Contents

ABS

Utility ABS returns

Innovative minibond deal gains wider reception

A consortium of six Italian utility companies has closed its third securitisation backed by minibonds secured by water service assets in the Veneto region of the country. The EIB has acted as anchor investor in all of the programme’s issuances, but the latest transaction saw a broader investor base participate.

The €248m Viveracqua Hydrobond 2020 operation involved the six companies each issuing three minibonds with different maturities of 24, 17 and 14 years, which were subscribed to by the SPV, which holds the bonds in three segments according to maturity. The SPV, in turn, financed the subscription of the bonds by issuing three series of ABS. These securities benefit from credit support, provided in mutual cash form by the six utilities, in proportion to the amount issued by each.

The EIB invested in the 24-year bonds issued by the SPV, subscribing to 50% of the total financed for €124m. Kommunalkredit Austria was the sole investor in the 17-year securities for €74m and Cassa Depositi e Prestiti invested €30m in the short-dated securities. Other institutional investors that participated in the short-dated segment for a further €20m were Volksbank, Banco di Desio e della Brianza, Fondo Pensione - Solidarity Veneto and Banca Valsabbina.

The consortium comprises: Acquevenete, Alto Trevigiano Servizi, Azienda Gardesana Servizi, Livenza Tagliamento Acque, Piave Servizi and Viacqua. The proceeds of the operation will be used to support infrastructure investments in the areas in which the six issuing companies operate, serving more than 320 municipalities and almost 2.3 million inhabitants, thanks to an aqueduct network that is close to 27,000 kilometers. Overall, infrastructure investments of approximately €700m are consequently planned across the entire spectrum of the region’s integrated water service over the next four years.

Banca Finint acted as arranger on the transaction and will also act in various roles as agent of the SPV, including servicer, while Sinloc will cover the role of monitoring agent. Banca Finint coordinated the consortium’s previous two securitisations: the €150m Viveracqua Hydrobond 1 from 2014 translated into €341.4m investments made in the region’s integrated water systems (SCI 24 July 2014), while the €77m Viveracqua Hydrobond 2 operation from 2016 resulted in €197.4m investments.

Corinne Smith

Structured Finance

SCI Start the Week - 9 November

Last week's stories
ESG philosophy
Federated Hermes answers SCI's questions
Finish line
Galaxy nears completion
Ramping up
Synthetic RMBS prepped
Storming STACR
Freddie Mac shrugs off the lockdown effect to go to town in 3Q and since
Synthetic CMBS eyed
Pension funds target CRE CRTs

Other deal-related news

• Semeris has today launched a document library called Semeris Docs for CLOs (SCI 4 November).
• Fitch reports that Hertz had disposed of nearly 170,000 non-program vehicles over the past five months, which is in line with its bankruptcy settlement plan (SCI 6 November).
• 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 (SCI 6 November).

Data

BWIC volume

Secondary market commentary from SCI PriceABS
6 November 2020
USD CLO AAA
13 covers to end off this week – 4 x AAA, 1 x AA, 1 x A, 1 x BBB and 6 x BB. AAAs trade in a narrow dispersion 123dm-136dm with levels firming up very slightly towards the 120dm mark at this end of the cap stack in high quality names like Blackrock and Neuberger. The US LLI has ticked up 108bps on the week and is now less than 50bps off the 2020 high.
USD CLO Mezz/Equity
The AA bond that trades today is CBAM's CBAM 2017-1A B 202dm / 4.8y WAL (2022 RP profile) which is at the tight end of 200dm-240dm context – this bond has clean metrics.
The single-A is a rare short dated bond HLA 2014-1A CR (Bardin Hill) 336dm / 1.6y WAL (2018 RP profile), this is an impaired deal which is deleveraging (CCC 19.5, Sub80 35.4, WARF 3830, ADR 5.1 and -18 IDT cushion) with MV shortfalls on the 2nd and 3rd loss tranches, this tranche has coverage given it's more senior in the paydown schedule 164.8 MVOC.
PIPK 2020-6A D from Partners Group (BBB) covers 449dm / 5.1y WAL (2021 RP profile) tight to recent 510dm-570dm context, this bond is of high quality and is a 3.0 post covid issue so has plenty of cushion (IDT cushion 5.4%) and a defensive portfolio (WARF 2625, WA collateral px 98.4, MVOC 116.5) so explains the tighter level.
BBs trade 669dm-964dm across numerous profiles which is not dissimilar to recent activity at this rating level. At the tight end is GoldenTree's GLM 2019-4A E 669dm / 7.8y WAL (2024 RP profile) which is tight to 750dm-850dm recent context (the deal is performing well – Sub80 1.5, CCC 6.6, WARF 3045, WA collateral px 96.5, MVOC 104.8), at the wide end is Alcentra's SHACK 2017-11A E 964dm / 7.3y WAL (2022 RP profile) with a cuspy MVOC 100.6, high CCC 11.2, higher WARF 3365 and cuspy IDT cushion 0.97).
EUR AAA CLO
There are 3 x AAA trades today. They have traded between 150dm and 160dm. This is about 4bps tighter on the AAA curve.
EUR MEZZ/EQUITY CLO
The Richmond Park AA traded at 223dm which is also about 5bps tighter than we had predicted.
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 - 9 November

CRT sector developments and deal news

Santander is believed to be readying a synthetic securitisation of UK auto loans, dubbed Project Spitfire. Meanwhile, Societe Generale is rumoured to be prepping two capital relief trades backed by corporate and SME loans. All three transactions are expected to close in 4Q20.  

Capital Relief Trades

Morgan motors

JP Morgan puts its foot on the gas in CRT highway

The CRT transaction derived from JP Morgan Chase’s corporate loan book reported on by SCI in September is set to close in the very near future, say well-placed sources.

“The deal is imminent and has been pre-placed with investors for some time now. I expect this will be the start of a new programme of corporate deals,” says one.

It is thought that PGGM, the €217bn Dutch asset manager is one of the only investors in the trade, and may indeed be the only investor.

Since it re-commenced operations in the CRT market a year ago, JP Morgan has concentrated on risk associated with mortgages and auto loans, but this would be its first attempt to offset corporate loan risk. It seems unlikely to be the last, however.

JP Morgan declined to comment.

At the same time, JP Morgan is also set to close another auto loan CLN/CRT deal following its first auto loan securitization for 14 years which closed in September. The new transaction, dubbed Chase Auto Credit Linked Notes Series 2020-2, is very similar to the earlier trade.

“The two deals are essentially identical. Only the reference pools are different, and even the pools themselves are very similar,” says Brian Coffey, a director of Fitch Ratings in New York.

On this occasion, the reference pool consists of a portfolio of prime retail auto loans comprising 85,921 obligations with a notional principal of $2.014bn.

There is no use of an SPV and the collateral will remain on the balance sheet of the bank as unencumbered assets. The issue transfers credit risk to the noteholders through the use of a hypothetical tranched credit default swap, so that, in effect, the noteholder sells credit protection to the bank on the designated assets. In so doing, it absorbs credit exposure to the loans.

“The deal is structured so that the auto loans are referenced but there is no actual securitization of them. The payments come from JPMCB, not from the payments on the auto loans. It is a unique structure in the auto loan space.” says Coffey.

Both interest and principal payments are unsecured obligations of JP Morgan Chase. This feature underscores the fact that less well-rated US banks would find it difficult to follow JP Morgan - rated Aa3 by Moody’s, AA by Fitch and A+ by S&P - down this particular path.

Nonetheless, the appearance of JP Morgan in this market once again in 2020 is powerful evidence for the proposition that the US CRT sector is in take-off phase.

“This is promising for the CRT market. It certainly fits in with the idea that we’re going to see a more active CRT market,” says David Felsenthal, a partner at Clifford Chance in New York. Clifford Chance is one of the leading - perhaps the leading - law practice for issuers in the CRT market.

The auto CLNs comprises six classes, all of which carry a final legal maturity of 25 February 2028. The $1.762bn A certificates, carrying a 12.50% credit enhancement and by far the largest slice of the deal, are retained by the issuer and not rated.

The largest of the remaining six tranches is the B class, for $157.63m, with a 4.67% CE, rated AA. In addition, there is a $22.16m A-rated C tranche, with a 3.57% CE, a $22.16m BBB-rated D tranche with a 2.48% CE, a $11.08m BB-rated E tranche with a 1.93% CE, a $7.76m B-rated F-tranche with a 1.54% CE and an unrated $31.02m R-tranche with a 0% CE.

So, from a total reference pool of $2.014bn, only $251.81m ends up in the hands of investors.

Fitch notes in its pre-sale report on the deal that the collateral backing the deal is strong prime credit quality. It has a weighted average (WA) FICO score of 772, and scores above 750 total 63.3%. The WA seasoning is 18.3 months and pool is deemed to have strong brand, model and geographic distribution.

Simon Boughey

Capital Relief Trades

Revised stance

Parliament backtracks on structural features

The European Parliament’s Economic and Monetary Affairs Committee (ECON) has approved the inclusion of time calls and pro-rata amortisation for STS synthetic securitisations, as part of a review of the European Commission’s ‘quick fix’ proposals (SCI 31 July). The committee had initially suggested an exclusion of these features from the final framework, but revised its stance last month amid a market backlash (SCI 15 October).

The European Commission initiated its quick fix proposals in July, which consist of two legislative acts pertaining to amendments to the Securitisation Regulation and the CRR, both of which are critical for introducing an STS label for synthetic securitisations. After a review of the Commission’s motion last month, the European Parliament initially suggested an exclusion of time calls and pro-rata amortisation from STS synthetic securitisations in line with UK significant risk transfer regulations.

However, it eventually retracted from that stance amid a market backlash. Indeed, from an issuer perspective, both structural features are crucial for the efficiency of significant risk transfer transactions. Time calls protect issuers from long and costly amortisation periods, while pro-rata amortisation keeps the cost of protection low over time.

ECON’s final draft permits time calls under certain conditions. Under its proposals, the call options should not be structured in a manner that protects investors from losses. Hence, “originators shall notify competent authorities how this requirement is fulfilled, including a justification of the use of the time call and a plausible account showing that the reason to exercise the call is not a deterioration in the quality of the underlying assets.”

Similarly, pro-rata amortisation is allowed, but with conditions attached. In particular, the final draft states that transactions with pro-rata amortisation should be accompanied by clearly specified triggers which can switch the amortisation structure from pro-rata to sequential, when contractual conditions pertaining to the performance of the deal allow this.

The document points to several triggers, such as thresholds of cumulative credit losses as a percentage of lifetime expected losses, thresholds of cumulative non-matured defaults as a percentage of the nominal amount  of  a securitisation, minimum levels for the weighted average credit quality of the portfolio, maximum levels of concentration for high credit risk (PD) buckets and minimum levels of portfolio granularity. Nevertheless, it is highly unlikely that banks will object to any of these conditions, given that they are standard market practice.

Looking ahead, trilogue negotiations between the European Parliament, Council and Commission will now follow and a final compromise is expected by December. Well-placed sources expect a much shorter trilogue compared to 2016, when the Securitisation Regulation was being negotiated, given acceptance of the broader framework and a willingness to hammer out a deal by year-end.

Stelios Papadopoulos

Capital Relief Trades

Risk transfer round-up - 11 November

CRT sector developments and deal news

Piraeus Bank is believed to be readying its first synthetic securitisation. The transaction would be the first capital relief trade to come out of Greece.

Meanwhile, JPMorgan is rumoured to be prepping a large US corporate capital relief trade with PGGM.

CLOs

CLO resurgence?

Primary spike contingent on sustained positivity

The US CLO market’s presidential election lull continued into this week ahead of yesterday’s holiday, despite the rally in equity and broader credit, with no new deals priced since 2 November. However, issuance could now take-off if a variety of factors align and positive sentiment can be sustained.

“The ferocity of the broad market rally has taken everyone by surprise,” says one US CLO investor. “But while it’s good everything is going up, it makes the CLO arb more difficult, so we’re waiting for loan issuance to spur new deals.”

He continues: “Tons of high yield issuance was announced at the beginning of this week, but it’s still wait and see in CLOs until Veteran’s Day is fully behind us. If what I’m hearing is correct, that’s going to be changing pretty quickly now, with plenty of new loans being prepped.”

CLO investors are readying themselves too. “The market was very quiet in the run-up to the election and for the remainder of last week,” the investor says. “We, like many others, spent that time focusing on our current portfolio and re-underwriting managers – who has done well in the crisis, who hasn’t, who we are going to favour in future, and so on? Now it’s all about getting money back to work.”

Indeed, there are significant cash reserves globally already earmarked for CLOs or – if insufficient buying opportunities materialise in the sector – unlevered funds, according to the investor. “Sure, some of the big Japanese investors are expected to hang back for a while. But there are plenty of other investors who want to make the arb work, as well as managers who want to do deals before year-end – which combined with positive sentiment will, we hope, be driving CLO primary to previously expected volumes and beyond.”

The market’s pre-election hopes for new fiscal stimulus by the end of the year (SCI 29 October) have been reinforced and have thus far supported price levels. The first two days of this week saw secondary triple-As to double-Bs on a tightening trend and it’s therefore likely that when primary issuance re-emerges, it will benefit from that tail wind.

As the investor concludes: “If this resurgence continues, we keep getting good news and consequently see tightening through year-end, we could even be back to markets that would support resets fully coming back in early 2021. That said, the one thing we’ve learned from this year so far is that you never know what’s going to happen.”

Mark Pelham

Structured Finance

ESG-focused CLO manager formed

Sector developments and company hires

ESG-focused CLO manager formed
A trio of ex-Ares Management partners have formed a new independent alternative credit investment firm that plans to adopt an active ESG screening approach. Founded by Americo Cascella, Daniel Hall and Shane Mengel, Pacific & Plains Capital is based in Dallas, Texas, with a presence also in Los Angeles, California. The firm will invest in loans to companies operating across a range of industries and based across both North America and Europe, principally by issuing and managing CLOs.

At Ares, Cascella served as a portfolio manager and senior executive in its credit division, specialising in below investment grade fixed income. Hall served as co-general counsel of Ares’ global credit group and was a senior executive focused on credit, execution of fund raises and strategic matters. He was also a founding member of the insurance solutions group at the firm.

Mengel held several positions at Ares, including co-head of research, client portfolio manager and investment research analyst in its credit division, specialising in below investment grade fixed income. Between 2014 and 2016, he led a new initiative focused on expanding and coordinating efforts between the credit and business development divisions to identify new business opportunities primarily with family offices and consultants.    

In other news…

CLO equity agreement inked
The TCW Group has entered into a strategic investment agreement with Jefferies and Kennedy Lewis Investment Management to support new issuance of CLOs on the TCW platform. Under the agreement, Jefferies and Kennedy Lewis will provide up to US$160m in equity to the TCW CLO platform, providing equity for the issuance of multiple CLOs over approximately the next two years. Through this investment, Kennedy Lewis and Jefferies will gain access to and share in the growth of TCW’s loan platform. TCW also plans to open a CLO warehouse in the near future.

Dutch mortgage platform expanded
NN Investment Partners has expanded its mortgage proposition with two new Dutch residential mortgage funds, which will purchase mortgages from Venn Hypotheken. The team currently manages over €32bn in different mortgage investment strategies.

One of the funds (NN Dutch Residential Mortgage Fund NHG) invests solely in mortgages with a national mortgage guarantee, while the other (NN Dutch Residential Mortgage Fund Non-NHG) will invest in non-NHG mortgages. The aim is to allow NN IP to offer clients a flexible risk/return solution and Venn Hypotheken to increase its market share, as it will be able to offer more types of mortgages to home buyers.

The funds provide efficient and flexible exposure to the asset class and enable smaller commitments, more operational ease and greater liquidity, compared to tailored mandates in the asset class. Investors in the funds are expected to benefit from Venn’s proven underwriting and servicing capabilities, combined with NN IP’s high-quality institutionalised portfolio management.

EMEA
ARA Venn has appointed Mark Prisk chair and non-executive director of the board of its Saltaire Housing subsidiary, with Sarah Wall also becoming a non-executive director. Saltaire won a concession last month from the UK government to provide £3bn of cost-effective long-term loans, of up to 30 years, to registered providers developing new affordable homes in England.

Prisk served as a UK Member of Parliament for 18 years before stepping down at the 2019 General Election. Prior to his role as Minister of State for Housing, he was Minister of State for Business and Enterprise.

Wall has over 20 years of experience as a senior funder to the social housing, real estate and infrastructure industries. Most recently a senior portfolio manager at Aviva and previously at the Pensions Protection Fund, she has also served as head of investment risk at Pension Insurance Corporation, director of credit research and debt restructuring at M&G, and rated social housing bonds at Fitch.

North America
Hansol Kim has joined Kanerai as a product development specialist, based in New York. Kim was formerly an md at FTI Consulting, responsible for strategic advisory and execution of risk management and investment solutions for financial institutions, institutional investors and government agencies. Before that, he founded consulting firm Pine Lakes Capital, having previously worked at Financial Security Assurance and GE Capital.

Structured Finance

Dutch BTL aggregator deal prepped

Sector developments and company hires

Dutch BTL aggregator deal prepped
Citi is in the market with a new Dutch buy-to-let RMBS. Dubbed Jubilee Place 2020-1, the transaction is backed by a €212.9m portfolio comprising 669 loans originated by Dutch Mortgage Services, DNL 1 and Community Hypotheken.

These three platforms focus on the non-consumer segment of the BTL market – in other words, professional landlords – according to Rabobank credit analysts. They note that the platforms follow the originate-to-distribute model, with the loans sold to warehouses funded by Citi. To mitigate potential misalignment of interests, Fortrum acts as a third-party underwriting auditor on the transaction.

The entire capital stack is expected to be sold, ranging from triple-A rated senior notes through to the unrated R tranche. The bottom class X and R notes are, however, preplaced.

GSO name-change
GSO Capital Partners has changed its name to Blackstone Credit. When Blackstone first acquired GSO in 2008, the group had US$9.6bn in AUM and fewer than 150 employees. Since then, it has become one of the world’s largest credit-oriented asset managers, with US$135bn in AUM and a team of over 350.

Structured Finance

Shortfalls hitting rated CMBS notes

Sector developments and company hires

Shortfalls hitting rated CMBS notes
KBRA reports that over 85% (225) of the 263 deals in its rated US conduit CMBS universe have been impacted by interest shortfalls to varying degrees. Prior to the coronavirus pandemic, shortfalls occurred in just over 40% (110) of the transactions, as of February 2020.

“The increase is not surprising, as interest shortfalls are generally driven by delinquent and specially serviced loans. Since the pandemic, KBRA has observed its rated conduit delinquency increase nearly eightfold to 7.9% and the specially serviced loan population reached a high of 8.2%, as of the October 2020 reporting period,” the agency notes.

As interest shortfalls have become more commonplace, they have affected more classes in the capital structure: there were 278 classes impacted across the 225 deals as of October 2020, representing a ratio of 1.2 classes per deal. In February 2020, the same ratio was less than 1.1 (121 classes across 110 deals). While the shortfalls have generally affected the first loss unrated classes of notes, KBRA has observed a large increase in shortfalls on rated classes.

There were 40 such classes (14.4% of all classes with shortfalls) in October, compared to just eight (6.6%) in February. During the same period, the outstanding principal balance of securities affected has more than doubled to US$9.1bn from US$4.2bn.

In other news…

GACS deal retained
The Italian Ministry of the Economy and Finance has granted BPER Banca a state guarantee under the GACS scheme on the senior notes of its SPRING non-performing loan securitisation, with a nominal value of €320m. The securities are held by BPER Banca Group, which benefits from derecognising the assets.

SPRING is the Group's third NPL ABS backed by a GACS guarantee, following the 4Mori Sardegna and AQUI transactions, which - together with the sale of a portfolio to UnipolRec for approximately €1bn last year - brought the total gross book value of its NPL disposals to around €5bn over the past two years.

Repository translations published
ESMA has issued the official translations of its guidelines on securitisation repository data completeness and consistency thresholds. National Competent Authorities (NCAs) to which these guidelines apply must notify ESMA whether they comply or intend to comply with the guidelines, within two months of the date of their publication.

CLOs

Garrison CLO platform acquired

Sector developments and company hires

Garrison CLO platform acquired
Mount Logan Capital subsidiary Mount Logan Management (ML Management) has acquired from Garrison Investment Management (GIM) and other sellers the rights under certain interests and agreements relating to Garrison Funding 2018-1 and Garrison MML CLO 2019-1, as well as the rights under certain side letter agreements, for a purchase price of US$3m. As of 30 June 2020, the 2018 and 2019 CLOs had approximately US$330m and US$332m of assets under management respectively.

At the same time, ML Management has been registered as an investment adviser with the US SEC to manage Garrison’s CLO platform, for which it is entitled to receive an annual management fee of 0.50%-0.60% of aggregate gross assets, subject to reductions based on caps, transaction fees and fee-sharing arrangements. The firm says the move is a step towards accelerating its transition to an “asset-light” business model.

In other news…

European CLOs migrating
Atlantic Star Consulting data shows that 58 CLOs originally incorporated as Dutch SPVs have now set up Irish DACs. These transactions are managed by nine collateral managers, the largest of which - by number of migrations - are PGIM and Alcentra. This follows a change in interpretation of VAT law in connection with CLO management fees by the Dutch tax authorities (SCI 24 February).