Contents

Capital Relief Trades

Risk transfer boost

US CRT market picks up

SCI publishes regular in-depth analysis of trends and developments across the capital relief trades market, in addition to our usual news output. In this latest CRT Premium Content article, we investigate US banks' attempts to manage coronavirus-related higher capital requirements via capital relief trades.

To upgrade your subscription to access all CRT premium content for a year, or for further information, email jm@structuredcreditinvestor.com (new customers) or ta@structuredcreditinvestor.com (existing subscribers).

Structured Finance

SCI Start the Week - 26 October

A review of securitisation activity over the past seven days

Last week's stories
Corona kickstart
Constellation of factors coalesced to push the US CRT market forward
JAAA launched
New triple-A CLO ETF well received
Jurisdiction expansion
European ABS market update
Mezz opportunity
'Rare' bonds on offer via large BWIC
Restructuring capacity
LMLs introduced to European CLOs
Risk transfer return
BDK preps capital relief trade

Other deal-related news

• Post-Covid crisis US BSL CLO structures differ in a range of ways from their predecessors, beyond shorter reinvestment periods, according to a new report from S&P (SCI 19 October).
• Hertz Global Holdings has secured commitments for debtor-in-possession financing totalling US$1.65bn and has filed a motion for approval of the financing by the US Bankruptcy Court for the District of Delaware (SCI 19 October).
• Standard Chartered has closed Prunelli Issuer I Compartment 2020-1, a rare revolving US$1.45bn securitisation of trade finance exposures granted to corporates and financial institutions (SCI 19 October).
• The EIB and the EIF have provided Alba Leasing with €490m via an SME securitisation financing operation (SCI 20 October).
• Crédit Agricole has placed the first green issuance of LMA, its European ABCP programme, for an amount of €25m (SCI 20 October).
• PIMCO and GE Capital Aviation Services (GECAS) have reached a preliminary agreement to develop an aviation leasing platform to support up to US$3bn in aircraft asset financings, subject to customary closing conditions (SCI 21 October).
• The CFPB has issued a final rule to extend the GSE Patch until the mandatory compliance date of a final rule amending the General Qualified Mortgage (QM) loan definition in Regulation Z (SCI 21 October).
• Trepp has implemented a new data integration with Risk Management Solutions (RMS) that aims to help evaluate and manage global risk from natural and man-made catastrophes (SCI 23 October).
• HalseyPoint CLO 3, which priced on 21 October, marks the tenth US CLO with AMR language printed to date (SCI 23 October).
• ISDA has launched the IBOR Fallbacks Supplement and IBOR Fallbacks Protocol, with the aim of reducing the systemic impact of the benchmark becoming unavailable while market participants continue to have exposure to that rate (SCI 23 October).
• The EIB has joined forces with the Instituto de Crédito Oficial (ICO) and PSA Financial Services Spain to support Spanish SMEs and mid-caps affected by the coronavirus crisis (SCI 23 October).

Data

BWIC volume

Secondary market commentary from SCI PriceABS
23 October 2020
USD CLO AAA
15 covers to end this week off – 3 x AAA, 4 x AA, 5 x A, 3 x BB, the week ends with US LLI up 13bps and retraces all of the dip seen last week. The AAAs trade 146dm-168dm, with Marble Point's MP4 2013-2A ARR at the wide end 168dm / 2.54y WAL – low MVOC 140.9, ADR 1.01 whilst IDT cushion is negative.
USD CLO Mezz/Equity
The AAs trade 189dm-212dm (2019-2022 RP profiles) tight to 200dm-240dm recent context, the credits today have weaker fundamentals but nonetheless trade tight to the respective curve.
The single-As trade in a wide dispersion 201dm-299dm (2019-2022 RP profiles) which is similar to recent trading context, at the tight end is Invesco's RCTTE 2015-1A CR 201dm / 3.3y WAL with a strong MVOC 125.2, low Sub80, low ADR 0.7 and lots of cushion on Int Div tests. However at the wide end is Bain's BCC 2017-2A CR 299dm / 5.6y WAL – low MVOC 112.8, high Sub80 6.1, high ADR 2.35 and neg IDT cushion pushing this bond close to a 3-handle dm.
The BBs trade 926dm-1186dm (2020/2021 RP profiles) which is wider than 700dm-1050dm context seen in these rare profiles this month, the reason being the IDT cushion is cuspy or negative in all of the BBs today and a MV shortfall on one of the bonds MP7 2015-1A ERR.
EUR AAA CLO
There are 3 x AAA trades. Harvest 11 with a margin of 92bps traded at 99.91 / 151dm. BBAM 1 (for RBC) and Arbour 8 with margins around 153bps traded at approx. 100.58 / 190dm.
EUR MEZZ/EQUITY CLO
There are 2 trades which were orig BBB, both from GSO and both have paid down a lot. Castle Park traded at 100.17 / 325dm & Sorrento Park at 99.50 / 314dm.
The one BB, Ares Euro 6, traded at 93.90 / 704dm.
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.

Structured Finance

Measurement uncertainty

Inclusion of climate exposures in ICAAPs explored

Many banks are planning to include climate exposures in their internal capital adequacy assessment processes (ICAAPs), but which pillar their assessments should fall under remains unclear. Nevertheless, bounding and monitoring metrics could help quantify climate risks better.  

A recent PwC survey notes that 59% of respondents are planning to include material climate exposures in their ICAAPs, but are unsure as to which pillar their assessments should fall under. The process of effectively integrating climate risk into existing risk management frameworks will need to start with the identification and measurement of climate-related exposures. Most of the respondents to the PwC survey appear to be at this stage.

Indeed, a total of 47% of respondents have started to incorporate their initial climate analysis into existing risk assessments, notably in relation to credit risk. However, the assessments have, overall, yet to be translated into quantifiable metrics.

The latter has to do with the way the UK PRA has been assessing climate risk up until now. Current assessments of climate risk within ICAAPs tend to be limited to a high-level qualitative risk articulation and an indication of how the process will be developed in the future. PwC notes that while such an approach may have satisfied regulatory expectations last year, the PRA will be scrutinising how these assessments have evolved over time, with greater emphasis on detailed - and ideally quantifiable - analysis.

Yet how banks develop the metrics remains unclear. PwC survey respondents seem to coalesce around so-called bounding and monitoring metrics, with 29% of respondents siding with bounding metrics and 43% with monitoring metrics.

Bounding metrics are a single or small number of measurements that set limits or bounds on the amount of climate risk that an institution is willing to take, such as exclusions and adjusted counterparty ratings for transition risks. Monitoring metrics, on the other hand, alert management to a potential change that could breach risk appetite, such as concentration metrics.

Nevertheless, the firm believes that banks could reasonably cover climate risk under Pillar 2a, Pillar 2b or both, depending on the nature of their exposures and their overall approach to risk management. Pillar 2a covers one in 1000 one-year scenarios and Pillar 2b covers one in 25 five-year scenarios.

“Both options should help to inform risk management processes as extreme climate scenarios become more severe and more frequent. While some firms may feel uncomfortable about the current lack of guidance around which pillar climate-related risk falls under, such an approach provides welcome flexibility for firms to tailor their approach in accordance with their specific risk profile,” says PwC.

The firm concludes: “Critically, firms should not be taking a wait-and-see approach to integrating climate-risk assessments into their ICAAPs. While additional regulatory guidance is due in 2021, firms need to get on the front foot now to avoid lagging behind regulatory expectations. This will require adopting a best efforts approach to assessing climate risk, beginning with qualitative analysis before incorporating quantitative disclosures as data collection improves and regulatory guidance evolves.”

Stelios Papadopoulos

Capital Relief Trades

Risk transfer round-up - 26 October

CRT sector developments and deal news

RBS is believed to be prepping a corporate capital relief trade that is expected to close in 4Q20. The UK lender’s last significant risk transfer transaction settled earlier this year and referenced project finance loans (SCI 31 January).

CDO

Diverse portfolio

Private equity CDO completed

CMFG Life Insurance Company has completed a rare private equity collateralised fund obligation (PE CFO). Dubbed MCA Fund III Holding 2020-1, the transaction is structured as a dual SPV and is backed by a diverse pool of private equity funds, with approximately US$574.7m in net asset value and US$189.7m of unfunded capital commitments.

The predominantly static portfolio comprises 64 commingled funds, two commingled co-investment funds and five co-investments managed by 57 fund managers, as of 30 June 2020. It has 848 underlying holdings in non-secondaries funds and 488 underlying fund LP interests and other positions in secondaries funds. The portfolio is also diverse in terms of vintage, with exposures from 2014 to 2017.

The underlying funds will distribute cash as they generate income or exit investments, and will make capital calls when they require additional cash to invest. CMFG will fund the capital calls.

Cashflows generated by the funds will be used to pay off the notes, as well as pay interest and expenses. Interest payments are deferrable in the case of the cashflow being insufficient.

Fitch notes that the portfolio has a material exposure to debt funds, which typically provide steadier cashflows relative to buyout funds. For this reason, cash shortfalls are less likely in a downturn scenario.

Smaller liquidity needs will be covered by distributions from underlying funds, such as the transaction’s income-producing funds. However, a limitation is the underlying fund LPA pledging collateral.

DBRS Morningstar and Fitch have assigned a single-A rating to the deal’s US$229.8m class A notes (which priced with a coupon of 3.25%), a triple-B rating to the US$100.6m class B notes (4.25%) and a double-B rating to the US$71.8m class C notes. The notes demonstrate a sufficient level of credit enhancement, with the LTV set at 40% for the class A notes, 57.5% for the class B notes and 70% for the class C notes.

The investment manager of the transaction is MEMBERS Capital Advisors.

Jasleen Mann

CLOs

Mind the gap

CLO equity price and NAV data examined

From now on SCI will be publishing regular case studies and reports on the CLO market in addition to our usual news stories on the sector. Here, we examine how CLO equity prices have fared so far over this most tumultuous of years and their relationship to their underlying NAVs.

While this first article is available to all subscribers, all future additional reports will only be accessible to premium subscribers. To enquire about SCI’s premium content, new subscribers should email Jon Mitchell and existing customers should contact Tauseef Asri.

ABS

Best-of-breed network

Zach Lewy, founder and group cio of Arrow Global Group, answers SCI's questions

Q: How and when did Arrow Global Group become involved in the non-performing loan market?
A: Arrow Global was established in 2005 as the European principal investment arm of Sallie Mae and was tasked with investing in distressed assets across the region. It was apparent that there were amazing opportunities for local champions to be successful, given that they remained relevant in financial services. In contrast, in the US for example, there are many national champions in each industry.

Because Arrow had its own balance sheet, we focused on small deals where local champions had a strong competitive advantage. The idea was – and still is – to execute a high volume of small deals that provide good diversification and unique access. We ended up working with 64 different platforms across Europe and, for around 78% of deals, we’re the only bidder.

In 2013 we went public, listing on the London Stock Exchange. Following on from that, we bought 14 platforms across Ireland, Italy, the Netherlands, Portugal and the UK, and integrated them into a coherent business with €66bn of assets under management.

From 2014, private equity funds began approaching us in the context of co-investment agreements. We were able to create an interesting nexus where private equity funds bought large packages of loans, using Arrow as a sourcing partner. So far, we have executed 647 deals, of which we’ve lost money on only 0.3%, while generating an average return of 18%.

Q: What are the firm’s key areas of focus today?
A: Historically, we have funded everything from our own balance sheet, but the focus now is to move to a capital-light business. The issue with relying on our own balance sheet is that we could either borrow money and grow or not borrow and shrink. This gave rise to a legitimate investor criticism: that it is difficult to grow the business while delevering at the same time.

As such, it made sense to launch our own fund and attract global investors with the opportunity to access a local deal set. We’re sitting as the critical conduit between two trillion Euro markets: the European banking system needs to delever and there is almost a trillion of assets that still need to be divested; on the other side is the alternatives investment market that is awash with cash and looking for yield.  We connect these two markets in a unique way.

We have, so far, raised €1.5bn in under a year from sovereign wealth funds, endowments, family offices, insurers and pension funds. At €1.5bn raised from scalable investors, the fund is large enough to enable us to grow. However, it was a sequential build: we needed a compelling track record and 14 specialised platforms to leverage first.

Q: How does Arrow differentiate itself from its competitors?
A: Our world is split into two: deals that are locally generated and deals that are centrally generated. In the case of locally generated deals, we have over 100 servicing clients, who sometimes want to sell assets to achieve certain objectives – for example, close out non-core lines of business or sell a portfolio of loans in arrears. About 80% of our local deals are originated in this way.

The remainder are assets that are already being serviced by us. If an institution has already outsourced the servicing, for both consistency of customer experience and administrative ease, it’s typically more straightforward to come to an agreement to sell them to us.

The central franchise also allocates capital, as well as manages our relationships with international banks – where it makes more sense to hold the relationship centrally, rather than dealing with each local arm of the bank – and the joint ventures with large funds.

From a business perspective, having such vertical integration is a significant source of differentiation and competitive advantage. An international bank can have a single relationship with a lender, yet efficiently access 14 different platforms across local markets.

However, the challenge then shifts to internal management: there are many different working parts, but our business culture and value chain blend well. For example, in buying 14 companies, it was important to work with ones that wanted to be on this journey with us – to create a best-of-breed network.

For those who did it right, we have all won big: we doubled the size of their business through our relationships. It’s an exercise in appreciating the different parts of the value chain: the whole should be bigger than the sum of its parts and the size of the prize means everyone is keen to work together to achieve.

We’re at the early stages of unlocking economies of scale. We have centres of excellence in various cities – such as IT programming in Lisbon, SPV management in Milan and finance and analytics in Manchester. This is one of the most rewarding elements of the company: the fact that local businesses are now part of a pan-European network.

Q: Which challenges/opportunities do you anticipate in the future?
A: The Covid-19 pandemic has helped and hurt. On one hand, there is a broader understanding of the need to address the European NPL overhang.

Outside of Europe, investors historically didn’t understand the European NPL situation – that stocks have built up over time and that it is an incredibly slow process to work them out. But everyone has realised by now that Covid represents a major dislocation event and we’re already set up to capitalise on this opportunity.

The number of people seeking income today versus this time last year hasn’t changed much, but the sources of income have been radically altered. Bonds are paying zero to negative yields, corporate dividends have been hit and other conventional sources of income – such as commercial real estate – have been badly damaged.

This has created a perfect recipe for substantial yield compression, which – coupled with a vast quantitative easing programme – results in more money seeking income with fewer safe places to find it. As such, secured asset purchases are likely to be supported.

However, on the other hand, some implications of Covid are less obvious. For instance, which governmental and regulatory accommodations will be removed and over what time period remains uncertain.

Clearly whole industries have been decimated in the fallout, while others are undergoing a K-shaped scenario. Foreclosure bans and forbearance are priced in for the moment, but gauging the impact of unwinding government measures is an uncomfortable risk journey. Against this backdrop, we’re dilligencing each situation forensically and remaining thoughtful about which part of the risk spectrum represents good relative value.

Corinne Smith

Structured Finance

AMCO deal completed

Sector developments and company hires

AMCO deal completed
Monte dei Paschi di Siena has completed an innovative €4bn limited-recourse financing in favour of the Italian Ministry of Economy and Finance’s AMCO vehicle, according to the new regulatory provisions introduced by the ‘Milleproroghe Decree’. Under the securitisation, a portfolio of non-performing and unlikely-to-pay exposures will be transferred to AMCO - via the HydraM SPV - as a result of a partial corporate demerger. Zenith Service acts as the SPV’s corporate servicer, calculation agent and representative of the bondholders.

BBC CMBS downgraded
Moody's has downgraded to A3 from A2 the ratings of the class A notes issued by three UK CMBS backed by buildings in which the BBC is the sole tenant, affecting approximately £1.07bn securities. The move reflects the recent downgrade of the UK's government bond rating to Aa3, with a stable outlook, from Aa2 with a negative outlook.

The affected transactions are Juturna (ELoC 16), Pacific Quay Finance and White City Property Finance, which financed sale and leaseback structures involving the BBC and key specialised operational properties located in London and Glasgow. Moody’s notes the BBC’s sensitivity to the UK's sovereign rating and the uncertainty around the upcoming mid-charter review process that will settle the license fee funding level from April 2022.

Structured Finance

Pan-European logistics CMBS prepped

Sector developments and company hires

Pan-European logistics CMBS prepped
Blackstone Real Estate Partners is in the market with a €318.6m single-loan pan-European CMBS. Dubbed Pearl Finance 2020, the transaction is secured by 61 predominantly last-mile logistics assets across Denmark, Finland, France, Germany, Ireland and the Netherlands.

The assets are valued by Cushman & Wakefield at €576.9m, as of 31 July 2020. Portfolio occupancy currently stands at 95% and benefits from a granular rent roll comprising over 350 tenants. The properties are expected to be fully integrated into Mileway, the largest last-mile logistics real estate company in Europe.

The €158.5m class A1 notes are being publicly offered, with IPTs set at three-month Euribor plus 140bp-150bp. Classes A2 through E are preplaced.

Pricing is anticipated as early as 30 October. BNP Paribas, BofA Securities and Societe Generale are arrangers and joint lead managers on the deal.

In other news…

EMEA
Blackstar Capital has appointed Simon Smart as head of credit and special situations and James Paul as portfolio manager. Smart will be responsible for expanding the company’s capabilities in providing innovative structured credit solutions to corporate clients, as well as expanding Blackstar’s capabilities into special situations advisory and financing. He most recently worked at BTG Pactual, having had a diverse career, including developing regulatory capital structures in the reinsurance industry.

Paul will be primarily focused on creating highly structured secured financing solutions for corporate clients operating both within the sport industry and beyond. He joins Blackstar from 23 Capital, where he worked as a credit and portfolio manager for two years. Previously, he held the roles of avp at Credit Suisse and analyst at JPMorgan.

Irish BTL portfolio divested
Permanent TSB is set to sell a €1.2bn (net book value) portfolio of around 3,700 Irish performing buy-to-let mortgage loans to Citi. Following the acquisition, Citi is expected to syndicate the portfolio through a securitisation. Permanent TSB will continue to service the loans for up to six months, after which legal title and servicing will be transferred to Pepper Finance.

‘True lender’ rule finalised
The US OCC has submitted for publication in the Federal Register a final rule to determine when a bank makes a loan and is the ‘true lender’. Under this rule, a bank is the true lender, if - as of the date of origination - is named as the lender in the loan agreement or funds the loan. The rule aims to provide certainty about key aspects of the legal framework that applies to loans made as part of banks’ relationships with third parties.

Structured Finance

UKML shareholder consultation continues

Sector developments and company hires

UKML shareholder consultation continues
The board of UK Mortgages (UKML) has completed the strategic review that it commenced following the withdrawal of proposals by M&G Investment Management (MAGIM) (SCI 14 August). The review has identified two potential options that will provide a clear path to the company’s objectives of enhanced liquidity, as well as a narrowing and removal of the discount at which UKML shares trade versus UKML’s NAV. The options are to either: continue operating as a publicly traded investment company under a revised mandate offering increased focus on enhancing liquidity and returns; or to proceed with an orderly wind-down of the company and returns of capital to its shareholders.

The board intends to embark on a further round of consultation with shareholders with a view to ascertaining their appetite for each of those two options. Following that consultation, it intends to make a firm recommendation and convene an EGM before year-end to vote on the proposals.

In other news…

Global
Latham & Watkins has promoted 33 associates to the partnership and another 33 to the role of counsel, effective from 1 January 2021. Among those promoted to counsel are Michael Hardy in Hong Kong and Brett Ackerman in Washington, DC. Both lawyers are members of the firm’s corporate department and their practices cover a range of structured finance and derivatives transactions.

Mid-market fund launched
BMO Financial Group has created a US middle market co-mingled private fund structure, specifically targeting European institutional investors. The BMO US Mid-Market Loan fund – which targets a yield of Libor plus 4.75% - offers the opportunity to invest in loans that are sourced, underwritten and managed by BMO. Every loan in the fund is matched on the BMO balance sheet, offering investors a co-investment opportunity with aligned incentives.

North America
NXT Capital chairman and ceo Robert Radway is set to retire towards the end of 2021, following more than 11 years of service at the firm and over 30 years in the industry. John Finnerty, head of the corporate finance group for NXT Capital, has been named president of the firm effective from 1 January 2021, at which time Radway will no longer serve as ceo, but will continue as chairman and member of the NXT Capital investment committees until his retirement. As part of this transition, NXT Capital’s real estate lending and investing activities - led by real estate group co-heads Craig Andreen and Kevin Rostowsky - will merge with NXT parent ORIX USA’s broader real estate lending and investing platform.