Contents

ABS

Collections clarity

Payment arrangement ABS strengthened

New legislation (Law 14.031) has been introduced in Brazil regarding payment arrangements that govern payment services used by the public. The move is expected to have a positive impact on securitisations backed by receivables from these payment networks.

Federal Law 14.031, enacted on 28 July, clarifies that proceeds for settlements of obligations related to the final user of a payment arrangement shall not commingle with other assets of the arrangement participant, and that those proceeds are not subject to consolidation in the case of bankruptcy or insolvency. As such, Fitch notes that the legislation provides clarity on the ownership of collections in the case of bankruptcy of the originator.

Nevertheless, questions remain regarding the effectiveness of control mechanisms, especially for smaller participants in the arrangement. In the best interest of securitisations, the originator should have appropriate controls in place that allow for the segregation of collections in a bankruptcy scenario, according to Fitch.

There are three main types of collateral in payment arrangement securitisations: receivables owed by card issuers to the acquirers; receivables owed by acquirers to sub-acquirers; and receivables owed by acquirers or sub-acquirers to merchants. Fitch suggests that information asymmetry exists for all types, since the originator - who is the acquirer or sub-acquirer - possesses full information on which receivables were transferred to the securitisation and which ones were paid off.

Consequently, the transaction is reliant on the originator for servicing purposes. What happens to the securitisation if this party fails is uncertain, as this scenario has not yet been tested.

The responsibility for complying with the new law remains with the originator. Hence significant credit and operational risks remain, which Fitch says means it is unable to detach a transaction rating from the originator’s rating.

If an originator experiences liquidity or solvency issues, it can divert proceeds from the securitisation in its role as servicer. Should an originator become insolvent, the risk of payment interruption increases, due to the potential delay in timing of reconciliation and payments of receivables due. However, recording the receivables in clearinghouses could facilitate reconciliation in the event of originator bankruptcy.

Fitch believes the presence of a hot back-up servicer (BUS) in the structure could act as a potential mitigant, as the BUS would have online processes mirrored in its own systems to enable immediate replacement. Nevertheless, the agency says it has not yet reviewed any BUS with adequate experience and systems to perform this role for securitisations backed by receivables originated in the payment arrangement industry.

Jasleen Mann

Structured Finance

SCI Start the Week - 10 August

A review of securitisation activity over the past seven days

Last week's stories
Asset-backed attenuation
Stricter underwriting in auto, credit card and home loan markets means fewer ABS deals
CMBS perturbation
Fitch report shows July US delinquency surge, especially in hotels and retail
CPIH calculation
Inflation index switch to support ICSL ABS
Freddie STACRs them up
New STACR deal was upsized and printed at the tight end across the capital structure
Greek momentum
Alpha applies for HAPS guarantee
NPL trade inked
Bank of Cyprus finalises Helix Two
Nuanced approach
Call for clarity in defining ESG
Other deal-related news

• European CLO equity cashflow returns average 9.3% year-to-date and - as all CLOs in reinvestment are currently paying - the full-year 2020 cashflow return is likely to be low-teens (SCI 3 August).
• Apeiron Management and Apollo Global Management have purchased a portfolio of claims owned by Grandi Lavori Fincosit for a value of over €1.3bn (SCI 3 August).
• Two transactions - BPBNP 2016-1 and BCCNP 2018-1 - have failed their cumulative collection ratio triggers in the June 2020 reporting period (SCI 3 August).
• The continued deterioration in credit quality of issuers due to the coronavirus pandemic resulted in a large number of US middle market CLOs failing a variety of tests for the first time in 2Q20 (SCI 4 August).
• Exor and Covéa Coopérations have agreed to invest €1.5bn in special purpose insurance vehicles managed by PartnerRe (SCI 5 August).
• The overall US CMBS delinquency rate dropped to 8.53% last month, while 25.78% of balances previously in grace became delinquent, according to S&P's monthly tracker (SCI 6 August).
• Alternative Access Funds has announced the registration of its new AAF First Priority CLO Bond ETF (SCI 7 August).
• Significant hotel sector performance deterioration as a result of the coronavirus pandemic and recession make the assignment of ratings to new US CMBS single-asset/single-borrower hotel transactions unlikely at this time, Fitch says (SCI 7 August).
• Fitch has revised its rating outlook to negative from stable on 362 US FFELP student loan ABS tranches rated triple-A (SCI 7 August).

Data

BWIC volume

Secondary market commentary from SCI PriceABS
7 August 2020
USD CLO Mezz/Equity
A quiet end to the week with 7 covers which in general suggest a continued tightening tone - 4 x A and 3 x BBB today. The single-As trade 248dm-362dm. The 2023/2024 RP profile single-As trade 248dm-306dm tighter to 280dm-320dm recent context. At the wide end of today's single-A trades is a shorter dated WAMCO CLO MHAWK 2014-3A C 362dm / 3y WAL wide to recent trading in vh200s context, the metrics are weaker with 2.56 ADR, 11.2 Sub80, 3823 WARF, 10.3% CCC and a neg par build -3.07.
The BBBs trade 394dm-440dm given across wide RP profiles, with the most liquid BBB cohort the 2024 RP profiles Canyon Cap's CANYC 2019-2A D covers 424dm / 8.31y WAL which is at the tighter end of recent context 400dm-470dm, the metrics look clean (ADR 0.7, Sub80 3.85, WARF 2901, CCC 5.3).
EUR MEZZ/EQUITY CLO
There are just 1 x BB & 2 x B today. The BB is CADOG 5X ER which traded at 763dm which is in line with recent levels.
The single B's traded between 980dm and 1000dm. We haven't seen any single B's trade by BWIC for a while so this is useful colour.
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 usfor a trial direct via SCI.

Structured Finance

Problem solving

Paul Wilden, global head of capital markets at Apex Group, answers SCI's questions

Q: How is Apex Group involved in the securitisation market?
A: We provide a combination of SPV administration, trustee and agency services to a broad cross-section of asset classes. Our capital markets business is broadly sector agnostic.

Q: What are the firm’s key areas of focus today?
A: Given the proliferation of private debt funds, one area where we add value is by working with funds to manage their loan portfolio administration processes. We are able to surround an opportunity by combining our world-class fund administration and loan administration services, in order to provide a single-source solution to our clients. Non-performing loans, debt restructurings and escrow are all key areas of focus, recognising the current dynamics across the globe.

Q: How does the firm differentiate itself?
A: Apex differentiates itself through our ability to understand the client need and create solutions which are both nimble (from a KYC/client on-boarding and bank account opening (Apex owns European Depositary Bank (EDB)) and meet the client’s requirements. An example of the Apex difference relates to KYC and our ability to both on-board a client and open bank accounts (where needed) in an incredibly quick timeframe.

In my experience, the regulatory environment in which banks operate can mean lengthy periods of time to both on-board new clients and complete account opening processes. Firms like Apex offer an alternative which is both quick and cost-effective.

We are also focused on partnership opportunities with banks. These opportunities have and will continue to be a reality in the Covid-19 world, as levels of distress increase and conflicts of interest which were deemed acceptable pre-Covid are no longer viewed as acceptable.

In addition, changes in strategy or sector and/or geographic exposure reviews may become the catalyst for the need to step away from various administrative roles associated with capital markets transactions. In order for incumbent providers to step away, they need a partner who is able to step in. Apex is ready to step up and replace the incumbent provider, thus ensuring the continuing smooth running of the transaction.

Q: Which challenges/opportunities do you anticipate in the future?
A: In the current environment, we see increased opportunities in connection with non-performing loans. We also expect continuing restructuring activity and opportunities for escrow - which is being discussed as a potential solution to Covid-related supply chain disruption and a mitigant to counterparty credit risk.

In terms of what happens next, I think there are two key questions, the answers to which remain unclear. The first question is whether the unprecedented fiscal easing and stimulus we’ve seen is enough to bring market participants back into the financial markets.

The second is the order in which the markets re-emerge post-coronavirus – in other words, Asia re-emerging first, Europe next and then the US, as opposed to the US re-emerging first, then Europe and then Asia. It will be interesting to see if investors start by focusing on parts of the world that undergo a better or quicker recovery from the pandemic.

Corinne Smith

Structured Finance

CMBS repeat loan volume declines

Sector developments and company hires

CMBS repeat loan volume declines
The percentage of US CMBS repeat loans dropped to 17.7% in 2019 and to 13.9% in 1H20, down by 21.4% year-over-year, according to DBRS Morningstar figures. Nevertheless, the volume of CMBS loans refinanced into CRE CLOs has remained strong, with over two billion loans exiting through such vehicles.

Based on an analysis of CMBS issuance, DBRS Morningstar identified a sample of more than 14,800 repeat loans that have been securitised in multiple CMBS transactions. These loans had an aggregate balance of US$292.1bn in their initial issuances and a total resecuritised balance of US$387.3bn (an increase of 32.6%) on the most recent CMBS financing.

ORIX renames CLO manager
ORIX Advisers has rebranded the Mariner Leveraged Credit Team as Signal Peak Capital Management (SPCM), following the sale of Mariner Investment Group (SCI 9 June). Co-led by David Martin and Erik Gunnerson, the SPCM team has over 10 years’ experience in investing in portfolios of leveraged loans and structured products, and currently manages eight active CLO vehicles and certain other client accounts. Utilising rigorous fundamental credit analysis and detailed capital structure and proprietary relative value modelling, the portfolio management team seeks to identify debt positions with superior credit quality.

Structured Finance

Piraeus taps HAPS

Sector developments and company hires

Piraeus taps HAPS
Piraeus Bank has filed an application for inclusion of its Phoenix non-performing loan securitisation under the Hercules Asset Protection Scheme (HAPS). The total gross book value of the portfolio is €1.9bn, the majority of which relates to mortgage loans, and the application is in connection with a Greek state guarantee on senior notes with a total gross value up to €1bn. The bank notes that an application for inclusion of the Vega NPL ABS, sized at up to €5bn, will follow “in the forthcoming period”.

In other news…

Climate risk data inclusion
Moody's is now including climate risk data and analytics from its majority-owned affiliate Four Twenty Seven in its research on and ratings process for US CMBS and CRE CLOs. While Four Twenty Seven climate risk scores inform Moody's ratings, they are not a direct input into its rating models. The agency notes that as extreme weather events and conditions become more frequent and severe, anticipation of these hazards will be increasingly reflected in insurance costs and eventually also capital expenditures and commercial property valuations. Climate change could also raise utility costs, due to factors such as higher demand for energy or a lack of water.

EMEA
Channel Capital Advisors has recruited Mike Watson as a member of its risk advisory council and chair of its asset resolution and recovery committee, reporting to Walter Gontarek, Channel ceo and chair. The role involves advising the firm’s London and Amsterdam teams with respect to emerging risk profiles, risk appetite and risk culture. Watson has extensive experience in working capital financings globally, including senior risk management and business leadership roles at Bibby Factors, Cattles Invoice Finance, Arbuthnot Commercial Finance and Barclays Bank.

North America
WhiteHorse Capital has named Jason Hicks principal, based in its New York office. He will be responsible for originating and executing middle market debt financings for private equity sponsored transactions. Previously, Hicks was an md at MC Credit Partners, where he spent seven years as an origination and execution professional for sponsored and non-sponsored transactions. He has also worked at a private equity fund and at Citi.

Structured Finance

Hertz review reversed

Sector developments and company hires

Hertz review reversed
Moody's has changed the direction of review for 11 tranches of rental car ABS issued by Hertz Vehicle Financing II (HVF II) to under review for upgrade from under review for downgrade. The action is prompted by: the recent court-approved order requiring Hertz to make lease payments and remit required vehicle sales proceeds (SCI 31 July), increasing credit enhancement and alleviating some performance uncertainty for the senior notes; current strong used vehicle prices and sales volumes; and the majority of the noteholders taking an active role in negotiating a favourable short-term outcome in Hertz's Chapter 11 bankruptcy proceedings that will result in the paydown of roughly half of the aggregate balance of the senior notes. Moody's downgraded these ratings and placed them under review for further downgrade on 29 May.

In other news…

Freddie CRT rating outlook revised
Fitch has taken various rating actions on 32 classes and related exchangeable notes from four GSE credit risk transfer transactions issued between 2014 and 2015 in response to the placement of the US sovereign rating on negative outlook (SCI 7 August). All classes of notes from STACR 2014-HQ2, 2015-HQ2, 2015-DNA1 and 2015-DNA3 have been affirmed, but the rating outlook for 16 of them has been revised to negative.

North America
René Mück has been promoted to head of capital partners Americas at Munich Re America and will also join the executive leadership team at the firm. Mück previously served as head of underwriting non-life in Munich Re’s Japan branch.

Structured Finance

LLPA increase 'misguided'

Sector developments and company hires

LLPA increase ‘misguided’
Fannie Mae and Freddie Mac are increasing the loan-level price adjustment (LLPA) by 50bp as an adverse market delivery charge on effectively all mortgage refinances, except for construction loans, with settlement dates after 1 September. In response to the move, the Mortgage Bankers Association states that the announcement “flies in the face of the Administration's recent executive actions urging federal agencies to take all measures within their authorities to support struggling homeowners”.

The association calculates that the increase means the average consumer will be paying US$1,400 more than they otherwise would have paid for a refinance mortgage. Further, the 1 September effective date means that thousands of borrowers who did not lock in their rates could face unanticipated cost increases days from closing. 

Recent refinance activity has not only helped homeowners lower their monthly payments, but it is also reducing risk to the GSEs and taxpayers, according to the MBA. It notes that at a time when the US Fed is purchasing US$40bn in agency MBS per month to help reduce financing costs for mortgage borrowers to support the broader economy, this action raises those costs and undermines the Federal Reserve's policy.

"We strongly urge FHFA, which had to approve this policy, to withdraw this ill-timed misguided directive," the association concludes.

In other news…

Aurorus upgraded on input error
Moody's has upgraded its ratings by one to two notches on the class B to F notes issued by Aurorus 2020, which priced last month (SCI 24 July), reflecting the correction of an input error in the application of the early amortisation triggers in its cashflow analysis. The agency notes that its initial modeling did not correctly consider certain triggers, such as the PDL trigger, that would lead to higher payments to rated classes of notes in the event of an early amortisation. The rating action also takes into account the notes' spreads and swap rate related to the transaction's fixed-floating interest rate swap, both being meaningfully lower than assumed at the initial provisional rating date.

Forbearance data integrated
RiskSpan has integrated Intex forbearance data into its Edge platform, allowing analysts to forecast bond performance leveraging loan-level data. The combination of Intex collateral data with RiskSpan's modeling and scenario tools allows mutual clients to run portfolio cashflows under a range of scenarios, with the aim of enabling the industry to more accurately analyse loans in forbearance as a result of Covid-19.

MBS price dislocations examined
In a recent Staff Report, the New York Fed examined the economic mechanisms that limited arbitrage between the cash and forward markets of agency MBS, and whether its asset purchases alleviated price dislocations. The analysis found that the cash-forward basis widened significantly - by nine cents per US$100 face value during the height of the Covid-19 crisis. The widening basis was accompanied by a significant increase in selling by customers in the cash market, indicating a “scramble for cash” following the liquidity shock.

At the same time, dealers provided liquidity by increasing both their long cash and short forward positions significantly, but the basis continued to widen - implying that balance sheet costs constrained dealer inventories. The report estimates dealers’ average costs of holding inventory for five weeks at about eight cents, with primary dealers affiliated with banks subject to Basel 3 liquidity regulations appearing to increase their positions more than others.

The basis narrowed by about seven cents following the Fed’s MBS purchases in the forward market. “We attribute this effect to the faster settlement schedules of the Fed’s purchases, compared to the market convention, which allowed a faster deployment of capital. Overall, our results show that the combined liquidity constraints of investors and dealers led to severe price dislocations and the Fed, in its role as the ‘dealer of last resort’, absorbed the liquidity demand that dealers lacked the capacity to meet,” the report notes.

North America
Elementum Advisors has announced significant additions and promotions across its investment and senior leadership teams. Jeff Davis will join Elementum in September as svp, investments. He most recently co-led Aon Securities' credit practice for (re)insurers and advised on capital raises, while also structuring and executing numerous catastrophe bonds.

Meanwhile, after nearly 10 years with Elementum, partner and portfolio manager Paul Barker will join the firm's executive committee as its fourth member, joining the committee's existing members, founding partners Tony Rettino and John DeCaro and managing partner Mike France. Additionally, partner Jake Weber has been charged with leadership of Elementum's newly formed analytics department, which is responsible for evolving the firm's view of risk through dedicated research, as well as providing peer review and support of the firm's transaction modeling efforts.

Note sales boost NPL collections
June collections for Italian non-performing loans were 78% higher than those in May and 6% higher than the pre-Covid average, according to Scope. The agency notes that judicial collections picked up from April’s decline, increasing by 36% in June versus the pre-Covid average. Nevertheless, June performance relied on an exceptional volume of note sales – €30m versus €1m in April - which represented 19% of total volumes, against the historical 10-month average of 10%.

“While judicial and DPO strategies show a lower deviation from their historical average, the share of note sales of total proceeds almost doubled in June, compared to the September 2019 to June 2020 average. Note sales strategies have so far negatively impacted transaction profitability and, since these are typically one-off transactions, the performance improvement could be a temporary boost rather than a stable recovery,” Scope notes.

Structured Finance

'Flip clause' complaint dismissed

Sector developments and company hires

‘Flip clause’ complaint dismissed
The US Court of Appeals for the Second Circuit has ruled that investors should keep roughly US$1bn received from various Lehman Brothers affiliates after the bank’s 2008 bankruptcy filing triggered the liquidation of dozens of CDOs. The case centres on the Bankruptcy Code’s treatment of ‘flip clauses’ in a securitisation waterfall, which reprioritise cashflow upon bankruptcy and often are included in securitisations that include swaps (SCI passim).

The Second Circuit’s ruling held that, even assuming the flip clauses in Lehman’s CDS were ipso facto clauses that modified the rights of the Lehman affiliates upon the filing of a bankruptcy case, they were still enforceable because Section 560 of the Bankruptcy Code exempted the swap agreements and their flip clauses from the Code’s general prohibitions on ipso facto clauses. The Second Circuit therefore affirmed the district court order dismissing Lehman’s complaint in its entirety. Lehman will have 90 days from entry of judgement to seek certiorari from the Supreme Court.  

In other news…

Aircraft ABS hit by novation failure
Fitch has downgraded the class A, B and C notes issued by Lunar Aircraft 2020-1 and assigned all classes a negative rating outlook, while removing the rating watch negative placement. The rating action reflects the termination of purchase agreements to novate six aircraft in the pool prior to the delivery expiry date of 23 November 2020 and the resulting higher concentration risks, with less diversification from an aircraft, airline lessee and regional exposure perspective compared with closing. Four aircraft remaining in the pool have leases maturing in the next 12 months and, were they to be sold, would result in further elevated concentration risks with just eight aircraft left in the pool at that point.

The actions incorporate the ongoing deterioration of all airline lessee credits backing the leases in the pool, downward pressure on certain aircraft values, Fitch's updated assumptions and stresses, and resulting impairments to modelled cashflows and coverage levels. On 30 July, a notice confirmed the redemption of the aircraft and stated that the applicable amount attributable to each undelivered aircraft will be used to prepay the notes without premium.

CDO administrator resigns over owed expenses
MaplesFS has advised Crystal River CDO 2005-1 noteholders that it intends to terminate the provision of all services to the issuer - including resignation of the directors and registered office - by initiating the termination clause of the administration agreement. The firm notes that for several years, it - and various other service providers to the issuer - have not been paid for their services. The trustee has advised that the current aggregate of unpaid administrative expenses to service providers exceeds US$1m (Maples outstanding fees are currently approximately US$40,000) and that there are insufficient proceeds to pay these administrative expenses.

Various other service providers have already ceased providing services to the issuer. In due course, unless successors are appointed, the Registrar of Companies will cause the issuer to be struck off from the register of companies in the Cayman Islands, whereupon the issuer will cease to exist.

Noteholders should contact Maples or the trustee if they wish to make payment arrangements in respect of these unpaid administrative expenses. 

North America
Bill Berliner has joined PennyMac as md, responsible for managing the company's research and fixed income investor relations efforts. He was previously director of analytics at Mortgage Capital Trading and has also worked at Kinecta Federal Credit Union, Manhattan Capital Markets, Countrywide Capital Markets and Bear Stearns.

Toorak Capital Partners has expanded its asset management team with the hires of Kevin Tatro as head of asset management and reporting and Stephen Tyde as head of special servicing. Tatro most recently served as principal and head of asset management at Woodbridge Investments and has held leadership positions at Macquarie Group, Doral Group, LBBW and JPMorgan Investment Management. Tyde previously served as a director with Rialto Capital Advisors and has also held leadership positions at DLP Real Estate Capital, Pulte Homes, Beazer Homes and Levitt & Sons. Earlier in his career, he was an attorney specialising in real estate and commercial litigation, land use, zoning and bankruptcy.

QM overlap mooted
The Structured Finance Association has submitted a comment letter to the CFPB agreeing with its proposal to delay the scheduled expiration of the GSE’s qualified mortgage ‘patch’ until the new proposed General Qualified Mortgage Rule is in place (SCI 23 June). Additionally, the association recommended an overlap period of six months between the current rule and any new rule, in order to allow for a smooth transition that does not disrupt access to credit.

STACR notes downgraded
Moody's has downgraded from Aaa to Aa2 the class M2, M2F, M12 and M2I notes issued by STACR 2014-DN1. The rating action reflects an increase in projected credit events driven by a rise in Covid-19 related delinquencies and forbearance. As of July, 4.17% of the reference pool is delinquent.

Moody’s notes that most fixed severity CRT transactions issued by Freddie Mac provide a grace period for delinquent loans that are affected by a natural disaster. However, the affected transaction does not have a natural disaster exception and loans will be recognised as credit event reference obligations when the loans become 180 days or more delinquent.

UKML to undertake strategic review
Since unanimously rejecting M&G Investment Management’s (MAGIM) cash offer for the company (SCI 20 July), UK Mortgages says it has consulted extensively with shareholders to seek perspectives on the offer, as well as its strategy and prospects. While the UK Mortgages board still believes that the terms of the MAGIM offer materially undervalue the company and its prospects, it has committed to commencing a review of future strategy once it is no longer in an offer period under the Takeover Code, with the aim of maximising the value created for shareholders from the company’s portfolio, enhancing liquidity and removing the discount at which its shares trade versus the NAV.

It is anticipated that the review will include: the optimisation of assets to release further funds; the gradual sale of assets to release further capital; the reconstruction of the company to facilitate its ongoing growth; and the orderly winding down of the company. The board would seek to conclude the review within a few months of the end of the offer period, which is due on 17 August.