Contents

Capital Relief Trades

Fannie takes a step back

As Freddie issues a new STACR, Fannie revises CRT approach due to new capital rules

Uncertainty surrounding the impact of the re-proposed capital rules for the GSEs released by the Federal Finance Housing Authority (FHFA) on May 20 is causing Fannie Mae to hold back from CRT issuance, confirm market sources close to the agency.

“They’re trying to evaluate what the new capital rules might mean before they take the next step,” says one consultant.

At the beginning of May, in a statement accompanying its Q1 earnings release, Fannie Mae said that due to “disruptions in the market and economic uncertainty, the company does not anticipate engaging in back-end credit risk transfer transactions in the near term.”

Since then, however, the market has calmed considerably. Indeed, last week, Freddie Mac announced it had sold a $1.1bn upsized STACR deal, so it would seem there are few market-based impediments to Fannie Mae bringing new CAS deal.

But Fannie is still keeping its powder dry. “Fannie is not doing any CRT transactions while it works with its newly hired financial advisers and the FHFA to review its business and capital plan to enable it to exit conservatorship, and while it evaluates the re-proposed capital rules and their impact,” said a well-placed source close to the GSE.

At first sight it might appear confusing that Fannie and Freddie are taking different routes in their response to the new rules, but insiders say the two institutions don’t always have the same priorities.

“I would say Freddie Mac is more market sensitive while Fannie Mae is more programme sensitive,” says one.

Another offered this perspective: “Freddie is more like a street firm, while Fannie behaves like a government agency.”

The capital rules envisage a much reduced role for the CRT mechanism. There are two mechanisms under which the GSEs are asked to judge capital adequacy - risk weighted asset calculation and leverage ratio - but they must implement the more onerous of the two.

Under a RWA framework, the GSEs would need to hold $135bn of capital, excluding all the relevant buffers, but under a leverage ratio framework of 4% they need to hold $152bn excluding buffers - so it is this framework that must be used. And, under leverage ratio rules, capital adequacy is not ameliorated by capital risk transfer.

“Leverage ratio has become the binding constraint, rather than a safety net, and synthetic risk transfer plays no role in leverage ratio rules as it doesn’t for banks. If you have a balance sheet of $100 and a leverage ratio of 4%, you need to hold $4 of capital,” explains a securitization banker.

The new rules also incorporate the Simplified Supervisory Formula Approach (SSFA) for regulatory capital to be held against retained tranches and the results are not kind to the GSEs. The SSFA rules calculate that CRT reduces required capital by 40%, while under the previous 2018 rules CRT cut capital requirements by 75%. Once again, this moves the GSEs more in line with banks.

Clearly, the regulator now views CRT as less effective as pure equity capital in protecting the GSEs from unexpected losses. This is because equity capital is much more flexible and can plug any holes below the waterline, while CRT only transfers credit risk on a specific reference pool of mortgages.

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

“The proposed rule continues to provide significant capital relief for CRT while ensuring that regulatory capital is appropriate for the exposures retained by the enterprises. Assuredly, the FHFA will seek enterprise and other input to better assess how the proposed rule may impact the enterprises’ business going forward,” an FHFA spokesman told SCI.

But, as this process goes ahead and as the date for the exit from conservatorship apparently looms closer, Fannie Mae has decided to quit the CRT market. This will have a significant impact upon its operations.

It has issued $46bn in the CAS market since its inception in 2013, transferring risk on $1.5trn in unpaid principal balance of mortgage loans from over 2000 different lenders. Its last single family CAS deal was a $966bn offering referencing 2015 and 2016 loans priced in March.

“To me, the important takeaway is that the reduction of CRT benefit on the micro level and the focus on the leverage ratio at the macro level, along with recent dislocation in the CRT markets, leads to the conclusion that CRT will be less central to the entities in their risk and capital management,” concludes the securitization banker.

Simon Boughey

CLOs

Structural changes

New US CLO docs anticipating Volcker

Most of the US CLOs currently marketing are already being structured to incorporate changes resulting from the revised Volcker rule (SCI 26 June). At the same time, new deal documentation is also enabling greater flexibility for managers to participate in restructurings.

Despite the Volcker rule changes not being effective until 1 October, new deals are already being offered anticipating those changes. “We’re seeing a lot of deals marketing now that incorporate a trigger mechanism that will allow the manager to buy securities once the new provisions become effective,” says Craig Stein, partner at Schulte Roth & Zabel. “The idea being that they can close now and have a few months trading under the old rules before moving to compliance with the new rule.”

He continues: “Obviously issuers can just add a 5% bond bucket to fit within the loan securitisation exclusion but we’re also seeing deals that are utilising a combination of some or all of the new provisions. For example, the new rules allow for deals to be structured so that the debt securities are not considered to be ownership interests even if the CLO is a covered fund.”

As a result, according to a recent report from Bank of America CLO research analysts, many new deals now allow CLO managers to participate in equity offerings for entities where the vehicle previously owned the term loan. “This could allow managers a greater say in the restructuring of the company and avoid situations such as that in Acosta (SCI 23 June),” they say.

Stein suggests that the significant majority of deals currently being marketed include a Volcker-related trigger of some kind. That does not, however, mean, they will definitely close that way.

“They could get push back from investors who may not want a full 5% bucket or possibly none at all,” he says. “As with any other issue, if there are investor objections issuers will adjust the structure to get the deal done, particularly in this market.”

Further, Stein doesn’t see the new rules having a major impact on the CLO market as a whole. “Volcker is not moving the needle positively or negatively on issuance volumes. The current growth of the deal pipeline and timing of forthcoming pricings is being driven by broader market forces, not Volcker, but overall I still see the changes as a positive for the market going forward.”

However, he adds: “It’s unlikely to impact existing deals as they cannot simply be modified because the rules have changed. Managers would have to amend the deal docs and first have to get consent from some or all of the investors depending on the individual deal’s wording.”

The above mentioned BofA research report also notes that new deals are also including increased documentation flexibility beyond the change in the Volcker rule. “In recent primary transactions, CLO managers have the flexibility to put additional capital via debt and equity,” it says.

For example: “There are variations across deals as to the kind of capital managers can deploy to purchase restructured loans and/or equity capital. In most cases, equity capital can be purchased using interest proceeds or using additional capital provided by CLO equity holders.”

The report continues: “For restructured loans/work out loans, some indentures allow managers to use principal proceeds to purchase those assets, provided par coverage ratios are beyond a certain threshold. CLO docs also place limitations on the concentration of restructured loans that can be in the deal - varying from 5-10% of the total collateral.”

Mark Pelham

Capital Relief Trades

Risk transfer return

Intesa debuts post-Covid Italian SRT

Intesa Sanpaolo has returned to the synthetic securitisation market with a new transaction from its GARC programme. Dubbed GARC Leasing-1, the €107m cash collateralised equity tranche references a static €1.5bn portfolio of lease financing to 2,600 Italian SMEs. The transaction is the first Italian leasing SRT and the first private capital relief trade to be issued out of Italy following the coronavirus crisis.

According to Biagio Giacalone, head of the active credit portfolio steering unit at Intesa Sanpaolo: "This transaction shows that even in a complex market context, a synthetic securitisation can be placed thanks to an available and continuously supportive investor base but under the right terms and conditions. The capital released through this operation can be now redistributed for further lending to our customers and in the real economy in Italy.”

The trade features a sequential amortisation structure which can be switched to pro-rata after a two-year period. The trade also includes a time call that can be exercised after four years and a 10% clean-up call. The corporate and investment banking division within the Intesa Sanpaolo group acted as the arranger.

The deal represents the latest enlargement in the scope of the GARC programme. The programme initially began as an SME initiative, but in 2018 the remit widened enough to include corporate loans and last year it expanded to residential mortgages (SCI 23 March).

Stelios Papadopoulos

RMBS

October cliff edge looms

The apparent recovery of many parts of the MBS market may be a false dawn

Mortgage-backed securities have in general rebounded with confidence in recent weeks, but there is an undercurrent of alarm in the market that the resurgence might have over-reached itself. Despite the last non-farm payroll report, much economic data is still extremely sobering and a shock in Q4 could be on the cards, say analysts.

For example, seven credits of the 100 constituent credits of the new CDX High Yield 34 Index, launched in March, have now defaulted, including California Resources, Hertz, JC Penny, Nieman Marcus, Diamond Offshore Drilling and Frontier Communications.

“This is way steeper in terms of the number of defaults than in the credit crisis of 2008 and 2009. If you compare it to the HY 9, which was launched in September 2007, defaults didn’t really pile up until 12-15 months after it was issued,” says Dmitry Pugachevsky, global head of research at Quantifi, the data solutions provider, in New York. There could easily be 20 defaults within the index by the end of the year, he adds.

Moreover, the estimated loan recovery rate on many of these defaults is pitifully low. Only Hertz and Frontier achieve the 30% threshold figure, while Nieman Marcus has a 3% loan recovery rate while California Resources achieved 1.125% at auction last week.

Default on this kind of level could have serious consequences for the US asset-backed markets, particularly in the lower-rated tranches. The default of retailers like Nieman Marcus and JC Penny, for example, spells trouble for the CMBS market. According to Wells Fargo data, BBB-rated CMBS were at plus 540bp on July 10, 135bp narrower on the month and a long way inside the recent high prints of 1150bp.

While recent forbearance data has been encouraging, mortgage delinquency data released today (July 14) by CoreLogic is less so. It reported that early stage delinquency, that is home loans that are 30 to 59 days past due, now constitutes 4.2% of all active mortgages.

The states which reported the biggest increases in delinquency rates are those that have suffered most acutely from Covid 19 infection or are those whose economies are particularly vulnerable to the shutdown. New York and New Jersey delinquency rates, for example, rose 4.7% and 4.6% respectively, while Nevada rose by 4.5% and Florida by 4%.

Furthermore, CoreLogic’s loan performance report says that the proportion of mortgages that moved from current to past due reached 3.4%. This is the highest level seen for 21 years, and, once again, exceeds what was seen in the financial crisis of 2007-2009.

Nor is it likely that this is the worst of it. The MBS sector could be heading for a cliff edge of worse delinquencies in Q4, say market consultants. Several key government stimulus programmes, such as CARES and the increased unemployment benefit, expire at the end of this month. Moreover, initial forbearance plans were granted for 120 days, so the first wave of these will conclude at the end of July as well.

The final CARES payment should allow borrowers to make August mortgage payments, but they might be less able to make September payments.  Any defaults will take a month until they show up in data, so October - often a painful month for financial markets - could be when the full extent of payment failure is revealed.

On top of that, Covid 19 infection has surged once more in various areas of the country, such as Florida and Texas. And even if new government stimulus measures are approved, the processing and applying relief efforts are unlikely to be immediate. “There’ll be a messy follow-up,” says one experienced market watcher.

So, although the securitized market now appears much healthier than it did a few weeks ago, it is faces a potentially difficult period, particularly in lower rated tranches.

Simon Boughey

CLOs

No rush

CLO investors have time on their side for resets and refis

Post-Covid US CLO issuance is gathering pace for new deals, but refinancings and resets are few and far between so far. There are opportunities for both types of restructuring, but for the vast majority of deals, there is no rush for equity investors to initiate the process.

There have only been two US CLO refinancings since the Covid crisis began – MCF CLO VIII on 2 July and TCW CLO 2018-1, which priced yesterday. There is yet to be a reset in the new market environment.

“Any time you look to refinance or reset, it has to be based on sound economics,” says Daniel Wohlberg, director at Eagle Point Credit Management. “Triple-As are wider than they have been in the last couple of years, so it may not be in the front of people’s minds right now.”

He continues: “The current trend is towards tightening and we could reach a point when activity picks up because of that, but we still have some ways to go. Today, however, there could be two other potential drivers to increased activity.”

First is the current potential for equity investors to refinance and swap floating tranches to fixed to lock in cheap fixed financing. “Historically CLOs have shied away from fixed because of the danger of asset-liability mismatches, but with Libor close to zero and with most assets and liabilities floored at zero or better, that concern is considerably less,” Wohlberg says.

Squared against that is some reticence for investors to expose themselves to potential rate rises driven by macro issues, such as potential fallout from the US election later this year, as well as the impact of Libor transition to SOFR. At the same time, Wohlberg observes: “Investors will also have to gauge if there will be sufficient demand for fixed assets, as well as having to decide for themselves whether they want to take a bit more mismatch risk for that locked in fixed rate reward if rates rebound in the future.”

Second, as CLOs approach the end of their reinvestment periods or start to amortise, investors have to look at their options, Wohlberg says. “Obviously they can call the deal if they think they’ve reached optimal value and move the proceeds to another form of financing; or they can let it run on as is – they basically are levered to a static pool after the reinvestment period: if they’re happy with that pool and the current capital structure, then they may opt to sit – or, if they see a different opportunity, they can look to reset and extend reinvestment periods.”

He continues: “We’ve not seen resets since the Covid crisis as people aren’t really focused on them right now. That is mostly a function of the cost of doing a reset along with the potential for a materially wider capital structure today. Dealers aren’t pitching these opportunities much as they would in tighter cost of capital environments, which often helps activity.  With the challenges today in costs and distributing these sort of deals, they have not been as active in that regard.”

Nevertheless, investors should look at the options. “The basic economics are likely not going work that well today with dealer’s costs, wider capital structures and potential for equity to need to put in more capital,” says Wohlberg. “In many instances it may be preferable to do a new CLO right now with that manager, where they may be able to construct a new pool with today’s assets to match the liability profile.”

Additionally, as Wohlberg concludes: “These are not options that expire tomorrow. Equity investors have time – they can wait it out to see if spreads come in further or we get greater economic stability; as better Covid treatments emerge, for example.”

Mark Pelham

ABS

Pandemic protections?

Structural features mitigate auto ABS risks

Structural features are overall mitigating Covid-19-related risks in auto ABS transactions, thanks to credit enhancement and other protections that largely offset any deterioration in collateral performance. However, delinquencies and defaults are expected to rise further, albeit not exponentially.

According to Moody’s: “Most auto ABS deals that we rate have substantially deleveraged and have significant credit enhancement, especially among senior tranches, which largely offsets credit quality deterioration stemming from the Covid-19 pandemic. Several structural features also help mitigate other negative effects of the coronavirus, such as potential liquidity disruptions caused by borrowers' use of payment moratoriums.”

Credit enhancement of tranches rated Aaa today has increased since closing, by approximately 160%, and for those rated at the lowest investment-grade rating level (Baa range) by 50%. Investment-grade tranches represent the bulk of auto ABS tranches rated by Moody’s. The rating agency notes that given substantial credit enhancement, most ratings can withstand a material deterioration in asset performance, where loss levels are 30% above current loss assumptions.

However, some Moody’s-rated deals are more susceptible to pandemic-related collateral performance deterioration than others. These include transactions with high take-up rates for payment moratoria and those with a large exposure to self-employed and commercial obligors.

Yet for highly rated notes, borrowers' use of payment moratoria does not cause liquidity disruptions due to structural protections. All tranches with investment-grade ratings benefit from either reserve funds, principal-to-pay interest mechanisms or high excess spread levels. Even for those auto deals with take-up rates of 30%-40%, the drop in interest collections to date does not compromise the servicing of senior notes.

Nevertheless, delinquencies and defaults are expected to rise further in the coming months, although not as severely as could be assumed. First, besides the fact that government measures will limit pool losses, post-2008 auto ABS will likely fare better in this crisis given the benign, low-default and low-interest rate pre-pandemic environment.

“Recent deal performance has been better than expected prior to the pandemic. Relatively low levels of take-up rates of payment holidays indicate that defaults will not rise exponentially in the coming months, even when assuming that a significant portion of borrowers currently on payment holidays will roll into default,” says Moody’s.

As of June 2020, the average take-up rate reported in servicer reports for Moody’s-rated European deals is approximately 4%. In the UK, where the average is slightly higher than the European one, rates are three time higher for non-captive lenders. Compared to May data, the take-up rates remain stable for the main European auto ABS markets.

Still, Moody’s cautions that the performance of auto ABS will depend on the credit quality of original equipment manufacturers (OEMs). For instance, some deals have high balloon loan exposure, where the borrower typically relies on the car dealer - an essential part of the OEM distribution channel - to make the balloon payment upon the borrower returning the car.

Typically, the return of the car to the dealer frees the balloon loan borrower from any remaining payments. Most European OEMs have a negative rating outlook and Moody’s has downgraded a couple of them since the beginning of the coronavirus crisis.

Moody’s adds: “Larger discounts on new vehicles will also hurt residual values and recovery proceeds from defaulted receivables, as they are heavily dependent on supply and demand dynamics affecting our rated auto ABS portfolios.”

The rating agency concludes: “Discounts and government measures to support the auto sector will influence demand by lifting sales of new cars at the cost of used cars. As many governments have introduced new cash subsidies toward the purchase of electric and hybrid vehicles, demand will shift towards these newer car types.”

Stelios Papadopoulos

Structured Finance

Seeking clarity

Call to reassess repo language

The AG MIT CMO versus Royal Bank of Canada case, which recently settled (SCI 3 June), highlights how Covid-19 disruption has caused confusion over what constitutes a ‘recognised market’ for the purpose of selling securities. Indeed, the lawsuit underscores the need for greater clarity in securitisation repurchase agreements.

In the case, AG Mortgage Investment Trust argued that RBC acted opportunistically by issuing margin calls in March and also ignored government policy, which states that those with financial difficulties during that time should be granted forbearance. Joseph Cioffi, chair of the insolvency, creditors’ rights and financial products practice group at Davis & Gilbert, says: “The dispute highlighted the issues that can come about when you have disruption in the market. When a lender seeks to auction the collateral in the midst of such disruption, it creates the potential for the borrower to argue that the lender is being opportunistic.”

He adds: “The lender may be enforcing its rights under the agreement, but the borrower may argue the lender is not acting in accordance with public policy. Where the government is trying to add stability and liquidity to the markets, borrowers may believe they have more arrows in their quiver than the argument the lender is acting commercially unreasonable.”

AG disputed RBC’s “entirely subjective and self-serving” calculation of market value for the affected collateral, which it contended was “unilaterally determined” based on a temporarily illiquid market. The repurchase agreement in question did not specify the calculation source to be used, but stated that it should be obtained “from a generally recognised source agreed to by the parties.”

Agreement on which source reflects true value becomes an issue in a seriously depleted market. As such, Cioffi highlights the importance of clarity with regards to language within repurchase agreements.

“Parties should review agreement terms for leverage in negotiations and proactively seek amendments. How tight is the language regarding margin calls and enforcement rights? Are recognised sources of pricing identified?” asks Cioffi.

He notes that there have been some temporary fixes to relieve liquidity pressure on REITs for now. “But the pandemic will likely outlast them and so collateral valuation issues may have a resurgence later this year or by early 2021,” he warns.

Jasleen Mann

Structured Finance

SCI Start the Week - 13 July

A review of securitisation activity over the past seven days

Last week's stories
Arch restarts MILNs
Relaunched Bellemeade Re 2020-1 priced
Collection boost?
NPL ABS performance remains volatile
CPR for CRT from Freddie
Freddie Mac's new upsized STACR shows market is healthy
Forbearance plans plummet
Forbearances fall to April levels, but rollercoaster ride isn't over
Polish SRT inked
Santander completes capital relief trade
Pricing recalibration
NPL ABS market growth pending?
Restructuring events?
Uncertainty over CRE values weighs on CRTs

Other deal-related news

• The impact of the changes made to the Volcker Rule will be relatively modest for the CLO market, according to S&P (SCI 6 July).
• Annaly Capital Management has completed the acquisition of its external manager, Annaly Management Company, finalising its transition from an externally-managed REIT to an internally-managed REIT (SCI 6 July).
• KopenTech has introduced a new live bidding feature to its BWIC electronic trading platform, which allows sellers to customise the two stages of the process (SCI 6 July).
• The average payment holiday take-up across the 18 securitisations JPMorgan follows in its UK auto ABS performance tracker stands at about 8%, as at end-May 2020, with a sizeable range between the transactions from as low as circa 1% to circa 23% (SCI 6 July).
• US CLO manager metrics have begun to improve or stabilise, according to JPMorgan's Q2 report on the sector, published today (SCI 7 July).
• Bridge Investment Group has launched its Open-Ended Agency Mortgage-Backed Securities strategy via the Bridge Agency MBS Fund Manager (SCI 7 July).
• Crédit Agricole CIB has placed with a leading ESG investor what is believed to be the industry's first green ABCP issuance financing electric vehicles (EVs) in client auto loan and lease pools (SCI 7 July).
• The SFA has filed an amicus brief with the US Bankruptcy Court for the District of Delaware related to the Hertz bankruptcy that is intended to educate the court on how a ruling can impact both the rental car ABS and broader securitisation markets (SCI 7 July).
• HM Treasury is set to give the UK FCA additional regulatory powers to deal with a small number of legacy contracts that cannot be transitioned from Libor, since they either have no alternatives or only inappropriate ones, with no realistic ability to be renegotiated or amended (SCI 7 July).
• KBRA notes that Taurus 2019-3 UK, a single-borrower CMBS secured by 21 purpose-built student accommodation assets in the UK, failed to meet the debt yield hurdle of 8% for the current 2019/2020 academic year, as of the June payment date (SCI 7 July).
• AnaCap Financial Partners has acquired and refinanced a portfolio of salary and pension guaranteed loans (CQS) with a face value of over €200m (SCI 8 July).
• Apollo Global Management has formed Apollo Strategic Origination Partners, which is expected to provide approximately US$12bn in financings over the next three years, targeting transactions of approximately US$1bn to help meet growing corporate demand for scaled direct origination solutions (SCI 8 July).
• UK Mortgages has issued a call notice stating that it intends to redeem the outstanding notes of the Oat Hill No. 1 RMBS on the next IPD in August (SCI 8 July).
• ODF Energía has registered on MARF the first issuance of commercial paper, sized at €30m, from its innovative new Spanish securitisation fund (SCI July 9 July).
• Australian banks are extending coronavirus-related financial relief measures for borrowers unable to resume loan repayments at the end of six-month payment deferral periods (SCI July 9 July).
• Drivers behind and expectations for European CLO OC ratios have been examined in a new report from S&P (SCI 10 July).
• The Australian Office of Financial Management has suspended its call for investment proposals for the ABSF (SCI 10 July).
• KBRA has placed 146 classes of certificates across 41 conduit CMBS on watch downgrade that are susceptible to negative credit drift owing to the economic effects of Covid-19 (SCI 10 July).
• ESMA has published its final report detailing its guidelines on securitisation repository data completeness and consistency thresholds (SCI 10 July).
• The receivables SPA for the Orbita Funding 2020-1 auto ABS has been amended to grant the seller (Close Brothers) a call option over delinquent receivables exercisable during the revolving period (SCI 10 July).
• The June reporting period saw a wave of new transactions reporting Covid-19 payment holiday information, with 112 standalone UK RMBS deals and four master trust programmes now represented in JPMorgan's UK RMBS Covid-19 payment holiday tracker at an aggregate outstanding balance of £89.8bn (SCI 10 July).

Data

BWIC volume

Secondary market commentary from SCI PriceABS
9 July 2020
USD CLO
17 covers today - all lower mezz/equity. The BBBs trade 437dm-582dm (2021-2024 RP profiles) versus comps trading as we have seen for a few months also in a wide dispersion 390dm-690dm. Drilling down into a more liquid subset to give a flavour as to market sentiment, the 2023 RP BBBs trade today in a tight dispersion 437dm-466dm which are broadly in line with a 400dm-480dm trading range this month to date.
The BBs also trade as expected in similar context, with a range today 796dm-1316dm across 2021-2025 RP profiles versus 810dm-960dm comps this month to date. Note however that stripping out the outlier trades (which are plentiful) the trading range today is 796dm-879dm. As is expected the probability of outlier trades at the moment is quite high so the BBs that trade >900dm all have high Sub 80 loan price migration buckets (8-10pc) from less mainstream managers (eg. DFG and ArrowMark) with Black Diamond's BLACK 2017-1A D at the wide end 1316dm / 5.7y WAL - vh WARF 3617 and vh CCC basket 14.35% tugging the DM wider.
There is one Equity trade today, BlueMountain's BLUEM 2012-2X SUB which trades at a cash price of MH20s, the RPE is 4 months away whilst the NC has passed last year, with the senior tranche locked +105bps there is no obvious path to refi/reset. The Int Diversion test cushion is negative (-0.84%), negative par build -1.05 (but expect this to normalise as asset prices rebound) whilst the Jnr OC cushion is cuspy 0.66% and ADR sits at 1.5% and the NAV is negative (-14.3 but note same point on par build) and this trades at circa 2.25y CF despite the transaction begin to deleverage later this year, there are still 2 x IPDs within the realms of the existing RP period.

EUR MEZZ/EQUITY CLO
A busy day in mezz and equity with 20 trades in all. The one AA, OZLME 3X B1, traded at 228dm.
4 x A traded between 302dm and 317dm.
4 x BBB traded between 494dm and 524dm.
6 x BB traded between 715dm and 860dm. The tight end of the range are the Redding Ridge deals which have high MVOCs (around 106%) and high Junior OC cushions (around 4.5%). The widest trade is TCLO 1X ER (Chenavari) which has middle of the road credit metrics (MVOC is 102% and Jnr OC cushion is 2.2%). One of the bonds, SPAUL 3RX ER, has breached its Jnr OC cushion but it still traded at 814dm.
4 x B traded in a range from 890dm to 1000dm. The tight end is CONTE 2X FR which ended its Reinvestment Period in Nov 2018 and has started paying down. The other three all traded near 1000dm.
Spreads are well defined in a narrow range at the moment which bodes for well for the various deals in book-building phase.
ARBR 3X SUB equity traded at 33.05 / 20.62%. NAV is 22. This does look cheap relative to recent equity trades.
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

ACIS activated

Freddie Mac brings first ACIS CRT deal since March

Following its recent re-opening of the CRT bond market with a $1.1bn STACR deal, Freddie Mac last Friday (July 10) priced its first ACIS deal since March. Like the STACR deal, this transaction was also over-subscribed and issue size was doubled to $425m.

The deal, designated ACIS 2020 DNA3, consisted of four tranches. The M1, for an issue size of $122.6m, was priced at 150bp, the M2, for an issue size of $154.7m, was priced at 290bp, the B1, for an issue size of $122.6m, was priced at 650bp and the B2, worth $35m, was priced at 1100bp.

The policy provides a maximum limit of up to approximately $425 million of losses on a $48.3 billion reference pool, says Freddie. Sixteen insurers participated in the deal.

“Much like the associated STACR transaction, we upsized Freddie Mac’s ACIS 2020-DNA3 transaction due to large reinsurer demand,” Mike Reynolds, vice president, credit risk transfer, told SCI.

The deal was the first ACIS transaction for four months since the 2020-HQA2, effective March 18. In that transaction, the M1 tranche priced at 100bp, the M2 priced at 190bp, the B1 and the B2 came in at 50bp and the B3 came in at 10bp.

Clearly, the pricing levels of last week’s deal are considerably more generous, particularly in the more subordinated tranches.

Fannie Mae announced two front end CIRT transactions, securing $729m and $600m of coverage, in late May but those deals were executed in March, prior to the Covid 19 market dislocation.

Simon Boughey

Capital Relief Trades

Risk transfer round up - 15 July

CRT sector developments and deal news

Credit Agricole is rumoured to be readying a corporate capital relief trade that is expected to close in 2H20. The French lender’s last risk transfer trade was closed in March 2018 with the IFC (see SCI’s capital relief trades database).

Structured Finance

Conflict-free trading

Benjamin Arnold, founding partner and ceo of Meraki Global Advisors, answers SCI's questions

Q: How and when did Meraki Global Advisors become involved in the securitisation market?
A: Meraki Global Advisors was founded with the rebellious determination to deliver conflict-free trading to asset managers. Meraki is a global multi-asset outsourced trading and operations firm that was launched in April 2019.

We identified a need among the more sophisticated multi-asset hedge fund community for a full-service outsourced trading desk capable of trading across asset classes. Since our inception, we have had the capability to trade structured credit, but over the last six months we have seen strong demand from clients and potential clients to trade more of these products. 

Q: What is your strategy with regards to outsourced trading for the ABS markets?
A: Prior to Meraki, outsourced trading desks were primarily viewed as an equity execution vehicle. A manager would sign up with an outsourced trading firm, staffed similarly to an equity sales trading desk, and the fund would route orders to the outsourced trading firm for execution.

The outsourced desk would execute those orders with the outsourced desk’s execution counterparties. Think of it as a hub and spoke model.

We found this model was ideal for smaller emerging managers for a plug-and-play solution, while the larger and more sophisticated managers required a more bespoke solution to fit their needs. There is no one-size-fits-all when trading for asset managers, so every strategy we implement for a client is unique.

Much of our day is spent understanding the issues or types of issues our clients are interested in, monitoring dealer flows and relaying pertinent market colour. Given our structure, Meraki is the buyside desk of our client’s funds and deeply integrated in that information flow. Similarly, we help our clients participate in BWICs, OWICs and work orders among their dealer network.

Q: How do you ensure that clients receive a bespoke service?
A: We are not in the business of a one-size-fits-all model or signing on as many clients as possible. Instead, we offer a premium, bespoke service that can fit any client’s needs.

We do this by adding clients in a calculated way and only after fully understanding their needs and processes. At Meraki, we view our client relationships as long-term partnerships and we are judicious in those partnership decisions.

Furthermore, client onboarding is structured in a calculated manner to ensure we have the finest traders on staff to service their needs. We seek out and hire traders who have the unique skillsets required to cover our more nuanced clients, unlike traditional trading desk staffing, where any trader on the desk may answer the phone or handle a client’s trades.

We pride ourselves on fitting into our client’s workflows, including augmented trading to fit their investment style(s), internal processes and integrating with their OMS/EMS technology. Our firm was founded with this core value, which continues today.

Q: What are the key asset classes that you focus on?
A: We can trade any product our clients are set up to trade. Our team of experienced buyside traders have deep expertise with equities, corporate credit, FX, rates, structured credit, and all related derivatives. Outsourced trading has traditionally been geared towards equities and FX, which still dominates the space, but recently we have increased focus in the credit and derivative markets.

Q: What differentiates you from competitors?
A: From what we understand, we are the only firm offering an outsourced trading solution for any and all products. Our model is unique in that we are our client’s trading desk, or a portion of it, not an intermediating third-party. As such, we can fully integrate into our client’s idea generation process and systems and we never face off against the client’s broker counterparties or the client.

Meraki is not the client; the fund remains the client all the way from execution to clearing with the sell-side. We are solely the authorised trader or trading desk. This builds trust, expertise and enables our traders to help garner alpha for our clients.

Q: What is the significance of offering conflict-free trading solutions?
A: When an investment team puts their heart and soul into generating alpha ideas, they need to know that the team getting them into and out of the trades are aligned with their interest. If your trading team, either internal or external, is incentivised to trade with certain brokers or has a high client to trader ratio, you will never be certain that you are a top focus client.

Under our model, clients know they have the varsity team focused on them. Our fee structure is 100% transparent and we are compensated for providing premium, full-service buy-side trading for our clients. 

Q: Have you identified future challenges that may arise?
A: Our model is designed to have a low client to trader ratio. With that comes the need to find talented multi-asset traders, who can provide the same exceptional service to new clients. Finding the right talent has, and always will be, the hardest challenge for any business.

Several members of our team have held senior positions at large credit funds, including Jabre Capital and Paulson & Co. They have been instrumental in building out the processes, relationships and knowledge bank we use to service our clients. 

The recent global pandemic has made our opening of new office locations a bit more complex. While we are still moving ahead with our 4Q20 expansion plan of opening a New York and Asia office, we have been fortunate to have our headquarters in Park City, Utah, where we continue to grow our team.  

Q: What opportunities do you expect to see?
A: We expect to see more funds partner with outsourced trading teams that not only execute all or part of their order flow, but also provide a full-service buy-side trading experience. We also expect to see a greater shift towards technologically innovative asset management service firms that can combine trading, finance, risk, operations and portfolio management expertise into a tightly knit, process-driven platform.

There are several outsourced models out there, but identifying which model works best for a particular client will be an educational process. We have been surprised by the up-take in non-equity business development, especially over the past six months, and are excited by future opportunities in the space.

Jasleen Mann

Structured Finance

LCX platform expanded

Sector developments and company hires

LCX platform expanded
LendingClub has expanded its LCX platform to make it easier for registered institutional investors to analyse, price and bid on loans at pre-issuance, down to the individual loan level. When it was first launched, LCX enabled the company to sell previously originated loans at, above or below par, from its balance sheet. For the first time, LendingClub can now sell loans with dynamic pricing before they are originated, meaning they never hit the company's balance sheet and thereby help it preserve liquidity. The expansion also increases investors' ability to evaluate and execute their purchase strategies in a real-time, data-rich environment. Loans on this framework will be offered on the LendingClub marketplace multiple times per day. 

In other news…

BUMF hearing due
The BUMF 4, 5, 6 and 7 issuers have informed noteholders that Alfred Olutayo Oyekoya, Rizwan Hussain, Rajnish Kalia, Jai Singh, Callon Shared Equity and Portfolio Logistics continue to purport to have assumed the position of directors (SCI 26 June). In addition, Hussain continues to hold himself out as the chairman of the issuers, which consider these actions to be entirely invalid and ineffective. The matter of Hussain and his associates' purported authority has been referred to the Courts for determination and a hearing has been listed for one day between 13 and 15 July.

EMEA
Pascal Meysson has been appointed md and head of HIG WhiteHorse Europe. Meysson has 24 years of investing experience overall, including 16 years in the European direct lending market. Prior to joining HIG, he was an md at Alcentra, where he was a founding member of the European direct lending platform. Before Alcentra, he was with Deutsche Bank and Charterhouse in London.

Hope bill drafted for CRE borrowers
US Representative Van Taylor has circulated a draft bill that would require the Treasury Department to establish and administer a facility to guarantee certain preferred equity investments in commercial real estate borrowers affected by Covid-19. Dubbed the ‘Helping Open Properties Endeavor Act of 2020’ (the Hope Act of 2020), it is intended to fill the gap in existing federal programmes by providing financial assistance to CRE borrowers - including those borrowers with CMBS debt - by guaranteeing the purchase by eligible financial institutions of preferred equity instruments issued by eligible CRE borrowers. The facility would be funded by utilising amounts already appropriated for providing liquidity to eligible businesses under Section 4003(b)(4) of the CARES Act (15 U.S.C. 9042(b)(4)), according to a recent Cadwalader memo.

The act incentivises financial institutions to purchase the preferred equity instruments by: guaranteeing that the Treasury will purchase the preferred equity instruments after a certain period of time; reimbursing the financial institutions for a portion of the preferred equity instruments; and paying the financial institutions an annual servicing fee. However, Cadwalader notes that the act does not provide a path to forgiveness of the equity investment for CRE borrowers like the Paycheck Protection Program provides for its borrowers.

North America
Aeolus Capital Management has named Aditya Dutt partner and president. He will also be a member of the Aeolus board, following a period of gardening leave from Renaissance Re (SCI 10 July), where he was svp and president of Renaissance Underwriting Managers.

Fiera Comox has launched a new private credit strategy, offering investors compelling private credit investment opportunities across the US and Europe. To develop and launch this new strategy, the firm has recruited Mathieu Desforges and Maxime Dorais from the Caisse de dépôt et placement du Québec (CDPQ). While at CDPQ, together they grew the junior and opportunistic credit strategy into an over C$3bn private credit portfolio from 2013 to 2019.

Structured Finance

Euro CLO par burn rises

Sector developments and company hires

Euro CLO par burn rises
After a relatively stable Q1, European CLO managers burnt an average -19bp of par in Q2 (compared to -3bp in Q1), according to JPMorgan’s latest report on the sector. Among 44 European managers, 14 managers built par in 2020 YTD by an average +19bp, while the remaining 30 managers burnt par by an average -41bp. Of the 14 managers who built par, only three – Apollo/Redding Ridge, ICG and Commerzbank – also increased WARF YTD by less than 373 (which is the lowest 25th percentile; WARF deteriorated across all managers YTD by an average 428).

Nevertheless, the report notes European CLO credit deterioration is less onerous than in the US and has stabilised recently. The average junior (double-B or single-B) OC cushion is 3.77% across 52 managers, ranging from 1% to 5.71%. Nearly all (48) are passing all of their individual junior OC tests, and only four managers are failing at least one transaction. Therefore, JPMorgan expects most European CLO equity will be paid a cashflow in the July quarterly payment date.

In other news…

ABCP STS notifications up
At 165, year-to-date STS notifications already outstrip last year’s total (143), thanks to the substantial influx of ABCP notifications. Accounting for only 30 for the whole of 2019, the latter had reached 113 as of 6 July, according to PCS.

To make sense of this data, the organisation suggests that three aspects need to be understood. First is that ABCP sponsors did not “come late to the party”.

Having an ABCP transaction notified as STS allows the conduit’s sponsor to obtain better CRR capital requirements for the liquidity facility it provides to the conduit. However, the new CRR requirements for conduits only came into force on 1 January 2020 – one year later than the rules for bank investors in STS securitisations.

Second, few ABCP STS notifications represent new financings: almost all notified ABCP transactions are for financings in place before STS came into force. “These transactions are reviewed, amended and updated at regular intervals and the market is seeing conduit sponsors using these reviews to adapt their transactions to the STS rules,” PCS explains.

Finally, the number of notifications substantially overstates the number of ABCP financings that are becoming STS because many involve one borrower syndicating a facility across a number of conduits. The way the STS Regulation is drafted though requires each sponsor separately to disclose their conduit’s share of the transaction.

Aussie vehicle prices jump
Wholesale used-vehicle prices rose to all-time highs across Australia in June, up 11% from May to 23% from the lows reached in April, according to the Datium Insights-Moody’s Analytics Price Index. Demand for vehicles remained high last month as the economy re-opened and public transportation remains an unattractive option. Additionally, both new and used vehicle supply remains low, pushing up prices of available inventory. However, Moody’s Analytics anticipates price decreases over the next two quarters as more vehicles reach the market and labour market concerns sap consumer demand.

North America
First Eagle Alternative Credit has expanded into asset-based lending solutions, with the appointment of Larry Klaff and Lisa Galeota to lead this initiative. The pair join the firm from Gordon Brothers Finance Company and will be based at First Eagle’s Boston office, reporting directly to its president Chris Flynn. Klaff, who joins the firm as a senior md and head of asset-based loans, will serve on the investment committee of the direct lending platform. Galeota joins as an md.

Owl Rock Capital Partners has appointed Alexis Maged as head of credit and Jeff Walwyn as head of non-tech underwriting. In his newly created role, Maged will oversee Owl Rock's credit underwriting, portfolio management and workout functions across the firm. He joined the firm at its inception as an md and head of underwriting and portfolio management. Maged has and will continue to sit on the investment committees of all of Owl Rock funds. In his role, Walwyn will oversee the day-to-day credit underwriting of non-technology investments at Owl Rock. He joined the firm in 2017 as a principal on the firm's underwriting team and was promoted to md in 2019. Prior to Owl Rock, Walwyn was an md at Guggenheim Partners, where he focused on evaluating credit investments. Walwyn will continue to report to Maged.

SLABS hit by maturity risk
Fitch has downgraded the ratings of all outstanding classes of Navient Student Loan Trust 2014-1. The outlook for the class A3 notes (downgraded to triple-B from triple-A) remains negative, while the outlooks for the class A4 (downgraded to double-A from triple-A) and B notes (downgraded to triple-B from double-A) have been revised to negative from stable. The actions are due to increased maturity risk in the transaction, stemming from increasing remaining loan term and a reduction in payment rate. The weighted average remaining term has increased to 164 months, up from 155 months at issuance. The negative rating outlook reflects the possibility of further negative rating pressure in the next one to two years, if the remaining term continues to increase or if payment rates persist at the recent lower levels. Meanwhile, Fitch has affirmed the ratings of all outstanding classes of Navient Student Loan Trust 2014-8 and 2015-1, with stable outlooks.

Structural tweaks
A number of forbearance covenant waivers for Ribbon Finance 2018 have been agreed. The waivers have been granted until 13 July 2021 in exchange for a £28m deposit into the equity cure account, among other things.

Newday has reset the interest rate on the A1 dollar-denominated notes of Newday Funding 2018-1 and extended the scheduled redemption date to August 2021. The new rate is equal to SOFR plus 110bp, which steps up to 210bp. 

Volcker warning
The LSTA has warned that the amended Volcker Rule (SCI passim) might be subject to invalidation under the Congressional Review Act (CRA), should the US government change hands at this November’s elections. But the LSTA concedes invoking CRA, which was created in 1996 to provide a mechanism for Congress to review new rules issued by federal agencies, is not certain even in the event of a Democrat President, House and Senate.

It says: “Importantly, the new rule included many changes impacting asset classes other than CLOs. Perhaps most visibly, the new rule now permits banks to invest in venture capital funds and credit funds. These changes could provide more motivation for Democrats to invoke the CRA, but because the rule must be considered in its entirety, action on VC and credit funds would also invalidate the changes affecting CLOs. On the other hand, a Democratic Congress may focus on other, unrelated, regulations that have priority over the Volcker Rule.”