News Analysis
Capital Relief Trades
Compromise pending
Parliament softens stance on 'problematic' proposals
The European Parliament will likely drop proposals for the exclusion of time calls and pro-rata amortisation from STS synthetic securitisations (SCI 6 October). The Parliament’s amendments were announced last week in response to the European Commission’s ‘quick fix’ framework (SCI 31 July). Compromise solutions are pending, with one potential option being time calls subject to regulatory approvals.
According to parliamentary sources: “We initially looked at the UK significant risk transfer market for guidance where pro-rata amortisation and time calls are prohibited, but last week’s report was just a starter and during the negotiations a compromise will have to be found among MEPs and then with member states. It would be surprising if there was a majority in Parliament for the total exclusion of time calls and pro-rata amortisation. Compromise solutions, such as time calls with regulatory approvals, could be one such option.”
If, on the other hand, these features do not end up in the STS synthetic securitisation framework, then executing STS synthetic trades becomes less obvious. Robert Bradbury, head of structuring and advisory at StormHarbour, notes: “Achieving an STS synthetic transaction as was previously proposed could be attractive; in some cases, if banks can fit what they are largely already doing in the STS framework with relatively small changes, it could be well worth incurring the additional costs and time to achieve it. On the other hand, if you exclude pro-rata amortisation and time calls, then from a portfolio efficiency point of view and particularly for some portfolio types, the decision on whether to apply becomes less obvious with respect to STS.”
The exclusion of pro-rata amortisation would render STS synthetic securitisations highly uneconomical from an issuer perspective. Under a pro-rata structure, as the underlying portfolio amortises, all outstanding tranches of the transaction are amortised on a proportional basis, keeping their relative size constant. Hence, over time, the cost of protection remains broadly stable as a portion of the pool.
Similarly, time calls are equally crucial for efficiency purposes. “If you have to use sequential amortisation after the replenishment period, then that is going to make the deals expensive. However, excluding time calls on top of that is even worse because the call option allows you to terminate a deal early and therefore protect you from a long and costly amortisation period,” says a structurer at a large European bank.
The main issue with lenders is that the Parliament’s amendments represent a step back, given that they concern issues that have already been addressed by the EBA. According to another structurer at a large European bank: “The EBA has already provided guidance which states that if you exercise a time call, you may not reacquire the assets at a price greater than their value, so impaired assets cannot be repurchased at par. The EBA has therefore effectively addressed prudential concerns.”
He continues: “The prudential concern is around so-called ‘flow-back risk’ or the notion that banks will suddenly become undercapitalised by having to hold new capital against these reacquired assets. Regulators have many ways to monitor this without having to disallow time calls. We are required in our annual stress tests to show regulators how the bank’s capital position would be affected by time calls or disruptions in the SRT market, and banks are required to have internal policies capping the amount of capital that should come from these deals.”
Consequently, from an issuer perspective, time calls and pro-rata amortisation are essential for the viability of the STS regime. However, this would still not amount to the end of the road. Indeed, several features in the European Commission’s recently proposed amendments to the Securitisation Regulation delegated act - which introduces an STS framework for synthetic securitisations - have raised eyebrows.
According to a legal expert: “One proposed requirement that is especially problematic is that a bank needs to have a CQS2 credit rating, in order to hold investor collateral that is deposited as part of a transaction; otherwise, the collateral should be invested in high quality assets or held by a third-party bank.”
He continues: “For many banks in Europe, this will be a problem, since there aren’t that many banks in Europe with such a rating, due to the country rating ceilings of certain jurisdictions. Moreover, it is difficult to find third-party banks to hold cash collateral because LCR rules mean that it is not economically attractive for them to hold such deposits.”
Overall, European authorities expect the on-balance sheet STS regime to act as a shot in the arm for synthetic securitisations and so remain concerned about the potential macro-prudential consequences of that. Looking ahead, Jo Goulbourne Ranero, consultant at Allen & Overy, concludes: “On the face of it, the fairly limited prudential benefits associated with the regime are hard to reconcile with expansion on that scale. But perhaps it is not so much the risk-weight changes themselves, as the sea-change in the European regulatory approach towards synthetics they represent that may make the real difference.”
The final framework is expected to be worked out by year-end.
Stelios Papadopoulos
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News
Structured Finance
SCI Start the Week - 12 October
A review of securitisation activity over the past seven days
Last week's stories
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Fix-and-flip profits
Low interest rates, inventory levels driving demand
Olympic debut
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Plunging forbearance
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Structured finance solutions
Contributed thought leadership by Ocorian
Transatlantic challenges
Contributed thought leadership by Mayer Brown
Transmitting credit
SRT and the real economy explored over five in-depth chapters
Other deal-related news
- With payment holiday concentrations having fallen over the past few remittance periods, the range of payment holiday take-up across UK RMBS is stark (SCI 5 October).
- DBRS Morningstar has downgraded by a notch the ratings of three tranches of Barclays' Colonnade Global 2018-5 capital relief trade (SCI 5 October).
- DBRS Morningstar has downgraded the class B and C notes issued by Alhambra SME Funding 2019-1 (SCI 5 October).
- 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 (SCI 6 October).
- Trans-Canada Capital (TCC) has committed to invest US$110m in opportunistic corporate and structured credit strategies managed by Pretium (SCI 6 October).
- ViViBanca is in the market with a restructuring of its Eridano 2 Italian consumer ABS, which originally closed in November 2018 (SCI 6 October).
- ESMA has published its final report outlining its guidelines on portability of information between securitisation repositories under the Securitisation Regulation (SCI 6 October).
- 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 (SCI 7 October).
- US CLO OC cushions are continuing to recover (SCI 9 October).
- Alpha Bank has begun transferring its non-performing exposure management operations to Cepal, a key pillar of its Project Galaxy securitisation (SCI 9 October).
Data
BWIC volume
Secondary market commentary from SCI PriceABS
8 October 2020
USD CLO AAA
We saw 33 trades across the capital stack today with a fair amount of activity in mezz - 14 x AAA, 2 x AA, 6 x A, 2 x BBB, 8 x BB, 1 x B. The AAAs trade 129dm-157dm across 2020-2024 RP profiles, with bonds with lower MVOCs along with elevated ADRs and cuspy IDT/Jnr OC tests migrating to the wide end.
USD CLO Mezz/Equity
The AAs trade 225dm-245dm (2023/2024 RP profiles) which is wide to 215area context for this cohort around the end of September, ANCHC 2020-15A B1 at 245dm / 5.9y WAL is at the wide end with clean metrics but only the manager's (Anchorage) performance weaker to its peers.
The single-As trade 263dm-318dm across 2022-2024 RP profiles which are in line with recent context, Trimarin's CRMN 2018-1X C 318dm / 6.4y WAL is at the wide end with a weaker MVOC 114.5 and high ADR 1.5 as key weaknesses.
The BBBs trade 354dm-373dm (2025 RP profiles) tighter to 370dm-460dm recent context, both bonds are recent vintages (2020) and naturally have low CCCs, low Sub80s and extra cushions.
The BBs trade 727dm-984dm which is in line with recent context, at the wide end is Symphony's SYMPH 2016-18X E 984dm / 5.7y WAL - this has a high ADR 1.63 and cuspy MVOC 100.6 along with a higher CCC 12.3 and lower WA collateral px 94.2.
The single-B trade is AMM's AMMC 2012-11A FR2 1347dm / 7.7y WAL which is through the wides at this rating level since month end (widest was AWPT 2013-1A D2R2 1277dm / 8.5y WAL), this bond is not covered by MV (MVOC 99.7), high CCC 10, ADR elevated 1.1, IDT cushion cuspy 0.65.
EUR MEZZ/EQUITY CLO
We have just 6 trades today. Both AA trades were around 225dm which is about 15bps tighter.
The 3 x A trades traded between 285 and 320dm. The widest trade is Toro 2, which does have an MV OC and Jnr OC cushion a little on the low side.
The one BBB trade is for Euro-Galaxy 5 which is at 416dm. This indicates unchanged to a few bps wider on the BBB curve.
DM, Yield & WAL - proprietary SCI data points complement Cover prices
PriceABS Data now includes DM/Yield/WAL for all CLO trading and Euro ABS/RMBS.
News
Structured Finance
Movie magic
Rare securitization of film library future revenues finds buyers
The $421.5m three-tranche securitization of film distribution revenue by Vine 2020-1, currently in pre-sale, will close on 29 October, according to analysts at Morningstar DBRS.
There are four listed co-issuers, all of which are units of Village Roadshow Entertainment Group (VREG), a movie financer and producer founded in 1986. A majority stake in the firm was acquired by private equity firm Vine Investment Advisors in 2017.
The collateral consists of film revenues derived from copyrights in the VREG library and the Virtual Film Library. Vine has also purchased the Virtual library, which, upon completion of this transaction will pass into the hands of VREG.
Rated A, the A tranche is worth $384.3m, the $21.2m B tranche is rated BBB and the $16m C tranche is rated BB. The anticipated repayment date is November 2027 and the notes are placed by RBC.
Securitizations of film library revenues are not common. DBRS Morningstar has rated eight such deals since 2009, according to Christopher O’Connell, senior vice president, US ABS, at DBRS Morningstar.
While Village has sold securitizations of film library revenues in the past, and has one deal outstanding at the moment, it is Vine’s debut in this space.
The portfolio backing the Vine 2020-1 deal is a library of 108 movies. Fees derived from the distribution of the movies to other distributors or through licensing agreements with streaming services like Netflix or Hulu go to pay bondholders.
As the deal is supported by anticipated future revenue flow from distribution rights, there is no delinquency danger to the deal from the closure of movie theatres due to Covid 19.
“This library deal includes films that have been through their theatrical window. The movie theatre shutdown has no direct impact on this deal. There are three to five year agreements in place, so we are able to forecast the cash flows for this deal,” says O’Connell.
Indeed, library deals can occur any time as long as the distributor is a known franchise with a well-diversified library of films and the increased popularity of streaming channels during the pandemic may in fact increase the value of library movies.
The value of films in the library varies. The most valuable are those that performed excellently on recent release. The last movie added to the asset pool in the Vine 2020-1 transaction was The Joker, which did tremendous box office business in 2019 (it took over $1bn) and for which Joacquin Phoenix won the Oscar for best actor. The revenue value of this film is thus high.
The oldest movie in the portfolio is Practical Magic, from 1998, which took only $68m (and cost $75m to make) at the box office and received indifferent reviews. According to Owen Glieberman of Entertainment Weekly writing at the time, it is "a witch comedy so slapdash, plodding, and muddled it seems to have had a hex put on it." Such a movie has a reduced revenue value.
“As valuations in film library naturally decline over time, we analyse that decline and assign decay rates,” says O’Connell.
Also contained within the library are the various films that constitute the Matrix franchise, the Sherlock Holmes franchise and the Ocean’s franchise (Ocean’s Eleven, Twelve, Thirteen, Eight and counting). All these franchises earned well in excess of $1bn in terms of gross box office receipts.
Simon Boughey
News
Capital Relief Trades
SME CRT completed
Intesa finalises mezz guarantee
Intesa Sanpaolo, the EIF and the EIB have completed a €90m mezzanine guarantee that references a €1.8bn static Italian SME portfolio. Dubbed GARC SME 9, the capital relief trade will enable the bank to provide €450m of loans to Italian SMEs and midcaps in regions negatively impacted by the economic effects of the Covid-19 pandemic.
According to Intesa: “The transaction falls within the active credit portfolio management activity of the bank, which aims to optimise resources and provide access to credit for SMEs. It is primarily aimed at supporting the supply chain networks that many SMEs are part of and investments in digitalisation and sustainability.”
Similarly, the EIF states: “Against the backdrop of a volatile macroeconomic environment, by acting as mezzanine guarantors in this transaction, the EIF and the EIB confirmed their continuous support to the Italian economy. Thanks to a through-the-cycle analysis of the portfolios, we can stay in the market even in a less benign scenario, confirming our role as a countercyclical investor.”
The tranche amortises sequentially because, under such a structure, it takes longer for the mezzanine to pay off - allowing Intesa to benefit from the credit protection for a longer period. The lender typically executes GARC trades for junior tranches, since that is where banks can achieve the most capital relief. Hence, in absolute terms, it is freeing less capital - although the lower pricing compensates for this.
Further features of the transaction include a portfolio weighted average life that is equal to two years and a time call that can be exercised once the WAL has run its course. The portfolio is backed by approximately 4,000 borrowers and features payment holidays, which amount to roughly 15% of the pool. Intesa notes that substitutions are permitted in case of loan prepayments without affecting the credit risk profile of the portfolio.
Intesa opted for the EIF for diversification benefits, but the bank also confirms that “uncertainty over the evolution of credit portfolios due to the pandemic affects investor willingness to enter new market transactions. We involved private investors in other transactions within the GARC programme, such as the GARC Leasing-1, launched at the end of June."
The issuer concludes: “In general, we believe that the Covid-19 pandemic highlights the importance of risk-sharing transactions, such as synthetic securitisations, to support the real economy and elevates the relative importance of public investors, as well as EU and government guarantee programmes.”
Stelios Papadopoulos
News
Capital Relief Trades
Made in the USA
Speakers at SCI conference herald dawn of new era for US CRT
"Every year I join these conferences and I say 'This is the year of the USA,' and I'm always made a liar because I'm still waiting for it, but this year we'll see real uptick in activity in the US and I expect this will continue," said Jessica Littlewood, a partner at Clifford Chance in London, specialising in credit risk transfer transactions
Littlewood was speaking at the SCI CRT New York conference last week. The burgeoning importance of the US CRT market, and predictions of material growth in the sector, were front, back and centre of many discussions over the two days.
Joost Hoogeven, a senior portfolio manager at PGGM Investments in the Netherlands agrees with Littlewood. He added that while it is possible for investors to gain exposure to US asset through issuance by non-US banks, because US banks have so much larger and more diversified lending books it is really up to them to make market more mature and accessible.
Citigroup is one of the few established US banks that makes regular use of the CRT mechanism, and, according to Mark Kruzel, a director in the financial solutions team in New York and another panellist at the meeting, the device has become very important and stands alongside mechanisms like Tier I and Tier II. But he admits that this has not been common in the past.
"In the US, people have tended to think of it as on the edge and esoteric, but here at Citi we see it as a critically important capital tool," he explained.
However, for Citi, CRT is not only an important capital tool it is also an important portfolio management tool which allows the borrower to diversify exposure.
Hitherto, timely and efficient execution has depended on the cultivation of relationships with the investors, so banks can possess a degree of certainty that a buyer or two stands at the other end of the line ready to take on the exposure. But he thinks that this essentially bilateral connection will change and more competition will be introduced to the price discovery process once the investor universe expands.
While the pace will be set by the larger US banks like JP Morgan and Citi, said Littlewood, it is likely that the smaller regional banks will come to the party before long. "There is a lot of interest from the regional banks and if we can get some momentum going I think we'll see a European type market coming to the fore," she said.
Regional banks are indeed interested in the structure, and for a number of different reasons, said Thomas Killian, an md in the investment banking group at Piper Sandler, and a veteran of bank capital adequacy methodologies.
The first reason concerns recent changes in accounting rules. The advent of mirror image accounting lessens the difficulty that smaller banks might have in managing the quarterly mark-to-market in changes in fair value to the derivative embedded in a CLN.
Also the ability to use CRT to offset current expected credit losses (CECL), the new accounting rules which became effective at the end of last year, makes the device "much more appealing than before," said Killian.
Capital market dynamics have also thrust the mechanism into the limelight. There has been a great deal of debt issuance by regional banks in recent years due to the historic lowness of rates. Traditionally, a bank might seek capital friendly issuance through subordinated debt, but this will not be useful if the borrower has already issued a lot of subordinated debt in the recent past or if it needs Tier I capital. Banks with a market capitalization of less than $40bn have already issued more subordinated debt this year than ever before.
Tier I capital might also be not cost effective if the bank is trading below book value, and, as Killian points out, a large number of top 200 banks are now indeed trading below book value.
Compared to other forms of capital alternatives, CRT also incorporates inherent pluses, he notes. Voting common stock, for example, is dilutive to earnings per share, particularly if the issuer is trading below book value, while non-cumulative perpetual preferred stock, while ticking a lot of boxes, is highly expensive as it's not tax deductible.
While CRT is more expensive to the borrower than subordinated debt, the after-tax cost differential to preferred stock is not overwhelming. Crucially, as well, the regulator is now on the side of the CRT market. "Clearly the regulator wants more capital and more tools in the tool box," he concluded.
Simon Boughey
News
Capital Relief Trades
Risk transfer round-up - 12 October
CRT sector developments and deal news
Barclays is rumoured to be prepping a corporate capital relief trade that is set to close in 4Q20. The lender finalised its last corporate CRT from the Colonnade programme in June (see SCI’s capital relief trades database).
Market Moves
Structured Finance
MPL platform ends note programme
Sector developments and company hires
MPL platform ends note programme
LendingClub is winding down its retail note programme and has ceased accepting new accounts. The platform says it is no longer ‘economically practical’ to continue offering notes as it moves towards becoming a full-spectrum fintech bank. PeerIQ notes that the move is unsurprising, given that the programme exposed LendingClub to potential conflicts of interest and invites regulatory scrutiny from the US SEC and CFPB.
In other news…
ABS fund launched
Janus Henderson Investors has launched the Janus Henderson Asset-Backed Securities Fund, which aims to deliver strong risk adjusted returns through a broad range of ABS investments. Opportunities offering secure income and downside resilience over market cycles will be identified. The fund is available in a UCITS structure and will primarily be sold in the UK.
Colin Fleury, head of secured credit, will manage the fund strategy alongside portfolio managers Ian Bettney and Dennis Struc. They will be supported by a global team with experience in investing, originating, rating and structuring debt.
Market Moves
Structured Finance
First EGF guarantee inked
Sector developments and company hires
First EGF guarantee inked
The EIB has approved €5.1bn of new financing to support investment by companies most impacted by Covid-19, alongside backing clean energy, water, sustainable transport and urban development. This includes up to €2.66bn of support – comprising €1bn of EIB-linked risk-sharing products and €1.66bn EIF guarantee and equity products - backed by the new European Guarantee Fund, which is expected to mobilise €11.33bn of total financing.
The EGF has begun its operational activity with the approval of a €162.5m uncapped guarantee to Banca Valsabbina, which aims to ensure that SMEs, larger corporations and the health sector can access finance through local financial partners across Europe.
Of the total EGF investment, 65% is earmarked for SMEs, while a maximum of 23% is earmarked for companies with 250 or more employees. Up to 5% of the financing can be allocated to public sector companies and entities active in the area of health or health-research or providing essential services related to the Covid pandemic, with a further 7% can be allocated to venture/growth capital and venture debt in support of SMEs and midcaps.
In other news…
CRE CRT upgraded
Scope has upgraded tranches B to F of Santander’s synthetic UK CRE CLO Red 2 Finance CLO 2018-1 and affirmed the triple-A rating of the A tranche. The rating agency notes that sequential amortisation, coupled with no realised portfolio losses have substantially increased credit enhancement since closing. However, it reports that as of July 2020, 42 exposures (accounting for £207.7m of the portfolio) are on Santander’s internal watch list, two of which (£36.5m) the bank considers to be non-performing.
EMEA
SYZ Capital has appointed Gian Kull principal, head of special situations and uncorrelated strategies. He has over a decade of experience investing in special situations, including distressed assets and litigation situations.
In his new role, Kull will not only be managing portfolios, but will also be spearheading the sourcing and execution of some of the firm’s private market investments. He reports to ceo Marc Syz and joins from Multiplicty Partners, where he focused on structured litigation investments. Previously, he was director of sourcing for VALTEGRA and launched the European office for Brigade Capital Management in Zurich.
Global
Värde Partners has promoted Jon Fox to the role of president and Andy Lenk to the role of deputy ceo. Fox is a partner and the head of the New York office, who joined the firm in 2013 and has led its global business development and investor relations team, fund and product development, and also oversees communications and public affairs. He is a member of the firm’s investment committee and senior leadership committee.
Lenk joined the firm in 2001 and is a partner in Minneapolis. As global head of strategy and portfolio operations, he works closely with the co-ceos on all aspects of firm strategy, finance, talent and operations. He is a member of the firm’s investment committee, senior leadership committee and the enterprise risk management committee.
Additionally, the firm has announced role changes within the areas of financial services, insurance and capital markets. Partner Elena Lieskovska will head a new dedicated insurance business after leading the financial services team and previously leading specialty finance investing in Europe.
Senior md Aneek Mamik will be promoted to global co-head of financial services from his current role leading those investments in North America and Asia. He will oversee the global team with partner Rick Noel.
London-based senior md and global head of capital markets Craig Rydqvist will join the financial services team to lead investments outside of North America, while md Missy Dolski will be promoted to global head of capital markets from her current role as head of capital markets for North America.
North America
Z Capital Group has hired Egidio Carlino as director and Jordan Shrem as senior associate. The two recruits are members of Z Capital Credit Partners' investment team.
Carlino is responsible for research and analysis of existing and prospective portfolio leveraged finance investments. He joins ZCG from DFG Investment Advisers, where he was an associate director, responsible for managing over US$5bn of leveraged loans.
Shrem is responsible for trade support and execution. He joins ZCG from CVC Credit Partners, where he was an associate, supporting trade execution and providing operational support to the credit team.
Market Moves
CLOs
Collateralised loan overlap
Sector developments and company hires
Collateralised loan overlap
Diversification risk across the US CLO market has increased this year, due to the 18% decline in US leveraged loan net supply over 2019 versus 79 different managers issuing deals in 2020. Consequently, JPMorgan CLO research analysts have published a new report looking at US CLO asset inter-overlap (to other managers), intra-overlap (across portfolios of the same manager) and vintage overlap.
“Overlap in the context of the US CLO market doesn’t seem egregious, averaging 24% across managers, but ranging 7% to 70% depending on 6,700-plus combinations of 117 managers we sampled in our engine,” the JPMorgan analysts note. “Meanwhile, intra-overlap tends to be higher than inter-overlap, averaging 74% - though again, wide ranging (40% to 92%). Overlap can be higher for loan portfolios in a given vintage and, at least in our historical example of the 2015 vintage, tends to increase over time.”
However, the analysts add: “Overlap is a useful but incomplete risk measure and CLO investors should also consider credit quality, issuers/sectors affected by the pandemic, manager strategies etc.”
Manager transfer
Dock Street Capital Management has replaced Collineo Asset Management as collateral manager to the House of Europe Funding IV ABS CDO. Under the terms of the appointment, Dock Street agrees to assume all duties and obligations under the collateral management agreement and other transaction documents. Moody’s confirms that the move will not impact any of its ratings on the notes. For more CDO manager transfers, see SCI’s database.
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