Contents

ABS

Support measures

Guarantee programmes hinder SME ABS comparability

European SME ABS comparability is being hindered by the diverging terms and conditions of guaranteed loan programmes across the region. Ultimately, the impact of the coronavirus fallout on SME ABS asset quality will depend on the path of economic recovery.

Beka Bakuradze, associate lead analyst at Moody’s, says: “Generally, SMEs have fewer financing options relative to large corporate borrowers, because SMEs are usually small in size and they often have more opaque financial statements making it more difficult for banks to assess an SME’s credit worthiness. Hence banks may be more reluctant to lend to SMEs.”

He continues: “Due to the virus, we have noticed that across Europe a number of countries offer debt moratoria to SMEs. For example, due to the lock-down, Italian SMEs experienced a liquidity shock and to overcome it, the government introduced support measures in favour of SMEs.”

However, comparability is hindered by diverging terms and conditions across Europe. State guaranteed loan programmes vary, depending on terms, sizes, limits and information that is available.

Bakuradze says: “In some European SME ABS markets, governments have imposed target limits for their respective guaranteed loan schemes, with the possibility for further extensions if fully drawn. In other jurisdictions, like Germany and the UK, target limits do not exist and the amount of available state guaranteed loans is rather demand-driven. In the UK, the majority of recent portfolios backing SME securitisations were originated by marketplace lending platforms.”

In Italy, the take-up rate is 8.4%, with the target limit of the scheme set at €400bn. Moody’s notes that this is relatively low when compared to the same metric for Spain, at 48.8% take-up with the total target limit set at €100bn. France has a utilisation rate of 29%, with the target limit of the programme set at €300bn.

Monica Curti, vp-senior credit officer at Moody’s, says: “The situation is fluid. The number of loans granted is evolving as demand and deadlines vary. In Spain, the application deadline is 31 September, while in other countries the deadline is the end of the year. Some of the guaranteed loans are fully guaranteed; others only partially, for instance at 80%.”

She adds: “There is some degree of scrutiny by banks to ultimately provide the loan. In Italy, there was a slow start in approving the requests, but now they are increasing steadily on a weekly basis.”

Nevertheless, SME credit profiles are weakening, raising concerns over asset quality. “SME credit profiles are weakening and thus the asset quality of portfolios backing SME ABS transactions is likely to deteriorate too. The ultimate effects of the coronavirus on SME ABS asset quality, including the roll rates from debt moratorium to default state, will depend on the path of the economic downturn and recovery,” says Bakuradze.

He points out most SME ABS already include some structural mitigants, such as high subordination levels (for senior tranches especially). In addition, they also have reserve funds and liquidity facilities.

“In particular, 84% of European SME ABS deals we rate have sufficient liquidity, helping to absorb cashflow disruptions on senior tranches, because they benefit from a fully funded reserve fund and/or liquidity facility,” notes Bakuradze.

Curti concludes: “The situation is not transparent and performance of SMEs depends on the interplay of those different measures; i.e. debt moratoria, state guaranteed loans and other fiscal measures, just to name some. In our opinion, performance of SME ABS portfolios, in addition to the shape of the economic recovery, will also be impacted by how easily and timely state guaranteed loans are provided to SMEs.”

Jasleen Mann

Structured Finance

Consumer considerations

Borrower relief aids performance

The downward trend of 30-plus delinquency rates for US marketplace lending, auto and credit cards continued into May. Higher delinquent levels were mitigated by borrower relief programmes.

Melvin Zhou, senior director, consumer ABS at KBRA, says: “30-plus delinquency rates for MPL, auto and credit cards were either stable or turning down in March and April, regardless of credit scores. We believe delinquent levels would have been higher for both prime and non-prime if virus-related borrower relief programmes had not been widely offered.”

He adds: “It remains to be seen how borrowers will perform after the employment benefit expires in July. The slowdown in payment fees will reduce short-term liquidity for ABS transactions, but at the current impairment levels, we do not believe this risk is significant.”

KBRA notes auto finance companies, credit card lenders and MPL platforms mitigated credit risk on new originations by tightening credit characteristics, such as minimum FICO scores, internal score and LTV. Eric Neglia, head of consumer ABS at KBRA, says: “Many lenders have enhanced their income and employment verifications. This includes full verification, in many instances for borrowers that are employed in high risk industries. We have also seen companies charging higher interest rates to meet their risk adjusted returns.”

He continues: “Tighter credit enhancement and higher rates that we have seen will likely cause reduced access to credit for certain borrowers and increase the cost of credit for those able to get a loan. We believe loan originations after the credit tightening will have a lower net loss compared to the legacy assets that we have analysed.”

Nevertheless, KBRA believes payment deferrals will impact ABS cashflows. This includes the possibility that they could avoid trigger breaches, which are designed to protect investors by building additional credit enhancement.

Neglia notes: “They could also delay the timing of losses if offered to someone who would default anyway or delude true overcollateralisation by including non-performing assets in the asset amount when calculating OC. This could allow cash to be released to the residual holders instead of paying noteholders and building up to the required OC targets.”

In auto ABS, KBRA notes that lease returns, auctions and repossessions were delayed from March to May. The agency expects those to return to the market in the near term.

“Given the Hertz bankruptcy and also rental car companies managing their fleet to match the weaker consumer and business travel, we are expecting the defleeting to increase auction supply. We expect the weaker economy to bring down demand for vehicles,” says Neglia.

Meanwhile, RMBS has longer periods of relief available than ABS. In the PLS space, the majority of servicers in the prime book have offered a similar forbearance period to the GSEs, of at least 180 days. The remainder would offer an initial forbearance period of 90 days with options to extend that further with additional information from the borrower. In non-prime and non-QM, servicers are offering a 90-day initial forbearance.

Jack Kahan, head of RMBS at KBRA, says: “Resolution scenarios are loss mitigation tools to get borrowers back on track and limit the impact on future investors or securitisations. A full reinstatement is a less likely scenario for a borrower that was seriously impacted. The borrower makes a full payment of the missed payments during forbearance. Repayment plans are a more likely scenario.”

KBRA reviewed data for borrower performance within the residential space and these outcomes were generated using a regression analysis. Kahan says: “A borrower who was self-employed and did not fully document income was three times more likely to roll from current to 30-days delinquent over the last two months than a wage-earner borrower with full income documentation and all other attributes held constant.”

Jasleen Mann

Capital Relief Trades

Risk transfer round-up - 1 July

CRT sector developments and deal news

NatWest is rumoured to be readying a capital relief trade backed by mid-market corporate loans for 3Q20. The transaction would be the issuer’s first post-Covid significant risk transfer deal, following the announcement of Project Grasshopper in December 2019. The latter deal referenced project finance loans (see SCI’s capital relief trades database).

Capital Relief Trades

Fast amortisation

SSPAIN deleveraging highlighted

Scope Ratings has published a monitoring report for Santander’s 2019 US auto significant risk transfer deal SSPAIN (see SCI’s capital relief trades database). The assigned ratings remain the same and the rated notes have benefited from deleveraging and lower than expected portfolio losses. However, back-loaded default scenarios are plausible, given Covid-19 uncertainties - although the impact of the pandemic cannot yet be gleaned from the portfolio data, since the latest transaction report is from March 2020.  

SSPAIN broke new ground when it was completed last year, due its tax-efficient direct CLN structure (SCI 5 July 2019). At present, the tranches consist of US$65.1m single-A rated class C notes, US$40.9m triple-B minus class D notes, US$23.3m double-B class E notes and US$15.8m double-B minus class F notes (SCI 2 July 2019). Scope hasn’t rated the class A, B, G or H notes.

According to the rating agency, 30.2% of the portfolio has amortised since the 28 February 2019 cut-off data that was used for the initial ratings. This is faster than its initial expectation and has increased credit enhancement for class C (19.5% from 16.5%), class D (15.2% from 12.1%), class E (12.8% from 9.6%) and class F (11.2% from 7.9%). Meanwhile, losses so far are 50% below Scope’s expectation at closing, with cumulative losses of 0.31% also well below the 2.7% trigger level.

The transaction further benefits from a weighted average FICO score of 753 at closing – indicating high credit quality borrowers on average. This provides an element of protection, should the US macroeconomic situation significantly deteriorate due to the coronavirus crisis.

However, “there is still material downside risk from back-loaded default scenarios, given the pro-rata amortisation features. This scenario is plausible, given future Covid-19 uncertainties and a portfolio maturity profile with relatively weaker obligors on the back end,” states Scope.

Compared to sequential amortisation, pure pro-rata structures typically erode credit enhancement for the more senior tranches. This risk is partially offset by a 2.7% cumulative loss trigger that switches the pro-rata mechanism to a fully sequential amortisation structure.

Another protective feature excludes the class G from amortising until it accounts for at least 7.5% of the outstanding notes. This has led to a non-material build-up of credit enhancement for the rated notes. However, Scope expects class G to start amortising in the near term.

Looking forward, the rating agency notes: “The US economy faces a recession in 2020, largely fuelled by the Covid-19 pandemic. Additionally, the ramifications of the recent spikes in unemployment – a reliable predictor of auto loan performance deterioration – can’t yet be gleaned from the portfolio data, given that the latest transaction report is from March 2020. A weakened used car market due to the pandemic would potentially depress recovery rates on repossessed vehicles sold at auction.”

Stelios Papadopoulos

Capital Relief Trades

Risk transfer round-up - 3 July

CRT sector developments and deal news

Details have emerged of three corporate capital relief trades issued by Barclays last month. The risk transfer transactions are the lender’s first following the coronavirus crisis. The combined first loss tranches total US$380m and reference a US$3.8bn global portfolio.

CMBS

Consistently attractive CMBS

CMBS is still the TALF favourite, but overall take-up could increase

Some 58% of loans requested under TALF 2.0 during the first subscription period, or $145m, were for CMBS purchases and the relative popularity of this asset class is not expected to diminish in the second subscription period beginning July 6, say CMBS analysts.

Spreads in CMBS are still generally more elevated than in other areas of the ABS universe, and with the TALF haircut set at 125bp over swaps plus 10bp fees (plus 150bp for CLOs), the CMBS market offers one of the only chances for investors to make money.

“I’m not expecting the CMBS proportion to shift much in the second round of TALF,” says Lea Overby, senior CMBS analyst at Wells Fargo in New York.

However, one thing that could change is that overall participation might be healthier because not all putative investors were set up in time. “There could well be better TALF pick up as there are kinks that need to be ironed out. It is not at all clear to me that all the investors had their documentation lined up,” adds Overby.

Even though the CMBS space offers one of the only chances to make a decent return with TALF, the pickings are still rather slim. Some of the higher yielding types of CMBS notes, such as single asset single borrower (SASB) and commercial real estate collateralised loan obligations (CRE CLO), are TALF-ineligible.

Only triple A conduit deals that were printed prior to March 23 2020 are allowed and the property securing the underlying mortgages must be located in the US. So, for example, recently issued triple A 30% CMBS deals currently trade at around 114bp to swaps (the recent high was plus 330bp) while triple A 20% 10 year paper - the only area offering any appreciable traction - is at plus 155bp.

Recent highs in the 20% 10-year paper were plus 460bp, which would have promised a very juicy TALF return, but spreads, in common with most other areas of the capital market, have rallied energetically in recent weeks. 

One of the differences between TALF 1.0 and TALF 2.0 is that investors appear prepared to buy vintages with slightly longer maturities this time around. One of the hazards of TALF participation is that investors are stuck with the bonds when the TALF loan expires in 2023. They are thus exposed to basis risk, which any investor wants to avoid.

In TALF 1.0 investors tended to want bonds with a very close maturity match, perhaps because spread volatility at the time was considerably more acute than is the case at the moment, thus exacerbating basis risk, speculate traders.

In 2020, however, investors have been willing to buy 10-year 2014s and 2015s, leaving them a year or two of basis risk to manage when the TALF loan matures. However, while this is noteworthy, analysts and do not anticipate a rush for extra-long deals such as the 2019s and recently issued 2020s.

Investors must also contend with the relative scarcity of 2013 vintages. They may be pushed further along the maturity curve not necessarily through choice but because they cannot source the favoured vintages.

The CMBS market in general is quiescent at the moment and spreads are range bound. But this could be the calm before the storm. Government aid plans run out at the end of July, which should, for example, give renters in multi-family CMBS structures the necessary resources to pay rent in August. September might be a different proposition, however.

Simon Boughey