Contents

CLOs

European evolution

European CLO market changing post-Covid

European CLO structures are evolving post-crisis, including the introduction of static deals only previously seen in the US. Such innovation combined with relative value opportunities could spur further market growth.

Dasha Sobornova, partner at Mayer Brown, says: “When the market opened up there were features that were quite different to what we were used to seeing in CLO 2.0. We had lower leverage deals, and shorter non-calls and shorter reinvestment periods.”

She continues: “Another recent feature is static CLOs which we have not seen in Europe before. The main difference is that the manager does not have the ability to trade the portfolio once the deal is set up so the pool is locked in at issue date and even though the manager does have a function to monitor the pool, they do not have the flexibility to trade the portfolio or switch strategies. Investors are given certainty about what is in the pool, and in the current climate that could be a relevant factor to consider.”

Scope Ratings agrees that the transparency created by static pools is appealing to investors. However, the agency notes that statics are more prominent in the US market where they price at lower spreads in comparison to typical managed CLOs. Equally, some managers may be concerned about the inherent loss of flexibility.

In any event, Benoit Vasseur, executive director at Scope Ratings, says: “CLO has been a relatively robust asset class through the cycle and resilient to economic shocks. Investors need yield and CLOs are offering attractive risk/return metrics, especially at the higher end of the capital structure.”

European deals are also offering relative value versus those on the other side of the Atlantic. Arthur Rosenbach, head of ABS & research desk of Nostro at Bank Leumi, says: “Spread is an important factor in determining where you want to put money. Single-A to triple-A in Europe offer 10 to 20bp more than the US.”

He continues: “Double-A has 5% to 7% more subordination than in the US. European collateral is likely to be of better quality than in the US with less energy exposure. Default trends have been positive, around 2% in Europe and 4% in the US.”

Post-Covid the European primary market has only seen new deals so far, but that could change. “We could potentially see a revival of the refi and reset market next year,” says Sobornova.

To date, European issuance has been on a smaller scale the before the crisis with most deals no bigger than €400m, but deal sizes could return to previous levels driven by attractive spreads from the issuer’s perspective. Scope notes an overall tightening trend with average triple-As in the 190bp range in May, down to 145bp in July and now typically marketing in recent weeks in the 125bp-130bp range.

However, Cyrus Mohadjer, senior analyst at Scope Ratings, adds: “2020 issuance volumes may end up 30% to 40% lower than market expectations at the beginning of the year, somewhere in the €18-20bn range.”

Nevertheless, the European market continues to recover the pandemic-driven market volatility seen earlier in the year. Chandrajit Chakraborty, cio, managing partner at Pearl Diver Capital, says: “The first green shoot of activity was motivation to try to place debt and term out existing warehouse structures and create CLOs.”

Since then, the secondary market has been picking up pace. “In May/June we saw more activity,” reports Chakraborty. “Active two-way interest from buyers and sellers created momentum, which we saw permeate into the primary space as well.”

Jasleen Mann

CLOs

Double-B disparity

US CLO lower mezz misses out

Last week saw high levels of activity across the bulk of the US CLO primary and secondary markets. However, new and very recent double-B paper has missed out.

“The majority of the new issue debt stack has been very actively bid, but double-B spreads have not been moving as tighter as expected,” says one trader. “In the secondary, we’re not seeing a lot of 2020 post-Covid double-Bs, because new issue is still relatively light in volume, and is not creating the necessary flow for the supply-demand equation in the secondary to be skewed toward selling at tighter spreads and then restack wider in the primary.”

He continues: “The majority of current issuers don’t really care much about the spreads and discount price that the relatively small proportion of the deal the double-Bs amount to. Often, if a manager is big enough in size they’ll retain the double-Bs and look to roll them out in the secondary at a later date. Similarly, there are currently more real money lower mezz buyers in primary, whereas secondary is dominated by fast money at the same part of the cap stack.”

As a result, the trader says: “Secondary is not really its usual good measure of double-B clearing levels for recent deals – there’s not much price transparency for those same profiles. For example,  CCITY 2020-1A D traded twice in September with a 98-handle and then covere on BWIC on 14 September at 99h, but by 22 September did not trade because we don’t think the seller got a bid in the 99s.”

Overall though, US CLO new issuance activity has been strong and last week saw 12 new deals price – the most in a week this year. It also saw the tightest post-Covid triple-A print with OHA Credit Funding 7 coming in at 125bp.

Nevertheless, away from the very top of the stack the supply combined with macro concerns led to new issue widening in double-As down to triple-Bs. The latest deal to price, yesterday’s ICG US CLO 2020-1, printed as follows: class As came in at Libor plus 140bp, Class A2As at plus 205bp, Class Bs 250bp, class Cs 425bp and class Ds 825bp.

Meanwhile, US CLO secondary spreads widened across the board last week in the face of continued high supply. SCI PriceABS shows in excess of US$1.5bn in for the bid, dominated by over US$829m of triple-A paper. The latter thought to be mainly driven by rotation trades.

In a report published last Friday, JPMorgan CLO research put generic US secondary spreads as follows: triple-As 132bp, double-As 190bp, single-As 250bp, triple-Bs 410bp, double-Bs 825bp and single-Bs 1675bp. Representing a week on week widening of 4bp, 5bp, 10bp, 20bp, 50bp and 75bp, respectively.

Mark Pelham

CLOs

Repayments rated

CLO debt repayment rates could act as a manager differentiator

Manager differentiation has become ever more important as the Covid-crisis and its resultant CLO market impact continues to play out. Real repayment rates could become the latest tool in the manager selection process as well as an important pricing input.

"Examining how quickly CLO rated debt is being paid down post reinvestment end date on a deal by deal basis provides a readily understood real world statistic," says Poh-Heng Tan, founder of the CLO Research Group. "The fact that there is a very big disparity between deals underscores how important it is to know the rate as it could have a significant impact on CLO tranche pricing. For example, for the European CLOs with reinvestment end date in the second half of 2018 the annualised CLO debt repayment rate varies between just under 1% and 31%."

Tan believes such calculations are also a consideration to manager selection. "The repayment rate is a direct function of CLO manager's behaviour, CLO post-reinvestment end date languages, collateral pool composition, OC breach, WAL test, among others," Tan says. "As such it enables effective and efficient managers to demonstrate to their investors that discounted CLO debt is a good investment even in a volatile environment like the current one."

He continues: "A fast repayment rate could potentially provide a lower risk/higher return opportunity to debt investors as older CLO debt was being pulled to par at a faster rate even in this challenging time. Conversely, a slow repayment rate would undoubtedly bode well for CLO equity prices in general. It works well for CLO equity investors when the repayment rate is very low - meaning more optionality and a prolonged stream of healthy equity cashflows."

Tan suggests around 20% per annum in the first two years would probably be the average expectation from debt investors in a normal functioning credit environment. "The first two years is what matters as later than that the manager and equity investors will be looking at a reset or rolling the deal into a new vehicle instead," Tan explains.

However, as the below chart shows of the 19 European CLOs with reinvestment end dates in 2018/2019 the majority are falling below such expectations.

Indeed, eight do not make double figures and overall 14 fall below 20%. While only three exceed 25%.

Mark Pelham

ABS

Programmatic approach

Chinese ABCP market gaining traction

Four public ABCP programmes have launched in China since the market opened in June. However, there are a number of differences between Chinese ABCP programmes and those in more developed jurisdictions.

“It is a new market, so at the moment both the programme structure and the underlying assets are less diverse in comparison to the more developed markets in the US and Europe. In addition, the issuance mechanism is also a little bit different,” notes Jerome Cheng, associate md, structured finance group at Moody’s.

In China, corporates sponsor and support all ABCP programmes, using them to tap an alternative short-term funding source for themselves, their clients or their suppliers. In other markets, however, financial institutions sponsor most ABCP programmes to provide asset-based funding to clients.

The first issuance within the sector occurred in June. “We expect to see more issuance, as corporates would be interested in this new product to get additional funding. The NAFMII launched this product, which allows the corporate to get short-term funding.”

The majority of the underlying assets in the Chinese market are supply chain financing receivables. Indeed, so far three programmes are backed by supply chain financing and the other is backed by auto lease receivables.

All Chinese ABCP programmes are single-seller programs, with simple structures. In international markets, multi-seller programmes are the largest programme type and they finance both consumer and commercial assets. Programme types can also include repo programmes, collateralised CP programmes and single-seller programmes, with varying structures and business purposes.

Most US and all European ABCP programmes are fully supported, whereby banks provide full credit and liquidity support, regardless of underlying asset performance.

Additionally, while programmes in overseas markets can constantly issue new series of ABCP to purchase additional assets into the conduits, Chinese ABCP programmes have only one series of notes outstanding from the same issuing trust. Proceeds from subsequent note issuance repays the maturing ABCP.

Jasleen Mann

Structured Finance

SCI Start the Week - 28 September

A review of securitisation activity over the past seven days

SCI Risk Transfer & Synthetics Virtual Seminar
Join SCI on 7 and 8 October for its Risk Transfer & Synthetics Virtual Seminar, which will explore the micro and macro drivers behind JPMorgan's landmark capital relief trades and whether this flurry of business could spur further risk transfer activity across a broader range of US originators and asset classes.
The seminar also examines innovation across the whole range of mortgage insurance-linked note and GSE credit risk transfer programmes, as the market re-emerges from the shadow of Covid-19. For more information or to register, click here.

CRT award submission deadline nears
The submissions period for the 2020 SCI CRT Awards is now open. The qualifying period for the awards is the 12 months to 30 September 2020.
Pitches and/or any queries should be emailed to cs@structuredcreditinvestor.com by 9 October. Click here for information on categories and the submissions process.
Final selections will be made by the SCI editorial team, with input from an industry advisory board. The winners will be announced in a special awards edition of SCI and at the London SCI Capital Relief Trades Seminar on 23 November.

Last week's stories
Calabrian calibration
FHFA silent on the implication of the director's comments about GSE CRT last week
Doubling up
Record year anticipated for the EIF
Into the light?
European CLOs continue to improve
JP Morgan at CRT again
The US bank is reportedly readying a corporate/SME loan deal
Spread compression
European securitisation market update
Syon safe
Fitch affirms ratings for Lloyds SRTs
Tight pricing
BNP Paribas completes SRT

Other deal-related news

• Moody's has issued a request for comment on proposed changes to its methodology for rating CLOs that adjust its analytical treatment of corporate obligors with a negative outlook or whose ratings are on review for upgrade or downgrade (SCI 21 September).
• An AMR auction for Mountain View CLO XIV is scheduled for 29 September, facilitated by the KopenTech platform (SCI 21 September).
• European DataWarehouse (EDW) has submitted an application to become a Securitisation Repository, registered and supervised by ESMA (SCI 23 September).
• Goldman Sachs is in the market with a balance sheet synthetic securitisation referencing a portfolio of predominantly investment-grade senior unsecured revolving loan facilities (SCI 25 September).
• NewDay has announced a UK credit card ABS from its Partnership Funding master trust via BofA, BNP Paribas, Santander and SMBC Nikko, breaking its two-year issuance streak from the NewDay Funding trust (SCI 25 September).
• The European Commission has unveiled a new Capital Markets Union Action Plan (SCI 25 September).

Data
BWIC volume

Secondary market commentary from SCI PriceABS
25 September 2020
USD CLO Mezz/Equity
6 covers today, all mezz with c. 120bps widening at the BB end - 2 x AA, 1 x BBB, 3 x BB. The AAs trade 195dm-197dm (2021 RP profiles) which are at the tighter end of 185dm-250dm context in the same cohort, some metrics for Mariner's ELM 2014-1A BRR (197dm / 3.9y WAL) weak - neg par build -2.4, IDT/Jnr OC cushions cuspy whilst cov-lites at 50% but the WA collateral price is strong 95.5 and low Sub80 0.69 / WARF 2874.
The BBB today is Monroe's Cap's MCBSL 2015-1X DR covers like a BB bond 928dm / 3.42y WAL which is heavily impaired and rated Baa3, the MVOC is not in shortfall yet 107.25 but other metrics point to very weak fundamental performance - ADR 2.5, Jnr OC cushion -5.9, WARF 4676, Sub80 20.1 and WA Collateral price is sub 90 (88.01). The BBs trade 854dm-979dm (2022/2023 RP profiles) wide to 720dm-870dm recent context, there is a c.120bps weakening tone at this level of the capital structure since the bonds today are clean from a fundamentals point of view and all covered by MV.
EUR MEZZ/EQUITY CLO
Just 2 trades today. The BBB is Holland Park which traded at 510dm. For us this level is 35bps wider than our interpolated point on the curve, after a widening on Thursday as well.
The BB is another GSO deal, Castle Park this time. This deal is paying down. This traded at 629dm which of course is a lot tighter than the regular BB curve.
DM, Yield & WAL - proprietary SCI data points complement Cover prices
PriceABS Data now includes DM/Yield/WAL for all CLO trading and Euro ABS/RMBS.

Capital Relief Trades

Risk transfer round up - 28 September

CRT sector developments and deal news

BNP Paribas is rumoured to be readying a full-stack consumer significant risk transfer trade for 2H20.The transaction would be the lender’s first post-Covid full stack SRT following the finalisation of E-CARAT 11 in February (see SCI’s capital relief trades database).   

Capital Relief Trades

Latest Magdalena finalised

Santander prices first post-Covid SME SRT

Santander, the EIF and the EIB have completed a €55m and €143m CLN that references a €2.2bn Spanish SME portfolio. Dubbed Magdalena Four, the transaction is Santander’s first post-Covid SME significant risk transfer trade.

The transaction consists of a €1.969bn retained senior tranche, a €55m senior mezzanine tranche (priced at three-month Euribor plus 1.6%), a €143m junior mezzanine tranche (plus 6%) and a €33m retained first loss tranche. Each of the placed tranches amortise pro-rata with triggers over a 2.61-year weighted average life. Further features include a six-month revolving period.  

Magdalena Four features a retrocession agreement as is typical of EIB/EIF transactions. In particular, Santander recoups a portion of the coupons if the bank meets certain contractual origination targets pertaining to SME lending with ESG characteristics.

The deal complies with Article 270 of the Securitisation Regulation. Hence, the risk weighting on the senior retained tranche is reduced from 15% to 10%.

The final price of the junior mezzanine CLN is 440bp lower than for Magdalena One, 285bp lower than for Magdalena Two and 200bp lower than Magdalena Three. Santander initiated the programme in 2017 (see SCI’s capital relief trades database).

Stelios Papadopoulos

Capital Relief Trades

SME boost

Commerzbank completes CRT

Commerzbank, the EIF and the EIB have completed a €125m mezzanine guarantee that references a €1.9bn German SME and midcap portfolio. The guarantee will enable Commerzbank to provide new lending of up to €500m to SMEs and mid-caps in Germany as a countermeasure to the ongoing Covid-19 crisis.

The transaction benefits from the support of the European Fund for Strategic Investments (EFSI). Under the guarantee, the EIB Group takes on the mezzanine risk under a synthetic securitisation transaction with Commerzbank. The EIF will provide a guarantee to Commerzbank in relation to an existing portfolio of SME and mid-cap loans and a counter-guarantee from the EIB will fully mirror the EIF’s obligations under the guarantee.

The deal features a replenishment period, as well as tranches that amortise on a pro-rata basis with triggers to sequential. Further features include a ‘use it or lose it’ excess spread mechanism.

The EIF could not confirm whether there are any payment holidays in the portfolio other than note differences between legacy and new deals. “For legacy deals, payment holidays have either a positive or neutral impact. But for new deals, we recognise that exposures subject to payment holidays are of a different quality,” says Georgi Stoev, head of Northern European and CEE securitisation at the EIF.

The German lender’s last transaction with the EIF was finalised in February (see SCI’s capital relief trades database). Commerzbank has not executed a private deal since December 2016, although the bank is expected to close one this year. The latter is believed to have been upsized after a private investor replaced PGGM as the counterparty.

Stelios Papadopoulos

CDS

Repack returns

Optionality, yield a hit with investors

The appeal of repackagings during times of economic stress became apparent during the Covid-related shutdown. Repack issuance is gaining traction among Asian investors in particular, due to the search for yield and the instruments’ customisability.

“The repack product becomes more attractive in times of stress when investors are looking for opportunities more quickly. With the continued low interest rate environment in Asia, the search for yield has always been strong in this region,” notes Scott Macdonald, partner and global head of Finance at Maples and Calder.

Peter Lundin, svp, with the Maples Group’s Structured Finance Fiduciary team adds: “There is optionality for the arranging banks, depending on where the investor is based or based on the underlying assets. We are seeing the highest volumes originating out of Asia.”

In terms of volume, vehicles domiciled in the Cayman Islands are leading. Additionally, Lundin identifies Dublin as a primary jurisdiction and notes that there have also been some issuances in Luxembourg.

Macdonald points out that the documentation and issuance procedures used in the repack industry have become more standardised. However, the range of underlying assets or products has become more diversified.

While investors are able to gain exposure to direct lending funds or private debt strategies through rated repackaged debt tranches, for example, Scope Ratings says the appeal of repackaged debt depends on an investment-grade rating of credit-linked notes. Due to non-investment-grade profiles of private debt portfolios, credit enhancement is required for rated instruments, such as overcollateralisation, additional refundable reserves or a lower instrument notional compared to the fund’s net asset value.

Maples Group highlights the significant role played by credit-linked notes in driving increased repack volumes. Lundin explains: “CLNs add a layer of customised ability for higher yields, which is attractive to investors during times of stress, despite the added layer of credit risk.”

Looking ahead, banks are expected to open up the product to a wider investor base. “We have seen a number of arrangers bring programmes to the market. We expect volume to increase for the remainder of the year and extend into next year. We have also seen an increase in lower deal size over the last few months,” Macdonald concludes.

Jasleen Mann

CMBS

Cashflow concerns

WFH shift highlighted in office, multifamily CMBS

Both the US office and multifamily CMBS sectors will be impacted by the coronavirus-induced working-from-home (WFH) trend. The consequent need for the reconfiguration of physical properties, as well as leases, is highlighted by Fitch in a new report.

Many workers will continue to choose to WFH, due to concerns about mass transit during the commute to work and the impracticality of social distancing within offices. As such, the importance of home and office proximity has reduced, and people are increasingly leaving urban centres for more affordable and spacious locations for families and home offices.

Nevertheless, operational changes will need to be implemented across commercial properties in order to adhere to health and safety guidelines and building codes. For example, Fitch highlights the importance of physical distancing, capacity restrictions and enclosed square-footage limits. The agency also anticipates that further measures may be considered to comfort workers, such as touchless technology for elevators, doors and security points.

Tenants in more ‘WFH-able’ sectors as those involved in financial services, technology, media and the legal sector, Fitch suggests. These tenants also occupy significant space in major CMBS markets.

However, due to the possibility of expensive alterations, these office spaces may become non-financeable. Lease terminations, rent deferrals and an increase in the cost of cleaning expenses are expected.

Equally, convincing tenants to enter new leases and renewals may be difficult. Therefore, Fitch believes that landlords may offer free rent or higher tenant improvements.

Retrofitting office space to adhere to local health and safety department guidelines may lead to greater differentiation between building classes and a flight to quality as tenants seek space with these high standards. Longer-term, office net cashflows may decline, due to rising operating expenses, lower occupancy and lower negotiated rents.

Meanwhile, multifamily properties in cities experienced steep declines in rental rate growth during the coronavirus pandemic as demand has fallen. Although cities will remain attractive places to live, the prime renter cohort of younger, childless professionals is growing more slowly.

Multifamily properties will also need to adapt to appeal to tenants who have specific space and amenity requirements. The pandemic has expedited plans to upgrade multifamily buildings to attract a more mobile, short-term tenant. Apartments historically had low capex as a percentage of net operating income, but Fitch expects these costs to increase over the long-term, pressuring margins as a result.

Fitch notes that the reduction in demand will be ‘marginal’. However, a long-term shift is expected with regards to net cashflows and underwriting. As a result of lower occupancy and rents, alongside operating expenses, net cashflows are expected to decline.

Jasleen Mann

Structured Finance

Mezz CLO fund closed

Sector developments and company hires

Mezz CLO fund closed
Pearl Diver Capital has completed the final closing of its eighth closed-end CLO investment fund, PDC Opportunities VIII, at US$400m. Launched with a target raise of US$300m, the fund hit its hard cap, with LPs represented by public pension systems, corporate pension plans, high net-worth family offices and endowments. The fund is designed to invest opportunistically in the US and European CLO space, focusing on the junior and mezzanine parts of the capital structure.

EMEA
Tim Davies has been appointed head of financial design at Blackstar Capital, a specialist structured finance and working capital solutions provider. In this newly created role at Blackstar Capital, Davies will be responsible for the design and execution of programmatic financial structures to back receivable and payable platforms. He was previously head of receivables finance at NatWest Markets and has also held the roles of md, head of origination at Demica Finance and cio of MORE Finance.

Global
Fitch has appointed Marjan van der Weijden as its new global group head of financial institutions. For three years prior to this, she was the agency’s global group head of structured finance and covered bonds. Rui Pereira replaces van der Weijden as Fitch's global group head of structured finance and covered bonds, after three years as its head of North American structured finance and covered bonds.

Redemption error
The put option notes issued by legacy Dutch RMBS E-MAC Program II - Compartment NL 2008-IV were erroneously redeemed in incorrect amounts on the July payment date. Only a redemption of the class A notes in an amount of €2.2m should have taken place, due to the occurrence of a target amortisation event. The issuer envisages correcting the undue payments on the class B, C and D notes by setting off on each quarterly payment date amounts due as interest and/or principal against the corresponding undue payment claim.

RPL RMBS hit
Moody's has downgraded the ratings of four classes and confirmed the ratings of 34 other classes issued by Towd Point Mortgage Trust from 2015 to 2019, affecting approximately US$1.7bn of securities across 22 re-performing RMBS. The impacted notes are: Towd Point Mortgage Trust 2018-2 class B1 (downgraded to Ba2 from Ba1); Towd Point Mortgage Trust 2018-5 class M2 (downgraded to Ba3 from Ba2); Towd Point Mortgage Trust 2018-6 class M2 (downgraded to Ba3 from Ba2); and Towd Point Mortgage Trust 2019-1 class M2 (downgraded to B1 from Ba3). The agency notes that the ratings of the affected tranches are sensitive to loan performance deterioration due to the coronavirus pandemic.

Structured Finance

SME ABS debut for Italian fintech

Sector developments and company hires

SME ABS debut for Italian fintech
Banca Valsabbina has supported fintech BorsadelCredito.it as arranger, account bank and subscriber - together with other institutional investors – of ABS notes in a €100m securitisation backed by trade receivables granted to SMEs and guaranteed by the Central Guarantee Fund for SMEs. This is the first unrated securitisation operation listed on Borsa Italiana’s ExtraMOT-PRO market, following a recent modification of its listing regulations. The initiative is part of the ‘Slancio Italia’ project that BorsadelCredito.it - ​​an entirely digital Italian provider of credit to SMEs - has launched, with the aim of providing liquidity to Italian companies.

In other news…

AMR auction DNT
The Mountain View CLO XIV auction - which was scheduled to be facilitated on KopenTech’s AMR platform yesterday (29 September) – did not clear, as there were insufficient bids submitted to refinance each tranche (SCI 21 September). Spread widening across the CLO market over the last two weeks caused the transaction to go from being in the money when the auction was initiated to out of the money on the auction day. Nevertheless, market participants will continue to monitor market conditions for a future opportunity to refinance Mountain View XIV, given that an auction can be called and held in as few as five days. KopenTech does not charge for auctions that do not clear, unlike regular syndication.

ILS perils, geographies continue to expand
US$9bn of catastrophe bonds was placed in the year to 30 June 2020, bringing new sponsors along with repeat issuers and the expansion of perils and geographies, according to Aon Securities’ latest annual review of the sector. The report cites the World Bank’s Philippines US$225m earthquake and cyclone ILS from 4Q19 and Bayview Asset Management’s US$225m Sierra Re 2020-1 from 1Q20 as particular highlights.

The World Bank utilised the new ILS framework available in Singapore for the Philippines transaction, demonstrating the value that an Asian domicile can provide certain sponsors that might have difficulty connecting promptly with a domicile like Bermuda or the Cayman Islands, according to Aon. “This transaction was also unique in their use of a modelled loss trigger. Using data provided by sources like the USGS and Japan Meteorological Agency, AIR provides a view of industry losses that trigger each note in a scaled fashion. Both classes of notes had the same expected loss at 3% and priced in similar ranges – the Earthquake at 5.50% for US$75m of coverage and the Typhoon at 5.65% for US$150m of coverage,” the firm notes.

Bayview Asset Management, on the other hand, is focused on mortgage credit investments. Because of this pool of risks, some of Bayview’s mortgage assets may be susceptible to earthquakes potentially delaying the uninsured borrowers repaying their mortgage loans on time.

As such, the parametric coverage provided by Sierra Re 2020-1 will help provide unallocated recoveries to Bayview that can be used in the event of an earthquake driving losses to its NAV. The transaction has two classes: a 0.79% and 2.71% expected loss that priced at 3.25% and 5.75% respectively for west coast and South Carolina earthquake risk.

Ratings charges settled
KBRA has agreed to pay more than US$2m to settle separate US SEC charges relating to the rating of CMBS and CLO combo notes. According to the order pertaining to CMBS ratings, KBRA permitted analysts to make adjustments that had material effects on the final ratings but did not require any analytical method for determining when and how those adjustments should be made. Further, the order finds that there was no requirement for recording the rationale for those adjustments and that KBRA’s internal control structure failed to prevent or detect the ambiguity in the record of its methodology for determining the CMBS ratings.

The SEC’s order relating to CLO combo notes finds that KBRA’s policies and procedures were not reasonably designed to ensure that it rated these securities in accordance with their terms. The combo notes included a defined ‘rated balance’ amount and also directed that noteholders were entitled to receive cashflows from the underlying components of the securities after the rated balance was reduced to zero. KBRA’s ratings of CLO combo notes were limited to repayment of the rated balance amount of each security and did not reflect the risk associated with any cashflows payable to noteholders over the rated balance, even though such amounts could materialise and would be payable to noteholders.

Without admitting or denying the SEC’s findings, KBRA agreed in the CMBS case to pay a civil penalty of US$1.25m and in the combo notes case to pay a US$600,000 civil penalty, as well as more than US$160,000 in disgorgement and prejudgment interest, and to establish a fair fund for the benefit of victims. The rating agency also agreed in both actions to review and correct its internal policies and procedures relating to the charged violations.

Structured Finance

'Dual-track' approach touted for SRT

Sector developments and company hires

‘Dual-track’ approach touted for SRT
The EBA is finalising its report on significant risk transfer and hopes to be able to publish it by year-end, according to Pablo Sinausia, policy expert at the authority. He disclosed during a TSI Congress 2020 panel today that the report builds on the EBA’s recent report on STS synthetics and will address structural features that may hinder SRT, including – for example - which call options are detrimental and which are allowed in the context of SRT.

The report will also introduce what Sinausia described as “safeguards” in terms of structural features that are beneficial for SRT. The aim is to standardise the SRT assessment process by developing a dual-track approach, whereby simpler transactions that incorporate the safeguard features will be fast-tracked and more complex transactions will take longer to assess. Further, quantitative tests for features such as excess spread will be recommended in order to make the assessment process more objective.

In other news…

Increased oversight for SLABS servicers
California's governor last month signed into law bills establishing additional standards for student loan servicers operating in the state and allowing borrowers to bring legal action against them. The governor also approved the creation of a state consumer protection agency that will increase oversight for a variety of financial services providers, including student loan servicers, with the power to bring administrative and civil actions and promulgate regulations.

Moody’s notes that state laws generally include clearer standards than existing consumer protection rules and could lead to fines for servicers outside of the litigation process, but that clearer standards can also help servicers to manage compliance. The agency suggests that servicers have enough financial resources to enable them to absorb subsequent costs and are also likely to streamline processes and leverage economies of scale. Nevertheless, if regulatory damages reduce the ability of sponsor servicers to provide on a timely basis liquidity to FFELP SLABS with maturity risk, the probability of noteholders not being repaid at the notes' legal maturities would increase.

North America
Churchill Asset Management has hired Kelli Marti as md and CLO portfolio manager, responsible for the growth of the firm’s middle market CLO platform. Based in its Chicago office, she will report to Mathew Linett, head of underwriting & portfolio management, senior lending. Marti previously spent 18 years at Crestline Denali Capital, most recently serving as chief credit officer, where she was responsible for overseeing the firm’s credit underwriting, research and portfolio management activities on behalf of its CLO portfolio. Prior to that, she served in a loan underwriting capacity at Heller Financial and First Source Financial.

Spanish RV risk highlighted
Auto ABS Spanish Loans 2020-1, which is due to price tomorrow, is notable for being the first Spanish auto loan securitisation exposed to residual value (RV) risk and the fact that RV risk is introduced by loan instead of leasing receivables. Over a third (35%) of the portfolio comprises balloon loans and Fitch notes that the SPV will be exposed to losses if the sale price of an underlying car is lower than the balloon instalment.

The agency adds that unlike in comparable European balloon loan securitisations, the contractual right of the borrower to deliver the vehicle and be discharged of the final balloon payment persists, even in scenarios in which the originator PSA is no longer operative. Accordingly, the transaction's servicer has a duty to provide an option to the borrower and coordinate the delivery and subsequent sale of the car.

In Fitch's base case scenario analysis, an RV loss has been calibrated assuming car sale proceeds of 85% of the final balloon instalments, based on market data and its forward-looking assessment of used car prices.

Structured Finance

New IMA inked

Sector developments and company hires

New IMA inked
Pollen Street Secured Lending (PSSL) has appointed Waterfall Asset Management as its investment manager, replacing PSC. An investment management agreement has also been signed with a new AIFM, Mirabella Financial Services. PSSL has agreed to pay PSC a sum representing the approximate balance of the unpaid base management fee, including the unexpired notice period. The PSSL board believes that Waterfall's appointment materially increases the likelihood that a firm all cash offer will be introduced for shareholders to consider. If a recommendable offer is not forthcoming, the board is likely to recommend to shareholders that the company pursues an orderly run-off, with capital to be returned to shareholders in as timely a manner as possible during the process.

In other news…

EMEA
Ashurst has appointed Douglas Murning as partner in the global loans practice in London. He joins from DLA Piper, where he was partner. Murning will focus on complex event-driven finance transactions, including leveraged and corporate acquisition finance, credit fund, special situation and fund-related financings and the restructuring of complex debt arrangements.

Forbearance hits SLABS ratings
Moody's has downgraded six securities and confirmed two others issued by eight FFELP student loan ABS, affecting approximately US$2.6bn of notes. The securitisations impacted by downgrades are: Academic Loan Funding Trust 2012-1 class A2 (downgraded to Aa1 from Aaa); Navient Student Loan Trust 2014-1 class A3 (downgraded to A3 from A2); Navient Student Loan Trust 2015-1 class A2 (downgraded to Aa1 from Aaa); Nelnet Student Loan Trust 2007-1 class A4 (downgraded to A3 from A1); SLM Student Loan Trust 2005-4 class A4 (downgraded to Aa1 from Aaa); and SLM Student Loan Trust 2010-2 class A (downgraded to A2 from A1). The affirmed notes are Access Group Series 2007-1 class A4 and SLC Student Loan Trust 2007-2 class A3. The rating actions reflect Moody’s revised expectations on performance, driven by increased forbearance as a result of a slowdown in economic activity and an increase in unemployment due to the coronavirus outbreak.

“Due to significant increases in forbearance, certain transactions are subject to slower collateral pool amortisation and subsequently bond payoff risk by their legal final maturity dates. The peak forbearance level in these pools ranged between 18% and 34% in 2Q20 and the forbearance level of some pools has subsequently reduced to between 11% and 21% during Q3,” the agency notes.