Contents

Capital Relief Trades

SRT for the real economy

Chapter two of SCI's Autumn 2020 CRT Research Report

The second chapter of SCI’s Autumn 2020 Capital Relief Trades Research Report explores how significant risk transfer can drive economic growth, supported by the recent High Level Forum recommendations, the European Commission’s Covid-19 recovery package and the STS synthetics framework. This section of the report comprises interviews with representatives from AFME, the High Level Forum, Intesa Sanpaolo, PCS and Santander.

The urgent need to address the Covid-19 economic fallout has accelerated efforts to ‘fix’ the securitisation market, including the fast-tracking of an STS synthetics regime. Policymakers appear to recognise that synthetic securitisation, in particular, is an important and efficient way of transmitting resources to SMEs and the real economy.

“From a policymaker perspective, whereas post-financial crisis banks were seen to be at the centre of the problem, they now appear to be at the centre of the solution. Banks are healthier and therefore there is greater confidence to provide leeway to transfer risk, especially given that the EBA paper provides a benchmark in terms of best practice,” observes Steve Gandy, md and head of private debt mobilisation, notes and structuring at Santander.  

Supporting economic growth
Biagio Giacalone, head of the active credit portfolio steering unit at Intesa Sanpaolo, agrees that in the current exceptional circumstances, banks play an even more vital role in supporting the real economy. “Through SRT transactions, banks are able to free up capital that can be reused through loans to the real economy and, in particular, to SMEs that benefit most from these operations. In this way, SRT transactions are able to provide benefits also in terms of financial stability and jobs retention, resulting in a more favourable economic landscape.”

Giacalone acknowledges that EU legislators have rightly introduced many safeguards to the securitisation market to prevent another financial crisis occurring. But he indicates that perhaps it is time to reassess whether there is a proper balance or if some improvements are necessary to allow the market to function better - especially given the present context.

“In particular, synthetic transactions are often a misunderstood instrument that now need to be looked at with no bias from the past: they actually can play an essential role, as a tool both for risk management purposes (as they allow for freeing up regulatory and economic capital) and for supporting new lending growth and the real economy as a whole, since that released capital can be immediately redeployed. In our opinion, if we are able to drop past bias on the instrument, it could be an important and efficient way to let public resources flow directly to SMEs,” he argues.

This is the way Intesa Sanpaolo, for one, views such transactions. “Therefore, we welcome the High Level Forum recommendation, which was very thorough in underlying some aspects that will need improvements - including simplifying the significant risk transfer assessment process, recalibrating capital charges applied to senior tranches, differentiating between disclosure requirements for private transactions and making the continuing interactions between originators and investors more flexible,” states Giacalone.  

High Level Forum
In the context of facilitating funding to SMEs via SRT, Thomas Wieser, chair of the High Level Forum, believes that a good starting point is to limit systematic ex ante risk assessment by Competent Authorities to complex transactions. “This - nearly by definition - would also enable SME-related products to be easily included in the securitisation framework, synthesised at comparatively low cost and thereby taken off the balance sheets of banks,” he observes. 

He adds: “This would probably not generate significant interest among investors looking for long maturities - SME loans typically have a tenor of up to 10 years - so insurance interest would be lower than for other products. But other investor classes should very much welcome this.”

Nevertheless, the presumption is that anything that frees up capital in banks will be beneficial to the economy, according to Wieser. He says that STS securitisation of non-SME products will be “just as welcome” and will translate into loan generation inter alia also for SMEs. 

Indeed, there are various incentives and choices as to which assets banks use SRTs to free up capital for. “Capital is fungible and the capital banks are required to hold against SME loans is discounted - a bank needs to hold about 75% capital against an SME loan, versus 100% for a corporate loan, for instance - which means banks achieve a bigger bang for their buck by executing a corporate loan SRT. Once a bank has freed up capital by executing the SRT, they can use it to lend to whomever they want,” explains Ian Bell, ceo of PCS.

He adds: “But it cuts both ways: a bank could issue an SME SRT and choose not to use the freed-up capital to lend to SMEs. What is important is that banks have a lending envelope.”

One of Wieser’s concerns, however, is that cross-border portfolios will continue be the exception. “Synthetic securitisation of cross-border portfolios would one day be a real game-changer, but would presuppose a significant convergence of legal frameworks, most importantly around non-bank insolvency. For large economies, this is not a huge issue, but it is a genuine issue for smaller markets,” he says. 

Recovery package
Regarding the capital markets recovery package announced in July, Richard Hopkin, md and head of fixed income at AFME, says the fact that the European Commission is planning to implement the EBA’s work on STS for synthetics is positive - especially in the context of SME loans, which are very capital consumptive. “Policymakers are putting job growth at the heart of the Covid-19 economic recovery; SMEs are important drivers of job growth, so they are trying to facilitate more SME lending. The STS synthetics framework makes sense for banks lending to SMEs, as it will help them find new counterparties to share risk and thereby free up their capital for more lending. The ‘quick fix’ is a timely tool to help the economy recover from Covid stress.”

Nevertheless, the key to increased capital relief trade volumes is whether originators are given preferential capital treatment – which, in theory, they should because they’ve transferred the risk. Some issuers are already executing SRTs, but the introduction of an STS synthetics label should incentivise more to enter the market.

Gandy says that preferential capital treatment under the STS synthetics regime is welcome and likely to have a beneficial effect on the margin – especially in light of the current wider pricing environment. “Policymaker support of the STS synthetics label sends a powerful message that the technology is OK if deals are executed properly. This, in turn, may encourage banks that had been reticent to enter the SRT market previously and ultimately facilitate lending to SMEs,” he observes.

He continues: “Certainly Santander is committed to SME lending across Europe and the STS synthetics regime will enable us to transfer more risk and therefore lend more than we otherwise would have. It enables us to do more of what we’re already doing.”

STS synthetics
Giacalone concurs that the STS label for synthetic securitisations could stimulate some originators to enter the market or to execute new transactions. However, he notes that for a positive effect on the economics of the transaction, it will be necessary to see if the achievable capital savings will be advantageous compared to the higher operating costs associated with obtaining the label.

“For cash securitisation, the STS label was driven primarily by investor protection,” Hopkin observes. “But for synthetic securitisation, the STS label is primarily a prudential measure to provide banks with more options to manage regulatory capital, share risk with the capital markets and therefore lend more – especially to parts of the economy that consume lots of capital, like SMEs.”

However, he agrees that to achieve optimum efficiency, the STS synthetics label must go hand-in-hand with a smooth and workable process for achieving SRT. In this regard, the next step is the publication of the EBA’s report, which is due by January.

Giacalone indicates that in the current landscape, a smooth and workable SRT assessment process is now more than ever desirable by originators, to enable them to react quickly to extraordinary challenges and allocate resources strategically. He says that Intesa Sanpaolo’s relationship with the supervisor has always been effective and transparent in the SRT space because the bank prefers to use straightforward features on its SRT deals.

“In general, we advocate for a shorter and lighter SRT assessment process for repeat/plain vanilla transactions to limit the operational burden and foster a healthy SRT business, in a time when the economy needs it the most,” he adds.

A European Commission review of the Securitisation Regulation is due by January 2022 and AFME is hopeful that some of the things that aren’t included in the quick fixes – like Solvency 2, LCR and disclosure issues – will be addressed during this process. “Perhaps STS synthetics would have been part of this review, if Covid hadn’t hastened the need to put the framework in place sooner. Policymakers understand the important role securitisation plays; they see how capital markets – including securitisation - have helped drive the post-financial crisis recovery in the US, for example,” Hopkin concludes.

Click here for the complete Research Report, including additional content, charts and data.

Corinne Smith

Capital Relief Trades

Seeking clarity

Chapter three of SCI's Autumn 2020 CRT Research Report

The third chapter of SCI’s Autumn 2020 Capital Relief Trades Research Report examines the impact of payment holidays on the SME significant risk transfer sector, as well as concerns over performance and data availability, and the emergence of multi-bank portfolios. This section of the report comprises interviews with representatives from Chorus Capital, the EIF, Integer Advisors, Intesa Sanpaolo, Latham & Watkins and PGGM. For further information on the risk transfer and synthetic securitisation market more broadly, join SCI for our two-day virtual seminar beginning today.

The regulatory side of the equation may be falling into place in terms of facilitating SME significant risk transfer, but other challenges still need to be overcome for the market to reach its potential. While a small number of European SME SRT deals were discussed with investors in the second and third quarters of 2020, the vast majority of them are believed to be being discussed with the EIF – given that its mandate is to support the sector – until further clarity regarding SME performance emerges.

Constructing a stable SME SRT portfolio is challenging under the current circumstances. A number of sectors have been visibly impacted by the Covid-19 fallout - for example, hotels, restaurants and retail - which investors may want excluded from portfolios or contained from a size and rating quality perspective. However, the borrowers that are indirectly impacted by the pandemic are often harder to identify.

Payment holidays
Governmental stimulus programmes - introduced to help corporate, SME and retail borrowers manage their finances during the crisis – have further complicated the SRT investment landscape. While measures such as payment holidays have helped large-scale defaults to be avoided, they are temporary and the high take-up rate in some countries creates significant uncertainty as to whether these borrowers will eventually repay their loans.

“Are all of these borrowers truly distressed or are some simply taking advantage of the stimulus and preserving cash?” asks Kaikobad Kakalia, cio at Chorus Capital. “For most, it’s probably the latter and they will restart payments when the scheme expires.”

He continues: “However, if 20% of a portfolio references borrowers who have loans subject to moratoria, even if the investor assumes that 80% of these borrowers will be able to restart their payments, the remainder are a very significant proportion of the protected tranche. With no ability to undertake fundamental analysis on a non-disclosed and granular SME portfolio, the investor has limited ability to identify the borrowers who will default once the moratoria expires.”

As such, investors may decide that all loans subject to moratoria are beyond their risk tolerance and therefore avoid any exposure to such borrowers. Smaller banks may struggle to select sufficiently sized portfolios if they are to remove such exposures, though larger banks will likely have a larger quantum of assets, allowing for further filtering by industry and borrower.

Multi-bank pools
In cases where smaller banks may struggle to build large enough portfolios, the EIF’s Romanian deal from May could provide a template for a number of them to come together to execute an SRT transaction - although the logistics around portfolio construction and the allocation of capital relief between the banks would have to be worked out. The transaction features an uncapped guarantee under the SIUGI programme covering 60% of a €1.368bn portfolio of SME credit rights originated by Banca Comercial Romana, Banca Transilvania, BRD - Group Societe Generale, CEC Bank, ING Romania, ProCredit, Raiffeisen Bank Romania, Libra Internet Bank and UniCredit.

“The current context could provide impetus for these types of deals. The arranger’s role would be particularly important in such a scenario in terms of driving the process forward and smoothing the dialogue within the group of originating banks, as well as between the banks and the investor,” suggests Suzana Sava-Montanari, counsel at Latham & Watkins.

Market participants may simply need to wait until the moratoria expire and borrowers make a couple of payments, in order to see which borrowers are performing. Kakalia says that risk appetite remains for SME SRT deals, but that capital is seeking a higher return and to limit its risks.

“To the extent a bank has issued SRTs before and has portfolio flexibility, there is a good chance that the issuer and investor will find a way to make the SRT transaction work,” he observes. “In the present circumstances, we prefer large corporate loan transactions as borrowers are typically disclosed. These borrowers are generally public companies and we are able to access and analyse their financial statements. This gives us greater certainty in our investment case.”

From the perspective of Intesa Sanpaolo, moratoria are positive for its customers in the Covid context, but at the same time could cause uncertainty for the market as well as for originators. Biagio Giacalone, head of the active credit portfolio steering unit at Intesa Sanpaolo, points to the difficulty of predicting or modelling what may happen once the payment suspension period ends and how the creditworthiness of companies will evolve.

“For transactions already in place, in our experience as originators, the implementation of the Covid moratorium has posed several challenges, such as an increased operational burden. On the investor side, there is an ongoing need to investigate the phenomenon, in order to understand how banks are handling the moratoria requests from clients,” he notes.

Many of the EIF’s legacy deals have been affected by payment holiday schemes, for instance. “In my view, the implementation of payment holidays was right and prevented many unnecessary defaults, but it was credit neutral for our transactions,” notes Georgi Stoev, head of CEE and Northern European securitisation at the EIF. “Loans subject to payment holidays were not permitted in the majority of our deals, so we’ve had to amend the documentation to allow for them because originators asked us for support, in order to avoid early termination of the deals. For new deals, however, we recognise that an entity asking for a payment holiday is likely to be less creditworthy and this is acknowledged in our credit policies.”

Integer Advisors managing partner Ganesh Rajendra questions if, to the extent payment moratoria continue, SRTs can be used to transfer the risk to the capital markets. “Theoretically at least, loans in forbearance may be well-suited to synthetic securitisations in so far as there is no reliance on asset cashflow to pay liability coupons, while the transaction can be structured whereby the investor takes ultimate risks of obligor non-payment. The roll rate from moratoria to default may be a quantifiable risk in many markets, though potentially not one that SRT investors are willing to stomach,” he observes.

He continues: “At present, there is only a limited IFRS 9 accounting impact from extraordinary payment holidays, but further forbearance extensions may require staging of loss expectations. In many cases, in order to minimise ultimate default risks, banks may find it makes strategic sense to continue the payment holidays, irrespective of what the regulatory guidance is at that stage.”

But any such decision will likely come at a cost to their balance sheets. As such, paying SRT investors to bear that risk may make sense.

Performance concerns
While the performance of the SME sector is currently being supported by emergency fiscal measures, Rajendra questions how the sector will perform over the next two to three years, given the temporary nature of this support. “The fallout is likely to be greater because SMEs are typically not as well-capitalised as larger-caps and are also more vulnerable to earnings and funding volatility. Unlike household credit that has benefited to a greater extent from direct ‘helicopter’ money, SMEs have more commonly been provided with loans to get them over the economic disruption. Fundamentally, this not only means that SME risk has merely been delayed, but potentially also magnified, given the incremental debt burdens post-Covid.”

He continues: “Given the likelihood of an overhang of credit-impaired SME assets after Covid, the ability to lay-off such risks via SRTs is very valuable, of course. The question is if SME SRTs are even viable from a demand perspective at the eve of such a loss cycle.”

Given the continuing economic uncertainty, Mascha Canio, head of credit & insurance linked investments at PGGM, anticipates more support to emerge for the SME sector – which she says complicates the SME SRT investment case even further. “As an investor, we can’t create a case for SME default rates not being affected by the current crisis. At some point, some pricing equilibrium may be reached or a different pocket of demand tapped.”

She adds: “Another solution may be for governments to guarantee SME loans, but what would that mean for bank capital? If the guarantees are close to 100%, banks aren’t incentivised to transfer the risk.”

RWA discount
PGGM’s mandate is to invest in all kinds of credit risk, including SME SRT deals. However, some aspects of the SME segment make risk-sharing transactions more challenging, according to Canio. She cites as an example the RWA discount for SMEs of close to 25%.

“Although such regulatory support means that the cost of capital is less for banks when executing an SME SRT, it doesn’t necessarily help the investor, which still has to provide protection to the bank regardless of the discount. Many investors are interested in adding diversifying exposures – including SMEs - to their portfolios, but pricing remains a challenge,” Canio observes.

Another challenge is the granularity of SME loans, which makes executing SRTs on such portfolios more cumbersome than for other asset classes, according to Rajendra. “It may be more challenging for protection buyers and sellers to reach common ground on SME pools, with the portfolio granularity often creating a bid/offer gap, both in terms of risk transparency as well as the clearing price of protection. The highest capital consuming SME exposures are normally unsecured loans, which may be a tough sell for investors.”

He adds: “Investors need to get comfortable with the risk. With SME portfolios, they’re buying into the backbone of the real economy via granular obligor pools that typically require a portfolio or actuarial rather than discrete, single-line approach. Arguably also there is a greater degree of vulnerability to bank credit selection, underwriting and servicing in the case of SME than in large cap SRTs.”

Data availability
Canio notes that data availability is crucial in the risk-sharing space. For the limited number of SME deals PGGM has looked at, the firm was able to dig deep into the banks’ historical data and come up with a number of questions, which led to the bank providing improved data.

“Generally, it would be helpful to see increased standardisation around the quality of the data. After STS, this is the next step for the securitisation market, but it is a significant challenge,” Canio observes.

She continues: “It’s crucial that the data allows one to compare apples to apples, with clean and clear definitions, and that it is subject to third-party verification. The latter aspect will help reliability.”

Given that the traditional approach to analysing SME SRT portfolios - statistical analysis of historical data - is no longer appropriate in the current context, Sava-Montanari suggests that the lack of forward-looking data availability and the inherent difficulty in diligencing every name is one area that could be addressed in order to get private investors more comfortable with the sector. Indeed, she says that because efficient SRT relies on investors and banks establishing long-term partnerships, the technology is perhaps particularly suited to SME securitisation.

“There has to be a certain level of trust between originator and investor,” she explains. “Whereas an investor can analyse each name in a corporate pool, since it’s impossible to analyse each name in an SME pool, they have to trust what a bank tells them regarding its origination and loss containment policies. At the same time, banks could communicate more about loss mitigation and selection criteria, and be more flexible about building portfolios that work for both parties.”

Giacalone says that in his firm’s experience, establishing an SME SRT programme was a thorough learning process with investors - which improved over time, as the programme evolved over the following years. “To bridge this gap, it’s important to set up a constant dialogue between the investor and the originator, in order to come up with a tailor-made transaction which can fulfill the objectives of both parties,” he observes.

He adds: “The dialogue needs to be ongoing, as investors need to be up-to-date on the evolution of the portfolio through time. This is one of the reasons why originators in the synthetic securitisation space had been skeptical on ESMA reporting, which is tailored to traditional transactions, very rigid and, as such, not particularly useful when investors need flexibility.”

Giacalone cites as an example the fact that, following the Covid-19 pandemic, investors are interested in having more information on payment holidays on a loan-by-loan basis. “That was new information not originally included in the dataset and which was added on an ongoing basis, following the explicit request by investors, given the flexibility we provide in reporting,” he explains.

Sava-Montanari points out that while investors may naturally want higher compensation for investing in an SME portfolio, given that the asset class appears more vulnerable in the current environment, the transaction also needs to make sense for the bank from a cost of capital perspective. “Regulators are increasingly focusing on the efficiency of SRT deals. I doubt whether price alone will help offset this, so it might be a case of negotiating structural features to compensate - such as credit enhancement (with tranches attaching above 0%), higher risk retention, excess spread or shorter maturities.”

Hybrid deals
Alternatively, hybrid transactions with mixed portfolios may be another way of increasing investor comfort with SME assets. Sava-Montanari cites Nordea’s Matador transaction – which referenced a portfolio of corporate and SME loans – from December 2019 as an example. Under this scenario, a methodology could be created to accommodate different eligibility and replenishment criteria for each asset type, and a relative cap introduced to limit their concentration.

In the EIF’s case, for example, it applies appropriate credit policies for the different constituent asset classes contained within a mixed pool and for secured versus unsecured exposures. The various credit analysis techniques it employs are similar to those used by rating agencies, according to Stoev.

“In most cases, we have mixed pools for size reasons; for example, if we can’t achieve the desired funding or capital target with a homogeneous pool,” he concludes.

Click here for the complete Research Report, including additional content, charts and data.

Corinne Smith

Capital Relief Trades

Stepping up

Chapter four of SCI's Autumn 2020 CRT Research Report

The fourth chapter of SCI’s Autumn 2020 Capital Relief Trades Research Report highlights the role of the EIF in supporting European SMEs via synthetic securitisation and guarantees. This section of the report covers the EIF’s Covid-19 support measures, as well as its efforts to promote new lending and catalyse private capital across the European SME sector. For further information on the risk transfer and synthetic securitisation market more broadly, join SCI today for the second day of our virtual seminar.

The EIF anticipates 2020 to be a record year in terms of its European SME synthetic securitisation activity, with easily double the volumes issued than under normal circumstances. Among the transactions closed by the organisation so far this year are three from first-time capital relief trade issuers.

New lending
“Part of the EIF’s mandate is to support the real economy when it needs it the most, so it’s not surprising that we’ve stepped up our activity in light of the coronavirus crisis. We have redeployed resources earmarked for other projects into synthetics in order to stimulate new SME lending across Europe,” confirms Georgi Stoev, head of CEE and Northern European securitisation at the EIF.

He adds: “SMEs are the backbone of the European real economy and any capacity we provide is redeployed to the SME sector as new lending. One aspect of SME SRT is clear: SME loans are versatile and liquid assets that lenders use for both capital and funding purposes, which - in turn - allows the asset class to price tighter than other asset classes that can’t be deployed so easily.”

Since the outbreak of the Covid-19 pandemic, the EIF has closed six synthetic SME financings (as of end-September), according to SCI data. Most recently, Volksbank completed its first significant risk transfer deal, which referenced a €700m Italian SME portfolio.

In July, the EIF closed an €87m mezzanine guarantee on a portfolio of Spanish SME and mid-caps with BBVA, as well as a PLN2bn Polish leasing receivables deal with Santander. Sabadell and Banca Agricola Popolare di Ragusa also completed their first SRTs the previous month, respectively securitising portfolios comprising €1.6bn of Spanish SME loans and €200m of Sicilian SME loans.

Finally, the EIF closed in May an unusual uncapped guarantee agreement with nine Romanian banks under the SIUGI programme, covering 60% of a €1.368bn portfolio of Romanian SME credit rights. Further transactions involving Romanian and Slovak lenders are in the pipeline.

Catalysing capital
Catalysing private capital is another of the EIF’s aims and the organisation is in discussions with third-party investors regarding a framework for what it describes as “combination deals”, whereby it guarantees the mezzanine tranche and private investors provide protection on the junior tranche. Potential alternatives could involve direct hedges provided by private investors to EIF-guaranteed mezzanine tranches, but it remains unclear when such transactions could first emerge on the market, since the discussions are not finalised.

“With our expertise and overview of many markets, we can support investors in jurisdictions that are outside their core competence. The key to a well-functioning market is critical mass; in other words, creating a large and diversified pool of originators and investors that allows for specific mandates and bespoke appetites to be accommodated,” observes Stoev.

Gaps that could be filled as a result include the funding needs of start-ups, lenders to ESG-compliant loans and online lenders with small portfolios, as well as the investment requirements of pension funds and insurers for portfolios with longer tenors. “There is an interesting supply and demand overlap here that is gathering momentum,” Stoev remarks.

Transparency
He adds that transparency is crucial in terms of aligning the EIF’s interests with those of private investors. “While the EIF could retain a portion of an exposure on its balance sheet, in a successful framework, the ultimate risk taker (the private investor) should be party to exactly the same information as us.”

Stoev suggests that one of the main reasons why the SRT market is not as large as it could be is that it takes quarters, if not years, for banks that aren’t active in the space to gain the necessary confidence to engage in concrete discussions and put appropriate frameworks in place for their ALM and treasury functions. “Data shouldn’t be a reason not to pursue an SRT deal,” he says.

He concludes: “We request the same amount of data as a rating agency typically would in order to determine creditworthiness and neither standardised nor IRB lenders have ever had a problem in supplying it, in our experience. Certain large banking groups have legacy systems, which delays their ability to provide data, but ultimately they can produce what is required.”

Click here to download the complete Research Report, including additional content, charts and data.

Corinne Smith

Capital Relief Trades

Growth opportunities

Chapter five of SCI's Autumn 2020 CRT Research Report

The fifth and final chapter of SCI’s Autumn 2020 Capital Relief Trades Research Report outlines the need for sensible significant risk transfer rules and the growth opportunities for the synthetic securitisation market once these are achieved. This section of the report consists of interviews with representatives from Integer Advisors, PCS and PGGM.

The future seems bright for synthetic securitisation in Europe, given regulatory support for the technology and the growing needs of banks to manage credit risk efficiently. Indeed, the great hope of the industry is that significant risk transfer will help European banks to remain competitive in an increasingly globalised market.

Mascha Canio, head of credit & insurance linked investments at PGGM, foresees there being plenty of growth opportunities for the risk-sharing market in the coming years - particularly in cases where banks are confronted with the need to manage credit risk. “Banks appreciate SRT as a hedging tool, especially for illiquid exposures. We expect banks that are already using SRT for their large corporate loan books to expand the utilisation of the tool to their other loan books. For example, nationally-focused banks typically have large SME portfolios and so a logical next step is for them to begin internal dialogues regarding SRT.”

Canio suggests that while many participants avoided synthetic securitisation post-financial crisis, the support of the High Level Forum for the sector and the European Commission’s fast-tracking of the STS synthetics framework will help them gain comfort with the technology. “The STS label is important for synthetics because it underlines the high quality of such a transaction. The framework doesn’t exclude other securitisation to take place, but it encourages investors on the side-lines to enter the market,” she explains.

She continues: “There is a significant number of real money investors looking at the market, but which had been hesitant to invest. An STS label provides the basis from which they can formulate a persuasive mandate to invest in the sector.”

Canio says that PGGM’s recent co-investment agreement with Alecta illustrates this point. “Alecta is interested in standardisation and high-quality investments. But it’s difficult for any fund to negotiate risk-sharing transactions from a zero starting point.”

However, she notes that two criteria are essential for the STS synthetics framework, in order for it to align with PGGM’s approach to risk-sharing. These are the originator having 20% skin-in-the-game, rather than the usual 5%, and there being no counterparty risk to the bank. In line with true sale securitisations, the cash should be safely invested in high quality securities.

Given that banks are well-capitalised and well-managed in terms of risk exposures, they are generally in a better position to deal with the initial shock of Covid than they were during the financial crisis. However, in the longer term, European banks will inevitably be impacted by credit losses and lower asset-based revenues, potentially coinciding with the need to rebuild capital buffers. Hence, Ganesh Rajendra, managing partner at Integer Advisors, is also bullish regarding SRT as a means of equity accretion and risk management - especially if the EBA STS synthetics recommendations are implemented.

He notes that European banks are typically disadvantaged in comparison to US and Asian banks. “Crudely put, US banks were encouraged to grow out of the last crisis in order to comply with new capital requirements, whereas European banks were guided into selling assets and de-risking business models to improve their capital adequacy. Covid-driven delays to Basel 4 implementation and the relaxation of capital buffers has given banks some respite; however, the European authorities have made it clear that these are temporary measures.” 

As such, PCS ceo Ian Bell believes that the European market must move to a scenario where SRT isn’t considered an exceptional event; rather, it is understood as part of normal day-to-day bank activity. “The lack of sensible rules isn’t a trivial issue: the outcome is crucial to how the European banking market will look in 10 years’ time. Capital relief trades will help European banks to remain competitive in an increasingly globalised market.”

The approval process for SRT transactions has historically been complicated by the lack of clear and predictable rules. However, the ECB appears to be undergoing what one source describes as “a sea-change in flexibility and attitude towards approving SRTs”.

The source concludes: “We now receive prompt and constructive feedback regarding transactions, and the ECB’s instructions are as facilitative as possible. It still comes up with questions and challenges, but we’d rather this than deathly silence – it enables us to address any concerns during the structuring process, rather than after a deal has closed.”

Click here to download the complete Research Report, including additional content, charts and data.

Corinne Smith

ABS

Olympic debut

Largest non-banking Greek ABS closed

Avis has completed a €186m securitisation of Greek auto leases and related residual value (RV) claims. Dubbed Cronus Finance, it is the first transaction from the jurisdiction since 2010 to achieve an investment grade rating by two major rating agencies and the largest non-banking ABS ever implemented in Greece.

The receivables were originated by Olympic Commercial & Tourist Enterprises, which is owned by a consortium consisting of Koc Holding (60%) and Avis Budget Group (40%). Olympic trades under the name Avis Budget Greece, but its rental car business is outside the scope of the securitisation.

The transaction – which pays an average interest rate of less than 1.4% - was privately placed with the EIF (which subscribed to €43m of the notes), the EBRD (€37m) and a Dutch institutional investor (€50m), whose investment is guaranteed by the EIF. The proceeds will be used to modernise Avis’ fleet of vehicles with electric and hybrid vehicles.

The class A notes are rated triple-B plus by Fitch and S&P - the highest possible rating, considering the Greek country ceiling rating of double-B. The transaction includes an 18-month revolving period after closing, subject to early amortisation events.

The RV component of the leases constitute up to 45% of the discounted portfolio balance during the revolving period. Olympic is obliged to repurchase the vehicles at maturity, but Fitch notes that the seller's insolvency would expose the issuer to the risk of RV losses if used vehicle prices decline.

The agency also points out that while the majority of lessees are SMEs, the portfolio has both industry and obligor concentration. The three largest industry sectors account for 41.1% of the portfolio balance, while the top 10 obligors have a 10% share of the portfolio.

The transaction features a fully-developed back-up servicing arrangement with QUALCO Information Systems and a cash reserve to ensure the ongoing performance of the maintenance obligations under the relevant lease agreements in the event of Olympic's insolvency.

Citi and Piraeus Bank acted as arrangers and joint lead managers on the transaction, and were advised by Hogan Lovells as to English law and by Bernistas Law as to Greek law. The originator and investors were each represented by Greek and English counsel.

Corinne Smith

Structured Finance

SCI Start the Week - 5 October

A review of securitisation activity over the past seven days

SCI Risk Transfer Seminar This Week
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 submissions – deadline Friday
The submissions period for the 2020 SCI CRT Awards closes this Friday, 9 October. 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 the deadline. 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
Cashflow concerns
WFH shift highlighted in office, multifamily CMBS
Double-B disparity
US CLO lower mezz misses out
European evolution
European CLO market changing post-Covid
Latest Magdalena finalised
Santander prices first post-Covid SME SRT
Programmatic approach
Chinese ABCP market gaining traction
Repack returns
Optionality, yield a hit with investors
Repayments rated
CLO debt repayment rates could act as a manager differentiator
SME boost
Commerzbank completes CRT
Under pressure
CRE uncertainty persists
Other deal-related news

• Pearl Diver Capital has completed the final closing of its eighth closed-end CLO investment fund, PDC Opportunities VIII, at US$400m (SCI 29 September).
• 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 (SCI 29 September).
• 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 (SCI 29 September).
• 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 (SCI 30 September).
• The Mountain View CLO XIV auction - which was scheduled to be facilitated on KopenTech's AMR platform yesterday – did not clear, as there were insufficient bids submitted to refinance each tranche (SCI 30 September).
• 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 (SCI 30 September).
• 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 (SCI 30 September).
• 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 (SCI 1 October).
• 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 (SCI 1 October).
• 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 (SCI 1 October).
• Moody's has downgraded six securities and confirmed two others issued by eight FFELP student loan ABS, affecting approximately US$2.6bn of notes (SCI 2 October).

Data

BWIC volume

Secondary market commentary from SCI PriceABS
1 October 2020
USD CLO AAA
With month end out of the way, activity picked up with 31 covers, mostly in line with recent context – 13 x AAA, 5 x BBB and 13 x BB. The AAAs trade 134dm-167dm (2021-2025 RP profiles) flat to recent trading activity.
USD CLO Mezz/Equity
The BBBs trade 373dm-481dm, once again flat to recent context, the bonds are clean with MVOCs around 110%, ADRs less than or equal to 1, healthy IDT/Jnr OC cushions and low Sub80 buckets <4.5. The BBs trade 757dm-955dm across 2021-2024 RP profiles which is fairly comparable to 720dm-910dm context over the past 10 days. There is one outlier trade ArrowMark's AWPT 2013-1A D2R² 1277dm / 8.5y WAL – the MVOC is cuspy 100.5, neg par build -1.56 and IDT/Jnr OC cushions on the low end 0.63/1.6 respectively, whilst WA collateral price is the lowest of all BBs to trade today 94.59 and WAS (a guide to credit risk) is the highest of all BBs today.
EUR AAA CLO
A huge mezz list traded yesterday. In total across all ratings 82 debt tranches traded, which is the heaviest day for EUR we can ever remember. We'll start with the 5 x AAA. All but Madison Park 14 traded in a range from 142dm to 156dm. For these bonds this is a slight tightening in the curve of around 7bps. Madison Park 14 traded at 99.50 / 171dm because of its high margin at 112bps.
EUR MEZZ/EQUITY CLO
The only orig AA, from Sound Point 2, traded at 230dm which is unchanged on the curve.
There are 23 orig single A bonds. Leaving aside Castle Park because it is paying down and traded at 100.01 / 230dm – the rest of them traded in a range from 270dm to 340dm, for which the dependent variable is stated margin. It's hard to say exactly, since the traded DM does move around as the margin varies but we would estimate the curve is around 5 to 10bps wider.
There are 53 x BBB trades. If we look at the outliers first, at the tight end we have Castle Park again which as already stated is paying down. It traded at 327dm. At the wide end we have 2 Carlyle deals, 2017-2 and 2017-3, which traded at 530dm. In both cases they have low MV OCs (111% handle versus a more normal 114.5%) and low Jnr OC cushions of 0.8% versus 3.5%. The rest of the trades were in the range from 360dm to 490dm again dependent on margin. Its again hard to say if there has been a definitive move in the curve but we would say it is perhaps 10 to 15bps wider.
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

Transmitting credit

SRT and the real economy explored

SCI will be publishing a chapter of our Autumn 2020 CRT Research Report each day this week. While today’s instalment - the introduction – is available to all subscribers, the subsequent chapters will be available to premium subscribers only.

To enquire about SCI’s premium content, email jm@structuredcreditinvestor.com (new subscribers) or ta@structuredcreditinvestor.com (existing customers). For further information on the risk transfer and synthetic securitisation market more broadly, join SCI for our virtual seminar on 7 and 8 October.

Chapter one: Introduction
The European SME sector is being impacted in a multitude of ways by the Covid-19 pandemic. Yet policymakers believe that SMEs can play a crucial role in the post-coronavirus economic recovery and are supportive of measures that can strengthen their position. As part of such efforts, the final pieces of the securitisation regulation – for which the industry has been calling for years - are being fast-tracked, with an emphasis on synthetics.

Backbone of the economy
European institutions view SMEs as the backbone of the European economy, due to their contribution to employment and job growth, according to Cadwalader special counsel Assia Damianova. “SMEs depend mostly on bank financing and one lending tool banks have is securitisation. Securitisation is being supported by the authorities in light of the state of the economy currently, especially as synthetics transfer risk and free up balance sheets,” she says.

She adds: “When European regulators think of synthetics, SMEs are often at the forefront of their analysis, due to their importance to the economy. Given that in Europe, SME lending is concentrated in banks, it’s a logical step to try to support the sector through tools that will allow banks to extend more loans to SMEs.”

A recent EIF Working Paper, entitled ‘European Small Business Finance Outlook 2020’, notes that a “real recovery and development of the primary securitisation markets could play a role in ensuring sufficient credit supply for SMEs during the crisis and the recovery process”. The paper highlights that in addition to the direct effects of the SME securitisation market, there are indirect benefits to SMEs from the development of other securitisation segments that free up bank balance sheets to allow for further SME lending. However, it argues that this will only benefit SMEs if the freed-up capital is used to finance the real economy.

Covid challenges
The EIF paper also summarises the numerous challenges that European SMEs – and by extension, SME securitisations - face, following the Covid-19 fallout. Not only are SME default rates likely to increase and have a related impact on SME securitisation portfolios, widespread payment moratoria are also affecting the sector.

Additionally, some SME securitisations have high concentrations of underlying companies in crisis-exposed industry sectors, such as tourism and retail. Moreover, SME leverage will increase with potential long-term debt affordability issues, especially in jurisdictions that experience a slow recovery from current disruptions.

The SME asset class has historically accounted for a meaningful portion of significant risk transfer volumes, at around a third of issuance. In terms of the number of trades executed, there are believed to be more SME deals than in other SRT asset classes.

Through an SME SRT deal, investors generally benefit from taking exposure - in exchange for a premium - to a bank’s SME lending business (which they cannot access directly) and can take advantage of the expertise of banks in managing such portfolios. SME pools typically comprise a large number of small loans, which have to be diligenced and representations provided, confidentiality issues have to be overcome and historical performance data has to be prepared to the highest quality.

Damianova notes that across jurisdictions, there is some fragmentation in terms of SME insolvency and enforcement regimes. Default and loss rates also tend to be slightly higher for SMEs than other asset classes, although this can be compensated for in pricing.

Prior to the Covid-19 pandemic, the main requirement for a successful European SME SRT transaction for IRB banks was having sufficient quantity and quality of data to support their expected loss assumptions. “Banks could achieve reasonable pricing by evidencing the predictability of their regulatory models,” explains Kaikobad Kakalia, cio at Chorus Capital.

However, he adds: “Today, historical performance is less relevant, as the impact of the pandemic and the subsequent lock-down will be different to what we have observed during the global financial crisis or the European sovereign crisis. Given the uncertainty involved in portfolio selection, investors will look for transactions with greater subordination, thicker tranches and higher pricing.”

Regulatory initiatives
Meanwhile, a pair of initiatives were unveiled during the summer that include measures to encourage a broader use of securitisation, especially in light of facilitating a coronavirus recovery: the final report by the High Level Forum on Capital Markets Union (CMU) in June; and the European Commission’s capital markets recovery package (dubbed the ‘quick fix’) in July. Both proposals aim to make it easier for capital markets to support European businesses, but the High Level Forum report explicitly highlights the limited capacity of bank balance sheets to extend funding to SMEs as one issue to be resolved in order to complete the CMU.

Ganesh Rajendra, managing partner at Integer Advisors, says it is encouraging to see the improving policymaker stance regarding securitisation. “Given the urgent need for a post-Covid economic recovery, the policymaker mindset seems to have switched from de-risking and controlling securitisation to using it more proactively to improve the real economy. But although there are good intentions behind the Capital Markets Union project, I’m cautious about its execution, given the piecemeal implementation approach historically taken by regulators.”

The remainder of SCI’s Autumn 2020 CRT Research Report explores the case for SME SRT, the regulatory initiatives designed to support the sector, the challenges to and potential solutions for enabling it to reach its potential, and the role of the EIF.

Chapter two: SRT for the real economy
The urgent need to address the Covid-19 economic fallout has accelerated efforts to ‘fix’ the securitisation market, including the fast-tracking of an STS synthetics regime. Policymakers appear to recognise that synthetic securitisation, in particular, is an important and efficient way of transmitting resources to SMEs and the real economy.

This chapter explores how SRT can support economic growth, the recent High Level Forum recommendations, the European Commission’s Covid-19 recovery package and the STS synthetics framework. It comprises interviews with representatives from AFME, the High Level Forum, Intesa Sanpaolo, PCS and Santander.

Chapter three: Seeking clarity
The regulatory side of the equation may be falling into place in terms of facilitating SME significant risk transfer, but other challenges still need to be overcome for the market to reach its potential. While a small number of European SME SRT deals were discussed with investors in the second and third quarters of 2020, the vast majority of them are believed to be being discussed with the EIF – given that its mandate is to support the sector – until further clarity regarding SME performance emerges.

This chapter looks at the impact of payment holidays on the SME SRT sector, as well as concerns over performance and data availability, and the emergence of multi-bank portfolios. It comprises interviews with representatives from Chorus Capital, the EIF, Integer Advisors, Intesa Sanpaolo, Latham & Watkins and PGGM.

Chapter four: Stepping up
The EIF anticipates 2020 to be a record year in terms of its European SME synthetic securitisation activity, with easily double the volumes issued than under normal circumstances. Among the transactions closed by the organisation so far this year are three from first-time capital relief trade issuers.

This chapter highlights the role of the EIF in supporting European SMEs. It covers the organisation’s Covid-19 support measures, as well as its efforts to promote new lending and catalyse private capital.

Chapter five: Conclusion
The future seems bright for synthetic securitisation in Europe, given regulatory support for the technology and the growing needs of banks to manage credit risk efficiently. Indeed, the great hope of the industry is that significant risk transfer will help European banks to remain competitive in an increasingly globalised market.

This chapter outlines the need for sensible SRT rules and the growth opportunities for the market once these are achieved. It consists of interviews with representatives from Integer Advisors, PCS and PGGM.

Capital Relief Trades

Risk transfer round-up - 5 October

CRT sector developments and deal news

Lloyds is rumoured to be readying its third mortgage significant risk transfer trade from the Syon programme for 4Q20. The last Syon transaction closed in February (see SCI’s capital relief trades database). Fitch placed Syon Securities 2019 and 2020 under rating watch negative (RWN) in April, but removed them from RWN last month (SCI 25 September).

Capital Relief Trades

Synthetics seminar line-up finalised

Fireside chat, CRT workshop on the agenda

The line-up for SCI’s 4^th Annual Risk Transfer & Synthetics Seminar has been finalised. Hosted virtually on 7 and 8 October, highlights of the event include a fireside chat between Clifford Chance’s Timothy Cleary and Christofferson Robb & Co’s Richard Robb, as well as a Mark Fontanilla & Co workshop on the US credit risk transfer market.

A market overview panel will focus on regulatory and structural developments in the US synthetic securitisation market, while another panel will explore the mortgage risk transfer sector. The issuer perspective panel investigates how capital relief trade issuers continue to innovate and enhance the liquidity of their programmes, while an investor perspective panel examines the influx of insurers and other mezzanine players into the space. Finally, an emerging trends panel tracks the development of new asset classes and jurisdictions across the market.

The seminar is sponsored by Arch, ArrowMark Partners, Clifford Chance, CQS, Guy Carpenter, KBRA, Mayer Brown, Mark Fontanilla & Co, Newmarket and Texel. Speakers also include representatives from Barclays, Chorus Capital, Citi, Deloitte, Deutsche Bank, Freddie Mac, IACPM, IFC, PGGM, Piper Sandler, Seer Capital, Santander and Willis Towers Watson.

For more information on the event or to register, click here.

Capital Relief Trades

Absolute attraction

Absolute 2021-1 shows growth of US CRT market and pass-through appetite

The sale of Absolute 2021-1‘s pass-throughs - the $184.8m repack of two CLNs from Goldman Sachs which closed on September 25 - represents further evidence that investor appetite for higher yielding repackaged pass-through securities is growing.

An S&P analyst who worked on the rating of the deal confirmed that the CLNs were reconfigured as a repack to suit investor needs, but declined to be more specific.

The appeal of the instrument during the current period of ultra-low rates, particularly to Asian investors, has been noted recently.

S&P assigned an A rating to the $98.56m class A pass-throughs while the $86.24m class B pass-throughs were rated BBB-.  These ratings are dependent on the performance of the underlying CLNs, and it is the view of S&P that these notes will receive full and timely interest and principal payments.

On the day the CLNs closed, Goldman issued the underlying notes, due 2025, to Absolute 2021-1, a Cayman-domiciled SPV, which in turn issued the pass-throughs.

The CLNs represent a CRT on a referenced portfolio of chiefly investment grade revolving loan facilities. As S&P’s evaluation of the trades notes, “the principal amount of the credit linked notes may be reduced due to losses accumulated on the reference portfolio in excess of the notes' respective subordination amounts ($200.20m and $286.44m for the junior mezzanine tranche and the senior mezzanine tranche)."

As such, the deal is also growing evidence of the growth of the CRT market among US issuers. It was around 12 months ago that JP Morgan issued an innovatory CRT trade referencing mortgage obligations, and has since followed that up with another two deals referencing mortgages and auto loans. Another is said to be in the works and should hit the tape before long.

The portfolio backing the Goldman CLNs consists of 146 debtors in 36 different industries, of which around 93% are corporate revolvers and the remaining 7% are term loans. Around 99% of the entire portfolio of loans is comprised of obligations from investment grade-rated corporate entities. Moreover, the industries represented in the portfolio are not those deemed to be most exposed to the effects of Covid-19 and the lockdown.  

Repacks are expected to extend their popularity in the coming weeks, with banks extending the product to a wider range of investors.

Simon Boughey

Capital Relief Trades

Finnish lift off

Latest KIMI deal completed

Santander has completed a €650m full-stack significant risk transfer trade backed by Finnish auto loans. Dubbed KIMI 9, the transaction differs from previous post-Covid full-stack SRTs in that the first loss tranche was not preplaced or privately placed before the deal’s announcement.

Santander notes that given the track record of the KIMI programme, the firm was confident that it could market the first loss tranche publicly at the same time as the other tranches. Rated by Fitch and S&P, the transaction consists of €591.5m AAA/AAA rated class A notes (which priced at one-month Euribor plus 70bp), €30.5m AA/A rated class B notes (plus 98bp) and €28m unrated class C notes (6.50%).

The subordinated notes amortise over a three-year weighted average life, but the senior piece does it over a shorter 2.12-year period. The amortisation structure is not the typical pro-rata with triggers to sequential. Indeed, the deal pays sequentially at the start of the amortisation period and the payment mechanism then switches to pro-rata once class A credit enhancement builds up to 16%; it is a feature that was incorporated in previous KIMI deals (SCI 19 December 2018).

Given that the purpose of the transaction is for funding and capital relief, this amortisation structure produces the most optimal result for Santander Finland, both in terms of maximising the size of the triple-A tranche and maintaining a stable cost of protection over the life of the deal.

Another marked difference with previous post-Covid full-stack SRTs from Santander is that approximately 10.2% of the portfolio is subject to payment holidays (SCI 16 September). Previous post-Covid trades added a clause whereby Santander would purchase or exclude any loans under payment holidays. The lender has responded to this by saying that payment holidays have been a staple of the Scandinavian consumer loan market for many years, so investors have become comfortable with them.

Credit enhancement is present in the form of an approximately 1% excess spread for the initial portfolio. However, this could change over time, since in a cash deal excess spread is not a fixed amount. Change will depend on the mix of assets in the pool, how they amortise, delinquencies or defaults and differences in base rates between the underlying pool and the coupons on the securities.

The structure benefits from a liquidity reserve, which will be fully funded at closing from the proceeds of a subordinated loan. The reserve's total required amount is set at 0.5% of the initial balance of the rated notes. The liquidity reserve is fixed during the six-month revolving period and can only be used to cure any shortfalls on senior fees and expenses, as well as interest on the rated notes.

The preliminary pool is granular and well diversified across brands and geography, and does not contain delinquent or defaulted contracts. As of the cut-off date, the largest and top 10 borrowers are 0.04% and 0.32% respectively. The portfolio's weighted-average down payment is 14.13%, indicating a strong loan-to-value ratio.

Stelios Papadopoulos

CMBS

Direct access

For-profit social housing provider debuts

Deutsche Bank is in the market with an unusual UK CMBS. Dubbed Sage AR Funding No. 1, the £220m transaction is sponsored by a for-profit social housing provider owned by Blackstone.

“It is quite an unusual deal because it is not common for a registered provider of social housing to access the capital market directly. This used to be an area of the lending market normally covered by banks and it may become an important alternative source of funding for the social housing sector,” notes Mirco Iacobucci, head of European CMBS at DBRS Morningstar.

The transaction is backed by a single floating rate loan which is secured by 1,609 new-build social housing units. These social housing units are distributed across 113 residential sites in the UK, with approximately 60% of the portfolio located in London, the South East and the South West. DBRS Morningstar notes that these are mostly houses or apartments in purpose-built schemes dating from 2017.

Most of the rented units are rented on what is called a starter lease and then transferred to a periodic assured tenancy after an initial probationary period of 12 months, which is extendable to 18 months. Tenants in social housing typically occupy the units for more than five years beyond the probationary period.

“The deal is structured like a normal CMBS. A peculiar feature related to the nature of the borrower is the special regime to which the transaction is subject, in case the same borrower becomes insolvent, requiring the assets to be sold to another registered provider of social housing in the first instance,” notes Iacobucci.

The deal is comprised of £89.1m triple-A rated class A notes, £17.6m double-A rated class B notes, £17.6m single-A rated class C notes, £24.2m triple-B rated class D notes, £41.8m double-B rated class E notes, £18.7m single-B rated class F notes. The £11m class R notes are unrated. IPTs for the senior tranche are SONIA plus 130bp-140bp.

The sponsor, Sage Housing, has taken advantage of the recent changes to English legislation now allowing the presence of for-profit social housing providers, which is attracting private investors to a sector that was struggling to keep up with the fast-growing demand for affordable homes.

Iacobucci concludes: “From an investors perspective, there could be a clear interest in investing in an assets class that it is expected to provide secure cashflow, is partially funded by the government and stable property value, due to the consistent demand of affordable housing in the UK.”

Jasleen Mann

Real Estate

Plunging forbearance

Mortgage forbearances enjoy biggest single Covid era weekly tumble

The number of US home loans in active forbearance schemes has nosedived by 649,000 over the last seven days, according to data released today by mortgage data and analysis firm Black Knight.

This represents an 18% reduction in the number of forbearances, which is the largest single week decline since the beginning of the Covid 19 lockdown.

The first forbearances initiated last April came to the end of the initial six-month term last week, and clearly, it seems, a significant number of home-owners have not needed to renew forbearance.

"As the first wave of forbearances from April hit the end of their initial six-month terms, we've seen the strongest decline in the number of active plans since the pandemic began. Though the market continues to adjust to historic and unprecedented conditions, these are clear signs of long-term improvement,” Andy Walden, Black Knight economist and director of market research told SCI.

The overall national forbearance rate has now declined to 5.6%, a significant move from last week’s rate of 6.8%. Active forbearances have dropped below three million for the first time since mid-April.

All categories of mortgages showed healthy declines in forbearances, but the largest decreases were in portfolio and private label loans. Here, forbearances dropped by nearly a quarter (24%) from the previous week, or 228,000.

Forbearances in GSE loans dropped by 213,000, or 16%, while even VA/FHA loans dropped by a sizeable 208,000 (15%) as well. However, some 9.4% of all VA/FHA loans remain in forbearance, as do 4% of all GSE loans and 5.6% of private label loans.

“We hope to see a continuation of the promising trend of forbearance reduction in October, as an additional 800K forbearance plans are slated to reach the end of their initial six-month term in the next 30 days," says Walden.

Simon Boughey

RMBS

Fix-and-flip profits

Low interest rates, inventory levels driving demand

The US fix-and-flip sector has experienced an increase in demand, fuelled by securitisation. Historic low interest rates and inventory levels are further boosting the market.

William Tessar, president of CIVIC Financial Services, says: “These are non-owner occupied investor property loans, not subject to regulations that owner occupied properties are subject to. Overall, interest rates are at historic lows. This has attracted a great number of qualified buyers, so investors have a larger audience interested in acquiring the properties being renovated.”

Additionally, Tessar notes that people are beginning to recognise that they can work from home, given coronavirus-related constraints. This means the home has become even more important: it can now be viewed as the place people live, work and maybe even educate their families.

Considering the function of the home is not the only part of the process that has experienced change, however. “There has been a paradigm shift in the way that properties are valued, and how buyers walk through open houses. Everything has to have a virtual aspect to it,” notes Tessar.

A process that would usually take five to 10 days, now has five to seven days added to it. Those involved have had to adjust and adapt to these changes.

Tessar explains: “Since the virus hit, the market paused completely, as no one knew how to value the same assets they were valuing 72 hours prior. This flushed out those who posed as lenders. Adjustments took around 60 to 90 days.”

Supply and demand are nevertheless expected to continue boosting the market. Tessar says: “My expectations are extremely bullish. On one side, there is the pandemic - which has not been rectified - the pending election, social unrest and racial divide. On the other side, there is lower interest rates, lower inventory level and people are looking at real estate assets differently.”

He concludes: “Expectations are high throughout the fourth quarter and into 2021. Regardless of who wins the election, there will likely be no change to interest rates.”

Jasleen Mann

Structured Finance

Structured finance solutions

Contributed thought leadership by Ocorian

Sonal Patel, md, head of sales - Americas, Bermuda and Caribbean, and Sinead McIntosh, business development director at Ocorian, a global leader in corporate and fiduciary services, fund administration and capital markets, highlight how structured finance solutions are coming to the fore across securitisation markets

Q: How is the securitisation industry responding to the Covid-19 fallout and how is it impacting securitisation structures?
A: Securitisations are typically structured to withstand varying levels of disruption to cashflows and that is why they have fared better than unsecured debt and equity in these relatively early days of fallout from the pandemic. We are seeing a number of products being resilient both in terms of their structuring and the quality of their underlying portfolios. Structural protections built into deals such as liquidity support, reserves, cash trapping and diversion of cash are all being utilised.

Throughout March and April 2020, the US government passed three main Covid-19 relief packages and one supplemental one, totalling US$2.8trn, making it the largest stimulus package in US history. For most securitisations linked to consumer receivables, the stimulus should help soften the pressure on securitised cashflows over coming months, but to what extent is yet to be seen.

Early on in the crisis in Europe, the ECB policy changes to stimulate bank lending have significantly helped to retain the appeal of structured finance and despite primary issuance levels decreasing, it remains a robust and attractive source of funding. That being said, the disruption has obviously impacted the loan repaying capability of retail borrowers in particular. Naturally, this has caused investors to stay clear of pools with irregular cashflows and if payment deferrals fall into actual delinquency and default, deals are going to become increasingly distressed.

Q: What is the role of the corporate services provider in the current securitisation market?
A: This is an uncertain time and the securitisation market continues to evolve at pace. Corporate services providers have a key role to play in the survival of securitisation products, sectors and businesses during this crisis, so we need to be at the forefront of regulatory and industry developments.

Methods of financing are changing and independent corporate service providers like Ocorian are perfectly positioned to implement bespoke structuring solutions and services for our clients quickly and efficiently. We support the full range of capital markets players and activities, from unsecured corporate and institutional clients, to some of the most complex structured finance and structured credit vehicles in the marketplace, enabling them to quickly seize opportunities and utilise new structures and products.

Q: Have communication, reporting and documentation requirements changed as a result of the pandemic?
A: Yes, the speed at which entrenched market practices have been overhauled during the pandemic is incredible. Entire financial institutions have been working remotely and long-established practices - such as physical due diligence, signings and bondholder meetings - were replaced overnight near-perfectly with virtual equivalents. Globally, our teams continue to prioritise communication with our clients to understand how their internal processes and governance methods are adapting to the ever-changing landscape, so that we can best provide solutions to meet upcoming regulatory and industry requirements.

Q: Where are you seeing opportunities in terms of restructuring, distressed debt and non-performing loan ABS?
A: Restructuring and insolvency proceedings are the inevitable trends arising and therefore funds, especially the distressed players, are eager to get going. There has been some increase in activity and workouts in the form of restructuring and non-performing assets, whether that be loans or other considerations. However, while robust government support remains in place, the torrent of restructures and defaults is being kept at bay. 

In our roles as trustee and agent, we are seeing an increasing level of scrutiny from creditors on waiver and amendment requests, as they try to assess what the landscape will look like at the next payment date and their forbearance begins to diminish.   

Q: How is Ocorian facilitating solutions to Covid-19-related stress?
A: As the impact of Covid-19 continues to be felt across all jurisdictions and sectors, we are uniquely positioned to provide bespoke, client-led solutions to the full spectrum of securitisation structures, including ABS, CLOs, RMBS, CMBS, ILS, ABCP and transportation financing. In our role as trustee on stressed and distressed debt, our independence and solution-focused approach ensures that our clients are given the benefit of our profound asset-specific expertise and leverage our experience in navigating creditor-led restructuring, defaults and amendments.

Ultimately, our clients rely on us for the partnership we create and a huge part of that is staying closely connected with the market to monitor volatility and assess windows of opportunity, so they can take appropriate action.

For more information about Ocorian's services to the capital markets, get in touch at ocorian.com. 

Capital Relief Trades

Transatlantic challenges

Contributed thought leadership by Mayer Brown

Complying with EU and US CRT rules simultaneously

A number of law firms have developed excellent synthetic securitisation practices in Europe, but few firms are at the forefront of developing synthetic securitisation in the US, and even fewer have a practice which can navigate EU and US synthetic securitisation rules at the same time. Mayer Brown stands out as the firm which can advise clients on complying with EU and US synthetic securitisation rules as part of the same transaction.

Each of Carol Hitselberger and Julie Gillespie in the US, and Edmund Parker in London advise on the most complex capital relief transactions and demonstrate deep knowledge of how the regulatory rules work in both theory and practice. SCI spoke to these three Mayer Brown partners about the challenges of getting deals which must comply with EU and US rules simultaneously over the line.

Q: Tell us about the clients you see which are looking to get capital relief on both sets of rules?
EP: We are seeing European banks which have a number of synthetic securitisation transactions under their belt looking to do transactions covering their US obligations; for example, a US SME loan portfolio of the US subsidiary of a European bank.  To get the desired capital relief, the bank and the transaction need to comply with both EU and US rules. This means that our clients will have a transatlantic team in place and, ideally, their law firm should too.

Q: Why is this happening now?
CH: The US has not seen the volume of synthetic transactions that we have had in Europe, but that seems set to change. The first transactions have, and are, getting comfortable with the regulatory, accounting and tax issues attendant to these transactions. Banks with established synthetic securitisation teams in Europe are looking at how they can share and leverage that expertise with their US teams and gain capital relief on US assets.

Q: What about US banks? How interested are they in synthetic securitisation?
JG: US banks are very interested in synthetic securitisation and barely a few days goes by without a new enquiry. US banks, as one would expect, want to release capital held against their high quality loan portfolios, and US capital rules let them do that.

There are a lot of intricacies to getting that capital relief though (see Mayer Brown's Structured Finance Bulletin Series on the key issues here: https://www.mayerbrown.com/-/media/files/perspectives-events/publications/2020/02/capital-relief-trades-part-123.pdf), with Dodd-Frank and Commodity Pool Regulation; consideration relating to characterisation of credit-linked notes and similar contracts as ‘swaps’ or other commodity interests; Volcker Rule, insurance and bank guarantee issues all to consider, before you even get onto the US operational criteria to be satisfied for the desired capital relief.

Q: And what about those operational criteria?
CH: Well, there is a lot of complexity there too; the rules aren't as spelt out as the European ones, and a lot of analysis is required. For example, we have spent a lot of time on the restructuring credit event, its necessity and breadth; as well as settlement mechanics and timing.

Q: Which asset classes are you seeing interest in?
EP: Looking at Europe, the most popular asset classes for CRTs have been SME loans, commercial real estate and corporate loans. With the new transatlantic transactions, we are seeing the same asset classes, but also a proportionally stronger interest in the credit card, residential mortgages and trade receivables asset classes - perhaps reflecting the strong investor base for these underlying assets.

Q: Any final thoughts?
JG: We think that the floodgates are going to open for these types of transactions: not just the transatlantic ones, but the pure US ones too. The European market can only be helped by the new STS rules on the horizon. Exciting times are ahead and we can only see ever-greater integration between European and US teams, both for our clients and us as a firm.

CLOs

Capital preservation

Sharif Anbar-Colas, head of structured credit at Kartesia, answers SCI's questions

Q: How and when did Kartesia become involved in the securitisation market?
A: Kartesia has been involved in the securitisation market for more than 10 years and made investments in securitised products from the first fund raised in 2010. This involvement came from an appreciation of how the securitised tranches of portfolios were trading at a discount to the actual names in the portfolio, despite having a structure that works to mitigate losses to the investor.

Q: What are Kartesia’s key areas of focus at the moment?
A: Kartesia is a firm that specialises in credit investments. The investment strategy is focused on capital preservation by sourcing credit risk in its optimal risk-adjusted form. We aim to achieve this through a combination of deploying capital into structured credit, direct lending and leveraged loans.

Q: What is your strategy going forward?
A: Kartesia will continue to enhance and develop its presence in all the areas we are currently active. This could be done by raising specific offerings to target opportunities we identify, as well as making selective additions to the team that will add value to ensure all the opportunities identified can be properly studied and executed.

Q: How will Kartesia expand its CLO investment capabilities?
A: The structured credit division is a key pillar of the firm and, as such, we are in a continual process of growth and development. Some ways this has taken form was in the recent hiring of a new member to the structured credit division, the continued buildout and development of our analytical capabilities, as well as identifying specific market opportunities that offer attractive risk adjusted returns and bringing them to the attention of investors.

Q: How do you differentiate yourself from others?
A: We offer a synergistic investment approach that combines the three strengths of the firm. The investment team comprises over 20 individuals with a thorough understanding of fundamental credit analysis; this enables us to review the assets in a CLO portfolio and come to a view on each name, even those that are less liquid or known.

The members of the structured credit team have decades of experience in analysing structures and navigating nuances in the legal language that underpins the documents governing these structures. This enables us to further segment the investable universe into distinct groups.

By leveraging the relationships and market experience of the different members of the firm, we can source and execute opportunities that may not be available to the larger market.

Q: Which challenges do you anticipate may arise?
A: We think the disruption from Covid-19 could last for a while, despite fiscal and monetary support. This can lead to bouts of volatility and deterioration in some credits.

Q: What opportunities are you expecting?
A: These same bouts of volatility will offer investors who can analyse credit the opportunity to differentiate between investments that have had a genuine credit deterioration from some that may just be lost in the mix and have a positive long-term outcome.

Jasleen Mann

Structured Finance

Range of moratoria take-up 'stark'

Sector developments and company hires

Range of moratoria take-up ‘stark’
With payment holiday concentrations having fallen over the past few remittance periods, the range of payment holiday take-up across UK RMBS is stark, according to JPMorgan’s latest Covid-19 Payment Holiday Tracker. Reflecting data reported primarily through September and August, the report identifies zero percent (in the case of the MORTI 2020-1 deal) and 0.6% (TWIN 2017-1 ) at the low end of this range to a maximum of 58.4% (CCMF 2017-1).

As of the most recent reporting period, 63 of the 128 combined standalone deals and master trust programmes covered in the Tracker are now reporting payment holiday concentrations below 10%, with 23 transactions (18%) reporting a payment holiday concentration below 5%. Conversely, 15 transactions still have payment holiday take-up of at least 30%, including seven deals (5%) with at least a 40% take-up.

By collateral type, the non-conforming and non-standard prime sectors continue to report the highest aggregate payment holiday concentrations at 19% and 17% respectively, down from around 25.5% in JPMorgan’s previous Tracker.

In other news…

Downgrades for corporate CRT
DBRS Morningstar has downgraded by a notch the ratings of three tranches of Barclays’ Colonnade Global 2018-5 capital relief trade. Tranche E of the transaction has been downgraded to single-A, tranche H to triple-B and tranche I to triple-B (low).

The agency notes that as of September 2020, there have been four loan defaults, which occurred in July and August 2020. The cumulative outstanding balance of the defaulted loans at the time of default represents €2.9m (or 5.2% of the guarantee initial balance), while the cumulative loss to date is €800,000 (1.4%).

EMEA
Kartesia has announced seven new hires for both its investment and operations teams, based in London, Paris, Madrid and Luxembourg. Karan Patole has joined the firm as an associate from 23 Capital, responsible for sourcing, executing and monitoring investments across Europe, with a focus on the UK. Cristina Amil Gil de Biedman will also join the London office as an associate in the operations team, joining from Goldman Sachs.

Meanwhile, the team in Madrid has been strengthened with the hire of Jorge Gimenez-Arribas as associate and Antonio Pastor as analyst, having previously worked at UBS and independent financial advisory Arcano respectively. Alexis Midol has joined the team in Paris as an associate, having previously worked for the Bank of Ireland and Deutsche Bank.

The operations team in Luxembourg has been bolstered with the addition of Coralie Gallego as financial analyst and Benoit Lapuh as compliance officer, whose past experience includes time at KPMG and EY respectively.  

SME ABS hit by defaults
DBRS Morningstar has downgraded the class B and C notes issued by Alhambra SME Funding 2019-1 to double-A (low) from double-A and to single-B (low) from double-B (low), resolving the placement of the deal under review with negative implications on 2 July. As of 18 September, four loans in the pool had defaulted, raising the cumulative default balance to €28.5m (or 10.4% of the initial portfolio balance). The defaults occurred between June and August 2020 and three of them could be directly associated with the hardship brought to businesses by the coronavirus pandemic, according to the rating agency.

Structured Finance

'Quick fix' draft legislation published

Sector developments and company hires

‘Quick fix’ draft legislation published
The European Parliament has published draft legislative resolutions on amendments to the Securitisation Regulation and CRR in connection with STS synthetics and non-performing exposures.

Among the proposals is a tightening of the definition of an NPE securitisation and the introduction of stricter language on risk retention, according to Rabobank credit analysts. The regulatory treatment of NPE securitisations is also set to be refined by defining the 100% risk weight for the senior tranche as a ceiling; in other words, lower risk weights are allowed under the three approaches, rather than being fixed at 100%. Additionally, the definition of the purchase price discount will be amended to include the additional discount realised when selling notes to investors.

Regarding STS synthetics, the proposals aim to simplify structures by disallowing non-sequential amortisation and removing the time-call option from the texts. The draft also seeks to remove the obligation to transfer collateral to a third-party upon a rating downgrade of the originator.

Changes to the prudential framework are anticipated by 31 December 2020.

In other news…

Capital allocation inked
Trans-Canada Capital (TCC) has committed to invest US$110m in opportunistic corporate and structured credit strategies managed by Pretium. The two firms note that this allocation of capital represents a continuation and expansion of TCC's lengthy relationship with Pretium, which began in 2013 with Pretium's single-family rental real estate strategy. 

CDQ ABS restructured
ViViBanca is in the market with a restructuring of its Eridano 2 Italian consumer ABS, which originally closed in November 2018. The deal comprises three tranches, with only the senior notes - rated Aa3/AA (low) by Moody’s/DBRS - being sold. There is a €100m protected order in place, according to Rabobank credit analysts.

The transaction has a €344m provisional pool, of which the outstanding portfolio accounts for 87% and the remainder is to be assigned at closing. The assets are predominantly comprised of CDQ loans.

Pricing is scheduled for next week.

CLO consultancy expands
CLO Research Group has launched an online premium offering, providing first-hand independent topical research to complement its bespoke CLO consultancy business.

SR portability guidelines published
ESMA has published its final report outlining its guidelines on portability of information between securitisation repositories under the Securitisation Regulation. These guidelines set out common provisions that a securitisation repository (SR) should follow when transferring securitisation information to another SR.

Following the feedback received during ESMA’s public consultation, the guidelines were restructured in order to make them clearer to follow for market participants. The guidelines include a set of common provisions that apply to all cases of transfer of securitisation information between SRs, as well as two detailed annexes that cover the specific provisions that SRs should follow in the event of a request by a reporting entity to transfer securitisation information from one SR to another, or in the event of a withdrawal of an SR’s registration with ESMA.

Structured Finance

IP transaction debuts

Sector developments and company hires

IP transaction debuts
Aon has launched an intellectual property (IP) capital market solution with the close of an IP-backed ILS transaction, believed to be the largest such deal ever consummated. The deal involves agriculture technology company Indigo, which is borrowing over US$100m utilising its IP as collateral, with the value of that collateral insured by a group of insurance markets led by Markel Specialty. Hudson Structured Capital Management (HSCM) was the largest capacity provider on the transaction.

IP value is not well understood in the capital markets. While IP may be the most valuable asset a company owns, current accounting standards typically do not allow internally developed IP to be explicitly valued as part of a company's balance sheet. This accounting treatment - and historic lack of creditable valuation methodologies - results in most growth companies turning to dilutive equity to finance their growth. Aon's IP solution assesses and values IP assets, leveraging a proprietary IP analytics platform.

North America
Mitsubishi UFJ Financial Group (MUFG) has hired David Lindley to lead its CMO derivatives trading efforts, as part of the firm’s buildout of its MBS trading platform. He will be responsible for leading MUFG's new-issue agency CMO and MBS derivatives business, based in New York and reporting to Michael McCarthy, head of MBS and securitised products trading. Lindley joins from Daiwa Capital Markets and was previously md and head of CMO derivatives trading at Nomura, where he served as a member of the management team.

Structured Finance

Litigation finance fund formed

Sector developments and company hires

Litigation finance fund formed
Tetragon and its diversified alternative asset management business TFG Asset Management have entered into an agreement with Brandon Baer to invest in his newly-created company, Contingency Capital. The company – which is expected to formally launch on 1 November - is a multi-product global asset management business that will sponsor and manage litigation finance-related investment funds.

Baer formerly worked at Fortress Investment Group, where he was a partner and md in the credit funds business. He was also the co-founder and co-head of its legal assets group.

TFG Asset Management will receive a significant minority equity interest in Contingency Capital and Tetragon will provide Contingency Capital with working capital and a US$50m commitment to its first commingled investment fund, with Tetragon retaining the option to invest further amounts. TFG Asset Management will also provide Contingency Capital with operating infrastructure, such as risk management, investor relations, financial control, technology and compliance/legal matters.

Fortress and Contingency Capital have entered into co-investment arrangements, pursuant to which Fortress may invest up to US$500m in Contingency Capital's opportunities. Contingency Capital has also entered into arrangements with a large fixed income asset manager relating to up to US$900m of additional co-investment opportunities.

In other news…

Asia Pacific
Walkers has added Shamar Ennis as a partner in its finance and corporate group in Hong Kong. Ennis relocates from the firm's Cayman office, having previously been seconded to Hong Kong for two years in 2014. She has a broad range of experience in corporate and finance advising on Cayman Islands and British Virgin Islands law aspects of leveraged and acquisition financings, structured finance, fund finance and general corporate lending transactions.

EMEA
BlueBay has hired Adam Phillips as head of developed markets special situations, a newly created position. Phillips is to further enhance global leveraged finance strategies, building out BlueBay’s capabilities within stressed and distressed credit and lead launches of new special situations investment strategies. He will also manage the firm’s existing event-driven credit strategy, alongside Duncan Farley and Tim Leary.

Phillips is based in London and reports to Mark Dowding, cio. He joins from Blantyre Capital, where he was head of investments.

Structured Finance

US CLO recovery continues

Sector developments and company hires

US CLO recovery continues
US CLO OC cushions are continuing to recover, according to the latest quarterly US manager report from JPMorgan CLO research.

It says: “In the upcoming final quarterly October payment (majority of CLOs), we estimate as much as circa 92% equity will pay a cashflow compared to circa 89% in July and circa 40% during the GFC. When examining double-B OC from end-Feb to end-May (when OC recovery began), only three managers increased cushions: Elmwood, NY Life, Pacific. Currently, the top 10% double-B OC cushion consists of Elmwood, New York Life, King Street, CarVal, Partners Group, Palmer Square, Kayne Anderson, AIG, Allstate and York.”

The JPMorgan analysts also highlight the shift in triple-C loan exposure away from their previous forecast of 10.3%. As of 5 October, the average Moody’s Caa exposure stands at 8.4% and S&P CCC at 9.6% respectively.

In the last three months, by manager, 60% decreased Moody’s Caa by an average 1.28%, while 40% increased by an average 0.73%. Similarly, Moody’s WARF factor spiked from 2860 in March to a high of 3319 in July, and has since recovered slightly to 3214. Average default exposure is up 0.22% to 1.58% in the last three months, but the 2019 vintage has only 0.70% and there is dispersion across managers (25th percentile 0.74% and 75th percentile 2.06%).

In other news…

Acquisition
Morgan Stanley is set to acquire Eaton Vance for an equity value of approximately US$7bn. The acquisition advances Morgan Stanley’s strategic transformation with three businesses of scale - institutional securities, wealth management and investment management – and means Morgan Stanley Investment Management (MSIM) will have approximately US$1.2trn of AUM and over US$5bn of combined revenues. The firm says that Eaton Vance fills product gaps and delivers quality scale to the MSIM franchise, as well as enhancing client opportunities. The acquisition is subject to customary closing conditions and is expected to close in 2Q21.

Cepal transfer underway
Alpha Bank has begun transferring its non-performing exposure management operations to Cepal (SCI 29 May), a key pillar of its Project Galaxy securitisation, which the firm says continues to progress as planned. Cepal will become the first licensed third-party servicer operating in the Greek market according to the provisions of Law 4354 and one of the leading players in Southeast Europe. The carve-out of the NPE management operations is expected to be concluded by end-November 2020.