”

He suggests that insurers have an important advantage relative to funds in that funded investors need to find cash, which is difficult to achieve at a fair price in the current environment. “This gap creates an interesting opportunity for insurers: to provide a better risk/return profile for investors. Insurers can sit in the first loss position and funds can sit in the senior part of the junior tranche, as - given the spread widening seen since the Covid-19 shock - they can achieve a similar yield to being lower down the capital structure pre-coronavirus.”

Such a mix of funded and unfunded investors should be helpful for originators too, given the requirement for larger junior tranches under the IRB approach.

Paone notes that investors’ expectations around SRT pricing have increased. “The distance between an insurer’s cost and an investor’s cost will be greater post-coronavirus, so the market is actively seeking a hybrid solution to create a new pricing range. Averaging funded and unfunded pricing expectations may be enough to meet mezzanine funded and junior unfunded target IRRs,” he indicates.

Prior to the Covid-19 shock, indicative coupons demanded by unfunded SRT investors were in the range of 4%-6% and in the range of 8%-10% for funded investors. Post outbreak of the pandemic, coupon expectations are now in the range of 5%-6% and 8%-12% respectively. A hybrid solution could conceivably put the coupon at around 7%, which should remain interesting for both types of investors.

Paone also believes that SRT can play a meaningful role in the economic recovery post-coronavirus, especially in terms of strengthening the Italian banking sector. With many smaller Italian banks struggling to survive following the pandemic containment efforts, he suggests that there is an opportunity for SRT to facilitate M&As across the sector.

Around 10 banks are understood to be in discussions to complete acquisitions by the end of the year. Any increase in capital absorption resulting from the difference between the standard approach of a smaller bank and the IRB approach of a larger one undertaking an acquisition could be mitigated by SRT.

Corinne Smith

For more on how the Covid-19 fallout has impacted the capital relief trades market, sign up for SCI’s virtual debate at 2pm BST on 9 June. Featuring representatives from Allen & Overy, Mariner Investment Group, StormHarbour and Texel, discussion topics include regulatory forbearance and bank issuance plans.

Capital Relief Trades

First steps

STS synthetics paper receives qualified welcome

The EBA’s final framework for STS synthetic securitisations has received an overall positive reception from the capital relief trades market (SCI 7 May), although questions remain regarding the limitation of preferential capital treatment to the senior retained tranches. More saliently, concerns have been raised related to ERBA portfolios and the prudential criteria for obtaining preferential capital treatment.

Overall, market participants have welcomed the EBA proposal for allowing preferential capital treatment for the senior retained tranches of synthetic securitisations. Steve Gandy, md and head of private debt mobilisation, notes and structuring at Santander Corporate and Investment Banking, remarks: “The final paper clarified and responded to industry concerns in regards to excess spread, which is now allowed. However, there is still no clear decision on capital treatment, although the EBA suggests granting preferential treatment for the retained senior tranche. If the European Commission approves this recommendation, I believe this would be an acceptable result for the industry.”

Nevertheless, Suzana Sava-Montanari, counsel at Latham and Watkins, comments: “The recommendation could have considered preferential treatment for the entire capital structure, rather than just the senior retained tranches, while the paper leaves out insurers offering unfunded protection. However, while there is always room for further improvements, the final paper is definitely an important step in the right direction.”

Similarly, Ian Bell, head of the PCS secretariat, notes: “There’s no reason to limit preferential treatment to the senior tranche, since STS transparency and robustness would be true for all tranches. It should be emphasised though that this isn’t such an issue from an overall market perspective, since none or almost none of the junior investors are banks and the senior is retained. Consequently, it is more of a benefit for originators retaining the senior.”

Jo Goulbourne Ranero, consultant at Allen & Overy, adds: “The exclusion of investors from the risk weight benefit - which is limited to originators’ retained senior positions - is not a significant limitation, given the current composition of the investor base, though it could have relevance in terms of future market developments.”

Although limitation to the senior tranche remains an acceptable result, market practitioners have conveyed a more positive tone for other aspects of the final paper. Besides permitting excess spread, the final framework shows significant improvements regarding the collateral criteria.

Matthew Monahan, partner at Linklaters, explains: “The proposed haircuts on securities collateral have now been dropped. Collateral criteria in the discussion paper stipulated that where a transaction was collateralised with securities - as opposed to cash - the deemed value of those securities would be subject to a haircut. The latter wouldn’t work in a typical SPV note structure, since the value of the collateral required would be greater than the issue proceeds of the notes. Instead, the collateral securities are required to be high-quality and short-dated.”

However, the EBA’s proposal for a limitation to the senior tranche is far from clear cut, since it’s accompanied by various conditions and the regulatory authority appears to have passed the ball to the European Commission. “The key advantage of STS synthetics is further transparency and this is why the EBA is promoting it. It’s the key reason behind the whole thing and also explains any reluctance for any definitive answer on preferential capital treatment,” suggests Frank Cerveny, vp at Moody’s.

Indeed, the issues with the proposal pertain more to ERBA portfolios and the prudential criteria that are a prerequisite for obtaining that preferential capital treatment. According to a legal expert: “In the case where the originator is applying the SEC-IRBA methodology, there is unlikely to be an issue, since there is only one senior tranche and it’s retained. Where you might have an issue is where the SEC-ERBA formula is being applied, since in order to obtain a triple-A rating for the most senior tranche, the originator may need to split the retained senior position into more than one retained tranche - all of which are senior to the placed tranches. However, this is relatively rare in this market, especially since the introduction of the new SEC-SA methodology.”

Another consideration is the conditions under which issuers can apply that preferential capital treatment. The latter means complying with Article 243(2) of the CRR.

“Although the article 243 requirements are the same as for true sale deals, the 2% concentration limit may represent more of a restriction in a synthetic context where portfolios can be less granular,” says Ranero.

However, the concentration limit is more of an issue for SMEs, commercial real estate and project finance portfolios. The legal expert concludes: “It imposes certain granularity limits, where no more than 2% of the portfolio can be exposed to a single obligor and also imposes certain limits on the risk weights of the securitised assets. This is more an issue for wholesale portfolios rather than SMEs. Even there, however, with the exception of commercial real estate and project finance - which have very lumpy portfolios - it is usually possible to structure a portfolio that meets these requirements.” 

Stelios Papadopoulos

Capital Relief Trades

Capital trouble

GSEs stare down the barrel of reduced capital relief for CRT deals

The re-proposed capital rules for the GSEs before they exit conservatorship, released by the Federal Housing Finance Authority (FHFA) on May 20, add further doubts to the future of the credit risk transfer market, according to market opinion.

Compared to the rules released in 2018, the new iteration cuts in half the credit relief afforded by CRT deals. Based on gross credit risk on September 30 2019 of $127bn, the 2018 risk-based rules reduced net risk through CRT by $43.1bn, while the new proposed rule allows a reduction of net risk of only $22.1bn. The new rules also assess gross credit risk to be $151.9bn.

This less generous assessment of the value of CRT transactions in terms of capital relief is based upon such considerations as the capacity of CRT deals to absorb losses and whether the market will be open to new issuance or not.

“These formulas are based upon various assumptions, so they made more conservative assumptions particularly with regard to how much loss the CRT market will absorb. In addition, among other things, the leverage ratio factors in how accessible the CRT market might be in a downturn,” says Warren Kornfeld, a senior vice president with Moody’s in New York.

Common equity - the highest-rated form of capital - is, for example, fully fungible with any business line a firm may operate, but CRT deals cover only losses accrued in a specific pool of home loans. So the FHFA has taken a less generous view of the quality of capital that CRT represents than the 2018 rules.

Moreover, the new rules propose a set of bank-like risk based and leverage capital requirements, and the FHFA says it has looked at bank capital models for guidance. In the past, CRT deals have been troublesome for banks. The typical structure employed by the GSEs, in which exposure detaches at around 50bp of loss and then re-attaches at, say, 4% or 5% requires such high levels of capital by banking regulators that it’s not worth it.

JPMorgan did issue a CRT deal on its mortgage portfolio last year which, eventually, received favourable capital treatment but it’s not a usual path and this probably influenced the FHFA as it sought to impose a bank-like discipline on the GSEs, say sources.

Overall, the new capital rules are significantly more onerous than the 2018 guidelines.  Based on assets on September 30 2019, the risk based assessment required $234bn in capital, comprised of common equity Tier 1 in excess of 4.5% of risk-weighted assets (RWA), Tier 1 capital in excess of 6% of RWA and adjusted total capital of 8% of RWA.

The leverage ratio requirement is even more burdensome, coming in at $243bn, based on Tier 1 capital in excess of 2.5% of adjusted total assets plus leverage buffers. The GSEs will have to hold the higher of the two numbers. The 2018 rules proposed total capital of 137bn, so the 2020 rules are 77% higher.

At the moment, the GSEs hold around a modest $45bn in capital, so an increase of this order is no easy task. It can either rely on earnings growth, which at present levels would take possibly a decade, or it can issue equity. The latter is the most expensive route to acquire capital, and following it would likely entail a very different business model for the GSEs.

“The big question is the cost of capital. To get the same return on capital the GSEs will have to, all things being equal, increase their guarantee fees. It’s a business of simple math,” says Kornfeld.

The relative unattractiveness of the CRT market under the new rules might also make the reinsurance market more appealing as a risk transfer route. At the moment, about 75% of the GSE transfer is achieved through capital markets in the form of CAS and STACR deals, and about 25% through the reinsurance market via CIRT and ACIS, but those proportions might shift.

“Credit Insurance Risk Transfers could look more attractive in this environment. Insurers are used to less liquid investments and generally have a longer investment time horizon relative to capital markets players. Borrower forbearance, along with the potential for loan modifications and principal reduction, introduce price volatility risks that make capital markets investors a less stable source of risk capital,” says Bob Gundel, a sales director at RiskSpan.

Of course, at the moment, the CRT market is effectively closed anyway. Prices were crushed in the Covid 19 panic selling and liquidity dried up.

Though prices have rebounded significantly, particularly in the M1s and M2s, it is still not likely that another deal will be priced in the foreseeable future. At the end of this week, M1 CRT deals were in the region of plus 200bp, M2s were around plus 215bp, B1s were perhaps plus 1000bp and B2s were plus 1500bp, say dealers.

“These levels still look expensive to me. Obviously people are still buying, but they’re not the CRT core investors. You need those guys to come back,” adds a trader. The last deal seen in the market was a $966m four-tranche CAS offering by Fannie Mae on March 3, which represented its 41^st CAS note.

Fannie Mae and Freddie Mac declined to comment on the new rules.

It might be too soon to write off the CRT market, however. If the new capital rules proposed on May 20 do take effect at some stage down the road, the GSEs may be forced to continue to make use of the structure as they will need every mechanism at their disposal to reduce capital requirements, even if the economic treatment of those mechanisms is less generous than hitherto.

“It’s true that the CRT sector does not offer the same benefit under this proposal, but because the FHFA has increased capital requirements by more than 70%, anything the GSEs can do to reduce capital requirements could be attractive. These rules don’t necessarily mean CRT issuance is de-incentivised,” says James Egan, co-head of securitised products research at Morgan Stanley in New York.

The application of these new capital rules is also a long way in the future. The new rules comprise a 424 page document, and for the next 60 days comment is invited from over 100 market participants. It seems likely this period will be extended.

There might, moreover, be a different incumbent in the White House in January 2021, with different ideas and different appointees, and the plan to release the GSEs from conservatorship could be quietly dropped. Even if it goes ahead, it will take an extended period for the GSEs to meet even a portion of the new capital requirement before they exit conservatorship.

A lot can happen before then.

Simon Boughey

May payments slump

Forbearances are down for the first time since CARES, but payments by borrowers in forbearance slump

Last week saw the first net fall in US mortgage forbearances since the beginning of the Covid 19 crisis, according to Black Knight data released this morning, but this encouraging news hides other more disquieting information, say market experts.

While welcoming the decline in forbearances, Black Knight ceo Anthony Jabbour notes that “far fewer homeowners in forbearance remitted May payments than did in April. If that trend holds true through the end of the month, the market should be prepared for another likely rise in the delinquency rate for May.”

As of May 26, only 22% of borrowers in forbearance had submitted their monthly payments, compared to a surprisingly high 46% in April. The latter figure had given encouragement to the hope that delinquency would not be as severe as was first feared as it appeared that a large number of borrowers had sought forbearance as a free option.

However, with only a little over a fifth of borrowers in forbearance plans making timely payments in May, that hope has taken a knock. To date, the MBS market has not felt the impact of delinquency and default, but that might be only a matter of time.

Expanded unemployment benefits are also due to come to an end on July 31, meaning that there could be another spike in requests for forbearance as well as actual delinquency after that date.

The number of loans in forbearance decreased by 34,000 last week to a grand total of 4.73m loans, compared to 4.76m last week.

In fact, government-backed loans, supported by Freddie Mac, Fannie Mae, the FHA and the VA, saw a 43,000 dip in forbearances last week, but this was offset by a climb of 9,000 loans in forbearance offered by private label lenders. Only 7.1% of Fannie and Freddie mortgages, or loans worth $420bn in unpaid principal, are now in forbearance plans.

The drop in forbearances seen last week could be due to increased refinancing levels  as borrowers took advantage of record low mortgage rates, suggest market sources.

Simon Boughey

Structured Finance

SCI Start the Week - 1 June

A review of securitisation activity over the past seven days

Last week's stories
Accessing guarantees
CBILS securitisation warehouses mulled
Forbearances falter
Forbearance volumes slow, but the next stage is daunting
Galaxy returns
Alpha relaunches NPL ABS
Growth phase
European CLOs seeing increasing attention to ESG criteria
Lift off
Hoist Finance answers SCI's questions
Marketplace merit
Online lending resilient amid impairments
Mobilising MILNs
The MILN market is in deep freeze but thaw might be due
Persistent opportunity
CDIB Capital answers SCI's questions

Other deal-related news

• The EIB board has approved a €25bn Pan-European Guarantee Fund (EGF) - which will be funded by EU member states pro rata to their shareholding in the bank – as part of its overall response to the Covid-19 crisis (SCI 27 May).
• The Fanes Series 2018 Italian RMBS issuer has announced that in order to address the Covid-19 emergency, Cassa di Risparmio di Bolzano - in its capacity as servicer and originator on the deal - intends to grant borrowers payment holidays in relation to an outstanding principal exceeding 5% of the collateral portfolio outstanding principal at the date of the relevant suspension (SCI 27 May).
• Investcorp has announced the fully subscribed final closing of approximately €340m in commitments for its second vintage Italian Distressed Loan Fund II, which is exclusively advised by Eidos Partners (SCI 27 May).
• The New York Fed has updated its TALF FAQ document to include securities rated by DBRS Morningstar and KBRA, to the extent that they also have a qualifying rating from one of the 'big three' rating agencies (SCI 27 May).
• UK Mortgages and TwentyFour Asset Management have notified Oat Hill No. 1 bondholders that the RMBS will not be redeemed on its first refinancing call date of 27 May (SCI 28 May).
• In order to clarify arrangements for prospective draws for interest forbearance and operational matters with regards to using the Forbearance SPV, the AOFM is seeking expressions of interest from SFSF-eligible lenders (SCI 28 May).
• ESMA has updated its Q&A document on the Securitisation Regulation, clarifying different aspects of the templates contained in the draft technical standards on disclosure (SCI 28 May).
• Hertz Global Holdings last week filed for Chapter 11 bankruptcy, following unsuccessful efforts to negotiate a restructuring of its lease obligations (SCI 28 May).
• Slate Asset Management intends to deploy up to C$500m of transitional capital to provide liquidity to the Canadian real estate industry, especially those impacted by the Covid-19-induced market disruption (SCI 28 May).
• Scope Ratings has issued a request for comments regarding the publication of its CRE security and CMBS rating methodology (SCI 28 May).
• By way of a joint venture, illimity Bank and VEI Green II have set up a securitisation vehicle for distressed loans with underlying assets that produce electricity from renewable sources (SCI 29 May).
• Ares Management has agreed to pay US$1m to settle SEC charges that it failed to implement and enforce policies and procedures reasonably designed to prevent the misuse of material nonpublic information (SCI 29 May).
• The Alternative Reference Rates Committee (ARRC) has published recommended best practices to assist market participants as they prepare for the cessation of US dollar Libor (SCI 29 May).
• CBL Properties has become the first US mall operator since the start of the coronavirus pandemic to announce its intention to cooperate with lenders in foreclosure proceedings and/or to return keys on some malls in its portfolio (SCI 29 May).
• Moody's has taken positive rating actions on three tranches of an unexecuted unfunded CDS pertaining to Santander's Grafton CLO 2016-1 capital relief trade (SCI 29 May).

Data

BWIC volume

Secondary market commentary from SCI PriceABS
28 May 2020
USD CLO
Fifty covers today – 11 x AAA, 3 x AA, 3 x A, 16 x BBB and 18 x BB. The AAAs tighten and trade 158dm-218dm, at the tight end PGIM's DRSLF 2019-76A A1 covers 158dm / 5.98y WAL (2024 RP profile) – good metrics 0 ADR, 12.8 sub80, 88 diversity, 3.8% CCC and -0.19 par build. At the wide end is Sound Point's SNDPT 2015-1RA A 218dm / 3.24y WAL (2022 RP profile) – weaker stats 3.07 ADR, 17.4 sub80, 6.62% CCC and -3.74 par build.
The AAs (2020/2022 RP profiles) trade 228dm-230dm in line with comps in 225dm-240dm recent context with an outlier trade HLA 2014-1A CR (Bardin Hill) 441dm / 1.92y WAL (2018 RP) which is post RP end and given the deleveraging this is an ex-single-A (A2) credit now upgraded to Aa1 hence the basis from traditional AA levels.
The single-As trade 289dm-370dm (2022/2023 RP profiles) with this cohort trading 290dm-460dm over the past 2 weeks today's levels are within the tighter end of this range, at the wider end today is Carlyle's CGMS 2017-2A B 370dm / 6.23y WAL – weaker metrics vs peer trades today 1.03 ADR, 18.1 sub80, 9.2% CCC and 3458 WARF.
The BBBs trade 459dm-884dm across a range of RP profiles (2021-2025), which is slightly tighter versus past 2 weeks trading across these cohorts 480dm-900dm. However we are now seeing many more sub-500dm trades which is evidence of tightening across benchmark transactions.
The BBs trade 864dm-1464dm which is a narrower range than the same cohort 886dm-2276dm over the past 10 days but we are now also seeing more sub-1000dm trades. At the tight end today is Blackrock's MAGNE 2019-23A E (2024 RP profile) 864dm / 9.03y WAL – 0 ADR, +0.32 par build, 5.99 sub80, 3045 WARF and 1.9% CCC basket which are extremely good benchmark metrics.
EUR CLO
3 x AAA, 2 x BBB & 1 x B trades today. The AAAs have traded very tightly grouped between 173dm and 176dm. These levels are a few bps wider than yesterdays ANCHE 1 A1 trade. The Spire deal is performing the best of the three but at the AAA level these differences flatten themselves out.
In BBBs HARVT 20X D traded at 486dm and DRYD 2014-35X DRR at 565dm. Comparing these two bonds we get (respectively) that MVOC is 107.33 vs 105.93, junior OC cushion is 3.35 vs 1.30, WA coll px is 91.85 vs 91.14. These differences are not huge but we believe Dryden deals always have an extra risk premium because of the high percentage of HY Bonds in the collateral, which of course will have lower recovery rates.
In single B BOPHO 4X F traded at 69.17 / 1258dm. This is a very dramatic change from single B trades earlier this month which were mid-50s price and 1800dm area.
SCI proprietary data points on NAV, CPR, Attachment point, Detachment point & Comments are all available via trial, go to APPS SCI + GO on Bloomberg, or contact us for a trial direct via SCI.

Capital Relief Trades

Risk transfer round-up - 5 June

CRT sector developments and deal news

Sabadell is rumoured to be readying an SME significant risk transfer deal for the second half of the year. The lender launched its first risk transfer trade in September 2019 in full stack form (see SCI’s capital relief trades database).  

CLOs

Experience counts

CLO managers surveyed

Manager differentiation remains a key issue in the CLO market, with many investors focusing on individual experience of past crises. A new survey of CLO managers by Fitch provides some reassurance in this regard.

"Whether portfolio managers have experienced a full credit cycle or two, and evaluating workloads amid the added pressures of credit quality deterioration are real focuses right now," says Russ Thomas, director in US structured credit at Fitch. The agency has published a survey of all 121 European and US firms covered in its most recent ‘CLO Asset Manager Handbook’.

About 52% of the US managers surveyed report their portfolio manager (PM) teams having 20-25 years of experience, with the overall average being approximately 24.7 years. European teams had slightly less, with an overall average of 22.5 years.

That experience is focused in relatively small groups, with about 75% of US managers having three or fewer PMs and an overall average of six. Europe reported fewer on average, at 3.5 PMs and 70% having two or less PMs.

As for broader credit teams, almost half of US respondents had teams of 10-20 analysts, while 64% of European platforms reported teams with fewer than 10 analysts. Of those surveyed, 59 US managers (55%) reported analyst teams averaging 10-14 years of experience and most of the European teams were clustered within the 10-13 year range. Overall, the US team average was 14.7 years and the European team average was 10.5 years.

In terms of workload, most managers said their staff handled within a range of 30-50 names per analyst (65%), largely unchanged from the previous year. There were some with heavier workloads, with 9% of platform respondents indicating their analysts covered over 50 names.

Roughly 10% reported 20 credits or less. Most of these are represented by middle-market platforms, which are typically known to cover fewer credits per analyst than their BSL counterparts. There was a significantly higher concentration in the 20-30 credits per analyst category for European platforms, at 45% versus US platforms at 16%, indicating smaller workloads.

The need for distressed credit specialists has unsurprisingly become an increasingly important factor of late. However, of the only 75 US managers that answered Fitch’s distressed analyst question, 53% reported having three or fewer specialists.

The agency explains: “The interpretation of distressed or workout specialists varies across firms, which is most likely why only a portion chose to respond to our question regarding specific analyst count. Some managers consider their whole staff to be distressed specialists, while others may have more top-heavy staffs, where only a senior manager is involved in workout scenarios. Nonetheless, rarely would a manager have zero staff with distressed credit experience, even those firms whose style is predicated on managing highly liquid BSL names only.”

In addition, Fitch undertook a review of CLO managers’ disaster recovery and business continuity plans in light of the coronavirus pandemic. As of mid-May, the agency notes that most managers reported minimal disruptions to normal operating activities.

Further, Fitch reports: “Based on telephone conversations with CLO managers, firms that had implemented technology solutions facilitating a work from home environment - including the use of cloud-based technology and third-party administration resources - reported that they experienced little to no major disruptions in their abilities to carry out their responsibilities as a CLO manager in the period since stay at home orders were implemented for non-essential workers.”

Mark Pelham

CLOs

Managers measured

CLO manager pandemic performance quantified

US CLO managers have worked harder than ever before to reduce triple-C exposure and build par in unprecedented circumstances since the start of March. Now, as rating downgrades appear to have plateaued it can be seen that their industry has met with some success, according to a new report from S&P.

“The credit profile of US CLO collateral pools has shifted more rapidly over the past several months than at any other point in the history of the CLO market,” the rating agency says. At the same time, it found since 1 March the portfolios within the CLO Insights 2020 Index of 410 US S&P-rated reinvesting BSL CLOs that: ratings on around one-third of the obligors in the collateral pools were either lowered or placed on negative watch; ratings on more than 170 of these obligors were lowered to triple-C; and more than 30 obligors were lowered into the nonperforming range, ie below triple-C-minus.

Due to these actions, triple-C buckets increased to 12.25% as of 25 May from 4.13% as of 1 March, while exposure to nonperforming assets increased to 1.35% from 0.63%. Together, these exposures increased by 8.84%.

Based on trustee reports S&P received during this period, portfolio turnover across individual CLOs ranged from less than 3% to 34%, with an average of about 8.75%. There was an average decline in par during this time of about 21bp across the index, ranging from a decline of 2.4% to an increase of 0.99%. Due to the downgrades, market value haircuts, and the par loss, the average junior OC cushion declined from 3.73% at the start of March to 1.63% (down 2.10%), with about 17% of CLO transactions in the index failing.

In an effort to measure how much of an impact CLO manager activity had over this time period, the S&P report calculates where the portfolios in its index would have been had they been left static since 1 March. It then compares the rating transitions as of 25 May in those static CLO portfolios to the actual current portfolios.

The agency finds that if the managers had done nothing to the portfolios their exposure to companies in the triple-C rated category, on average, would have risen to 13.2% (0.93% higher than what actually happened); and exposure to companies with ratings below triple-C-minus would have risen 1.7% (0.30% higher than what actually happened). Together, the triple-C category and nonperforming bucket would have been 1.23% higher than it actually was; but because there was no trading, par would not have declined.

Further, S&P notes: “Interestingly, had the managers done nothing, exposure to single-B-minus rated CLOs would have been 0.6% lower, suggesting part of the proceeds from reductions in the triple-C and nonperforming buckets were used to move slightly up the credit scale and purchase single-B-minus rated loans. By turning over 8.75% of the portfolio, managers were able to reduce their triple-C and nonperforming exposures by about 1.23% at the cost of 21bp in par. These trades likely saved a few deals from failing their junior OC tests.”

Overall, the report concludes: “Given the swift impact that Covid-19 had across multiple sectors, having a diverse portfolio was not enough to shield CLO portfolios from credit deterioration, even if the portfolio before the downturn was higher than average credit quality... Some managers have been willing to give up some par in order to reduce their triple-C exposures – with some transactions experiencing significant par loss due to triple-C reduction – only to pass an OC test with a 0% cushion ahead of a payment date. On the flip side, we have seen some managers build par by purchasing more assets. As time goes on, we will learn more about asset managers' actions as they juggle between managing credit, par, and their CLO OC tests.”

Mark Pelham

NPLs

NPL ABS prepped

Pancretan Bank readies Castor

Pancretan Bank is readying a non-performing loan ABS that references an approximately €1.1bn real estate-backed SME portfolio. Dubbed Project Castor, the transaction is one of a handful of Greek NPL securitisations launched during the coronavirus outbreak.

Pancretan Bank has carved out nearly €300m for sale, while the rest of the portfolio will also be awarded for servicing by Mount Street. The portfolio is secured by primarily Cretan SMEs and small business loans backed by commercial real estate, hotel, logistics and industrial collateral. The proposed servicing contract has a 10-year life, but the portfolio is expected be cleared earlier.

The exact size and pricing of the tranches is still to be determined, although it is estimated that the senior tranche will be sized at approximately 50% and the mezzanine tranche at 20% of the portfolio. The securitisation will likely not benefit from the Hercules Asset Protection Scheme (HAPS).

Vasilis Theofanopoulos, senior director at Mount Street, notes: “The bank opted for securitisation, since it offers a cost-effective vendor financing alternative to bidders, with a view to maximise proceeds over the life of the portfolio while achieving significant risk transfer and releasing capital to deploy into its ambitious organic growth business plans.”

Pancretan is a co-operative organisation mainly operating on the island of Crete, with a national market share of around 0.6% as of December 2019 and a strong foothold and franchise in Crete, having the second largest market share after Piraeus Bank. Yet despite its relatively captive market share in Crete, as with other Greek banks, it has high levels of problem loans - at 63.4% of gross loans, or €942m in absolute terms - combined with a modest provisioning coverage of 36% as of December 2019.

According to Moody’s: “The potential reduction in the bank’s NPEs will be driven mainly by loan restructurings, liquidations, write-offs and NPE sales. We view positively the bank’s efforts to support its management team and focus on handling these NPEs, with the hiring of specialist managers from the industry. However, there will be a delay of at least a year in the implementation of Greek banks' NPE reduction plans, and all banks will have to defer loan instalment repayments for at least six months to borrowers affected by the Coronavirus.”

Theofanopoulos concurs: “Covid has pushed back several business NPL restructurings, given the uncertainties across a number of sectors and practical impediments to deals. In the case of Greece, that means uncertainty in regards to the tourism industry.

He concludes: “Although it is expected that a negative effect on growing real estate prices in key sectors will materialise, there is still a pipeline. Furthermore, NPL portfolio transfers to investors offer an opportunity to rationalise capital structures and deploy capital in financially constrained Greek SMEs with confident management teams.” 

Stelios Papadopoulos

NPLs

Collection hitch

Italian NPL ABS suffer Covid setback

The Covid-19 pandemic has severely hit Italian non-performing loan securitisations. Since April, the volume of gross collections has decreased by about 46% relative to the January-February average. Low collection levels are likely to persist for the rest of this year, as Italy’s economy is not expected to recover before 2021.

According to Scope Ratings, the drop in collections has been driven both by a delay in the timing of recovery strategies - where the suspension of court activity has played a clear role - and a deterioration in affordability and liquidity conditions. State aid has helped mitigate reduced income from households and corporates, but not completely. Furthermore, deteriorating real estate market conditions could affect collections on secured exposures going forward.

The decrease in gross collections has been reflected similarly in judicial and extra-judicial recovery strategies. So far, there is no evidence of significant changes to servicers’ work-out strategies due to the pandemic.

Scope notes: “Four transactions actually registered a sharp increase in extra-judicial collections, where about 60%-90% of the proceeds were cashed in from a few borrowers. These could be one-off events or may signal a more profound change in recovery strategies, once servicers have gone through the process of amending their business plans.”

JPMorgan’s Italian NPL ABS performance tracker shows that 23 deals are currently exceeding their cumulative collection ratio triggers and PV cumulative profitability ratio triggers, meaning that no class B interest subordination events have occurred. As at the most recent reporting period, JPMorgan’s tracker consists of 28 NPL securitisations with a current outstanding volume equal to €14.9bn.

However, similarly to Scope, the bank notes that April 2020 cumulative collection ratios for five deals all exhibited deterioration relative to previously reported ratios, thanks to the effect of Covid-19 on NPL collections. Most severely, the cumulative collection ratio for BPBNP 2017-1 declined from 96.9% in October 2019 to 74.2% in April 2020.

Meanwhile, Scope has downgraded the class A tranche of Red Sea SPV. The Italian NPL ABS’ rated senior tranche was sized at €1.15bn and downgraded from triple-B to triple-B minus.

Negative rating drivers include a recovery rate on closed positions that is lower than Scope’s base case expectations at closing: 53.8% observed recovery rate versus Scope’s 63.4% expected recovery rate at closing. Despite government measures, increased collateral liquidity risk and weakened borrower liquidity positions negatively affect recovery prospects for the deal.

Stelios Papadopoulos

RMBS

Vulnerability highlighted

Irish re-performing RMBS 'more sensitive'

Measures taken to contain the coronavirus pandemic have resulted in economic contraction, which is expected to weaken Irish RMBS further (SCI 30 April). Due to the characteristics of the underlying collateral, S&P suggests that Irish re-performing RMBS are particularly vulnerable to performance deterioration.

Payment holidays of up to six months are being offered by all lenders and servicers of Irish RMBS transactions rated by S&P. The extent to which these measures will provide relief for borrower distress and prevent delinquencies or defaults is unclear at this stage, but further applications could lead to additional liquidity constraints.

Irish re-performing RMBS are expected to be more sensitive to rising unemployment than prime RMBS and are also expected to see a higher level of defaults. S&P anticipates that recovery timing will lengthen, determined by government-mandated moratoriums on repossession and barriers to enforcing and liquidating security imposed by lockdown measures.

The agency applied hypothetical stress scenarios to its rated Irish re-performing RMBS, grouped by liquidity shock, increase in defaults, delays in repossessions and house-price declines. The results indicate a greater likelihood for rating migrations further down the capital structure, with single-B rated tranches most vulnerable.

However, triple-A to triple-B ratings are expected to remain stable. In the most severe scenarios, low investment-grade ratings (single-A and triple-B) showed rating migration of one to three notches.

S&P notes that rating changes will depend on stress timing, deal deleveraging and absolute levels of excess spread.

Meanwhile, Moody's has placed the ratings of five notes in the European Residential Loan Securitisation 2019-NPL1 (Baa3 rated class B and B3 class C notes) and 2019-NPL2 (A2 class A, Baa3 class B and B2 class C notes) Irish re-performing deals on review for downgrade, reflecting slower and potentially lower anticipated cashflows. The agency also notes that potential loan restructurings and re-performance are drivers behind such transactions and the current environment may negatively impact the possibility of sustainable restructuring solutions.

Jasleen Mann

RMBS

Risk mitigation

Southern European RMBS 'insulated'

An increase in European RMBS delinquency rates is expected in the coming months, reflecting coronavirus-induced stress on borrowers. However, Southern European RMBS transactions have structural features and portfolio characteristics that are expected to mitigate the negative impact of the crisis.

Andrea Corda, avp at Moody’s, says: “Italian, Spanish and Portuguese RMBS we rate would largely weather a short, sharp recession followed by a recovery of lower magnitude. If there were a long and severe recession with a slower recovery, they would come under more financial stress, especially the mezzanine and junior tranches.”

Moody’s rates 62 Italian, 135 Spanish and 11 Portuguese RMBS deals. Four tranches across three Spanish deals have so far been placed on review for downgrade.

Structural features and portfolio characteristics are expected to mitigate the negative effects of the crisis on the senior tranches of these deals. In most of the transactions, senior tranches were insulated from collateral losses in stress scenarios recently applied by Moody’s. The mezzanine and junior tranches face more risk, particularly within Spanish transactions.

All arrears buckets were increased by 15%, 50% and 40% for Italian, Spanish and Portuguese deals, and there was also a moderate increase in severity in the first scenario stressed by the agency. In the second scenario, which was more severe, arrears were increased by 40%, 100% and 60% respectively, with a substantial increase in severity.

Meanwhile, technical factors expected to reduce the impact of collateral credit quality deterioration include the local currency ceiling cap. There are also triggers within Spanish RMBS that can switch transactions from pro rata payments to sequential, thereby enabling the senior tranches to build CE faster.

Further, Moody’s notes that Italian, Spanish and Portuguese RMBS transactions benefit from good liquidity coverage and limited exposure to self-employed borrowers because of positive selection in RMBS pools. An improvement in underwriting criteria and a low interest rate environment are also contributing factors in risk mitigation.

First-quarter appraised house value data from Spain's Ministry of Transport, Mobility and Urban Agenda showed a 0.8% decline from 4Q19, marking the first decline experienced by Spain’s property market in almost four years. Moody’s notes that for Spanish RMBS, the Q1 house-price decline decreases the recovery rate when a borrower defaults, and also decreases the additional equity built up for mortgages that were originated in previous years.

Jasleen Mann

Structured Finance

Equity opportunities?

Sector developments and company hires

Equity opportunities?
Despite a lack of visibility and liquidity and with cashflows likely to deteriorate further into upcoming July payment dates, there may be some opportunities in the CLO equity space, according to a new research report from JPMorgan.

It finds that while NAVs remain negative, there has been some improvement between March lows and late 2019. Equally, cashflow performance has not “completely fallen off a cliff”.

For US CLOs with a January/April/July/October payment schedule, quarterly equity cashflow returns declined to 2.79% in Q2 from 3.44% in Q1 and 3.89% in 4Q19. “A significant drop in Libor is in large part responsible for this decline (three-month Libor dropped from 1.90% in January to 0.36% currently),” the report says.

European CLOs with the same payment schedule experienced similar declines in quarterly equity cashflow return, dropping to 3.18% in April from 4.07% in January.

The report continues: “It’s difficult to call ‘the bottom’ in CLO equity, but there may be some interesting optionality in better-quality, assuming some variant of a V- to U-shaped economic recovery. Many scenarios generate large principal write-down on the equity notional, but relative value is more about pull-to-par potential in the underlying portfolio. The second-order effect of reinvesting into wider spread loans helps.”

…And in Euro deals?
Meanwhile, research from Bank of America published last week analyses the current differences between US and European CLOs higher up the stack. They find several pros and cons for CLOs on both sides of the Atlantic.

“European CLO double-B bonds have a higher credit enhancement versus US double-B (10% versus 8%), although there is also increased idiosyncratic risk in EUR CLOs. For instance, the top 100 loans account for 20% of a US CLO portfolio versus 46% in EUR CLOS,” the BofA CLO research analysts say. However, they add that the increased tail risk in US, coupled with lower OC cushions currently (1.5% for US double-Bs versus 4.4% for European double-Bs) imply a greater OC breach ratio and estimate 33% of US CLOs are breaching at least one ID/OC test compared to only two EUR deals breaching their tests.

As a result, the BofA CLO research analysts conclude: “We believe that at present, European CLOs offer a higher spread pick-up versus US, adjusting for currency hedging. Across the IG stack, European CLOs offer a 15bp-40bp spread pick-up, adjusted for currency hedges. European CLO double-Bs offer similar spread pick-up versus US CLO double-Bs - although with a lower tail risk and higher OC cushions, we prefer European double-Bs currently.”

In other news…

Ashbourne offers withdrawn
Three of the offers accepted for the purchase of 12 care homes underlying the Ashbourne loan, securitised in the Eclipse 2006-1 and 2006-4 CMBS, have been withdrawn following the Covid-19 outbreak. Due to the lockdown of the care home sector, the anticipated timeframes for progressing the remaining offers are expected to extend. Of the portfolio, five closed properties remain, comprising one exchanged contract (for the Warren Park property) on a conditional basis and four other properties that are currently being evaluated for alternative uses. A further 10 care homes are being marketed for sale.

HVF II downgraded on bankruptcy
Moody's has downgraded 11 tranches of rental car ABS issued by Hertz Vehicle Financing II (HVF II), affecting approximately US$4.3bn of securities. All 11 tranches remain on review for possible further downgrade. The rating action is primarily prompted by: Hertz's Chapter 11 bankruptcy filing without a pre-negotiated plan with noteholders to amend the lease and the high likelihood of a liquidation of all or a large portion of its vehicle fleet (SCI 28 May); increased risk around the amount of proceeds that will be derived from the sale of the vehicle fleet and sale timing, given the challenging market conditions that the used car market continues to face as a result of Covid-19; and uncertainty related to the outcome of the bankruptcy. Earlier last month, Fitch downgraded all its ratings on outstanding ABS issued by HVF II, totalling US$6.04bn of securities. After Hertz was unable to make the May operating lease payment to the ABS trust, BONY as trustee drew on the letter of credit and reserves supporting the securitisations to pay the May interest to noteholders and passed through the vehicle sales proceeds for principal.

Madden clarified
The OCC has finalised the ‘valid when made’ rule (SCI 27 November 2019), clarifying that a bank may transfer a loan without affecting the legally permissible interest term. The rule supports the orderly function of markets and promotes the availability of credit by answering the legal uncertainty created by the Madden decision, according to the agency. The ruling is expected to improve liquidity for marketplace loans in the whole loan and ABS markets by removing the uncertainty on the validity of loan terms originated by a bank and sold across state lines to a non-bank.

North America
Lockton Capital Markets has appointed Ken Pierce as ceo, leveraging his 30 years of experience in the insurance and alternative asset management industries. In 2019, Pierce founded and began serving as ceo of Vanpoint Advisors, which originated and structured asset portfolio financing transactions for alternative asset managers, as well as closed block reinsurance, sidecar reinsurance and surplus notes. He also previously served as co-founder of Vanbridge, as well as in leadership roles at Mayer Brown, Morgan Stanley and Lehman Brothers. The assets of Vanpoint will be merged into Lockton Capital Markets.

Underpayment to be rectified
Principal was underpaid on eight of the 12 classes of notes issued by the Dublin Bay Securities 2018-MA1 RMBS on the IPDs between 4Q18 and 3Q19, due to an incorrect allocation of revenue and principal receipts. The underpayment will be rectified on the forthcoming June IPD from funds to be paid to the issuer by the class R noteholders, which were overpaid.

Watchlisted loans spike
US CMBS servicers added US$29bn conduit loans to their watchlists and transferred US$4.7bn to special servicing during the May remittance period, according to Wells Fargo figures. This marks the largest monthly inflow of watchlisted loans ever, surpassing the prior peak of US$21bn in May 2008, when the conduit universe was roughly twice its current size. Of the US$4.7bn, US$1.9bn was on the servicer’s watchlist in April, while US$2.8bn transferred directly to special servicing. In comparison, US$12bn transferred in May 2009 following the bankruptcy of General Growth Properties (SCI 13 May 2009), with 2009’s average monthly volume reaching US$4.5bn.

Structured Finance

More Euro CLOs on review

Sector developments and company hires

More Euro CLOs on review
Moody’s has put a further 234 tranches from 77 European BSL CLOs on review for possible downgrade. The securities involved are rated Baa2 to B1 and below. The action brings the total number of European CLOs Moody’s has under negative review to 351, representing around 16% by count, or 6.5% by balance, of its rated European BSL CLO tranches outstanding.

Moody’s explains: “Since April, the decline in corporate credit has resulted in a significant number of downgrades among the assets underlying some CLOs. Consequently, the weighted average default risk of these CLO portfolios has increased substantially and the credit protection available to the CLO securities has eroded, prompting Moody's to place additional securities on review for possible downgrade.”

In other news…

CRE data integration
Trepp has implemented a new data integration with CompStak, a provider of commercial real estate lease comps, sales comps and property information. Trepp clients will now be able to view CompStak's critical market and submarket leasing metrics, while mutual clients of both firms can access CompStak's detailed property and space level data. As part of the integration, Trepp and CompStak have released an initial report combining Trepp's CMBS data and CompStak's lease comp data in New York City to examine the underlying income risk on commercial real estate properties over the next two years. The analysis reviewed more than 120 properties revealing that nearly US$750m in loan balance is at refinance risk due to upcoming renewal and maturity concerns.

DSB asset sales postponed
Due to the Covid-19 pandemic, the bankruptcy trustees of DSB Bank have decided to postpone the sale of the remaining assets of the bank’s securitisation programmes until further notice. Because of this temporary postponement, DSB Bank does not intend to make a bid in the near future for the receivables portfolios of the Monastery 2004-I and 2006-I and Dome 2006-I SPVs. The bank notes that some noteholders are considering selling their notes issued by the SPVs and it is prepared to consider purchasing the Monastery 2004-I class B to class E notes and the Monastery 2006-I class B to class D notes if holders wish to sell them at below par.

EMEA
Brit has appointed Michael Wade as an independent strategic consultant. In this role, Wade will act as an adviser to Brit’s management team across a number of areas, while also acting as an external ambassador for the group. He brings over 40 years of experience in the insurance market, during which time he has held a series of high-profile positions, including advising the UK government on the Pool Re and Flood Re projects. He is currently non-executive chairman at TigerRisk Capital Markets & Advisory, the senior non-executive director of Neon Underwriting and a senior adviser to Swiss Re.

Ocorian has appointed Nick Bland as director and head of UK client services in London. Bland will manage a team responsible for client service delivery to corporate and institutional clients, private clients, alternative investment funds and corporate trust clients. He previously managed Deutsche Bank’s EMEA structured credit services group within the corporate trust division and was responsible for CLO/CDO, private debt, loan and hybrid transaction servicing.

Interest-free restructuring ‘credit negative’
Obvion is offering borrowers who took advantage of coronavirus-related payment holidays the option to convert their total deferred principal and interest payments into a new and interest-free loan part that will be added to the existing loan. Repayment of this added loan part would begin two years after the restructuring via equal monthly instalments over three years. The deferred payments would therefore begin repayment in 2022 (instead of the first half of 2020) and bear no interest until repaid within five years in 2025. Moody’s notes that Obvion's payment solution is in line with the plans of other Dutch lenders that will likely take similar steps. The agency suggests that if interest-free restructuring emerges as the common solution to payment holidays stemming from the coronavirus crisis, the cashflows of Dutch RMBS would be reduced in a prolonged crisis with a severe recession, a credit negative.

Margin call settlement
AG Mortgage Investment Trust has entered into a settlement agreement with RBC pursuant to which they mutually released each other from further claims related to a financing agreement that the latter alleged the former had defaulted on at the height of the Covid-19 shock. As part of the settlement, AG paid RBC US$5m in cash and issued to RBC a secured promissory note in the principal amount of US$2m. AG REIT Management, the company’s external manager, simultaneously entered into a separate intercreditor and subordination agreement with RBC that subordinates the payment of the company’s previously issued US$20m secured promissory note payable to the manager to the note payable to RBC. AG had disputed RBC’s notices of events of default and filed a suit in federal district court in New York, seeking both to enjoin RBC from selling the company’s collateral securing the financing, as well as damages.

Structured Finance

Conduit CMBS on watch

Sector developments and company hires

Conduit CMBS on watch
S&P has placed its ratings of 96 classes from 30 US conduit CMBS on credit watch (CW) with negative implications, reflecting the bonds' exposure to the adverse impact of Covid-19 on the lodging and retail sectors, and the related uncertainty about the duration of the demand disruption. The agency says it will resolve or update the CW negative placements after further discussions with the master and special servicers, and as more information regarding the performance of the loans becomes available. Specifically, it plans to contact servicers regarding the status of any missed loan payments, the status of any debt relief requests, special servicing transfer activity, payoff/refinance indications (for 2020 loan maturities) and the servicers' advancing intent and asset resolution strategies (for specially serviced assets).

In other news…

CRT tool released
The FHFA has published a credit risk transfer spreadsheet tool based on the re-proposed capital rule for Fannie Mae and Freddie Mac, with the aim of providing additional transparency to the public. The tool shows how CRT formulas work and allows users to input assumptions and calculate the amount of capital the GSEs are required to hold across retained risk exposures in different types of CRT transactions.

MM CLOs under review
Fitch is undertaking a review of the 59 middle market CLOs it rates to evaluate whether rating changes are required. The review involves updating the point-in-time credit opinions (COs) for private borrowers for the loans held in the deals.

Fitch is initiating requests with MM CLO managers to provide the most current financial information for these private borrowers in their CLO portfolios. The updates of COs will include that information and analytical overlays to the Corporate Credit Opinion Model that reflect Fitch's view on the coronavirus impact. If updated financials are not available at the time of the review, the agency will apply adjustments to the most recent figures available. Approximately 80% of an average MM CLO portfolio's credit quality is determined by COs, which are usually only updated annually, with the remainder determined by a public rating.

More US BSL CLOs reviewed
Moody's has placed on review for possible downgrade a further 241 tranches issued by 115 US BSL CLOs, plus another two linked CLO combination securities. The move involves eight tranches rated Aa2, 51 rated A1-A3, 59 rated Baa1-Baa3, 62 rated Ba1-Ba3 and 61 rated B1 or below. These actions combined with the tranches Moody’s put on review in April total 1,100 and represent approximately 24% by count, or 7% by balance, of Moody's-rated US BSL CLO/CBO securities outstanding. Approximately 93% of those tranches on review are currently rated Baa1 or below.

North America
Logan Lowe has joined Diameter Capital Partners, focusing on structured credit. He was previously a partner at Prophet Capital Asset Management.

Matthew Cantor has joined Pretium as a senior md focused on bankruptcy and distressed assets. In his role, Cantor will help identify and provide diligence on investments across the firm’s credit platform. Most recently, he was the evp of legal affairs and general counsel for Lehman Brothers Holdings, where he was responsible for overseeing the company’s complex litigation matters that generated positive outcomes for creditors. Previously, Cantor was a founding principal at Normandy Hill Capital and before that he was a partner at Weil, Gotshal & Manages and Kirkland & Ellis.

SLABS downgraded on maturity risk
Moody's has downgraded 38 securities issued by 29 FFELP student loan ABS, affecting approximately US$11bn of bonds. Of those 38 downgraded securities, nine from four transactions have also been placed on review for possible further downgrade. The agency has also placed the ratings of an additional seven securities issued by five FFELP student loan securitisations on review for possible downgrade. The review for downgrade actions reflect an increased likelihood of slower collateral pool amortisation and bond payoff risk by their legal final maturity dates, due to significant increases in forbearance resulting from a contraction in economic activity and an increase in unemployment following the coronavirus outbreak.

Structured Finance

Senators seek TALF expansion

Sector developments and company hires

Senators seek TALF expansion
US Senators Jerry Moran, Martha McSally and Thom Tillis sent a letter to Fed chairman Jerome Powell and Treasury secretary Steve Mnuchin requesting that TALF be expanded to accept ABS backed by assets from all essential lending sectors as eligible collateral. The letter specifically urges personal instalment loans and non-agency RMBS be included as eligible collateral to ensure that lenders can continue to provide adequate financing to borrowers. The letter follows similar requests from lawmakers in the House of Representatives urging the Fed to expand TALF to reflect the evolution of the securitisation market over the past decade (SCI 3 April).

Model input errors corrected
Moody's has downgraded from A1 to A3 the rating of the class E notes issued by Pepper Residential Securities Trust No. 17, following the correction of model input errors. During past surveillance rating actions, Moody's reports that it incorrectly modelled the step-down conditions for pro-rata principal amortisation. The call option date sub-trigger was incorrectly set up, such that the pro-rata conditions would never be satisfied and the principal waterfall would always be fully sequential. Other model input errors that have been corrected but which haven’t had a rating impact are in connection with a different pro-rata principal amortisation condition and the yield enhancement ledger.