News Analysis
Capital Relief Trades
Democrats and CRT
Banks, GSEs eye Washington for policy clues
It is, probably, a reasonable assumption that US President-elect Joe Biden has never given a second thought to credit risk transfer mechanisms. But for this market and particularly the GSEs, the new administration represents a sea-change in philosophy and policy.
The potential extent of any legislative innovation depends, firstly, on whether the Senate will approve or block action by the executive branch. It is still uncertain whether Democrats will wrest control of the Senate or whether Republicans will retain command, due to two very tightly contested races in the state of Georgia.
Both are to be determined in run-offs on 5 January and the consequences of these votes for the next four years of American politics can hardly be overstated. The GOP is believed by most pundits to have a slight edge in both cases, but that edge is wafer thin.
Were the Democrats to win these two posts, then the voting balance in the Senate would become 50:50 - a deadlock which would be broken by the casting vote of the Vice-president. This is a doomsday scenario for the GOP.
In this scenario, the chairs of committees most pertinent to the CRT industry will also change hands. For example, the banking committee is likely to pass to Sherrod Brown of Ohio, who has made the provision of affordable housing for the middle class a particular focus of his political career. In 2018, he was at odds with current chair Mike Crapo (R-Idaho) and his more moderate Democrat colleagues over efforts to weaken the Dodd-Frank Act, which gives an indication of his leanings.
The size and type of any new stimulus package is also in doubt. A divided legislature after the inauguration is unlikely to pass a large new measure of financial aid to consumers, which suggests greater volatility in MBS and consumer ABS is on the cards.
As Fitch notes in its16 November paper ‘Effects of 2020 election results on US structured finance’, stimulus measures, enhanced unemployment relief and payment deferral schemes have thus far kept delinquencies low and ABS prices stable. However, those schemes are now coming to an end and consumers are far from out of the woods yet.
“Anaemic federal aid (in Q4) will not materially alleviate financial stress for individuals and businesses. Lenders could pull back on lending to weaker borrowers,” the report says. The implications for delinquencies and market prices are clear.
“Delinquencies for STACR and CAS have been pretty low so far. But forbearance ends under the CARES Act, so now what happens? We could see these turn into liquidations and foreclosures,” says one CRT analyst.
Even if the incoming administration does not possess command of Congress, it is still able to change regulatory stance on any numbers of issues and could, in theory, also replace the current heads of regulatory agencies, such as the OCC and the FHFA. Both of these agencies are pertinent to the CRT market.
Brian Brooks is acting comptroller and was on 17 November nominated by President Trump to serve a full five-year term, a nomination which has to be ratified by the Senate. However, even if he is confirmed, the new president might remove him “at will”, following a landmark ruling by the Supreme Court in July. This is potentially significant as, under Brooks’ leadership, the OCC has been more favourably disposed towards the use of the CRT sector by US banks than appeared to be the case under his predecessor.
The director of the FHFA is Mark Calabria and he is due to remain in the post until 2024, but, once again, there are fewer complications about heads of agencies being axed by a new administration than was the case previously. Calabria has, of course, been a vocal advocate of exiting the GSEs from conservatorship.
Indeed, it is the attitude of the new administration towards the GSEs that is the most pressing talking point. “The biggest issue is the GSEs. I’ve no real sense of how this will be handled,” says one source in the CRT market.
Under a less laissez-faire administration, the current initiative to take the GSEs out of conservatorship and into private hands might be halted, or at the very least slowed. “If the new president is the opposite of Trump, he won’t be as interested in getting stuff away from the taxpayer and getting the GSEs away from conservatorship,” says another well-placed source.
At the moment, the FHFA is holding the line. On 5 November, two days after the US election, the FHFA was reported saying: “Since director Calabria began his tenure in April 2019, FHFA has worked as quickly as possible to fulfil our statutory mandate of responsibly ending the Enterprises’ conservatorships. As an independent agency, FHFA will continue this work by following the milestones laid out in our recently finalised Strategic Plan, while working with the Enterprises to ensure they are meeting all the goals laid out in their Scorecard and Strategic Plan.”
However, despite these bold assertions, exit from conservatorship and a return to private hands in anything like the near term seems unlikely. “We haven’t seen much in terms of Biden’s plans for the GSEs, but in our view the chances of the GSEs being released from conservatorship under his administration are remote,” says Michael Shepherd, a director in financial institutions at Fitch.
Democrats are squeamish about entities that have a public mission being owned by private shareholders, particularly as efforts to please those shareholders caused the GSEs to take on more risk while forgetting their policy mandate to provide affordable housing, notes another source.
If, then, exit from conservatorship is kicked into the long grass, this could mean, in turn, that the new capital rules released at the end of the May might become less important as well. The new rules are based upon making the GSEs more attractive to potential shareholders and, if there are no potential shareholders, then there need in theory be no new capital rules.
However, yesterday (18 November), the FHFA released the finalised capital rules. And if they were applied to the GSE’s balance sheets on 30 June 2020, the Enterprises would be required to hold no less than US$283bn in total adjusted capital.
So while conservatorship might be fading over the horizon, the 2020 capital rules could be here to stay. But it is likely the GSEs will have longer to beef up capital than seemed the case at first. If the timeline were three or four years, as Calabria suggested was likely earlier this year, the GSEs would have to raise equity and to do so they would have to improve current ROE in a manner which would be unpalatable to a Biden regime.
“To attract investors, they have to raise returns. This means higher G-fees and that is a political hot potato,” says another CRT source.
It seems that the only option is, then, to allow capital to grow through earnings. This could take up to a decade or more.
Where does this leave Fannie, absent from the CRT market since the onset of the Covid-19 lockdown? Sources close to the GSE suggest it has been waiting for greater clarity about the capital rules and if the news is good, then it could be tempted out of hibernation.
Freddie Mac, meanwhile, has taken a diametrically different path. Not only did it re-open the CRT market with a STACR trade in July, it has also executed another four since.
There are a number of different reasons for this, suggest experienced market watchers. “Freddie really spearheaded this market. It wasn’t Fannie. The former has more ownership of it,” says one.
Another points out that as Freddie’s balance sheet is appreciably smaller than Fannie’s, the CRT market represents a relatively larger piece of its capital management mechanism and thus it was incentivised to get back into action sooner rather than later.
Simon Boughey
19 November 2020 10:20:28
News Analysis
CLOs
Automated alternative
CLO tax solution getting traction
An automated alternative to the traditional season-and-sell process that enables tax efficiency for CLOs is starting to gain traction. Smaller firms are expected to be the earliest adopters, though the programme’s efficiencies could benefit all collateral managers.
Season and sell is utilised by US CLOs that are typically Cayman corporations designed not to be engaged in a US trade or business. The main aim of the technique is to avoid characterisation of a loan purchase as a loan origination, which may trigger adverse tax consequences. Instead, it qualifies a loan purchase as a more tax advantageous secondary market purchase.
Developed by Todd Anderson, a partner at law firm Practus, fintech solution Season & Sell 2.0 seeks to improve the efficiency and consequently reduce the costs of the historic process. It does so primarily by reducing the loan seasoning period to 20 days in all instances, versus the traditional 30 to 90 days, thereby speeding up the process and reducing funding costs. It also eliminates other historic investment guidelines, such as the need for an independent valuation (or independent authorisation to purchase) and to sell some percentage (usually 15%-50%) of its loan production to unrelated third parties.
At the same time, the solution automatically requires traditional tax representations from all parties involved – the loan seller, the loan buyer, and the loan trading platform. The programme’s protocols ensure that each loan trades through an active, open and robust decentralised secondary loan trading marketplace platform and that there is no tax gamesmanship by any party.
Anderson suggests his product is a first-of-its-kind solution, which he attributes to the conservative nature of other tax practitioners and the recent growth of active and robust loan trading platforms. “Most tax practitioners are cautious about varying from the historic process and reluctant to try new ways, arguing ‘if it works, it works’,” he says.
Market participants are exhibiting similar caution, but there at least Anderson is seeing some traction. “I’m talking to 40 or so investment managers, but as of yet nobody has launched. It’s a difficult step to take, as they already have a process and tax counsel in place, but a number have said they will consider it for their next fund.”
Anderson believes that once one firm makes the switch, others will follow quickly, though he expects the biggest CLO managers to move last. “If you’re a major manager, you don’t want to allow your main competitors to diligence the loan – that is a disadvantage of this fully transparent process,” he says. “However, there are ways of excluding certain buyers, provided you offer the loan to a liquid market of other willing buyers.”
He continues: “The big CLO managers also object to an open market because it means their loan can be bought by someone other than their affiliate. All they have to do is sell to the highest bidder, which could be their affiliate (or not) and that way they also get excellent execution on their loan.”
Mark Pelham
In practice
The Season & Sell 2.0 programme works as follows:
- The loan seller registers with an online loan marketplace that qualifies for the programme and lists its loan(s).
Then, simultaneously:
- The loan seller sells its loan(s) to the highest bidder on the 20th calendar day (a reserve price must be set at a price that yields the loan seller a profit typical of loan sellers).
- The loan seller pays the online loan marketplace its fee as the loan sale closes.
- The loan seller, the loan buyer and the online loan marketplace execute a carefully designed set of proprietary boilerplate US tax representations that they pre-approved at the time of loan listing (to ensure that there is zero tax gamesmanship by any party involved with the loan sale).
- The loan buyer receives a US federal income tax opinion with the highest level of tax opinion comfort rendered by Practus.
19 November 2020 16:41:30
News Analysis
Capital Relief Trades
Greek synthetics eyed
Alantra targets CRTs, new jurisdictions
Alantra has evolved to become one of the premier players in the non-performing loan markets by utilising a combination of services, including credit portfolio advisory and asset management. However, following the recent hiring of Francesco Dissera (SCI 3 November), the arranger is now eyeing capital relief trades, including in the currently untapped Greek market.
Alantra’s services consist of investment banking, asset management and credit portfolio advisory. The company has grown organically, but also through the acquisition of boutique firms like KPMG UK’s portfolio advisory business.
The business specialises in consulting services for financial institutions in relation to non-performing and non-core banking assets globally. In the securitisation market, the firm acts as both advisor and arranger, with traditional areas of focus in the NPL and reperforming loan space.
The firm is now eyeing further expansion into capital relief trades. Beyond Greece, the firm will be aiming for opportunities in its main markets, such as Spain, Portugal, Ireland and the UK.
Dissera notes: “When we analyse portfolios, we offer a bottom-up approach, owing to our network of local experts. In Greece, for example, banks doing NPL ABS transactions under the HAPS scheme realise that it is important to present investors with a credible business plan and data disclosures. All these things require the expertise and resources of third-party independent arrangers.”
Holger Beyer, md at Alantra, adds: “The combination of skills, including asset level analysis and capital markets expertise, along with the banking and investor relationships we built over the years are quite unique. We are also independent, since we never invest in any of our transactions and we wouldn’t provide leverage to an investor.”
Nevertheless, circumstances also aided the transition to CRTs. Dissera comments: “It can happen that when a bank disposes of an NPL portfolio - even via an ABS - a loss materialises, so banks have to consider other alternatives. But this requires knowledge, given all the different ways for releasing capital, such as full capital deduction and AT1 bonds. This is especially true in Greece, since - due to the recession - banks were not able to tap the capital markets for some time.”
Additional Tier 1 (AT1) securities and contingent convertible capital instruments, known as CoCo bonds, absorb losses when the capital of the issuing financial institution falls below a supervisor-determined level. The notes have been a key instrument in regulators' post-crisis bail-in regime, which seeks to impose principal losses on creditors during firm-level financial distress, outside the normal bankruptcy process and without recourse to the public purse.
CoCos have been popular with Greek banks, most likely given the structural complexity of significant risk transfer transactions - although CRTs should be preferable, given the customised exposure a bank can receive compared to CoCos. CoCo exposure is typically across the bank’s business, including legacy issues and underperforming loans, and they also feature caps on issuance.
Nevertheless, with the arrival of third-party arrangers such as Alantra and the expertise such firms bring, the Greek market is preparing for a long-awaited pick up. Indeed, Piraeus Bank is believed to be readying the market’s inaugural capital relief trade, which is expected to close this quarter.
Stelios Papadopoulos
20 November 2020 17:27:17
News
ABS
Record print
VW's latest Chinese ABS oversubscribed
Volkswagen Financial Services has completed its largest-ever Chinese auto ABS, despite challenging market conditions. Dubbed Driver China Eleven Trust, the RMB8bn (circa €1bn) is backed by a diversified pool of receivables from over 134,000 financing contracts.
Bernd Bode, head of group treasury and investor relations at Volkswagen Financial Services, says: “We have now placed 11 Driver transactions in the Chinese market and are thus considered a frequent issuer. As a result, the structure is already well-known by investors in the market and is in line with our global securitisation approach. In turn, this enables us to attract a larger group of regular investors and helps us to ensure an efficient placement process.”
With a volume of RMB7.1bn, the deal’s class A tranche was placed at a fixed interest rate of 3.8% and was oversubscribed by 1.9 times. The notes were assigned domestic ratings of AAA/AA+ by S&P Ratings China and China Bond Rating Co respectively, as well as an international rating of double-A plus by S&P.
“In general, an oversubscription of the notes tells us that the transaction was well received in the market and that there is plenty of investor appetite. To be sure, we have experienced oversubscription on our previous Chinese transactions as well. Of course, this also helps us narrow in on the correct market pricing of the individual tranches,” notes Bode.
The securitised financing contracts were predominantly for new vehicles (representing 96.6% of the pool) and private customers (94.4%).
China is one of the most important markets for VW and the firm has a current contract portfolio of over 1.2 million units in the jurisdiction. Concurrently, ABS has become a significant funding source for its business in China.
Bode concludes: “The investor landscape has also developed strongly over the last years. Thus, we are hopeful that there will be no significant restrictions on our ability to safeguard funding and business growth over the upcoming years.”
Jasleen Mann
16 November 2020 11:32:04
News
ABS
Positive outlook
DoValue signs NPL MoU
DoValue has signed a memorandum of understanding with Bain Capital Credit for the exclusive management of a portfolio of non-performing loans originated in Cyprus for a total claim of approximately €650m. Following this agreement, the total volume of servicing mandates won by doValue in Southern Europe so far this year has reached €9.3bn. The latter is in line with the firm’s pre-Covid full-year target of between €9bn and €11bn, suggesting a positive outlook for the loan and real estate servicing markets.
The portfolio, known as Project Marina, was originated by the National Bank of Greece and consists of secured corporate and SME loans from more than 2,000 debtors. DoValue will carry out all NPL and REO servicing activities through local subsidiary Altamira Asset Management Cyprus, including the preparatory and on-boarding processes.
Bank of Cyprus opened up the Cypriot NPL market after the coronavirus crisis with its second Project Helix deal, although the size of the pool was much smaller than initially expected due to the pandemic-induced economic downturn (SCI 5 August).
The Cypriot banking sector has been tackling one of the highest NPL ratios in Europe. Significant deleveraging has been carried out by the remaining two largest banks, which between them hold over half of the loans and two-thirds of the country’s bank deposits. This has been achieved through a combination of portfolio sales and organic work‑out methods.
However, the market has only picked up over the last two years following a package of legislative measures approved by the Cyprus parliament in July 2018, which are fundamental to further investor interest. The legislation includes clarification of rules governing the sale of credit facilities regarding the respective transfer rights, obligations and priorities of the parties involved, simplification of procedures to rehabilitate debtors who have not committed offences, a new framework for debt securitisation under the supervision of the Central Bank of Cyprus and the Estia scheme.
The Estia scheme is designed to reduce NPL levels through government subsidies, enabling vulnerable borrowers to restructure long‑standing non‑performing loans mortgaged on their primary residence.
Stelios Papadopoulos
20 November 2020 16:45:53
News
Structured Finance
SCI Start the Week - 16 November
A review of securitisation activity over the past seven days
SRT seminar NEXT WEEK
Join SCI on 23 and 24 November for its virtual 6th Annual Capital Relief Trades Seminar, which will explore a number of recent regulatory developments that underline European policymaker support for balance sheet synthetic securitisation. The event also examines the latest trends and activity across the significant risk transfer sector.
Highlights of this year's seminar include fireside chats with PGGM's Mascha Canio and EBA policy expert Pablo Sinausía. The event will conclude with SCI's CRT Awards presentations. For more information or to register, click here.
Last week's stories
CLO resurgence?
Primary spike contingent on sustained positivity
Morgan motors
JP Morgan puts its foot on the gas in CRT highway
Revised stance
Parliament backtracks on structural features
Transition revamp?
Legacy language amendments remain challenging
Utility ABS returns
Innovative minibond deal gains wider reception
Other deal-related news
- 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 (SCI 10 November).
- 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 (SCI 10 November).
- NN Investment Partners has expanded its mortgage proposition with two new Dutch residential mortgage funds, which will purchase mortgages from Venn Hypotheken (SCI 10 November).
- Citi is in the market with a new Dutch buy-to-let RMBS (SCI 11 November).
- 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 (SCI 12 November).
- 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 (SCI 12 November).
- ESMA has issued the official translations of its guidelines on securitisation repository data completeness and consistency thresholds (SCI 12 November).
- Mount Logan Capital subsidiary Mount Logan Management has acquired from Garrison Investment Management and other sellers the rights under certain interests and agreements relating to Garrison Funding 2018-1 and Garrison MML CLO 2019-1 (SCI 13 November).
- Atlantic Star Consulting data shows that 58 CLOs originally incorporated as Dutch SPVs have now set up Irish DACs (SCI 13 November).
Data
BWIC volume
16 November 2020 11:06:33
News
Capital Relief Trades
Risk transfer round-up - 16 November
CRT sector developments and deal news
Details have been revealed of two global corporate capital relief trades issued by Barclays which were finalised in 2Q20. The first, dubbed Colonnade Global 2020-2A, is a US$210m CLN that matures in 2028. The second, called Colonnade Global 2020-2B, is a US$90m CLN that also matures in 2028. Barclays initiated its first post-Covid corporate CRT in June and is expected to close another corporate deal in 4Q20 (see SCI’s capital relief trades database).
16 November 2020 16:32:37
News
Capital Relief Trades
CRT seminar line-up finalised
Fireside chats, awards presentation on the agenda
The line-up for SCI’s 6th Annual Capital Relief Trades Seminar has been finalised. Hosted virtually on 23 and 24 November, highlights of the event include fireside chats with PGGM’s Mascha Canio and EBA policy expert Pablo Sinausía.
A market overview panel will outline how the Covid-19 fallout has affected performance, activity and issuance levels across the CRT market, while another panel will explore the role of insurers in the sector. The regulatory developments panel will focus on the EBA’s discussion paper regarding STS criteria for synthetic securitisations, while the structuring considerations panel will cover the latest structuring and documentation developments in the sector.
Additionally, there is a panel exploring the full-stack issuance trend, as well as one examining issuer and investor perspectives on the CRT market. The event will conclude with the presentation of SCI’s CRT Awards, hosted by ex-Bloomberg News anchor Mark Barton.
The seminar is sponsored by Allen & Overy, ArrowMark Partners, Clifford Chance, the EIF, Linklaters, Newmarket, RenaissanceRe, Santander, Societe Generale and Texel. Speakers also include representatives from Bank of Ireland, Barclays, BNP Paribas, Cairn Capital, Citi, 400 Capital, PwC, StormHarbour and UniCredit.
For more information on the event or to register, click here.
18 November 2020 11:10:04
News
Capital Relief Trades
Synthetic RMBS priced
Lloyds finalises Syon transaction
Lloyds has priced the third transaction from its Syon programme. The seven-year significant risk transfer trade is motivated by prudent risk management within the context of providing support to first-time buyers, in line with the bank’s Helping Britain Prosper Plan. After withdrawing high LTV mortgage products in March 2020, the UK lender is now seeking to re-enter that market with the benefit of risk mitigation with respect to the underlying loans (SCI 5 November).
Rated by Fitch and KBRA, the deal consists of £33.88m BBB-/BBB rated class A notes (which priced at SONIA plus 4%), £59.29m BB-/BB rated class B notes (plus 6.25%) and £84.70m unrated class Z notes. The credit protection covers interest and principal payments, with all three tranches amortising on a modified pro-rata basis, subject to a performance trigger.
The protection lasts for seven years, with a 2.5-year tail period, subject to a 10% clean-up call. The notes were widely distributed across a broad range of investors, including five newcomers.
Syon Three differs from the two previous deals from the programme, due to the introduction of an up to 15-month ramp-up period. The latter is governed by eligibility criteria and concentration limits, including an LTV cap. The reference portfolio comprises an approximately £535m back-book and an up to £1.248bn future flow front-book, representing a 30% to 70% split.
The pool consists of prime owner-occupied repayment mortgages, with fixed-rate loans accounting for 99.1% of the composition, all of which revert to Halifax’s Homeowner SVR on expiry of the fixed-rate period. The rest of the loans pay a floating interest rate at a margin above the Bank of England base rate.
Loan reversions are concentrated in 2022, reflecting the predominance of the two-year fixed product in the portfolio. The fixed-rate loans are not subject to any hedging arrangements, since they are not dependent on interest receipts to make their coupon payments, but on the provisions of the financial guarantee.
Stelios Papadopoulos
19 November 2020 15:27:11
News
Capital Relief Trades
Capital headache
The finalized GSE capital rules give with one hand whilst the other takes
The finalized capital rule for the GSEs, released yesterday afternoon (November 19) by the Federal Housing Finance Agency (FHFA), increases the amount of dollar relief afforded by CRT mechanisms from that envisaged by the rules released in May, but the effect is offset by higher overall risk weightings the amended rules impose, observe sources.
“CRT is more effective because the FHFA has imposed higher risk weightings on underlying exposures. I’d almost call it sleight of hand,” says a source in the CRT market.
The adjusted risk weight floor assigned to mortgage exposures has been raised from 15% to 20%. This has pushed the combined total adjusted capital GSEs would have to hold if the rules were applied to total assets on June 30 2020 to $283bn from $263bn.
Currently, the Enterprises hold a combined $45bn: $25bn at Fannie and $20bn at Freddie.
The higher overall number is also in part attributable to a 9% growth in assets since June to a total $6.6trn as refinancing has surged, but $12bn of the $20bn increase is due to the increased risk weighting.
As the risk weight floor has been increased, the risk based capital requirement becomes more onerous than the leverage ratio, unlike the May ruling. For example, according to the fact sheet released yesterday, Fannie Mae’s total risk-based capital requirement, including all the buffers, is now $171bn compared to a leverage ratio-based requirement of $155bn.
Freddie’s risk-based capital requirement is $112bn and leverage ratio-based is $110bn.
There are various adjustments to the calculation of capital relief for CRT. These are, according to the fact sheet, a change to the overall effectiveness adjustment for a CRT on a pool of mortgage exposures that has a relatively lower aggregate credit risk capital requirement; a change to the method for assigning a risk weight to a retained CRT exposure to increase the risk sensitivity of the risk weight; and a modification to the loss-timing adjustment for a CRT on multifamily mortgage exposures to better tailor the adjustment to the contractual term of the CRT and the loan terms of the underlying exposures.
While these adjustments are sure to please the GSEs, they probably fall short of the highest hopes.“Treatment for CRT is slightly better, but only because you have a higher starting point,” says another source.
Commenting on the finalized rules, David Brickman, ceo of Freddie, says, “The final capital rule is an important step toward Freddie Mac’s exit from conservatorship. We will now begin the process of implementing the new standards.”
Meanwhile, Fannie ceo Hugh Frater says, "FHFA's capital rule for the housing GSEs is an important step in ensuring the housing finance system can serve the needs of homeowners, renters, and the broader mortgage market for generations to come. The new capital standards set the stage for a responsible end to the conservatorship and a future recapitalization of Fannie Mae. We applaud Director Calabria for his leadership in finalizing the rule."
Of course, there is no guarantee that these rules will remain in place. There is going to be a new administration in Washington in January, and Mark Calabria - an advocate of an end to conservatorship - might be replaced as head of the FHFA. Even if he is not, the return to private hands of an entity with a public mission might be given the go-slow.
This means the new capital rules could become less urgent. After all, the rules released in May changed significantly the 2018 rules released under Calabria’s predecessor. The same thing could happen again.
“The capital rule may end up not being that important if the GSEs remain in conservatorship for the foreseeable future,” says Michael Shepherd, a director in the financial institutions group at Fitch Ratings.
Simon Boughey
19 November 2020 18:38:28
News
CMBS
Maturity wall eyed
Mall loans face financing difficulties
US CMBS mall delinquencies have reached approximately US$9.65bn across 93 non-defeased loans secured by regional malls and large anchored retail assets, according to a new DBRS Morningstar analysis. The overall delinquency rate for this cohort of loans is 18.7%, with circa 69.8% of the balance within the 2011-2014 vintage, including the largest delinquent loan – the Mall of America (securitised in CSMC 2014-USA), which contributes about 14.4% to the total delinquent balance.
Approximately 91.8% of delinquent regional malls are currently in special servicing. Around US$6.1bn of the total balance of specially serviced loans are again from the 2011-2014 vintage.
DBRS Morningstar notes that regional mall delinquency rates are increasing due to declining sales and occupancy. Improvements will depend on market position, stability of the asset and borrower strength – all of which are considered key factors in the restructuring process.
Maturity extensions and other loan modifications are expected to be granted. However, as loans default, an increase in deed-in-lieu and foreclosure activity is likely, due to a disruption in investor appetite for retail properties.
Sponsors who have less cashflow in their portfolios and limited options for financing are those dealing with assets in smaller markets. Assets in smaller markets are typically exposed to lower quality tenants and less desirable locations. Such assets were already experiencing the impact of fewer visitors, low capital investment and vacant spaces because of department store closures.
Finding financing for malls with declining sales and occupancy is likely to be difficult. Indeed, DBRS Morningstar suggests that firms that do not meet holiday sales targets may announce bankruptcy filings and store closures in early 2021.
Additionally, the regional mall universe faces a maturity wall, with a new wave of loans from the 2011-2015 early CMBS 2.0 cohort set to mature between 2021 and 2025 - including 85.7% of loans currently designated as delinquent. Major mall loans that are currently delinquent and are scheduled for maturity in 2021 include US$180.4m Holyoke Mall, US$190m Whitemarsh Mall, US$137.5m Fox River Mall and US$138.6m Poughkeepsie Galleria, which combine for 7.5% of the delinquent mall universe.
Jasleen Mann
18 November 2020 17:22:39
Market Moves
Structured Finance
CRE data initiative launched
Sector developments and company hires
CRE data initiative launched
Moody's Analytics has formed a new partnership with The Business School (formerly Cass) at City, University of London, to build a database of loan-level commercial real estate information covering the UK and Europe. The initiative will extend The Business School's UK CRE lending survey under the Moody’s Analytics Data Alliance framework. By participating in this initiative, lenders and other market participants will benefit from access to aggregate industry data, as well as robust analytics for benchmarking.
Co-leading the initiative is Nicole Lux, senior research fellow at The Business School. Lux conducts the UK CRE lending survey, which has been gathering data from more than 100 participant firms for over 20 years to produce a comprehensive record of CRE lending. She will work with industry participants to gather the loan-level information on behalf of the City-Moody’s Analytics initiative in the UK.
ILS moves
Arch Reinsurance has named Brian Lynch senior operations advisor, ILS and retrocessions, based in Bermuda. He was previously vp, ILS at Aon, where he led teams located both locally and internationally to provide outsourced management services to large ILS-backed commercial entities. Before that, he worked at HSBC, Amundi Pioneer Asset Management and EY.
Twelve Capital has appointed Tony Maximchuk as a non-executive director for Twelve Capital (UK), based in London. Maximchuk was previously a business development executive at Securis Investment Partners and before that worked at Conning Asset Management and Credit Lyonnais.
17 November 2020 17:26:11
Market Moves
Structured Finance
APAC capital advisory formed
Sector developments and company hires
APAC capital advisory formed
Aon has launched an Asia Pacific Capital Advisory unit to deliver a holistic approach to capital optimisation for re/insurers. The initiative follows Aon’s launch of similar units in the UK and US.
At the same time, actuary Seewon Oh has joined the unit from Smartkarma Innovations, where she was an analyst researching the insurance sector across Asia Pacific. In her new role, Oh will focus primarily on rating agency advisory work, while broadening into other areas of client engagement. She will report to Rupert Moore, Aon’s ceo of Japan for reinsurance solutions.
Moore comments: “The goal of Capital Advisory is to help clients achieve capital efficiency either by accessing alternative or traditional capital, or through identifying opportunities that make better use of existing capital, while taking into account cost and returns. This in turn helps them to generate better returns on common equity.”
Liquidity reverse lease offer launched
PKO Leasing is launching the first liquidity reverse lease offer on the Polish market. Under the EIF’s COSME-Covid guarantee, the company will allocate PLN500m to support the financial liquidity of SMEs. The offer targets owners of passenger cars weighing up to 3.5 tonnes that are clients of PKO Leasing and PKO Bank Polski. Through the leasing transaction, they can recover the funds spent on the purchase of the vehicle with the possibility of its further use. The terms under the offer include an active leasing contract or a company account for a minimum of six months.
Merger hits leverage ratios
REIT Simon Property Group's (SPG) revised merger agreement to acquire an 80% stake in mall operator Taubman Realty Group would likely weaken SPG's aggregate and secured leverage ratios, according to Moody’s. The companies have agreed a revised price of US$43 per share (versus US$52.50) to conclude pending lawsuits brought after the merger became contested in February.
Moody’s observes that the new acquisition cost would lower SPG’s common equity investment by US$675m to slightly above US$3bn. The REIT will also own US$363m of TCO's preferred stock.
“The leverage metrics would likely weaken, given Taubman's capital structure, but would also depend on SPG's yet to be announced funding plan,” the agency says.
However, it notes SPG’s sound liquidity position provides significant financial flexibility. Consequently, the merger is not expected to affect the REIT's ratings or outlook.
Optigo approval granted
CRE specialist Sabal Capital Partners has been approved by Freddie Mac as an Optigo Conventional Mortgage lender. The Freddie Mac Optigo core multifamily loan products now offered by Sabal include debt solutions in fixed-rate, float-to-fixed and floating-rate. To start, Sabal will focus primarily on meeting mid-tier loan demand, where needs are currently underserved and the lender’s platform efficiencies will prove beneficial.
18 November 2020 18:05:45
Market Moves
Structured Finance
Highland trio launch new firm
Sector developments and company hires
Highland trio launch new firm
Ex-Highland Capital Management executives Mark Okada, Jack Yang and Trey Parker have launched Sycamore Tree Capital Partners, an asset management firm specialising in private and alternative credit. Okada will serve as ceo, Yang will serve as president and head of business development, and Parker will serve as cio. John Muse and Ken Hersh are strategic investors in the firm's initial fund launches and will also serve on the management company advisory board to help shape long-term strategy.
The firm's initial strategies will include traded credit, structured products and special situations. Sycamore Tree's launch is funded by its co-founders and the firm is headquartered in Dallas, Texas, with an office in New York City.
Okada was previously co-founder and cio of Highland Capital Management. Yang was managing partner at Highland Capital Management and most recently, head of the Americas and global head of business development at Alcentra Group. Parker was a partner at Highland Capital Management and held a number of key leadership roles, including co-cio and portfolio manager.
In other news…
EMEA
SCIO Capital has appointed three Deutsche Bank alumni to its newly-founded advisory board. SCIO’s founding advisory board members are: Oliver Wriedt, founder of HighKey Catalyst; Ganesh Rajendra, managing partner at Integer Advisors; and Carole Sanz-Paris, head of debt capital markets at IDB Invest.
The creation of the advisory board follows the launch in May of SCIO’s most recent closed ended-fund offering, SCIO European Secured Credit Fund III. The board will advise SCIO’s senior management on strategy, market trends, business development and governance.
20 November 2020 17:34:03
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