Contents

CLOs

Changing focus

US CLO primary garners more attention

Retracement in the US CLO secondary market has been rapid. Now, bolstered by the belief, misguided or otherwise, in a v-shaped economic recovery, attention is shifting to the primary market.

“The CLO debt rally has been strong – the secondary market has been in the green for more than a week,” says Daniel Wohlberg, director at Eagle Point Credit Management. “We’re adjusting in the same way as other markets on the back of underlying positive sentiment, though CLO equity has lagged the broader rally.”

He continues: “With the secondary rally, market focus can shift to building up primary issuance and for that we need triple-A spreads to come back even more. They’ve come in to 170bp from outside 200bp, but they still have a ways to go before the pre-Covid 120-130bp levels that would spur more issuance.”

For now, deals are getting done, often utilising print and sprint tactics, shorter reinvestment periods or static structures. Four new US CLOs priced last week, making it an above average week since the Covid-driven issuance slowdown.

However, volumes are still significantly lagging last year. According to JPMorgan CLO research figures year to date, 118 US CLOs have priced totalling US$53.8bn (66/US$29.9bn new issue and 52/US$23.9bn refi/reset/re-issue). This compares to 155 US CLOs totalling US$77.1bn (116/US$57.7bn new issue and 39/US$19.4bn refi/reset/re-issue) for the same time period in 2019.

Meanwhile, concerns still remain at the bottom of the stack for legacy deals. Though, here too, Wohlberg suggests there is room for cautious optimism as the market heads into July payments.

“Triple-C and single-B rated loan prices have edged up substantially on the back of the broad market rally,” he says. “Back in April when a notable percentage of deals were failing their OC tests everyone was saying July was going to be significantly worse, but now perhaps the situation might be better than forewarned.”

Indeed, Bank of America CLO research analysts noted earlier this week: “July could see a lower ID/OC breach rate due to (a) improvement in triple-C prices and (b) continued trading out of triple-C names by CLO managers.”

Overall, Wohlberg concludes: “Our focus is in sourcing quality CLO investments and selling opportunistically into the rally, which has become less of a challenge recently. The CLO market continues to confound some, but, above all, remain interesting for many investors.”

Mark Pelham

CLOs

Synergy search

CLO manager consolidation to stay sporadic?

There have been a flurry of CLO manager mergers and transfers recently (SCI passim). However, the need for the right synergies and difficult market conditions makes it likely that such deals will remain sporadic.

“There are maybe a few consolidation candidates out there – a few of the smaller firms with only a handful of CLOs and who will be finding it hard to raise equity in this environment,” says one CLO trader. “But irrespective of market conditions, it’s always about the right buyer and the right price.”

He continues: “Typically they’re fairly big transactions that take considerable time and effort to get over the line and with current low NAVs, they’re hard to justify. So I don’t think we’ll be seeing a large run of CLO manager mergers or transfers, but if two firms can find the right synergies, then deals will get done.”

Those synergies don’t always have to be the obvious ones, the trader argues. For example, he cites THL Credit Advisors buying Kramer Van Kirk Credit Strategies in 2018. “The two firms were across the street from one another and while the deal made sense in other ways, it was the fact that everyone knew everyone else that really made it work.”

However, the trader argues the most recently completed deal and the likely next one up are more clear-cut. Announced on Monday (SCI 8 June), BlueBay Asset Management is taking on RBC’s US CLO management business.

“RBC is BlueBay’s parent, but BlueBay has the bigger CLO book and capability, so the move makes perfect sense,” he observes.

Meanwhile, Assurant is understood to be in talks with Morgan Stanley Investment Management (MSIM) over the sale of its CLO assets. “Assurant decided last year it wanted to divest itself of its CLO business,” explains the trader. “Then they let it be known they were looking for a price, but that price was maybe too much unless you have a lot of synergies.”

The trader suggests that among various potential business-driven synergies there is also a notable one in terms of personnel. Michael Feeney is the co-head of leveraged credit and head of the leveraged loans team in global fixed income at MSIM, but was the head of credit and high yield portfolio management at Assurant.

“So, he is effectively buying back his own CLOs,” the trader says. “Because of that connection, we’d heard that MSIM was in the frame a while ago, but being bank-owned I guess they had a lot of regulatory issues to deal with first. Now the deal looks like it is going to go ahead.”

Where the next deal will come from is harder to gauge. As the trader concludes: “There aren’t any obvious buyers out there looking to scoop managers up – everyone who wants a CLO manager already has one. I don’t think we are going to see a lot more of these deals in the near future, but more firms are having the conversation.”

Mark Pelham

Capital Relief Trades

Risk transfer rebound

Deutsche Bank completes SRT

Deutsche Bank has completed a US$325m CLN that references a disclosed US$5bn global portfolio of large corporate revolvers. Dubbed CRAFT 2020-2, the transaction is the lender’s first capital relief trade following the Coronavirus crisis and the second post-Covid SRT to be issued after Bank of Montreal’s trade last month (SCI 15 May).

Yuri Greenfield, head of risk and portfolio management for one of the largest corporate lending books at Deutsche bank, notes: “During the Lehman crisis of 2008, some types of CLOs/CDOs earned a reputation as exceedingly complex. A lot of investors suffered large losses and it was very difficult to place CLO tranches for at least a year after that.”

He continues: “As a result, there was a widespread concern that when the next crisis came around, the market for CLOs would freeze again. These recent transactions demonstrate that even at the height of the worst crisis in a decade, CLOs can still get placed in large sizes and there is a deep investor base willing to come in for the right price. The key difference with the Lehman crisis is that this time CLOs are not in the eye of the storm.”

Greenfield adds that the transactions are far less complex, more transparent and serve a clear purpose – to mitigate the credit risk of loans actually held by banks and provide them with capital relief. “Perhaps surprisingly, this could prove a positive environment for the banks. Although SRT pricing has clearly widened, the same is also true for the spreads that banks can charge their borrowers. It makes sense for us to pay a higher price for RWA relief if the bank can redeploy this capital more profitably,” he says.

The trade was priced at Libor plus 12.25% and features a replenishment period. The  pricing has widened by nearly 3% compared to the CRAFT 2020-1 ticket that was executed in January (see SCI’s capital relief trades database). However, from a risk perspective, the two transactions are different, since Deutsche Bank altered the underlying portfolio of the latest deal in terms of both rating and industry composition. 

Market practitioners have underlined the importance of revolver drawdowns during the peak of this crisis in March and April as a driver behind higher issuance, although Deutsche Bank denies that it was a driver in this case, as opposed to managing risk limits and freeing up capital to deploy to corporate clients.

Nevertheless, similar to other banks, committed credit facility drawdowns have had an impact on capital. According to the issuer’s 1Q20 statements, drawdowns and prudential valuation adjustments due to Covid-19 drove a 40bp decline in the CET1 ratio, while the new securitisation framework supplied another 30bp. Overall, the ratio was 12.8% at quarter-end, compared to 13.6 % at the end of 2019.

Further large corporate SRTs from the CRAFT programme are expected. Indeed, the bank is readying another transaction that references a US$2bn large corporate portfolio called CRAFT 2020-3.

Commenting on the near-term outlook, Greenfield states: “Loans to large cap corporates benefit from a wealth of disclosure, enabling the CLO investors to carry out their own credit analysis and get comfortable with the risk; this is why deals referencing such underlying portfolios are still viable, even in this very challenging market.”

He concludes: “I expect to see more of them done in the coming months. However, loans to SMEs are a different story; the German banking secrecy law limits disclosure, so CLOs hedging such loans must be blind pools. This makes it harder for investors to analyse such risk, especially in the current environment.”

Stelios Papadopoulos

RMBS

Risky retention

Haircuts become more severe in Covid 19 world

Issuers of mortgage-backed bonds are at the moment finding it increasingly difficult to fund the risk retention pieces, say market sources.

Lack of liquidity in the MBS repo market is in part to blame, but also rates have soared to uneconomic levels for issuers wishing to lend notes in return for cash as the likely economic effects of Covid 19 devalue mortgage-backed assets.

“The repo market is based on counterparty credit and the value of the pledged assets, and it’s become more expensive and/or more constrained in certain areas. Additionally, the larger required haircuts prompted by greater asset price volatility and reduced liquidity at a certain point become economically prohibitive. There’s not much incentive to do it if the haircut means you give up 75 cents for every dollar,” says one mortgage market source.

In lieu of the repo market, MBS issuers have to fund the retention pieces via debt capital or equity capital. This is also an expensive option.

Funding risk retention has been a problem for MBS issuers for some years, yet these difficulties have become significantly worse as a result of the Covid 19 market crisis, add sources.

Some issuers are thus turning to what one market source termed “more innovative ways” of funding risk retention, without going into further detail.

The most recent SIFMA numbers show a drastic reduction in the volume of non-agency MBS issuance in April - the first full month of Covid 19 dislocation. Only $300m of RMBS bonds were printed in April, compared to $1.1bn in March and $4.4bn in February.

CMBS issuance showed an even more aggressive slowdown. There were no CMBS bonds sold in April, compared $5.3bn in March and $5bn in February.

Non-agency MBS issuance is almost 75% lower in 2020 than in the comparable period in 2019. There has been a total of $8.9bn of new debt printed in the first four months of the year compared to $35.4bn in the first four months of 2019.

Agency issuance, in contrast, outperformed with Fannie Mae, Freddie Mac and Ginnie Mae selling $245.6bn in April compared to $170.7bn in March. In fact, agency MBS issuance is almost twice what it was in the first third of 2019.

The obligation upon RMBS issuers to retain the first 5% of loss of any mortgage securitization was stipulated by the Dodd-Frank regulations, introduced in the wake of the financial crisis. In October 2014, these rules were adopted by the six federal agencies charged with applying Dodd-Frank.

The rules were based on the belief that in the years leading up to the financial crisis, mortgage originators had simply passed on the risk to the investor, giving it carte blanche to extend credit to all manner of borrowers without facing the consequences. The risk retention, “or skin in the game,” was designed to re-introduce discipline and caution to the underwriting process.

As the 2011 Financial Crisis Inquiry Committee put it, “Collapsing mortgage lending standards and the mortgage securitization pipeline lit and spread the flame of contagion and crisis.”

Simon Boughey

Structured Finance

SCI Start the Week - 8 June

A review of securitisation activity over the past seven days

FREE - Capital Relief Trades Virtual Panel - LIVE
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Last week's stories
Capital trouble
GSEs stare down the barrel of reduced capital relief for CRT deals
Collection hitch
Italian NPL ABS suffer Covid setback
Experience counts
CLO managers surveyed
First steps
STS synthetics paper receives qualified welcome
Long road ahead
CLO secondary pricing action premature?
Managers measured
CLO manager pandemic performance quantified
May payments slump
Forbearances are down, but payments by borrowers in forbearance slump
New paradigm?
Trustee discretion required in virtual environment
NPL ABS prepped
Pancretan Bank readies Castor
Repricing of risk?
Funded, unfunded investor collaboration to rise
Risk mitigation
Southern European RMBS 'insulated'
Vulnerability highlighted
Irish re-performing RMBS 'more sensitive'

Other deal-related news

• 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 (SCI 1 June).
• Meanwhile, research from Bank of America published last week analyses the current differences between US and European CLOs higher up the stack (SCI 1 June).
• 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 (SCI 1 June).
• 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 (SCI 1 June).
• The OCC has finalised the 'valid when made' rule, clarifying that a bank may transfer a loan without affecting the legally permissible interest term (SCI 1 June).
• 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 (SCI 1 June).
• 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 (SCI 1 June).
• 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 (SCI 3 June).
• 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 (SCI 3 June).
• 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 (SCI 3 June).
• 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 (SCI 3 June).
• S&P has placed its ratings of 96 classes from 30 US conduit CMBS on credit watch 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 (SCI 4 June).
• 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 (SCI 4 June).
• Fitch is undertaking a review of the 59 middle market CLOs it rates to evaluate whether rating changes are required (SCI 4 June).
• 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 (SCI 4 June).
• Moody's has downgraded 38 securities issued by 29 FFELP student loan ABS, affecting approximately US$11bn of bonds (SCI 4 June).
• 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 (SCI 5 June).
• 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 (SCI 5 June).

Data

BWIC volume

Secondary market commentary from SCI PriceABS
4 June 2020
USD CLO
A 'quieter' day with 20 covers - 8 x 1st pay AAA, 3 x 2nd pay AAA, 2 x AA, 2 x BBB and 5 x BB.  The 1st pay AAAs trade in similar context 155dm-198dm, at the wide end of this range is Wellfleet Credit's WELF 2018-2A A1 198dm / 4.87y WAL - the ADR 0.50 and sub80 12.6 levels are in line with peers but with the negative par build -0.18 comes weaker MV metrics (MVOC 140.88 vs mid-140s-153 for peers) from a less mainstream manager with relatively weaker credentials than peers.  The second pays trade tight 187dm-197dm and are migrating tighter as the market grinds in.
The AA is PGIM's DRSLF 2013-28A A2L 221dm / 5.27y WAL which is in the 210dm-240dm range seen for similar comps this week.
The BBBs trade in a wide dispersion 439dm-643dm, with the tight end the lowest seen for this 2021 RP cohort post-vol as this range trades with significant tiering of 500dm-880dm over the past week.  At the tight end is TCI's TFLAT 2016-1A DR 439dm / 5.45y WAL - 0.16 ADR, 8.3 sub80, 106.5 MVOC and CCC basket of 5.2%.  Conversely, at the wide end is Wellfleet's WELF 2017-1A C 643dm / 5.33y WAL - 20.3 sub80, -0.9 par build and a 10.45% CCC basket with MV only just covering the notes 100.8.
The BBs trade 815dm-1107dm versus a comp trading range for equivalent cohorts this week 763dm-1312dm, DMs at this level largely driven by a combination of volatile ADR, CCC and sub80 buckets whilst MV coverage not quite achieving 100% (in 97-99 context) all taking responsibility for the significant tiering.
EUR/GBP ABS/RMBS
We have 1 ABS CVR today, PCLF 2017-2 A, A Premium Finance deal in GBP at AAA level which traded at 99.11 / 152dm to step up date.
EUR CLO
A lot of trades today. Starting with the 2 x single A - they both traded around 320dm. This is within the range for trades earlier this week.
There are 6 x BBB and they have traded from 400dm to 460dm. For reference the MVOCs of these bonds has ranged from 104.7 to 107.6 and Jnr OC cushions from 1.7 to 4.4.
There are 4 x BB. Three of them have traded between 800dm and 810dm but one of them, CADOG 8X ER, traded at 929dm. The CSAM bond does have a long WAL with an RPE date of 15 Apr 2024 and it also has the lowest MVOC at 97.97. One of the other bonds, JUBIL 2017-19A E, also has a low MVOC at 98.03 but traded much tighter at 800dm but then it is much shorter with an RPE of 25 Jan 2022.
There is 1 x B, CIFCE 2X F, which traded at 970dm. The last single B trade we saw was BOPHO 4 F which traded at 1258dm on 28 May 2020, so obviously single Bs have tightened considerably.
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

Spread compression

European ABS market update

The rally in broader risk assets and the lack of new supply has boosted demand for paper in the European ABS secondary market. An increasingly acute supply/demand imbalance is expected to be supportive of valuations over the near term, however.

“We have been on a bit of tear over the last week and a half,” says one European ABS trader. “Spreads have compressed pretty dramatically; for example, triple-A CLO bonds are now being bid in the mid-100s. Everyone is happy to lift at the moment.”

Three-year prime, buy-to-let and non-conforming RMBS seniors have tightened by 10bp, 13bp and 13bp respectively to SONIA plus 66bp, 135bp and 145bp. ECB-eligible Portuguese and Italian RMBS senior bonds saw generic levels rally by 7bp and 8bp respectively to three-month Euribor plus 108bp and 117bp. Consumer ABS seniors have rallied 10bp to one-month Euribor plus 125bp, while European auto ABS seniors and subordinate bonds have tightened 5bp and 15bp respectively to plus 42bp and 185bp.

However, the primary market remains quiet, with year-to-date distributed European issuance totalling €19.3bn – 21% lower than the level seen at the same time last year and at its lowest level since 2009, according to JPMorgan figures. The trader points to the lack of arbitrage as one driver.

“Assets have tightened, but liabilities have lagged. There isn’t enough spread in portfolios for deals to be economic," he explains.

He adds that not many warehouses are open and arrangers appear reticent to add more warehouses to their books. “On top of this, there is no full marketing and syndication process. Deal sizes are significantly smaller than usual and they are not the same type of transactions as what we had prior to the pandemic.”

However, one bright spot in terms of primary issuance is Morgan Stanley’s new UK BTL RMBS – the £300m Tudor Rose Mortgages 2020-1 – which securitises an Axis Bank portfolio. The full capital structure is expected to be publicly offered.

BBVA is also in the market with its largely preplaced BBVA Consumer Auto 2020-1 transaction, which is expected to price this week.

Jasleen Mann

Structured Finance

LCR eligibility eyed

Final credit mapping framework awaited

Prime Collateralised Securities last week withdrew several liquidity coverage ratio assessments on double-A rated STS securitisation bonds. The move was in connection with an EBA Q&A that includes a temporary mapping, in which the credit quality step (CQS) 1 corresponds with triple-A ratings only.

Ruben van Leeuwen, head of credit strategy and regulation at Rabobank, says: “The interpretation of the Q&A is that all non triple-A positions are no longer qualifying [for LCR eligibility]. A fairly large proportion of ABS positions in Italy, Spain and Portugal are expected to be made LCR ineligible, mainly because of their country ratings ceilings.”

Among the LCR eligibility requirements for ABS exposures - which include an STS designation since 30 April - is a minimum rating requirement of CQS1. The CQS is mapped to credit ratings, as set by rating agencies, and CQS1 was widely understood to corresponded with at least a double-A minus rating.

The Q&A follows the go-live of the most recent version of LCR, in the context of the new Securitisation Regulation and an update of the securitisation chapter in the CRR. The mapping has sparked concern regarding the future of many STS securitisations.

“All new transactions - despite STS qualification - might not be eligible for LCR purposes. This will be a tough sell for bank investors,” notes van Leeuwen. 

The issue could be resolved, however, as the official texts stipulate that the EBA should develop an official credit map for securitisation positions in a technical standard. This has not been published yet; hence, the mapping in the Q&A is a temporary solution.

Van Leeuwen notes that the market awaits the final framework. But he points out that in the meantime, BBVA’s latest auto ABS deal – the €951.5m senior notes of which are double-A rated - will not be LCR-eligible. BBVA Consumer Auto 2020-1 complies with the additional STS+ requirements and features PCS as the third-party verification agent. IPTs for the 3.9-year class A notes – about a third of which are expected to be publicly placed and the remainder preplaced - are in the 80bp area.

Jasleen Mann

Structured Finance

Addressing inconsistencies

Performance metrics switched

Metrics that assess the level of portfolio interest and principal cashflows have become more reliable performance indicators than traditional default and delinquency metrics in the wake of coronavirus-driven moratoria. Moody’s notes that the need for more reliable metrics for the ABS and RMBS it rates is driven by inconsistent reporting on the proportion of portfolios under payment holidays.

Anthony Parry, svp at Moody’s, says: “We are in this phase where we have had lockdown; there have been pressures on the job market, which led to temporary unemployment. A lot of people have been furloughed. In a normal situation, you would have expected delinquencies to come through. But that is not happening largely because of payment holiday schemes - many of which are regulatory-driven.”

Traditional performance metrics are unable to address the resulting inconsistencies from investor reports. For example, loans subject to payment holidays are not reported as delinquent.

Parry says: “Cashflows and how they are being reduced as a result of payment holidays and limited refinancing opportunities are assessed; for example, the levels of interest and principal receipts on the portfolio, compared to the pre-coronavirus trend. Although there is a lag in the reports, some indicators are weakening and we expect to see more of that in the months ahead.”

Moody’s notes that last month unscheduled principal receipts, from prepayments, declined by more than 20% for RMBS and 40% for ABS, relative to the average in the first four months of 2020. Cashflows declined across all ABS asset classes during May.

UK auto ABS delinquencies also rose significantly. The closure of car dealerships reduced refinancing options, while borrowers’ ability to voluntarily terminate led to a decline in unscheduled principal payments.

There was an increase of over 25% in UK non-conforming RMBS delinquencies, relative to the average recorded in the first four months of 2020. “There were a few signs of stress through May and over the next couple of months, we expect to see some metrics come under further stress,” notes Parry.

Jasleen Mann

Structured Finance

Strategic review

Direct lending JV formed

Newly established investment manager KKV Investment Management has finalised investment management agreements with two UK secured loan funds – SQN Asset Finance Income Fund and SQN Secured Income Fund - whose NAV is in excess of £425m and will be renamed KKV Secured Loan Fund. Specialising in direct lending and alternative credit, KKV is a joint venture between its mds Dawn Kendall and Ariel Vegoda - key employees of SQN Capital Management since 2017 and 2015 respectively - and Kvika Securities, a wholly owned subsidiary of Kvika Banki.

The boards of the SQN funds commenced a strategic operational review in February, including the provision of investment management services, and opted to appoint KKV following a two-month competitive manager selection process. The move reflects both the progression of SQN Capital's business in the UK following the retirement of co-founder Neil Roberts earlier this year and its transition to focus on insurance-based investments and managed accounts in the US and its advisory business for equipment leasing funds in the Cayman Islands.

As part of the commencement of investment management services to the two funds, KKV will hire around 18 professionals, most of whom have been involved with managing the funds in recent years. The firm’s daily operations are led by cio Kendall and coo Vegoda. Along with other key members of the management team, the pair have taken a minority interest in the company.

Kendall has 34 years' experience in financial services, including 25 years' experience managing fixed income portfolios at institutions such as TwentyFour Asset Management. Her areas of specialism are private and public debt, structured finance, product development and derivatives.

Vegoda is a qualified lawyer and has over a decade’s experience of transaction negotiation, deal execution and complex workouts. He specialised in commercial litigation, asset recovery and dispute resolution while at Mischon de Reya, prior to assuming the role of SQN general counsel in 2015.

Chris Greener and Christian Holder have joined KKV as investment managers, reporting to Kendall. The pair founded White Circle in 2017.

Prior to this, Greener spent two years as a director of several developing businesses with a focus on SME and consumer finance. From 2008 to 2014, he managed over €8bn of European asset-backed credit at BlackRock and before that was a director responsible for covering ABS in Europe and Asia with Société Générale.

Holder previously worked at Jupiter Asset Management as a senior credit analyst covering securitised and corporate credit. He also worked at BlackRock for over 11 years until 2015, with his last role as lead investment manager in the European asset-backed credit team. Between 1996-2004 he was a member of Fitch’s consumer ABS and RMBS monitoring team, before becoming lead credit analyst in its whole business securitisation team.

Meanwhile, Ken Hillen has been appointed executive chair of KKV, while Kvika Securities md Gunnar Sigurdsson, Kvika Advisory md Helgi Bergs and Kvika banki’s finance and operating division md Ragnar Dyer will join him as directors on the board. Hillen has held a number of senior banking roles throughout his career, including senior corporate director at RBS, md for Scotland and Northern Ireland at Anglo Irish Bank and head of commercial and corporate banking for Scotland at Bank of Ireland. He will also chair the management committee of KKV, with the cio and coo reporting to him.

The firm has additionally recruited an experienced executive with significant operational, regulatory and risk management capabilities, who is expected to join in Q3.

SQN Asset Finance Income Fund was launched in 2014, but has recently struggled due to a limited number of non-performing assets, causing its share price to trade significantly below NAV. KKV will therefore, in the short term, focus primarily on restructuring and maximising the value of the fund's problem assets, while simultaneously assessing and responding to the impact of Covid-19 on the fund's borrowers.

Corinne Smith

Capital Relief Trades

Risk transfer round-up - 10 June

CRT sector developments and deal news

Santander has exercised a 10% clean-up call for its Red-1 Finance CLO 2017-1 transaction. The UK commercial real estate capital relief trade was structured in 2017 with a June 2022 maturity (see SCI’s capital relief trades database).  

NPLs

HAPS ABS debuts

Eurobank finalises Cairo transaction

Eurobank has finalised the first non-performing loan securitisation under the Hercules Asset Protection Scheme. Dubbed Cairo, the €7.5bn deal was sealed alongside the lender’s Project Europe, the sale of the bulk of its servicing unit to doValue.

The Cairo securitisation consists of a €2.4bn senior tranche, a €1.5bn mezzanine tranche and a €3.6bn junior tranche. The transaction involves doValue taking 20% of the mezzanine notes and the “minimum required percentage of the junior notes”.

The implied valuation based on the nominal value of the senior notes and the sale price of the mezzanine and junior notes corresponds to 33.3% of the total gross value of the securitised portfolio. Eurobank will retain 5% of the of mezzanine and junior notes and 100% of the HAPS covered senior notes.

The remaining mezzanine and junior notes will be distributed to Eurobank shareholders, subject to a pending general meeting. The distribution is expected in 3Q20, at which point the loans of the Cairo securitisation will be deconsolidated.

The aim of distributing a portion of the subordinated notes to shareholders was always a key driver behind the bank’s utilisation of ABS technology. Besides benefiting from an upside, the bank noted in an investor presentation last year that the structure of the Cairo securitisation would protect shareholders from dilutions by hiving off assets to an SPV and recognising losses at the holding level (SCI 31 May 2019).

Meanwhile, the terms of Project Europe stipulate the sale of 80% of FPS-Eurobank’s servicing unit to doValue and a corresponding 14-year service level agreement (SLA) with FPS for the servicing of the lender’s NPEs and retail early arrears. This compares to an initial 10-year SLA for the same agreement.

The impact on the bank’s total capital ratio amounts to approximately minus 340bp. This breaks down to minus 390bp due to Cairo, plus 75bp due to Europe and minus 25bp due to transaction expenses and taxes.

Going forward, the bulk of Greek banks will resume their NPL ABS activity in 3Q20, although the coronavirus crisis could complicate NPL reduction strategies (SCI 24 April).

Stelios Papadopoulos

NPLs

Robust pipeline

Distressed debt fund exceeds target

Balbec Capital has closed a distressed debt fund dubbed InSolve Global Credit Fund IV. The fund consists of US$1.2bn total commitments, which exceeds Balbec’s US$1bn target and makes it the firm’s largest fund to date.

The fund will seek to identify and capitalise on investment opportunities with a focus on a subset of non-performing loans where the borrower or assets are subject to an insolvency proceeding, restructuring, liquidation or other form of distress. Balbec says it will “leverage its extensive experience and global footprint” to selectively invest across geographies and asset types to source opportunities, while mitigating macro risks. To date, the fund has called 45% of commitments.

Warren Spector, Balbec chairman, notes: “The strong support we have received for our fourth fund is a testament to investors’ confidence in Balbec’s experienced team, differentiated credit platform and disciplined approach to investing in and managing complex assets. We look forward to continue leveraging our deep expertise in global bankruptcy regimes and longstanding industry relationships to source attractive opportunities that we believe will deliver strong risk-adjusted returns for our investors.”

Charles Rusbasan, founding partner and ceo of Balbec, believes the firm is well-positioned to continue to capture opportunities globally by “transacting with speed, certainty and discretion”. He expects the pipeline of opportunities to remain robust, as the firm looks to build upon its track record of investing across market cycles.

Since inception in 2010, Balbec has invested over US$5.2bn across more than 300 transactions in 19 countries. The firm’s predecessor vehicle, InSolve Global Credit Fund III, closed in 2018 with US$727m of capital commitments. Earlier vehicles in the series, InSolve Global Credit Fund II and I, closed at US$629m in 2015 and US$143m in 2012 respectively.

Balbec holds approximately US$2.4bn AUM and specialises in acquiring loans or claims that are in bankruptcy, a structured debt settlement plan or financial restructuring. The firm focuses on a subset of consumer and SME loans, subject to voluntary insolvency plans, such as Chapter 13 in the US and similar regimes globally.

Stelios Papadopoulos

Real Estate

Calabria confidence

FHFA director was bullish at Senate Banking, but day of reckoning may be at hand

Mark Calabria, the director of the Federal Housing Finance Authority (FHFA), and Ben Carson, secretary of the Housing and Urban Development (HUD) department, yesterday (June 10) both appeared before the Senate Banking Committee to speak about the immediate prospects for the US housing market.

Calabria expressed some confidence about the current state of the market, noting that some 6.4% of GSE-backed loans are in forbearance but the combined 30 and 60-day rate of delinquency remains below the estimated rate of forbearance as borrowers who requested forbearance are continuing to make payments.

However, end of next month (July) is set to be a testing time in the mortgage market, as both the enhanced unemployment benefit and the freeze on foreclosures provided by the CARES Act are due to expire.

The FHFA unilaterally extended the moratorium on foreclosures provided by CARES by a further one month at the end of June, and it may extend it yet further, but this process cannot go on indefinitely.

Payments that home loan borrowers have continued to make while being in forbearance have mostly been more substantial than feared, but this is in part due to the extra $600 a week of unemployment benefit allowed under the CARES bill.

With the end of the first phase of relief in sight, there is obvious concern about what will happen in August.

Calabria also said he was “encouraged” by the capacity of mortgage servicers to absorb the first 120 days of interest and principal payments for loans that are in forbearance. Total monthly GSE loan principal and interest payments are about $32bn, and of this the non-bank servicers must supply $8bn, or about one quarter.

Given a forbearance rate of 6.5%, and the fact that some borrowers are still making payments, the servicers’ total 120-day liability is $2.1bn. Were the forbearance rate to rise to 15%, then servicer 120-day obligations would rise to $5bn, yet, said Calabria, “FHFA’s analysis of servicer capacity indicates that servicers as a whole have multiples of that number available should they need it.”

He also noted that hefty Federal Reserve support had stabilised the MBS market. Ten year MBS notes yield under a 100bp to Treasuries, after having spiked into the 190s in March. Thirty year MBS continue to trade at elevated yields, however, likely due to “ongoing uncertainty about the pace of economic and labour market recovery, the impacts on mortgage servicing rights, and constrained lender capacity to absorb increased levels of borrower demand.”

Despite his relative buoyancy about the current state of play, Calabria stressed that the current crisis has revealed the fundamental weaknesses in the structure of the US housing market, in particular the low levels of capital that the GSEs command and their consequent fragility in the face of a continued downturn. He said that his capital plan for the GSEs, announced on May 20 and which will require Fannie Mae and Freddie Mac to raise an additional $243bn in fresh capital, will allow each GSE to “become safe and sound to fulfill its statutory mission across the economic cycle”.

How much cross-party support there will be for continued mortgage relief later in the summer remains moot. Those who believe enough is enough have been encouraged by last week’s surprisingly strong non-farm payroll number.

“Getting folks re-engaged in their monthly [loan] responsibilities is a good thing long-term," suggested committee member Senator Tim Scott, (Republican, North Carolina).

Simon Boughey

Structured Finance

Resolve and resilience

Content sponsored by Ocorian

James Maitland, regional head of Americas, Bermuda & Caribbean, and global head of capital market services at Ocorian, spoke to SCI about how resilience is benefiting the industry and his firm

With the traditional office environment disappearing almost overnight and widespread personal restrictions, we have seen a smooth transition and incredible resilience both within our own firm and across the broader market. From remote working arrangements supported by video conferencing tools and our proprietary infrastructure, we have personified the power of collaboration, ownership and technology; our staff have tirelessly supported our clients, accessing our systems securely and efficiently throughout the pandemic without disruption.

Such resilience has also allowed the market to continue operating in relative normalcy, underlining that any areas of slowdown were due to market conditions, not operational restrictions or deficiencies. The industry’s contingency planning suggests that material lessons have been learnt from past market crises and events.

In conjunction with the strength of market infrastructure, the industry has benefited from regulatory support and a pragmatic approach from the authorities. For example, the move to electronic filings from physical presentations has generally been accommodated quickly and smoothly.

Having lived through the financial crisis, the investor community has become more sophisticated and experienced with navigating unchartered waters; to date there appears to be a collective sense of calmness and perspective in their approach to the Covid-19 shock. Instead of panic, there has been a recognition of the unprecedented nature of the situation, with many adapting strategic focus/priorities to capitalise on unique opportunities the current conditions have precipitated. Market participants are poised to act and deploy their strategies as soon as conditions stabilise.

Clients are not only strengthening their existing investment strategies, but many are also hunting distressed opportunity plays, including in the real estate and transportation sectors. The funds space continues to be active, while a number of CLO managers are extending warehouse periods to tap the market at the optimal time.

In terms of documentation, we are seeing more bespoke requests to help facilitate the collection and integration of information, as well as its disbursement.

The collective challenge presented by Covid-19 has triggered a strong level of partnership and coordination among market participants to maintain market logistics. We continue to work with clients, intermediaries and infrastructure/regulatory partners as we navigate the next phase of the pandemic and the adoption of the “new normal”. As a global leader of fiduciary and administrative services, we are both privileged and proud to support our clients and the broader marketplace as we all adapt to the “new normal”. 

About Ocorian
Ocorian is a global leader in corporate and fiduciary services, fund administration and capital markets. Our global network is designed to put us exactly where our clients need us to maximise the potential of their business and investments and we operate across the Americas, Asia, the Caribbean, Europe and UAE. The firm has 17,000 structures under administration, representing US$260bn of assets. Our approach is personal, professional and flexible. We take the time to understand our clients' ambitions and work with them to deliver expert, customised, scalable solutions. We provide local solutions on a direct or a distributed supplier basis, depending on the needs of our clients. Our offering is unique in terms of our breadth of capabilities across capital markets, funds and the private client space, from unsecured corporate issuance to structured finance.

Structured Finance

CLO business integrated

Sector developments and company hires

CLO business integrated
RBC’s US-based CLO management business is being integrated into BlueBay’s CLO management platform. Sid Chhabra, who joined BlueBay – which is owned by RBC - in 2018 to build the firm’s structured credit and CLO capabilities, will lead this team. The US-based team includes four experienced individuals and the US$500m CLOs they manage.

In other news…

Counterparty risk hits
Fitch has downgraded 20 tranches from across 15 Spanish RMBS, reflecting the recent corresponding rating downgrade of Societe Generale (the SPV account bank provider for the deal) from single-A to single-A minus, as the RMBS ratings are capped by the bank rating. Thirteen of the tranches have been removed from rating watch negative, while the other seven tranches remain on RWN. The affected tranches are exposed to excessive counterparty risk, as a very material component of each tranche's credit enhancement (CE) protection is provided by the cash reserves held by the account bank. The RWN on the remaining seven tranches of seven Spanish RMBS reflects the high probability of downgrade as a result of the coronavirus pandemic, due to insufficient CE to compensate for additional projected losses on the portfolios.

Investment strategy rebalanced
Chenavari Toro Income Fund is enhancing its dividend policy (targeting a quarterly dividend yield of 2.5% and quarterly special distributions of available excess cash) and rebalancing its investment strategy, with the aim of reducing the discount between the company's share price and the net asset value per share. The latter will focus on liquid and tradable European ABS and CLO securities, through the company's existing opportunistic credit strategy. Consequently, it will cease to make new investments in illiquid assets through its current originated transactions and private asset-backed strategies, but will continue to support existing illiquid assets with a view to maximising shareholder value. The company will seek to realise its illiquid assets and redeploy the proceeds into liquid and tradable European ABS and CLOs if the opportunity arises.

JCP exposure gauged
JCPenney has revealed the names of 154 stores slated for closure, representing about 60% of the total store closures planned as part of its bankruptcy. Trepp calculates that 27 US CMBS loans (or loan pieces) have exposure to the 154 stores, totalling US$1.75bn in outstanding balance - although US$519.7m comes from a portfolio loan, for which only one of many properties backing the loan has JCPenney exposure. The largest loan with exposure is the US$105.8m Arbor Place Mall securitised in JPMCC 2012-C6: JCPenney is a collateral tenant with just under 15% of the space.

Loan repurchase mulled
The Finsbury Square 2017-2 issuer has disclosed that various discussions have been held with Kensington Mortgage Company (in its capacity as indirect holder of the RMBS certificates) in relation to the purchase of the loans in the mortgage pool. These may lead to the redemption of the notes (on or after the September 2020 interest payment date, which is the call option date), although the issuer notes the discussions are ongoing and preliminary in nature.

North America
Jonathan Kitei has joined the leadership team at Nearwater Capital as senior md and head of its risk retention financing business. Previously md and head of US securitised products distribution and global CLO distribution at Barclays. Before that he held senior loan sales and trading positions at Lehman Brothers, SunTrust and Bank of America. He also served on the board of the LSTA for six years, including two years as chair.

Structured Finance

NCSLT consent judgment denied

Sector developments and company hires

NCSLT consent judgment denied
Fitch has affirmed 37 notes and maintained its rating watch negative placement on nine notes from 12 National Collegiate Student Loan Trust (NCSLT) securitisations. The move follows Delaware District Judge Maryellen Norieka’s decision last month not to approve a consent judgment proposed by the CFPB and purportedly agreed to by the NCSLTs.

The judgment was intended to address alleged violations - including illegal student loan debt collection - by the NCSLTs of the Consumer Financial Protection Act of 2010. The CFPB has until 19 June to respond to a motion to dismiss filed by Transworld Systems, the subservicer and debt collector for the affected transactions.

The proposed judgment requires an independent audit of all student loans in the NCSLT portfolios. Collections on any student loans identified by the audit to lack proper documentation or for which the statute of limitations has expired on the debt collection would have to cease.

If the proposed judgment is confirmed, it may result in the NCSLTs making an aggregate payment of at least US$19.1m, due within 10 days of the effective date of the judgment. Fitch notes that should this result in a lump sum, one-time senior liability, it may impair the ability of some of the trusts to pay senior interest in a timely fashion, thereby resulting in an EOD for the notes. If instead the payment is distributed over time, it will reduce the cash available to repay noteholders and thereby reduce the available protection.

Considering that the action remains outstanding, Fitch is maintaining the triple-B rating cap for these transactions and the RWN on all notes with ratings of single-B or above.

In other news…

Mariner MBO agreed
ORIX Corporation USA has agreed to sell Mariner Investment Group to Mariner chairman and ceo Curtis Arledge, Mariner founder, partner and co-cio William Michaelcheck and other senior members of the firm. The transaction aligns with ORIX USA’s objective to consolidate its investment capital and asset management strategy in the US, with a focus on alternative assets.

As part of the transaction, ORIX USA will retain Mariner’s leveraged credit business, co-led by David Martin and Erik Gunnerson. As of 31 March, the team had approximately US$4.6bn of assets under management across eight CLOs and multiple separately managed accounts.

ORIX USA says it has made significant investments in the leveraged credit business and this transaction will enable it to “continue taking advantage of opportunities in broadly syndicated loans and CLOs”. The firm will use an existing affiliated registered investment adviser to house the leveraged credit business, as well as other potential asset management strategies in the future.

Art Mbanefo, senior md, cio and head of principal business of ORIX USA, has assumed Arledge’s role as head of ORIX USA’s asset management business.

After closing, the Mariner business will be 100% employee-owned and continue to operate under the Mariner name. As an independent company, Mariner will continue to provide its investors with fixed income relative value and credit strategies in the public and private markets.

Structured Finance

Euro ABS 'game changer' recommended

Sector developments and company hires

Euro ABS ‘game changer’ recommended
The European High-Level Forum (HLF) on the capital markets union (CMU) has published its final report, which proposes 17 inter-connected “game changers” – measures that the EU needs to implement to remove the biggest barriers in its capital markets. The European Commission stresses that completing the CMU has become particularly urgent in order to speed up the EU’s recovery from the coronavirus pandemic. One of the proposed measures is the growth of the European securitisation market, including improving the significant risk transfer process, incorporating synthetic securitisations in the STS regime, improving CRR and Solvency 2 calibrations and improving access for securitisations to LCR pools. The Commission welcomes feedback on the report by 30 June.

In other news…

Climate guide ‘credit positive’
The ECB’s draft guide on climate-related and environmental risks – which it released last month - is credit positive for mortgage collateral in RMBS because it will require banks to proactively manage and disclose such risks, according to Moody’s. Proactive management and disclosure of climate and environmental risks is, in turn, expected to reduce the likelihood that these risks will devalue mortgage collateral. The guide states that banks should set key performance indicators on climate and environmental risks and consider them in the credit granting process, as well as disclose key information on these risks. Moody’s suggests that such disclosure will increase transparency, foster better risk management and improve data capture.

Rapid amortisation event triggered
A rapid amortisation event has occurred in connection with the Kabbage Asset Securitization Series 2019-1 small business ABS, caused by an asset deficiency after the collateral pool balance fell below the required amount. KBRA notes that the revolving period will terminate as a result and the notes will switch to sequential principal payments. As a result of the Covid-19 crisis, Kabbage has temporarily paused originations of new small business loans, which directly impacts the ability of Kabbage 2019-1 to purchase collateral. KBRA notes that the event will not prompt immediate rating actions, although watch downgrade placements on the transaction’s class A through E notes remain in effect and will be resolved pending further evaluation of the transaction’s performance data.

Structured Finance

Californian auto loans eyed

Sector developments and company hires

Californian auto loans eyed
The Westlake Automobile Receivables Trust 2020-2 issuer has disclosed that the state of California is considering new legislation - Assembly Bill No. 2501 (AB 2501) - that could significantly impact auto loan securitisations with high concentrations of Californian loans. S&P notes that in its current form, if this legislation is enacted, it could require servicers of the auto loan contracts to not repossess vehicles during the Covid-19 emergency and for an additional 180-day period following the emergency.

If requested by borrowers, the servicer may also be required to provide forbearance on the auto loan for at least 90 days, which could be extended for up to a cumulative total of 270 days. While in the forbearance period, the interest that could be charged to the borrower would be capped at 7%.

In other news…

CLO credit deterioration to continue
The credit quality of many US and European BSL CLOs will likely deteriorate over the coming months as asset defaults increase, although credit conditions as reflected in negative rating actions on corporate issuers are stabilising, according to a new report from Moody's. The default risk of assets in many CLOs - as measured by WARFs - has increased, while other performance metrics such as OC ratios have deteriorated in recent weeks.

“The weakening in asset quality has led to increased risks for CLO liabilities, prompting us to place additional CLO securities on review for downgrade, including a small number of securities in the US at the single-A and double-A rating levels. The weakening trend in credit quality is likely to slow, however, as credit conditions stabilise and corporate rating actions continue to taper off,” Moody’s says.

EMEA
Christos Danias has joined Fair Oaks Capital as principal, based in London. He was previously an md in ABS and CLO sales and origination at StormHarbour and before that, worked at Cantor Fitzgerald and BNP Paribas among other securitisation roles.

NewDay redemption
NewDay Cards has confirmed that it does not intend to exercise its option to extend the NewDay Funding Series 2017-1 scheduled redemption date. The firm says the move reflects current funding market conditions and the strength of the liquidity position in the NewDay Funding master trust, as well as the NewDay group as a whole. As such, it is expected that the Series 2017-1 notes will be redeemed on 15 July. The redemption will be funded by drawings under the existing committed senior variable funding loan notes issued by NewDay Funding Loan Note Issuer.

North America
AIG has appointed Paschal Brooks as ceo of AlphaCat Capital, an AIG company that provides investment advisory services in the ILS markets. Brooks oversees the implementation of ILS strategies and was previously coo of AlphaCat. Brooks now reports to Chris Schaper, ceo, AIG RE.

Mount Street Group has named Kirsten Glaser senior director, head of debt advisory, based in Atlanta, Georgia. She was previously md and head of capital advisory at Rivercrown Group in London, and has also worked at JLL.

Jimmy Levin will succeed Robert Shafir as ceo of Sculptor Capital Management, effective 1 April 2021. Levin is also expected to be elected to Sculptor Capital’s board at its annual meeting of shareholders on 24 June. He will continue to serve as the firm’s cio and executive md, while providing day-to-day leadership and management of its 109 investment professionals and investment portfolios worldwide. Levin is a member of the firm’s partner management committee and its portfolio committee. Prior to joining Sculptor Capital in 2006, he was an associate at Dune Capital Management and an analyst at Sagamore Hill Capital Management.