Contents

Structured Finance

SCI Start the Week - 2 November

A review of securitisation activity over the past seven days

Last week's stories
Best-of-breed network
Arrow Global Group answers SCI's questions
Diverse portfolio
Private equity CDO completed
Election focus
US CLOs hold up for now
Measurement uncertainty
Inclusion of climate exposures in ICAAPs explored
Mind the gap
CLO equity price and NAV data examined
Risk transfer boost
US CRT market picks up

Other deal-related news

• 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' (SCI 26 October).
• 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 (SCI 26 October).
• Blackstone Real Estate Partners is in the market with a €318.6m single-loan pan-European CMBS (SCI 28 October).
• 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 (SCI 28 October).
• 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' (SCI 28 October).
• The board of UK Mortgages has completed the strategic review that it commenced following the withdrawal of proposals by M&G Investment Management (SCI 30 October).

Data

BWIC volume

Secondary market commentary from SCI PriceABS
29 October 2020
USD CLO AAA
18 covers today, mostly mezz with some softening seen especially in BBBs as the US LLI has dropped 75bps since last Friday – 1 x AAA, 1 x AA, 7 x BBB, 9 x BB. The AAA trade BMILK 2018-1A A1 (GSO) covers 142dm / 4.4y WAL (2023 RP profile) at the tight end of 140dm-175dm context this week – the bond has a strong MVOC 154.6, low Sub80 4.1, low ADR 0.5 and healthy cushions from a benchmark manager.
USD CLO Mezz/Equity
The AA trade is ICG 2014-2X BRR (ICG) 220dm / 5.5y WAL (2023 RP profile) which trades towards the wider end of 195dm-230dm context this week – Sub80 assets is high 9.0, WARF 3495, CCC high 13.1, ADR is elevated 1.4 and IDT cushion is negative.
BBBs trade 477dm-520dm (2022-2024 RP profiles) wide of early-mid 400s dm context recently. The MVOCs on todays bonds are 108-109 so no material dispersion and there are no significantly impaired bonds so the effect of the softening has impacted BBBs by around 70bps.
BBs trade 642dm-1084dm (2018-2023 RP profiles) with 700dm-930dm context this week in these profiles, there are 2 bonds outside of this context KKR 17 E (KKR) and PARL 2018-1A D (DoubleLine) that have cuspier MVOC 100-102, higher WARFs 3400 area and cuspy IDT cushions and the fact that DoubleLine's bond props up the wide end (1084dm / 7.6y WAL) being a weaker manager than its peers.
EUR AAA CLO
There are 5 AAA trades today. AAA spreads definitely wider – about 9bps wider across the curve. Range is from 160dm to 170dm apart from Aurium 6 which priced to call because of its high stated margin (190bps). It traded at 100.46 which optically is 233dm to maturity.
EUR MEZZ/EQUITY CLO
It's a similar story with AAs. The curve is 16bps wider with spreads now between 225dm and 240dm.
The only single A trade, CVC Cordatus 10, traded at 308dm and at the BB level CVC Cordatus 9 traded at 760dm.
DM, Yield & WAL - proprietary SCI data points complement Cover prices
PriceABS Data now includes DM/Yield/WAL for all CLO trading and Euro ABS/RMBS.

Capital Relief Trades

Risk transfer round-up - 2 November

CRT sector developments and deal news

BDK has priced its seventh full-stack capital relief trade from the Red & Black Germany programme. The transaction is broadly in line with R&B Six, but changes have been made to the composition of the portfolio and payment triggers (SCI 23 October).

The €935m class A notes pay one-month Euribor plus 70bp, the €25m class Bs pay one-month Euribor plus 120bp, the €25m class Cs pay one-month Euribor plus 195bp, the €10m class Ds pay one-month Euribor plus 270bp and the €5m retained class E tranche pays an undisclosed fixed price. Societe Generale acted as the arranger in the transaction.

Capital Relief Trades

Storming STACR

Freddie Mac shrugs off the lockdown effect to go to town in 3Q and since

Freddie Mac's new CRT issuance credit-protected more unpaid principal mortgage balance at a higher maximum coverage in 3Q 2020 than in any other quarter since it began reporting these numbers, according to Mike Reynolds, vice president of single family CRT at the GSE.

It is striking that this should have occurred in a quarter when market uncertainty occasioned by Covid 19 continued to dog the market.

Freddie Mac executed $5.4bn of issuance via STACR and ACIS trades. This, in addition to $1bn of senior subordinated securitization deals and some lender risk sharing transactions, transferred credit risk on a total of $167.3bn of single family mortgages in the period.

The GSE re-opened the CRT market after a three-month hiatus due to Covid 19 with STACR 2020-DNA3 closed on July 8, and since then the pace has been brisk since with another four STACR transactions.

“We basically took the business that we didn’t print in 2Q plus the business we were planning to print in 3Q anyway and printed it all in Q3. We did two quarters in one quarter so it’s been a very busy time,” says Reynolds.

Nor is 3Q 2020 a flash in the pan; the foreseeable future looks hectic for STACR and ACIS as well. Freddie Mac has been acquiring new inventory at record levels in 2020, often through refinancing of existing mortgages due to record low rates, and excess exposure will have to be covered by CRT schemes.

“Our plan is to keep pace with these record-breaking acquisition volumes and, looking ahead, 1Q 2021 has a really good chance of breaking our record for 3Q 2020 given all the volume Freddie Mac has been acquiring in 2020,” says Reynolds.

As a result of the STACR and ACIS on-the-run transactions in 3Q, Freddie transferred between 79% (in the high LTV HQA series notes) and 85% (in the low LTV DNA series notes) of the credit risk on the underlying reference pools, thus helping to reduce the capital required under the Conservatorship Capital Framework (CCF).

Serving director of the Federal Housing Finance Authority (FHFA) Mark Calabria intends to ready the GSEs for exit from conservatorship, although whether there will be any change to these intentions, and indeed to the leadership of the FHFA as a result of Tuesday’s election, remains to be seen.

Another landmark event during 3Q was STACR 2020-HQA4, the last STACR deal to use Libor as a reference rate. The GSE has now moved to alternative reference benchmarks as Libor abdicates from the international financial markets after its long reign, and two weeks ago printed STACR DNA5, the first single family SOFR-based CRT note.

The $1.086bn note comprised four tranches. The M-1 yielded 30-day average SOFR plus 130bp, the M-2 yielded 30-day average SOFR plus 280bp, the B-1 yielded 30-day average SOFR plus 480bp and the B-2 yielded 30-day average plus 1.15%.

Freddie Mac has been happy with the response afforded the deals it has launched since the lockdown, despite the clouds that continue to darken the landscape. “Several of our deals were oversubscribed and upsized, suggesting investors were ready for the return of new issuance in this asset class,” adds Reynolds.

During this period, Fannie Mae, the second GSE, has taken a voluntary leave of absence from the CRT markets. Sources close to Fannie suggest that it will not return until there is greater clarity surrounding the import and impact of the re-proposed capital rules released at the end of May.

By the end of 3Q, 44% of the Freddie Mac single family guarantee programme was covered by CRT deals. Since its inception in 2013, the CRT mechanism has transferred $64bn in credit risk on $1.7trn of mortgages.

Simon Boughey

Capital Relief Trades

Ramping up

Synthetic RMBS prepped

Lloyds is marketing the third synthetic RMBS from the Syon programme. Dubbed Syon Securities 2020-2, the latest deal differs from previous issuances from the programme due to the introduction of a ramp-up period. The shift from a static to a dynamic pool should enable the lender to front-book and recycle its freed-up origination capacity.

Rated by Fitch and KBRA, Syon Securities 2020-2 will consist of class A, B and Z CLNs. According to Sara Mariani, associate director at Fitch: “The main difference with previous Syon transactions is that the pool isn’t static, since there’s a ramp-up period equal to 15 months. One eligibility criterion of the ramp-up period is the 90% LTV cap, which applies for every new loan added to the portfolio, but the other conditions are wider in scope.”

The novel feature allows Lloyds to front book and recycle its freed-up origination capacity. The primary motivation behind the Syon programme and most synthetic RMBS deals is the management of internal risk concentration limits rather than capital relief, given the already low risk weights for residential mortgages (SCI 25 July 2019).

According to the terms of the ramp-up period, loans may be added to the portfolio for up to 70% of total issuance. The ramp-up period ceases if the percentage of loans greater than 90 days in arrears exceeds 3% of the pool.

At the end of the period, any unused principal capacity will be paid on a 100% pro-rata basis to noteholders of classes senior to Z. Hence, the relative size of each mortgage-backed note is preserved.

The risk transfer trade is the third synthetic securitisation of owner-occupied residential mortgage loans originated by Bank of Scotland under the Halifax brand and Lloyds secured over properties located in England, Wales and Scotland. The deal includes loans with LTVs higher than 85% and a high proportion of first-time buyers (70.1%).

The predominance of first-time borrowers explains why lending terms are longer than in a typical UK RMBS. Indeed, 49.1% of loans in the static pool were granted for an original loan term longer than 30 years, with 12% featuring a term longer than 35 years.

Fixed-rate loans account for 99.1% of the pool, all of which revert to Halifax’s Homeowner SVR on expiry of the fixed-rate period. The rest of the pool pays a floating interest rate at a margin above the Bank of England base rate.

Loan reversions are concentrated in 2022, which reflects the predominance of the two-year fixed product in this pool. The fixed-rate loans are not subject to any hedging arrangements, since they are not dependent on the interest receipts from the pool to make their coupon payments, but on the provisions of the financial guarantee.

The marketing of the newest Syon capital relief trade follows a decision by Fitch in September to remove the programme’s first two deals from rating watch negative in line with a recovery in UK house prices. The rating agency placed them there in April, following the Coronavirus outbreak (SCI 25 September).

Nevertheless, economic uncertainty due to the pandemic persists, which is something that Fitch has accounted for. Duncan Paxman, senior director at Fitch, concludes: “Fitch’s sustainable price discount assumptions for UK residential property are 21.1% at the national level, with the stress increased as you move up the rating scale from single-B. Additionally, our modelling is built to account for variation on a regional and property type basis. High LTVs do not necessarily change the risk of the underlying properties.”

Stelios Papadopoulos

NPLs

Finish line

Galaxy nears completion

Alpha Bank has received two binding offers for its Galaxy project (SCI 6 August). The transaction will involve a non-performing loan securitisation and the sale of the bank’s loan servicing platform Cepal.

Several sources note that that the binding offers come from PIMCO and Davidson Kempner, as momentum in the Greek NPL ABS market continues to gather pace despite the coronavirus crisis (SCI 24 April). According to one source: “Once you get to the binding offers, investors can get more information, so one investor pulled out of the deal because it’s a large and complicated trade with lots of properties. The due diligence won’t be easy and Covid will complicate valuations. However, PIMCO and Davidson Kempner are large investors with expertise.”

PIMCO opened the Greek NPL ABS market in June 2019 with its involvement in Eurobank’s landmark project Pillar, the first rated NPL securitisation in Greece (SCI 31 May 2019).

The binding offers come on the back of the finalisation of the first HAPS deal by Eurobank. The bank’s €7.5bn Project Cairo closed in June and was sealed alongside Project Europe, the sale of the bulk of its servicing unit to doValue (SCI 8 June).

More recently Piraeus signed an agreement for its own HAPS NPL ABS, dubbed Project Phoenix, with Intrum in September and is readying another one called Vega (SCI 4 September).

Nevertheless, despite the strong pipeline, investors will have to contemplate a few challenges going forward as lockdowns return to Europe. In Greece, Covid has already pushed back several NPL restructurings, given the uncertainties across a number of sectors, such as tourism, and raised practical impediments to deals (SCI 3 June).

Stelios Papadopoulos

Structured Finance

ESG philosophy

Andrew Lennox, senior portfolio manager at the international business of Federated Hermes, answers SCI's questions

Q: How and when did the international business of Federated Hermes become involved in the securitisation market?
A: The Federated Hermes European structured credit team consists of senior portfolio manager Stephane Michel, me and two analysts covering the universe of ABS and CLOs. I arrived at the firm 2.5 years ago.

One of the attractions of moving to work at Federated Hermes was its strong track record in ESG, having been at the forefront of sustainable investing for over 30 years. I had a blank canvas with which to begin building a framework and philosophy for structured credit at the firm; that was specific to structured credit but leveraging the firm’s existing internal ESG resources.

The structured credit market has lagged the progress made in other sectors in terms of adopting ESG principles. Beyond looking at the explicit environmental elements of green ABS, for instance, there has been little emphasis on assessing the social and governance factors within securitisation. We’re looking to move this forward and make real progress at Federated Hermes.

Q: What are the firm’s key areas of focus today?
A: To consider ESG factors in connection with securitisations does not require a total rethink of how to perform credit analysis; rather, the analysis should be viewed through an ESG lens. ESG is core to how we analyse structured credit and its performance.

We score everything we invest in from an environmental, social and governance perspective to come up with a weighted average score that we use to differentiate between deals. Not only can we draw out ESG factors when analysing the underlying assets backing securitisations, we can also consider ESG factors when analysing how those assets are serviced as well as the structures themselves. For example, from a governance perspective, investors in securitisation structures should assess whether servicers are being paid appropriately, as well as the risk mitigants and noteholder protections in a deal.

It’s not enough to recognise that lending to consumers has a social aspect to it: the quality of that lending also has to be considered. This is where social and governance factors start to interconnect – good governance in origination and underwriting practices can support social factors as well. As such, the sustainability of the lending – assessing whether borrowers can afford to pay, including in stressed scenarios – needs to be analysed too.

Over time, performance data will show whether a lender provides financing on a sustainable basis. High delinquencies and defaults could suggest a lender has been underwriting unsuitable products, financing borrowers with unsuitable creditworthiness, or both.

As an investor, it is our responsibility to analyse the arrears, collection, debt management and forbearance policies of lenders. There is a social imperative to allow a borrower to remain in their home, for example, even when they have ceased to service the debt. Nevertheless, this also has to be balanced against what is financially prudent.

From our perspective, the governance weighting has come to the fore this year, given the current environment and widespread Covid-induced payment holidays.

Q: How does the firm differentiate itself from its competitors?
A: Marrying an ESG framework with sound credit analysis results in strong investment processes. If an investment scores highly from an ESG perspective, it is likely to score highly from a credit perspective too.

Q: Which challenges/opportunities for you anticipate in the future?
A: To further the adoption of ESG principles across the securitisation market, better data collection is required, as well as quantifiable proof that deals with higher ESG scores lead to improved financial performance. In turn, this will not only encourage the expansion of ESG products, but also ESG investing in the asset class.

The industry is aware that more needs to be done and there are significant differences between one lender and another in terms of ESG adoption. Some adhere to ESG policies; some take energy efficiency into account in their lending processes; some release sustainability reports; and others don’t pursue any of these activities.

As an investment house, we’re pushing for more ESG disclosure across the board. We’re working with a group of lenders under the auspices of our EOS stewardship team. With £1.1trn assets under advisory, as at end-June, the idea is to act as an engagement platform that leverages the team’s expertise to encourage sustainable lending practices for the long term.

More broadly, the bond market needs to tackle the issue of greenwashing. One advantage of securitisation is that the collateral in an SPV can define whether the bonds can definitively be classified as ‘green’ or ‘not green’; in other words, it is clear that a securitisation is truly ‘green’ because the use of proceeds is clear. Consequently, the industry has the perfect opportunity to finance green or socially beneficial projects.

Corinne Smith

Structured Finance

Strategic partnership expanded

Sector developments and company hires

Strategic partnership expanded
Pretium has entered into an expanded strategic partnership with American Equity Investment Life Insurance Company (AEL), building upon AEL's prior investment commitments with the firm and increasing total commitments to US$1bn, with pre-agreed terms for expansion to US$2.25bn. The investments will initially be primarily deployed into attractive residential credit assets sourced and managed by Pretium.

In addition, AEL has invested US$100m in the growth of Pretium's management platform. The firm intends to use the proceeds to expand its growing franchise in real estate, residential credit and corporate and structured credit.

In other news…

EMEA
Alantra has appointed Francesco Dissera as md, to lead its new securitisation activity, alongside James Fadel’s secured financing activities. Dissera joins the firm from Banco Santander, where he led its Continental Europe securitisation business. Prior to this role, he was head of structuring and advisory at StormHarbour Securities, and has also worked at UBS and JPMorgan. Dissera and Fadel will lead a London-based team of more than 15 senior professionals dedicated to advising on structured finance transactions across Europe.

North America
DFG Investment Advisers has recruited Rehan Virani as ceo, overseeing management of the firm, spearheading strategic fundraising initiatives and developing tailored investment solutions that align investors’ interests with DFG’s core competencies in structured and corporate credit. Virani most recently served as head of business development for private debt for the Americas and Asia at Partners Group and before that worked at Bardin Hill Investment Partners, Napier Park Global Capital and Credit Suisse. Additionally, DFG is expanding its leadership team with the promotions of Kashyap Arora to co-cio, Selma Cilka to co-chief risk officer and Alex Nerguizian to co-head of business development.

Flat Rock Global has hired Laurent Rimmen as md within its capital markets team, specialising in marketing and client relations with institutional investors, registered investment advisors (RIAs) and family offices. Rimmen was previously an md at DFG Investment Advisers, responsible for business development, marketing and client relationships. Before that, he worked at Hybrid Financial, Barclays, Deutsche Bank and Société Générale. 

Pemberton has unveiled the latest step in its strategic expansion into the US and Canadian markets, with the appointment of Scott Hamilton to the newly created role of md for North American business development. Hamilton will lead institutional client coverage and consultant relations for Pemberton’s European private debt strategies in the region. He brings 19 years of experience of client coverage and structuring solutions across a range of alternative credit opportunities, most recently as md, institutional distribution at Alcentra. He previously held senior roles at Bank of New York Mellon and Thomas Weisel Asset Management.

Structured Finance

CLO library launched

Sector developments and company hires

CLO library launched
Semeris has today launched a document library called Semeris Docs for CLOs. The service initially covers European CLO documents and summaries on over 75 transactions, which will continue to grow and see a US CLO library launched in 1Q21.

Semeris Docs is built on NLP (natural language processing) and the latest AI techniques, combined with human curation, with the aim of providing accurate summaries and interactive versions of legal documentation in the capital markets. To maintain transparency, the deal summaries include an instant direct connection between analysis and source documents.

Semeris Docs for CLOs is supported by feedback from over 20 global market participants across managers, investors, arrangers, lawyers and trustees. The service aims to ease the review of documents and help users navigate legal language through summaries of the key terms, an enhanced document viewer aware of legal terms and features such as tracking synonyms of defined terms across deals.

Semeris was founded in April 2020 by CLO market veteran Peter Jasko and fintech entrepreneur Sam Daroczy. With an international team of 15 software developers, curators, sales and marketing specialists, Semeris is privately funded from the founders’ three previous fintech exits.

Mid-market investment firm formed
Bennett Goodman and Avi Kalichstein have established Hunter Point Capital (HPC), an independent investment firm seeking minority stakes in middle-market alternative asset managers. As part of the launch, HPC has formed a strategic partnership with a group of leading global investment entities associated with Jacob Rothschild.

Headquartered in New York, HPC is targeting managers in private equity, credit, real estate and infrastructure across North America, Europe and Asia. Goodman will serve as executive chairman and Kalichstein as ceo of the firm. The former co-founded and built GSO Capital Partners, while the latter was most recently a managing principal at Easterly Partners Group.

Joining HPC as president is Michael Arpey, who most recently served as global head of investor relations and management committee member at The Carlyle Group. Other senior executive management team members include: Rex Chung, head of capital formation (formerly head of client & partner group in Asia at KKR); Debra Bricker, cfo (formerly cfo of Harvest Partners); and Mariska Richards, general counsel (who will join HPC in January 2021 from Kirkland & Ellis, where she is a partner).

North America
Brian Herr has joined Exos Financial as md, based in New York. He was previously cio and co-head of structured credit and asset finance at Medalist Partners and before that worked at Candlewood Investment Group.

Structured Finance

Hertz in line with settlement plan

Sector developments and company hires

Hertz in line with settlement plan
Fitch reports that Hertz had disposed of nearly 170,000 non-program vehicles (NPVs) over the past five months, which is in line with its bankruptcy settlement plan. These dispositions amounted to approximately US$3.3bn of proceeds, with a combined net book value (NBV) of US$2.8bn. Per the Hertz Vehicle Financing II liquidation event, these sales proceeds have primarily paid down the outstanding ABS notes sequentially, first to the class A notes until they are paid off and then to subordinate notes.

Approximately 60% of outstanding class A notes have thus far been paid off to date. The class A ABS note balances total US$1.69bn (as of the October 2020 servicing report), accounting for 26.3% of the remaining HVF II note balance, and must be paid concurrently with the outstanding HVF II 2013-A variable funding notes (VFNs) class A US$1.76bn balance (representing 27.4% of HVF II).

Interest payments on the ABS notes continue to be funded by draws on letters of credit (LOC) provided by Goldman Sachs. The LOCs have funded ABS interest payments since Hertz filed for bankruptcy in May and are currently approximately 45% drawn. Fitch notes that they should continue to provide for interest payments through the end of 2020.

Fitch has reviewed and maintained its rating watch negative on all ratings on the outstanding rental car ABS issued by HVF II. The agency believes that Hertz still faces execution risks due to ongoing coronavirus impact on the travel and rental car sectors, as well as a challenging operating environment as it continues to operate in bankruptcy.

Mid-market JV formed
TCG BDC has formed a joint venture with an investment vehicle managed by Cliffwater to create Middle Market Credit Fund II (MMCF II). The transaction is designed to position TCG BDC to better capitalise on compelling senior-loan opportunities that have emerged amid the recent market volatility.

MMCF II initially consists of a US$250m portfolio in investment principal comprised predominantly of senior secured loans contributed from TCG BDC. While the equity ownership will be approximately 84% for TCG BDC and 16% for Cliffwater, each of TCG BDC and Cliffwater will have equal voting rights on the board, including equal voting discretion over any potential future investment activities of MMCF II. 

UK hotel CMBS hit
DBRS Morningstar has downgraded the ratings of UK hotel CMBS Ribbon Finance 2018, Magenta 2020 and Helios (ELoC 37), with the exception of the class A notes issued by Ribbon Finance, which it affirmed at triple-A. The agency has also assigned a negative trend to the ratings because the underlying collateral, and the UK hotel sector, continues to face performance challenges associated with Covid-19. Indeed, as England enters into a second national lockdown and tighter restrictions are enforced across the UK, it anticipates that hotel revenues will decrease further, pushing back any sector recovery.

Regarding Ribbon Finance, the borrower and facility agent have agreed to certain waivers, consents and amendments under the senior finance documents. Of note, the sponsor (the Dayan family) deposited £28m into the equity cure account, in exchange for a waiver of any senior loan EOD for a period up to the senior loan payment date falling on 13 July 2021.

Regarding the Magenta deal, CBRE has entered into an amendment and waiver letter with the senior loan facility agent, the mezzanine loan facility agent, senior holdco and mezzanine holdco with a view to allowing the senior obligors to manage their liquidity and their business in the medium term without breaching their obligations under the senior loan finance documents (SCI 18 June).

Finally, the Helios cash trap covenant was reportedly triggered in August, leaving almost no headroom for the debt yield default covenant (SCI 14 April). The borrowers and the servicer have not agreed to any amendment or waiver of senior financial obligations so far, according to DBRS Morningstar.