Contents

ABS

Collections conundrum

Italian NPL ABS amortisation eyed

The number of Italian non-performing loan securitisations with lagging collections is set to rise to 17 by 1Q21, Scope predicts. If the slowdown continues, the average time for deals to amortise will exceed 10 years, according to the agency’s NPL Dynamic Coverage Index.

The index is based on the median of the net yearly proceeds by outstanding liabilities and measures the average number of years needed for transactions to amortise if the pace of collections remains unchanged. Scope’s NPL Performance Index tracks the ratio between aggregated cumulative net proceeds and original cumulative business plan net forecasts.

“We expect both indices will continue to deteriorate in the short term, based on our projection of the slowdown in the pace of collections resulting from the coronavirus pandemic and the recent Italian lock-down,” says Paula Lichtensztein, senior representative in the structured finance team of Scope. “Consequently, the Scope NPL Performance Index is likely to fall below 100, while the projected average number of years needed for transactions to amortise will exceed 10 years.”

Scope examined the performance of 25 NPL ABS, with an aggregated gross book value of €73bn. The agency expects that by the next quarter, an expected average underperformance of 27% in terms of gross collections versus original business plans will be seen across the sector.

As at end-September, underperformance was seen in 14 of the 25 transactions, in terms of gross collections, and 12 of the 25 in terms of net collections. Subordination and/or underperformance events have been reported by nine out of 25 transactions.

Various factors drive underperformance, including initial servicing onboarding processes causing delays for servicers’ activities, the slow-down in judicial proceedings this year, a deterioration in borrower affordability and liquidity conditions and real estate depreciation.

Out of 24 transactions, 22 are overperforming. Scope notes that overperformance has been driven by factors such as collections from cash-in-court positions and servicers reaching extra-judicial agreements, which leads to a frontloading of collections.

Given the risks brought about by lockdown measures, attention has turned to recovery strategies. Scope has identified judicial proceedings as the main recovery strategy, accounting for on average 49% of transaction collections. Discounted-pay-offs with 23% of transaction collections and note sales with 8% of transaction collections have also been seen.

Jasleen Mann

Structured Finance

SCI Start the Week - 30 November

A review of securitisation activity over the past seven days

Last week's stories
Double trouble
Two - not one - JP Morgan corporate loan CRT trades have been in the market
Emergency exit
Taking the GSEs back to private hands in two months is the tallest of tall orders
Excess spread harmonised
EBA's SRT recommendations released
Generation change?
Investor, issuer ESG engagement surveyed
Offshore demand
Chinese securitisation continues to gain traction
Restructuring boost
Project Galaxy portfolio acquired
SCI CRT Awards 2020
Credit Insurer of the Year: RenaissanceRe
SCI CRT Awards 2020
Impact Deal of the Year: Project Grasshopper
SCI CRT Awards 2020
Innovation of the Year: Vale Securities Finance 2019-1
SCI CRT Awards 2020
Investor of the Year: Alecta-PGGM
SCI CRT Awards 2020
North American Transaction of the Year: Chase 2019-CL1
SCI CRT Awards 2020
Transaction of the Year: Resonance 5

Other deal-related news

• The EBA has published its long-awaited report on significant risk transfer in securitisations, which includes a set of detailed recommendations to the European Commission on the harmonisation of practices and processes applicable to the SRT assessment (SCI 23 November).
• Kamakura Corporation has highlighted concerns over the assessment of CLO combo notes in a new research report from its North American client team (SCI 23 November).
• Penta CLO 2 has become the first European CLO to trigger its payment frequency switch to semi-annual, with the manager Partners Group (UK) Management doing so at its discretion, according to Fitch (SCI 23 November).
• The EBA has published its first assessment of the use of Covid-19 moratoria and public guarantees across the EU banking sector, based on data disclosed by banks as of 30 June 2020 (SCI 23 November).
• The UK FCA has launched its new STS notification platform, with the aim of allowing UK securitisation originators and sponsors to 'pre-populate' the STS list in anticipation of the end of the Brexit transition period on 31 December (SCI 24 November).
• Moody's has downgraded the global scale ratings of 49 classes of notes from 10 South African RMBS and auto loan ABS, and affirmed the GSRs of 16 classes of notes (SCI 26 November).
• The Basel Committee has published a technical amendment in connection with the capital treatment of non-performing loan securitisations (SCI 27 November).

Data

BWIC volume

Capital Relief Trades

SCI CRT Awards 2020

Issuer of the Year: Intesa Sanpaolo

Intesa Sanpaolo has won the Issuer of the Year category at SCI’s Capital Relief Trades Awards for drastically expanding both its investor base and the asset classes it securitises via significant risk transfer transactions. Key to this success has been the holistic approach of the active credit portfolio steering (ACPS) unit.

Intesa Sanpaolo began its famous GARC programme in early 2014 as an SME programme and progressively expanded in terms of both investor base and range of asset classes and structures, with IMI C&IB - Global Markets Solutions & Financing acting as arranger and placement agent.

Indeed, over the last year the Italian lender finalised an unfunded mortgage transaction with AmTrust International, an SME and a corporate deal, as well as four SME transactions with the Italian guarantee fund. Innovation continued into the post-Covid period and in June the bank closed a capital relief trade backed by leasing assets, as well as another SME trade with the EIF in September.

According to Elisabetta Bernardini, head of credit portfolio management at Intesa Sanpaolo: “We started planning for an expansion of the asset classes we cover well before the pandemic, but the crisis led us to revisit our action plan by focusing on selected projects and taking into consideration the new issues that emerged. We acknowledged that the Covid pandemic created uncertainty across the market regarding the evolution of credit portfolios, following the expiration of payment holidays and other government programmes.”

As with other banks, Intesa enhanced the credit quality of underlying portfolios by excluding Covid-affected industries and higher risk borrowers. Payment holidays were permitted, since Italian moratoria have a broad enough scope that is not specifically aimed at struggling borrowers. Furthermore, extensive due diligence has been performed with the involvement of the CFO, CRO, CLO and other relevant business units, while the strong track record of the GARC programme has visibly paid off.

However, key to the bank’s dramatic expansion has been the active credit portfolio steering unit within the CFO area. The unit was one of the leading initiatives of the 2018-2021 industrial plan and it was created for credit portfolio management purposes.

The ACPS mandate is to actively manage credit portfolios by supporting units to achieve a better risk/return profile through more targeted credit origination and a more dynamic management of both performing and non-performing loans. ACPS activities are carried out holistically across broad cross-functional teams, from CFO to CRO, business and credit officers, with direct access to all key decision-makers.

Biagio Giacalone, head of the active credit portfolio steering unit, comments: “In recent years, due to more conservative regulatory requirements, rising margin pressures and a need for a more forward-looking approach to credit risk, the role of credit portfolio management has acquired a broader scope. The ACPS unit was set up within the CFO area to address these changing needs and requirements. The purpose is clear: enabling the achievement of a target credit portfolio, which is sustainable and coheres with the risk appetite of the Group.”

ACPS is still evolving its role, by focusing on each phase of the credit value chain, such as steering credit portfolio at origination, pricing adjustments for more attractive sectors, dynamically managing the performing portfolio, executing credit risk transfer transactions to optimise economic and regulatory capital for supporting new lending and identifying strategic NPL de-risking initiatives and partnerships with specialised investors.

Giacalone concludes: “This holistic approach can contribute to an active reshaping of the portfolio through risk-sharing and steering, enabling more credit flows at the business level for various asset classes and a larger base of private and public investors.”

Honourable mention: Santander
Santander remains a leader in the significant risk transfer market, in terms of transaction volumes, diversity and structural innovation. The bank has completed 12 capital relief trades and broken new ground on several fronts during the awards period.

Most notably, it became the first issuer to syndicate an unfunded synthetic securitisation across multiple re/insurers. Providing first-loss protection on a portfolio of revolving credit facilities, the transaction features a novel portfolio referencing mechanism.

For complete coverage of SCI’s 2020 CRT Awards, click here.

Capital Relief Trades

Risk transfer round-up - 30 November

CRT sector developments and deal news

Getin Noble Bank plans to execute its first capital relief trade, a synthetic securitisation referencing a Sfr750m portfolio of foreign exchange mortgage loans. The purpose of the transaction is to optimise capital by transferring both credit and foreign exchange risk. JPMorgan is acting as the arranger in the deal.

Capital Relief Trades

SCI CRT Awards 2020

North American Issuer of the Year: Freddie Mac

Freddie Mac has several claims to fame over the last 12 months. One of the most arresting is that the GSE rejuvenated the credit risk transfer sector following the most traumatic period of market turbulence and investor alarm in the last decade.

On 8 July, over three months after its previous STACR deal and when this period of acute market dislocation was to a large extent still prevailing, Freddie closed its 2020-DNA3. Rewarded for its boldness, the original US$555m deal was upsized to US$1.106bn. It drew 52 investors, over 80% of which were based in the US, but five names (one of whom resided outside the US) were entirely new to the CRT space.

“In April, it was a very tough time in all markets, but we saw good price recovery in May. And in the second half of that month we had conversations about the capacity to bring a new transaction and in the second half of June we felt confident enough to bring a deal,” says Mike Reynolds, vp of single-family CRT at Freddie Mac. 

Until this deal was launched, it had looked likely that the Covid-19 crisis had put paid to the agency CRT market for good. Indeed, Fannie Mae has not brought a CAS deal since before the coronavirus crisis engulfed the market.

The ice-breaking 2020-DNA3 deal did contain several features that were designed specifically to help the transaction cope with the unique circumstances. In particular, any loans that were reported to be in forbearance were excluded from the pool.

This went a long way to buy investor confidence, says Freddie, but it also increased credit enhancement on all tranches. The retained first loss tranche was increased from 10bp to 25bp, the B1 CE was increased from 60bp to 75bp and the M2 CE from 110bp to 175bp.

Spread levels were also wider than had been seen in recent STACR deals. But not as wide, suggests Reynolds, as the general increase in the cost of credit seen during the selloff, thanks to these additional investor-friendly buffers.

Prior to the launch, Freddie also organised a series of virtual events spread over two weeks in June, in which it met its valued investor base to discuss a wide range of topics of concern and interest. The events were attended by over 270 investors from 100 different firms, and represents the most well attended the borrower has ever mounted.

Not only was DNA3 a success, it cleared the way for further issuance. Almost immediately thereafter, Freddie completed an ACIS transaction, which covered an additional US$425m of losses on the US$48.3bn DNA 3 reference pool and was also doubled from original size.

Another four STACR deals have followed in the wake of DNA3 and in fact 3Q20 was the busiest quarter for Freddie in the CRT market ever.

In mid-October, Freddie made the headlines again when it sold the first CRT deal referencing SOFR rather than Libor. The latter has been in use in a vast range of financial instruments since time immemorial, but is due to exit the stage at the end of 2021.

The STACR REMIC 2020-DNA5, worth US$1.086bn, comprised four tranches. The M1, the narrowest, was priced to yield 130bp over 30-day average SOFR, while the B2, the widest, yielded 1150bp over 30-day average SOFR.  “As a member of the Alternative Reference Rates Committee (AARC), Freddie Mac has been a leader in the shift from Libor to SOFR,” says Reynolds.

The GSE had been in talks with investors, broker-dealers, data vendors and other market participants before it took the plunge to ensure that its transition from Libor to SOFR - still an unfamiliar benchmark to most in the market - would be as smooth as possible. 

The next SOFR deal is due in November 2020 and, in fact, Freddie is now back to its regular issuance schedule. After the benighted year of 2020, this is no small achievement.

Honourable mention: Citi
Quietly, without much fuss, but with persistence and continuity, Citi has demonstrated considerable commitment to the CRT market in the US. JPMorgan and Goldman Sachs have joined the arena in the last 12 months, broadening the scope of participation in the CRT market, but Citi has been there for years.

Its deals tend to slip under the radar screen, often arranged between the borrower and one or two investors. But for Citi, the CRT market is as fundamental a mechanism of capital management as any of those that are more generally used by the majority of US financial institutions. It is the grand-daddy of the non-GSE CRT market in North America.

For complete coverage of SCI’s 2020 CRT Awards, click here.

Capital Relief Trades

SCI CRT Awards 2020

Arranger of the Year: Credit Suisse

Credit Suisse completed two significant risk transfer transactions during 2Q20 that differ significantly from the typical capital relief trades executed during the height of the coronavirus crisis and were placed with different investor bases. The bank is SCI’s CRT Arranger of the Year in light of its proven placing power, structuring capabilities and motivation to bring the SRT market forward.

The first of Credit Suisse’s Q2 issuances was Elvetia 12, a funded transaction that references a Sfr1.8bn predominantly blind portfolio of SME and mid-cap loans, with a maximum concentration of 1%. The 0%-7.25% equity tranche was placed with two institutional investors, which benefit from 20% side-by-side risk retention.

Certain industry sectors most affected by the Covid-19 fallout were excluded from the reference portfolio and the structure features a 2.5-year replenishment period, based on pre-agreed criteria. “We took a cautious and conservative approach to the structure and portfolio, including eligibility criteria to avoid contaminating the portfolio with Covid stresses,” confirms Hannes Wilhelm, md at Credit Suisse. “We didn’t approach as many investors as usual during the marketing phase – only those that we knew would be interested, despite the Covid stress in the market. We were surprised by the positive feedback, which enabled us to lower the price and close without any difficulties.”

The original plan was to bring a shorter deal and retain the equity tranche, but the ultimate investors were happy with the first loss and a longer term. “They are longstanding investors in the Elvetia programme, so have experience with our book and are comfortable with the risk,” Wilhelm notes.

He suggests that demand was also driven by the lack of SME deals being offered at the time, given that large corporate CRTs were more straightforward to execute. “A number of investors don’t have the credit expertise to undertake bottom-up analysis of large corporates and therefore rely more on statistical analysis, preferring granular pools.”

The second of Credit Suisse’s Q2 issuances was an unfunded dynamic hedge facility that enables the bank to draw down protection on an undisclosed portfolio of income-producing real estate when needed. Essentially, the bank has a recurring option to purchase protection, such that the size of the portfolio and the protection can be adjusted to meet its capital requirements every quarter.

This is achieved by pro-rata amortisation, with a trigger to sequential amortisation in the case of a default. “If there is a default, it is difficult to scale up or down: if scaled down, the default could become too big relative to the size of protection. To solve this, upon a default, the transaction switches to sequential amortisation, with the existing pool and the unused portion of the facility continuing on the original terms,” Wilhelm explains.

The portfolio can be ramped up to a maximum of Sfr2bn, at which point it will provide roughly Sfr87m of protection. The risk premium payable by Credit Suisse is based on the prevailing tranche size in the respective quarter, subject to a minimum facility commitment fee.

Protection is in the form of a financial guarantee provided by RenaissanceRe, which took exposure to the mezzanine tranche (0.2%-4.55%). The transaction priced in the mid-single digits.

The fact that these transactions were executed during a difficult period at economic levels demonstrates that there is a true partnership between Credit Suisse and its investors, according to Wilhelm.

Honourable mention: BNP Paribas
BNP Paribas placed nine significant risk transfer transactions totalling over €6bn-equivalent with external investors in 2019-2020, in both cash and synthetic formats across multiple jurisdictions.

In particular, the bank expanded its pioneering cash SRT programme - featuring the ‘use it or lose it’ excess spread mechanism - thereby helping to turn cash SRT into a publicly marketed ABS product and allowing the pricing outcome to be optimised. BNPP Personal Finance was the first issuer to bring such a true sale SRT ABS and the mechanism was adopted by many others thereafter.

Meanwhile, a highlight of its activity in the synthetic space was Resonance 5, which enabled BNP Paribas to hedge a second loss tranche – split into funded and unfunded protection on a pari passu basis – referencing an €8bn portfolio of global corporate loans. As well as reinforcing the reputation of the programme with key institutional investors, the transaction achieved an RWA reduction of over €3bn and was shareholder value accretive for the bank. Indeed, actively using securitisation technology to optimise the group balance sheet is a strategic objective for BNP Paribas.

But arguably what sets the bank apart is its vision for the SRT market, which is to bring the product to the core ABS universe. As such, it has built a strong flow and financing securitisation franchise and leading league table position, enabling it to leverage its knowledge and investor relationships when placing SRT transactions.

For complete coverage of SCI’s 2020 CRT Awards, click here.

Capital Relief Trades

Test case

JPMorgan CRT details revealed

Further details have emerged in connection with a corporate capital relief trade that was completed last month between JPMorgan and PGGM and Alecta (SCI 27 November). The transaction was motivated less by capital needs, given the US lender’s strong capital position, but more from a desire to test the trade from an efficiency standpoint. 

The cash collateralised deal references a US$2.5bn replenishable large corporate pool of mostly drawn commitments. The replenishment feature enables JPMorgan to hedge both new and existing loans via a multi-year programme. The capital relief trade was first revealed in early November, although both parties have been laying the ground for it over a number of years (SCI 11 November).

Angélique Pieterse, senior investment manager at PGGM, notes: “It takes time to get all stakeholders on board and acquire the information needed. We perform a thorough due diligence, where we learn how the bank rates and manages risk and make our assessment on that basis. Obviously, getting there and building trust takes time.”

She continues: “The transaction shows how important this technology is even for banks who are well capitalised, since it improves efficiency by boosting the return on capital for their lending business.”

Indeed, executing this deal was a conscious effort by JPMorgan to test the product from an efficiency standpoint. Pieterse comments: “Pricing the risk of providing capital through credit risk-sharing transactions can be done much more effectively, since - unlike raising equity - you don’t have to make assumptions about the bank’s multiple businesses.”

Pieterse expects such activity to pick up on the commercial banking side. She explains: “The drive for more efficiency is always there and credit portfolio management tools can be limited, especially where there’s less liquidity in the secondary loan market or in single name CDS. CRTs can be a helpful tool to manage less liquid credit risk exposures in an efficient way, while providing the investor with a unique type of risk not readily available in public markets. Illiquidity is even more of an issue in commercial banking, since you cannot buy and sell CDS on SME loans, so the benefit there is even greater.”

JPMorgan opened the US CRT market in October 2019 with a residential mortgage transaction dubbed Chase Reference Mortgage Notes 2019-CL1, with other transactions following (see SCI’s capital relief trades database). So far this year, the bank has brought further residential mortgage and auto loan portfolios to market and is expected to close a club CRT referencing corporate and SME loans this month.

Stelios Papadopoulos

Capital Relief Trades

SCI CRT Awards 2020

North American Arranger of the Year: BMO Capital Markets

BMO Capital Markets (BMO) has led the way in true risk sharing trades outside of Europe for over four years. Its well-established programmes, combined with strong investor connections enabled it to be the first to close a deal after the declaration of the global Covid-19 pandemic and seal its place as SCI’s North American Arranger of the Year.

BMO completed its first SRT issuance in 2016 and remains the only Canadian bank to have issued SRT transactions. Since expanding the programme in earnest the following year, BMO has now completed nine transactions with a total protected notional of over US$13bn and notes placed with 18 investors totalling approximately US$1.2bn.

The programme and BMO’s arranger capabilities were put to the test with the arrival of the Covid-19 crisis-driven market volatility and widespread lockdown measures. Jean-Francois Leclerc, md & head, risk & capital solutions at BMO, recalls: “We have regular discussions with all of our investor institutions – it’s an opportunity to catch up with what they’re doing and gauge interest in deals we are planning – and we did so as the Covid-19 market stress was beginning to materialise, focusing mainly on our existing book of investors.”

He continues: “That gave us insight into who was looking for opportunities and who was closed for business. So we were able to assess client interest for a deal that we were hoping to do in April.”

BMO considered a range of alternative partners, but ultimately decided a bilateral deal was the best choice in those market conditions. That deal was Muskoka 2020-1, where BMO structured, arranged and placed U$132m in guarantee linked notes referencing a US$1.887bn portfolio of large corporate loan facilities.

“We don’t normally do bilateral deals; our preference is for small club deals,” says Leclerc. “However, it was different in the early days of the pandemic, where multiple investors would have been much harder to manage. A bilateral arrangement, which usually involves a bit of give and take between issuer and investor, is easier to manage and was the best way to get something done at that time.”

Leclerc adds: “Typically we aim to engage a number of investors from the very beginning of the deal, both old and new, and that works best for us. But in most transactions, market conditions are much clearer and we are able to close the deal in that way.”

Indeed, BMO was back in the market in July with Muskoka 2020-2. This time, the US$184m guarantee linked notes referencing a US$2bn portfolio were widely marketed and successfully placed with a number of investors, including two equity buyers who were new to BMO’s SRT programme.

As Leclerc concludes: “Relationships are key in arranging any SRT deal successfully, alongside the credibility of the team and the credibility of the institution. For investors to invest in a transaction, they must have faith in the risk management ability of the institution behind the trade.”

Honourable mention: Goldman Sachs
Goldman Sachs’ entry into the still early stages of the US non-GSE capital relief trades market would in and of itself be noteworthy. But to bring innovation to the structure and arrangement of its first deal in the sector merits an honourable mention from SCI in the North American Arranger of the Year category.

On 25 September 2020, Goldman Sachs Bank USA’s Credit Linked Notes Due 2025 issued US$98.56m senior mezzanine and US$86.24m junior mezzanine tranches, which generated capital relief treatment. The deal synthetically referenced a portfolio of predominantly investment-grade revolver loan facilities under which Goldman Sachs or one of its affiliates is the lender.

On the same day, Goldman Sachs issued the CLNs to Absolute 2021-1, a Cayman-domiciled SPV, which in turn repackaged the mezzanine tranches and issued pass-through class A and B notes. The decision to offer the CLNs in repack form is understood to have been in response to investor needs and facilitated the smooth and efficient placing of the deal.

It is expected that similar structures will be adopted by other arrangers in future as the US CRT market grows and repacks become increasingly popular with investors.

For complete coverage of SCI’s 2020 CRT Awards, click here.

Capital Relief Trades

SCI CRT Awards 2020

Law Firm of the Year: Allen & Overy

In a highly disrupted year, Allen & Overy (A&O) has distinguished itself by not only maintaining its significant market share, but also by being able to expand its offering into new markets, advising on a variety of deals in numerous geographies as well as a variety of first-of-their-kind deals. At the same time, A&O has played a key role in framing post-Covid crisis documentation.

The key is the firm’s holistic approach to the sector, according to A&O partner David Wainer. “We offer breadth and scope and have never viewed SRT as the domain of one or two partners operating in one office. We see it as a collaborative effort across a number of partners and teams in various offices and, as we’ve seen the market grow and diversify, that approach has paid dividends. In London alone, we have Parya Badie and Guy Antrobus, as well as myself actively working on balance sheet synthetics, and partners such as Salim Nathoo and Sally Onions supporting a busy cash SRT practice.”

He continues: “Our primary focus has been to try and do the most interesting work for the most interesting clients. While we value working with seasoned issuers who regularly tap the market, we have worked hard to develop a reputation as a go-to firm for banks looking to do their first SRT trades or for others trying to do new or innovative things in the SRT space. The close collaboration that comes from helping our clients navigate their way through the myriad of legal and regulatory issues when executing these transactions is very rewarding. The process can be long and bumpy, but that experience helps foster stronger bonds.”

The stand-out deals that A&O advised on over the last 12 months are too numerous to mention here, but include: the first SRT deal to reference a portfolio of exclusively UK ESG loans – Project Grasshopper; the first SRT transactions for Santander Consumer Bank in Italy and Sweden; the first SRT transaction for BNPP Fortis in Belgium; the first SRT transaction for Banco Sabadell in Spain; and the first syndicated unfunded SRT transaction involving insurers. Among those, Wainer says: “NatWest’s Project Grasshopper was one highlight, a deal which garnered much interest for its novel ESG sector focus. We were proud to be involved in such a widely acclaimed deal.”

Further, he says: “Another innovative deal was Santander’s unfunded syndication to insurers, where we acted for Fidelis, and its successful conclusion reflected a long-talked about development in the market. We were also involved in a number of first transactions showing the market expanding into new geographies.”

For example, A&O advised BNP Paribas Fortis on the first deal in Belgium last December and is now working for two other Belgian debutants. “That has become a familiar pattern – once we successfully close one deal in one jurisdiction, others tend to follow and our initial involvement places us in a favourable position to be involved in the subsequent transactions,” says Wainer.

“It is true also in other more mature markets like Spain, where our regular work advising on deals this year for Caixa, BBVA and Santander helped us scoop the mandate acting for first-time issuer Banco Sabadell - a deal which, given its launch mid-pandemic in June, was especially pleasing to see close successfully,” he adds. “We’ve also benefited from a close relationship with the EIF and EIB, each of which became particularly active in the crisis, stepping in to help banks manage their capital and facilitate new lending into depressed markets.”

Another highlight for the firm this year has been A&O’s role at the forefront of drafting standard language to help the market come to terms with the impact of Covid-19-triggered general payment moratoria and the related EBA guidance on existing provisions (such as the impact of payment holidays on credit events and refinancing provisions). “This began with the development of standardised language for the EIF, which was a natural consequence of the deal work we were doing for them,” Wainer says. “We started to build that new wording into EIF deals immediately and have since seen it replicated more broadly in other deals as well.”

Honourable mention: Linklaters
As one of the major law firms in the SRT market it is to be expected that Linklaters has clients in every part of the market from arrangers and originators; to fund investors; to reinsurers; to the EIF. But it is the work it has done with investors and in the regulatory space that merits an honourable mention this year.

The list of deals on which Linklaters advised an investor, or sometimes multiple investors with different teams of lawyers, is a list of landmark and innovative transactions. Highlights include many of this year’s SCI award winners: Project Vale, Project Meno, Project Grasshopper and Resonance V. In addition, the firm assisted clients in a number of complex private deals.

Among Linklaters’ regulatory work this year it has assisted the International association for credit portfolio managers (IACPM) with its responses in two key areas. First, to the EBA’s consultation paper on an STS regime for synthetic securitisations; and second, to the European Commission’s request for information on how the Capital Markets Union could further assist banks and investors in contributing to real economy finance after Covid-19.

For complete coverage of SCI’s 2020 CRT Awards, click here.

Capital Relief Trades

Innovative SRT inked

Belgian synthetic RMBS finalised

AXA Bank Belgium has completed a synthetic RMBS that references a static €730m portfolio of Belgian prime mortgages. Dubbed CASPR-1, the significant risk transfer trade is unusual due to the underlying asset class and the amortisation structure.

Rated by Fitch and S&P, the transaction consists of a €23.575m AA/AA- rated class A tranche (which priced at three-month Euribor plus 200bp), €17.860m A/A rated class B tranche (plus 300bp), €15.717m BBB+/BBB+ rated class C tranche (plus 575bp) and a retained €2.144m BB+/BBB+ rated class D tranche (plus 800bp).

The deal features a sequential amortisation structure that switches to pro-rata after 10 months, except for the first loss tranche, which pays off sequentially throughout the life of the trade. The feature was included as additional credit enhancement, since the tranches ended up thinner than expected, due to the benefit of a 0.75% annual excess spread.

Further features include time calls that can be exercised in five years - subject to regulatory approval - and eight years, once the expected WAL of the portfolio has run its course. The underlying assets are not subject to any payment holidays.

The capital relief trade was preplaced for two reasons. According to Boudewijn Dierick, head of ABS markets at BNP Paribas: “First, it’s a novel structure; it’s not a cash deal, so we needed to know who could buy it. Second, due to the small size of class C and D, we expected investors to buy these as combo notes. This allows time to discuss the terms with them, without having to resort to 20-plus counterparties, as is the case with a syndicated trade.”

Residential mortgages are not typically hedged in synthetic structures due to already low risk weights. However, for standardised banks or IRB banks with sufficient volumes of mortgages, synthetic securitisations can make sense from a cost of capital perspective. Indeed, the Axa Bank Belgium deal was driven by regulatory capital considerations.

“Residential mortgages can work for certain banks with large volumes of such loans - such as Axa Bank Belgium - or for certain types of residential mortgages, such as high LTV pools. And with Basel 4 on the horizon, issuance could pick up,” says Dierick. 

The last point is illustrated by CASPR-1’s portfolio, which has been selected from the riskiest portion of the lender’s book and has an overall riskier credit profile compared to typical Belgian RMBS. Indeed, the pool consists of loans originated with original LTVs of nearly 90% and a debt-to-income (DTI) distribution skewed towards the highest buckets.

According to Fitch, as of end-September 2020, more than half of the borrowers included in the pool had a DTI in class 4 or above. Most of the portfolio comprises owner-occupied properties (89.2%), with the remainder consisting of investment properties.

BNP Paribas and Belfius acted as joint arrangers and lead managers on the transaction.   

Stelios Papadopoulos

Capital Relief Trades

SCI CRT Awards 2020

North American Law Firm of the Year: Clifford Chance

The burgeoning development of the US bank capital relief trade (CRT) market has been one of the major talking points of the sector in 2020 – perhaps the major talking point – and Clifford Chance has been at the forefront of this business.

This coming of age of the US CRT market has been talked of for several years and, though there have been several false starts, 2020 seems to be the year when it has all come together. Several factors have coalesced to make this possible, most notably regulatory benevolence and the extent to which the Covid-19 lockdown has underlined the importance of sufficient capital adequacy.

Though some banks have had experience in the sector, others have been less experienced. Yet for the more experienced and for the less experienced, Clifford Chance has been on hand to pilot issuers through the shoals and past the reefs.

It has represented two of the three largest issuers in the US CRT market in 2020 – which have been Goldman Sachs, Citigroup and JP Morgan - and it is for its unrivalled legal footprint and expertise in this sector that it has been selected as SCI’s North American Law Firm of the Year.

JPMorgan has made most of the headlines, with its breakthrough mortgage securitisation of 2019 securing regulatory approval in February and several new CRT transactions following that throughout the year, including its first auto loan securitisation in 14 years in August. Goldman Sachs issued two CLNs worth US$184.8m in September, later repacked as pass-throughs, while Citi - one of the stalwarts of the US market - has continued to be active below the radar screen.

Though Clifford Chance was unable to confirm which two of these three it represented, it is clearly at the heart of the matter.  In addition to its instrumental role in opening the market for US domestic issuers, the firm has represented foreign issuers, arrangers and investors in the US market for more than two decades and has been at the forefront of the development of many of the practices that allow global CRT issuers to reach US investors and investment managers.

The firm set itself the target of being the go-to practice for any bank contemplating CRT issuance in the US and, after 2020, it is hard to argue that it has not succeeded in this respect. It has a highly respected and experienced New York practice, headed by partners Gareth Old and David Felsenthal.

Felsenthal graduated from Princeton and Harvard law school, and started work at the Federal Reserve. He joined Clifford Chance in 1992, becoming a partner in 1997.

Old brings a wealth of international experience, having started his career with Clifford Chance in London in 1997, before moving to Hong Kong and Frankfurt and then to the New York office in 2004.

“We are delighted and honoured to have won this award from SCI, which reflects the fact that Clifford Chance is able to bring the strength in depth and expertise we possess in CRT markets around the globe to the North American market,” says Felsenthal.

The Clifford Chance CRT team is anchored by partners Jessica Littlewood and Timothy Cleary in London, both well-known and highly respected names in the industry. The firm’s global CRT team includes key partners in Madrid, Frankfurt, Luxembourg, Hong Kong, Singapore, Brussels, Amsterdam, Milan, Paris and Tokyo as well.

Clifford Chance’s expertise covers the full range of CRT securitisation, from the use of an SPV acting as protection seller and note issuer to bilateral transactions between originator and investor, either in the form of a CDS, financial guarantee or credit insurance policy.

Clearly, in this world, staying abreast of key regulatory developments could not be more important, and no law firm is in closer touch with regulatory thinking or more cognisant of the import of all current and pending rules than Clifford Chance.

In short, few law practices possess the strength in depth across global CRT markets than Clifford Chance, but the fact that it has been the advisor to two-thirds of the banks active in the North American market means it has at the moment few significant rivals in this jurisdiction.

Honourable mention: Mayer Brown
Any US issuer bent on a capital relief trade offering is sure to encounter the name of Mayer Brown sooner or later. The premier US law practice has been at the forefront of the synthetic securitisation market for a number of years, in Europe as well as the US.

In fact, Mayer Brown is the firm that can offer cutting-edge advice and guidance to borrowers which need to comply with both US and EU laws as part of the same transaction. It has well-respected partners in both London and New York to provide the necessary hand-holding to, for example, European banks wishing to bring CRT deals in the US to cover obligations of North American subsidiaries.

It is also very well-placed to capitalise on the predicted boom of the CRT market in the US, not only from European borrowers but from US names as well.

For complete coverage of SCI’s 2020 CRT Awards, click here.

Capital Relief Trades

Covid communications

The pandemic has meant greater negotiation over terms between CRT buyers and sellers

Discussions between CRT issuers and potential investors have become more protracted in  2020 as a result of Covid 19, with borrowers more willing to give way on areas such as term sheets and credit exposure limitations, notes Kaelyn Abrell, a partner and portfolio manager at ArrowMark Partners, a $20bn asset manager based in Colorado.

“Negotiations have reached even higher levels of depth and detail. Issuers have demonstrated a much greater willingness to have these discussions in an effort to limit costs by identifying the combination of terms that work  for both parties,” she explains. Abrell was speaking last week at SCI’s annual capital relief trades seminar, appearing on the panel devoted to the perspectives of issuers and investors in 2020.

The dialogue between buyers and sellers has generally concerned a few key topics. For example, the credit quality of the average CRT reference portfolio has improved this year with more rated investment grade rather than non-investment grade. Lower credit limits are also at higher attachment points, so that while transactions before 2020 might have cut off at B or B- they are now more likely to cut off at BB or BB-, thus limiting investor credit exposure and also tail risk.

There have also been energetic talks around exposure to sectors most acutely affected by the pandemic, so the latter have been minimized or even removed from portfolios entirely. Some deals have been investment grade only. Although many sectors of the economy have received assistance from the government, buyers have become acutely aware of how these sectors might look when all the help has dried up.

“It’s been very beneficial to have government measures provide stability to at-risk companies and individuals but it also delays economic clarity. This dynamic has begun to flow through to the new issuance process and contributed to the need for greater negotiation,” she says.

Replenishment periods have also been often negotiated down from three years to two years, and there have been greater restrictions on portfolio drift with limits imposed on high yield exposure and also caps on single credit exposure. Investors have become very keen to restrict the impact of Covid 19 and to have as high a quality portfolio as possible from the outset.

Issuers have been more compliant than in the past as they want to get the deal done at an acceptable cost. “We have had significantly more dynamic conversations than has been the case in the past,” says Abrell.

A greater willingness to ensure certainty of execution has also meant that there have been more small deals, more bilateral deals and more with only one or two investors in 2020.

Covid 19 has also affected the issuance environment in a more prosaic manner. As travel has been restricted, issuers now have to meet potential investors via zoom rather than face to face, and, for investors that might be new to the market and worried about portfolio quality, a virtual meeting has its limitations.

“Video calls can work as a bridge but it’s difficult to develop a personal connection. Investors that are new to this asset class would infinitely prefer and benefit from an on-site due diligence,” she says.

All these factors have affected volumes in 2020, but, looking forward, Abrell sees a healthy pipeline building for the European CRT market in 2021. To date, Q420 has been much slower than normal, with volume running at only a half or even a third of the average deal flow. Moreover, two of the most prolific issuers in recent years - Deutsche Bank and Santander - have been absent from the market in 2020 and this has created something of a vacuum. So, there is considerable pent-up demand.

But, on a cautionary note for the nascent US CRT market, corporate default rates are now at the highest rate seen since the financial crisis year of 2009. While consumers and SMEs have been supported by stimulus measure, especially generously in some countries, Covid has exacerbated any problems large US corporations might have been suffering before the pandemic. So for all the talk about a benign global credit environment, it is salutary to note that in the US corporate default levels are worryingly high.

Simon Boughey

Capital Relief Trades

SCI CRT Awards 2020

Advisor/Service Provider of the Year: US Bank

US Bank’s global corporate trust team has established a strong presence in Europe over the past 10 years, ranking as the region’s top structured finance trustee by deal volume, according to multiple sources including Moody’s and S&P. Indeed, the firm has built a reputation for helping clients navigate complex deals and is trustee on a significant number of risk transfer trades in Europe. In light of its successful track record in the space, US Bank is SCI’s CRT Service Provider of the Year.

US Bank prides itself on having the experience, reach and technology to navigate the mechanics of challenging deals with transparency, consistency and quality of service. Together with managing intricate and unique transactions across diverse jurisdictions, the firm views its role as protecting the interests of investors and effectively engaging with all parties to a deal. Among the qualities necessary for such engagement are: agility, flexibility and responsiveness; advanced knowledge of new markets; the ability to be commercially aware, respecting a client’s time and costs; detailed cash, currency and investor reporting; and proactive communication.

Anatoly Sorin, svp, CDO and CLN relationship management at US Bank, notes: “Our clients tend to be large banks; primarily UK banks, with huge portfolios of assets. Although our clients are the issuing CRT banks, our services also benefit investors, which appreciate the quality of our reporting. Investors tend to have preferences about which trustee is appointed on a deal and we often see repeat investors, given that only a handful specialise in CRTs.”

US Bank differentiates itself from its competitors in the CRT trustee arena by being highly rated and having dedicated teams in Ireland and the UK. “If an underlying asset defaults, a certain process needs to be followed to enable the financial guarantee to continue. Verification is undertaken by an accounting firm and the asset is usually swapped out of the portfolio. But there is often a tight turnaround, the success of which can have a direct impact on investors’ rate of return,” says Sorin.

He continues: “Similarly, we often have to wait for months for deals to come to fruition and then they have to be executed speedily. The execution aspect is critical and is facilitated, in US Bank’s case, by having consistent documentation across clients.”

A leading magic circle law firm represents the majority of the firm’s customers. “Having high-quality and standardised documentation in place helps deals get off the ground quickly and efficiently,” Sorin notes.

He concludes that while CRT volume has slowed this year due to the Covid-19 fallout, December is expected to be extremely busy in terms of issuance, driven by the year-end closing of books and cleaning up of balance sheets.

Honourable mention: Granular Investments

Founded by former Arch and PMI Europe senior executives Giuliano Giovannetti and Richard Sullivan in 2019, Granular Investments continues to gain traction in terms of bridging the gap between the different approaches taken by insurers and banks to capital relief trades. The firm acts as arranger and adviser to the former, while providing a single point of contact for the latter to access multiple insurance counterparties.

Granular works with a panel of insurers that functions like a syndicate, comprising different risk appetites across the spectrum, including large corporate loans, SME exposures and consumer debt in the core European jurisdictions. As such, the firm has the ability to identify various sources of insurance capacity, with the aim of increasing the size and stability of the CRT market by facilitating a diversified base of protection providers.

A notable success for Granular over the awards period was its role in advising Fidelis Insurance on a large SRT deal for a major European bank, the bank’s first-ever unfunded SRT. The transaction references a €1.3bn portfolio of largely undrawn revolving credit facilities.

For complete coverage of SCI’s 2020 CRT Awards, click here.

Capital Relief Trades

STACR due

BofA and Wells Fargo to underwrite imminent STACR deal

Freddie Mac has mandated Bank of America and Wells Fargo as joint bookrunners for its imminent STACR REMIC 2020-DNA6, due to be priced in the week beginning December 14^th,  the GSE made known today.

This is the fifth STACR trade Freddie has brought to market since it re-opened the CRT market with its 2020-DNA3 in July. In fact, 3Q was its busiest ever in terms of STACR trades.

It will also be the second Freddie trade to reference 30-day average SOFR, which is being introduced as a new benchmark for floating rate notes rather than Libor, which is being phased out from financial markets.

The first to use SOFR was its 2020-DNA5, priced last month. That trade was worth $1.086bn, and the upcoming 2020-DNA6 will be of similar size.

Any mortgage loan which has been reported to by the servicer to be in forbearance, regardless of delinquency as of October 31 2020 is not eligible for inclusion in the reference pool. This is in common with all STACR deals priced since the Covid 19 market dislocation.

The GSE expects to make more pre-marketing material available next week.

Simon Boughey

Capital Relief Trades

SCI CRT Awards 2020

Analytics Firm of the Year: Mark Fontanilla & Company

Mark Fontanilla & Company (MF&Co), founded in Charlotte, North Carolina, in 2017, provides a host of financial market advisory and consultancy services. The CRTx Total Return Index and its associated data/analytics suite is the firm’s flagship offering.

Unveiled in April 2018, the CRTx is the first and, as yet the only, commercial index that tracks the daily total return performance of all outstanding benchmark CRT at-issuance securities issued by Fannie Mae and Freddie Mac. “I perceived a gap in the market and set out to fill that gap. The GSE CRT market was one of the newest US bond market sectors and, unlike other major financial market segments, it did not have an independently administered, cash-based total return index to track and compare sector performance,” explains Fontanilla.

The suite of indices comprises the CRTx Aggregate and a series of sub-indices, including the CRTx Upper Mezzanine, the CRTx Lower Mezzanine and the CRTx Subordinate, as well as annual deal vintage sub-indices. The CRTx Index suite gives the market a much-needed tool for the benchmarking and decomposition analysis of performance across the GSE CRT sector, allowing comparison and portfolio optimisation testing relative to other fixed income sectors.

The value of these indices was underlined during the period of acute Covid-19 related market dislocation in the spring of 2020. The CRTx was the only publicly visible index that provided a clear view of the GSE CRT market in toto, but also of the comparative performance of different tranches and vintages of GSE-issued CRT securities.

Fontanilla’s firm also offers a range of financial, operational and strategic solutions that combine advanced analytics and human intelligence - but it is the human aspect that is deemed the firm’s hallmark. This is in stark contrast to some of MF&Co’s competitors, perhaps, and it is seen as one of the firm’s chief differentiating qualities.

“Instead of concentrating on data and models alone, we emphasise the human intelligence aspect. This is the primary value-added feature of MF&Co. We believe a human expert should be telling a model what to do, rather than a model telling the human expert what to do,” stresses Fontanilla.

That human element is supplied by Fontanilla and his five colleagues at MF&Co, who have a rich financial services background. He brings over 20 years of experience in bond markets, mortgage finance, fixed income research and strategic advisory services to the table.

Before starting his own firm, he was a senior fixed income marketing strategist at Fannie Mae, which included specific involvement in the CAS programme. Prior to joining Fannie Mae, he was a mortgage research analyst at Wells Fargo and also traded RMBS, CMBS and ABS at RBC.

Clients of MF&Co are chiefly large publicly traded firms and private companies, but there are investment funds and smaller local businesses on the roster as well. These clients receive strategic advice and solutions based on both proprietary methods and in-house analytic tools that decompose and benchmark risk and reward.

“We don’t only look at the range of risks for an investment or company, but also whether that risk is worth the spectrum of rewards you may receive,” says Fontanilla.

The firm’s ambit of expertise covers US bond and rates markets, as well consumer finance, but its sweet spot is US mortgages, structured finance and complex securities. These are the key areas in which MF&Co’s skills and knowledge are most abundant, and where it can best help clients to develop strategies that make a difference. 

The firm’s staff knows what investors are looking for and what questions need to be asked, they know how to assess the dynamics of a given market and they know how to determine the different risk/reward profiles of different strategies, explains Fontanilla. In an era in which ever greater fields of data and more powerful technology are seemingly prized above all else, it is refreshing to find that Fontanilla resides his faith in the fundamental power of human intelligence and the capacity to deploy that wisely.

“Ultimately, financial analytic tools and models are only as good as their creators,” he says.

Honourable mention: Open Source Investor Services
Greek goddess Athena was an uncompromising lady who sprang from the head of Zeus full-grown; she wasn’t to be messed with.

One trusts that the powers that be at Open Source Investor Services (OSIS), a Dutch fintech founded in 2010, were versed in classical mythology when it named its pioneering credit risk transfer analysis tool after the eponymous warrior princess. If so, it’s a bold statement of intent.

Athena - the credit risk transfer tool, not the goddess - takes the perspective of both the originator and investor to show the performance of a CRT deal as it operates under different types of economic conditions and under different types of regulation. It is used by brokers, investors, asset managers and structurers.

For complete coverage of SCI’s 2020 CRT Awards, click here.

Capital Relief Trades

SCI CRT Awards 2020

Personal Contribution to the Industry: Steve Gandy, md and head of private debt mobilisation, notes and structuring at Santander

At the helm of arguably the most active and diverse capital relief trades arranging team, Steve Gandy has demonstrated strong leadership in innovation and the introduction of new asset classes and jurisdictions to the market. However, this award also recognises his significant contribution to the industry in terms of thought leadership and advocacy with policymakers and regulators on significant risk transfer matters.

Santander first began exploring SRT issuance in 2008-2009, but began a programmatic organised issuance programme in 2014, after Basel 3 was fully adopted in Europe. “Since 2015, we have issued them in a strategic and disciplined way as part of the bank’s capital planning process. We have a pipeline of deals approved at the beginning of the year, which we execute over the following 12 months on a regular basis,” Gandy explains.

Santander has multiple points of entry to the SRT market, given that its principal subsidiaries are autonomous in terms of managing their own capital and liquidity. As part of the group budgeting process, they are all challenged to be more efficient in the use of capital.

“The bank’s subsidiaries may choose to manage their capital in a variety of ways, one of which is to employ securitisation to recycle capital. SRT deals have proven to be an efficient way of recycling capital and reducing RWAs at below our cost of capital, so it makes sense to execute them,” Gandy observes.

Securitisation has historically been a key product for Santander and securitisation is a cost-effective financing tool. Consequently, because securitisation is strategically important to the group, it is natural that the bank should be an advocate for the industry.

This advocacy includes the PCS initiative, which Santander and other market stakeholders established in 2012 to develop a labelling entity that encourages best-in-class features to be incorporated in securitisations, with the stated purpose of restoring the badly damaged reputation of ABS. PCS, in turn, was one inspiration behind the European Commission proposing the STS criteria - many of which were patterned after the criteria developed by PCS.

At around the same time, the ECB approached Santander - along with other banks - to drive increased transparency in the securitisation market and create a privately-owned data repository. The European DataWarehouse (EDW) was established in 2013 and is committed to developing ABS data templates to be included in the ECB collateral framework.

With the emergence of the STS debate, the European Banking Federation asked Gandy to chair its securitisation working group. He also joined the AFME’s Securitisation Board EXCO through which he participates in EBA roundtables and provides testimony. Notable contributions made in this role include the EBA’s SRT discussion paper and STS synthetics proposals.

“It’s strategically important to Santander to maintain an open and constructive dialogue with regulators to ensure that the resulting legislation responds to the needs of market participants, so that securitisation can be an effective source of funding, for banks, and hence, for the economy,” Gandy remarks.

Together with his involvement in the EBF and AFME, Gandy is a member of the EDW board and the PCS Association Board and chair of the PCS market committee. “Following the Covid crisis, policymakers have begun asking what they can do to help banks lend more in the real economy. The industry has responded that one key point is to make the SRT process more predictable and streamlined, and the EBA has responded through its helpful recommendations for streamlining the process in the SRT Discussion Paper,” he notes.

Gandy looks forward to participating in the consultations related to the upcoming review of the securitisation legislation that the European Commission will commence in 2021 in the context of Capital Markets Union. This includes the securitisation risk weights, the LCR treatment of securitisations and clearer rules around the controversial topic of excess spread. Additionally, there are many issues related to the new ESMA templates that the industry is struggling with, which is important for facilitating increased transparency across the SRT market.

Santander defends increased transparency in the SRT market. All of Santander’s Magdalena and most of its consumer SRT deals are listed on stock exchanges, with publicly available performance data.

“More transparency would provide increased confidence to regulators, which would in turn facilitate increased volumes and attract more investors to the sector,” Gandy concludes.

For complete coverage of SCI’s 2020 CRT Awards, click here.

CLOs

Tech solution

Peter Jasko, ceo at Semeris, answers SCI's questions

Q: How and when did you become involved in the securitisation market?

A: Semeris launched last month (SCI 4 November), but I started getting involved in securitisation and CLOs in particular in 2001. I had been involved in the credit derivatives market for a couple of years prior to that, looking at basket trades and cranking the numbers on those.

When I was structuring deals at Credit Suisse and JPMorgan, it always struck me that legal documents were hard to  read, they were lengthy and always a pain point for me – usually losing a Sunday afternoon and evening going through these documents! I had a bit of a tech background, having started my career in the sector, and it seemed to me there had to be a better way of dealing with docs. But at the time, what was available wasn’t fully up to the job.

In the end, I left the banking world and went back to tech, launching a couple of other start-ups. But that thought about improving the process around legal documentation was always at the back of my mind. When I exited my previous start-up in consumer finance at the end of last year and was deciding what to do next, it became clear that it was a natural time to come back into the CLO space and launch Semeris.

The technology we’re now using – artificial intelligence (AI) and natural language processing (NLP) – has come on a long way since I was in banking and so it’s something that can now be made to work. A lot of the technologies are there and they’re a lot cheaper than they used to be and a lot easier to use.

But still people don’t necessarily want to be given a tool-kit and be told ‘we can do the analysis for you, but here’s a bunch of consulting to make it work.’ So, we have had to take it on further and offer one complete package.

Q: What are the firm’s key areas of focus today?

A: We’re obviously doing a lot of research into AI and NLP, but we’re also doing a lot of work on the engineering side of the business to bring that raw tech in a usable format to our customers. Our overall focus is on analysing and making it easier to work with legal documentation in the capital markets and we are using European CLOs, followed by US CLOs, as our entry point into the space.

We look for docs that are long and complex, where we can add the most value in analysing them. We provide software and library data, so it’s a complete service where we help customers extract information, trace back where it’s come from to uncover value by making it easier to make judgments and pick out the nuggets of information they need - not just in one deal, but across, say, 20 or 30 deals or whatever they define their market as.

Q: How does the firm differentiate itself from its competitors?

A: There are a couple of firms out there doing similar things in adjacent markets in terms of helping customers understand what’s in their legal documentation. So we view them as competitors in that way, but they use lawyers to do the summarisation work, so are slower and their cost base is much higher than our tech-based approach.

Equally, the benefit of our approach is that we can provide a broader view across comparable deals, rather than focusing on just the docs for the one you are being asked to summarise. We are also building a back library, so users can compare how things have changed over time and across the market.

In addition, there are some competing firms that focus on the tech side and our difference to them is that we are providing a library of data as well. It’s packaged and ready to use; you don’t need to start training it up and teaching it how to look for things in the docs – it’s our job to do that for customers.

Q: What is your strategy going forward?

A: We first want to make sure that we’ve covered the CLO market properly and are doing a good job there. Once we’re comfortable with that, we’ll start to look at adjacent markets where it makes sense for us to enter.

We’ll be guided by where our clients want us to go, but are taking a close look at securitisation as a whole – CMBS, RMBS and related markets. Ultimately, we want to be able to build up a body of knowledge to be able to help people to look at more private transactions, but that’s a longer-term goal.

Q: Which challenges/opportunities do you anticipate in the future?

A: We’re a service provider and always dependent on how the market performs and at one level back at the beginning of the Covid crisis, there was a real concern that the leveraged loan and CLO market would implode - which would, of course, have presented a huge challenge. However, that’s not really panning out, even though some sectors have been hit very hard.

It’s typical of the three- to four- or four- to five-year cycle we’re used to seeing in credit anyway, where a few sectors are badly hit, so people rotate out of those sectors or they restructure the loans within their portfolios. Those who called it right to be lightweight in those sectors ahead of the pandemic have done alright, while those who were heavyweight have suffered. But by and large, the CLO market is still healthy and functioning, so that’s good for us as well.

At the same time, experience says that big shifts in economics or crises of one sort or another drive innovation and that’s where we see ourselves – in the innovation space looking at how we can help people use technology to become better and faster at digesting legal documents. Some things have even become easier during the pandemic, such as being able to secure time with people for a meeting. Obviously, people’s budgets are fairly constrained, but there is a greater openness to use technology to help make things more efficient and that’s where we see the opportunity.

Structured Finance

Information giants to combine

Sector developments and company hires

Information giants to combine
S&P Global and IHS Markit have entered into a definitive merger agreement to combine in an all-stock transaction that values IHS Markit at an enterprise value of US$44bn, including US$4.8bn of net debt. Under the terms of the agreement, which has been unanimously approved by the boards of both companies, each share of IHS Markit common stock will be exchanged for a fixed ratio of 0.2838 shares of S&P Global common stock. Upon completion of the transaction, current S&P Global shareholders will own approximately 67.75% of the combined company on a fully diluted basis, while IHS Markit shareholders will own approximately 32.25%.

Douglas Peterson, president and ceo of S&P Global, will serve as ceo of the combined company. Lance Uggla, chairman and ceo of IHS Markit, will stay on as a special advisor to the company for one year following closing.

The combined company's board will include the current S&P Global directors and four directors from the IHS Markit board. Richard Thornburgh, current chairman of S&P Global, will serve as chairman of the combined company. Ewout Steenbergen, evp and cfo of S&P Global, will serve as cfo of the combined company. The rest of the leadership team will comprise senior leaders from both organisations.

Following closing, the company will be headquartered in New York, with a substantial presence in key global markets across North America, Latin America, EMEA and Asia Pacific. The transition and integration of the combined company will be led by executives from both S&P Global and IHS Markit.

The transaction is expected to close in 2H21, subject to customary closing conditions and the approval of shareholders of both S&P Global and IHS Markit. It is not subject to any financing conditions.

In other news…

Anchor investor triggers board replacement
Corestate Capital Holding has revealed that it has a new anchor investor, Vestigo Immobilien Investments, which owns around 9.9% of the share capital of the company. As proposed by Vestigo and to implement a strategic development of the company, all previous members of the Corestate supervisory board have resigned and been replaced by former Dexia ceo Friedrich Munsberg, former KPMG and EY partner Hermann Wagner and DekaBank board member Friedrich Oelrich. Munsberg has been named chair of the supervisory board, while Wagner has been elected as deputy chair and chair of the audit committee.

Structured Finance

IBA to consult on Libor transition proposal

Sector developments and company hires

IBA to consult on Libor transition proposal
The US Fed, the OCC, the FDIC and the UK FCA have welcomed a proposal by ICE Benchmark Administration (IBA), the administrator for Libor, that lays out a path forward in which banks should stop writing new US Libor contracts by end-2021 while enabling most legacy contracts to mature before the cessation of the benchmark. Under the proposal, IBA will consult this month on its intention to cease the publication of the one-week and two-month Libor settings immediately following the Libor publication on 31 December 2021, with the remaining Libor settings ceasing immediately following the Libor publication on 30 June 2023. The move is designed to facilitate an orderly wind-down of the benchmark.

IBA is separately consulting on its intention to cease the publication of all GBP, EUR, CHF and JPY Libor settings immediately following the Libor publication on 31 December 2021. IBA expects to close the consultations for feedback by end-January 2021.

In other news…

Acquisition
Blackstone is set to acquire DCI, a quantitative credit investing firm with approximately US$7.5bn in AUM across the global investment grade, high yield and emerging corporate credit markets. Based in San Francisco and led by a team of seasoned fixed income research professionals, the firm applies a proprietary, fundamental-based, technology-driven model to deliver differentiated returns to clients. The transaction will broaden Blackstone Credit’s capabilities in high yield and investment grade, enable the integration of DCI’s models and technology across the combined Blackstone Credit and DCI platforms and increase access to investors via a UCITs platform.

Aircraft financing partnership formed
Castlelake has formed a partnership with Boeing and its subsidiary Boeing Capital Corporation to provide financing solutions for new commercial aircraft deliveries. Through the partnership, Castlelake will seek to provide up to US$5bn of capital for new Boeing commercial aircraft deliveries via senior secured financing, mezzanine financing and high loan-to-value finance leases.

The firm will have full discretion over which transactions to pursue and the terms of those transactions. The term of the partnership is through 31 December 2022 and can be extended for an additional two years.

With an aviation team of more than 60 dedicated professionals across underwriting, finance, technical and other disciplines, Castlelake believes it can provide attractive, tailored capital solutions to aviation industry participants. The firm’s aviation lending strategy is led by partner Armin Rothauser, who joined last month from Starwood Capital, where he was an md and head of credit. Prior to that, he was md and co-head of structured credit at Deutsche Bank in New York and has also worked at Goldman Sachs, RBS Greenwich Capital and Morgan Stanley.

APAC
Hayfin Capital Management has opened a new office in Singapore, establishing a local presence in the Asia-Pacific region to capitalise on its investor base there. The Hayfin team in Singapore will be led by Glenn Clarke as head of Asia-Pacific. He will focus on building the firm’s Asian franchise while retaining his responsibilities as institutional portfolio manager.

EMEA
Alter Domus has recruited Boris Betremieux as head of successor agency and turnaround, Europe. In this newly created role, he will be responsible for managing an existing book of widely syndicated and restructured facilities and will also focus on expanding this new product line in Europe. Betremieux has over 15 years’ experience working across the debt financing and legal sectors, having joined from GLAS, where he managed all aspects of the Paris office. Previously, he was senior associate in the banking department of the London office of Ropes & Gray.

Euro CLO credit deterioration predicted
Credit quality will deteriorate for new European CLOs in 2021, but credit enhancement should help maintain strong performance among outstanding deals, according to a new report from Moody’s.

“While the credit quality of collateral continues to weaken into 2021, mirroring trends in the leveraged finance market, sector diversification will limit CLOs' exposure to hard-hit industries,” says Frank Cerveny, vp - senior research analyst at Moody’s. “CLO structures will become more flexible to better adapt to the Covid-19 market environment, with deal credit enhancement also helping to mitigate the risk of rising defaults.”

The report adds that collateral overlap across deals will increase as managers try to avoid issuers and sectors hit hardest by the pandemic, and amid an accelerated move toward ESG investment criteria. With an increase in speculative-grade corporate defaults and declining recovery rates across the leveraged finance market, individual CLO managers' skills gain in importance, Moody’s notes, and will lead to more differentiated CLO performance than in the past.

North America
Tikehau Capital has appointed Daniel Cruise as senior advisor. Based in New York and working alongside Gregoire Lucas, head of external relations, Cruise is tasked with expanding and institutionalising the firm’s outreach to key stakeholders. He will also be responsible for providing insights into geopolitical, public policy and ESG trends to help define and grow investment themes.

Cruise brings more than 20 years of experience working with policymakers and business leaders, having previously led the government and public affairs functions for Alcoa and Arconic. He has also worked as assistant Press Secretary at the White House and was part of the National Security Council staff. 

SME guarantee inked
The EIB Group has provided a mezzanine guarantee on a €330m portfolio of mainly Austrian loans to SMEs and mid-caps, originated by Hypo Vorarlberg Bank. With this financial support, Hypo Vorarlberg will expand its lending to households, SMEs and mid-cap customers for new highly energy-efficient residential buildings.

The operation is supported by the Investment Plan for Europe, under which the EIB and the European Commission are strategic partners to boost the competitiveness of the European economy. The transaction also underlines EIB Group's firm commitment in the field of synthetic securitisation in Austria to widen and diversify the scope of cooperation with a view to maximising its impact on the real economy.

Structured Finance

Pre-pandemic trends persist for US CLOs

Sector developments and company hires

Pre-pandemic trends persist for US CLOs
Pre-pandemic trends in US leveraged lending - including high leverage, weak covenants and declining recoveries - resumed by 3Q20 and should continue into 2021, absent a renewed downturn, according to Moody’s. Consequently, the agency expects that in 2021 US CLOs will include structural features for maintaining loan workout and trading flexibility to help manage assets under stress.

“We expect speculative-grade defaults to continue to rise through the first quarter of 2021 and decline thereafter, putting a focus on managers' options to minimise losses on defaulted or stressed assets and manoeuvre around OC test thresholds,” Moody’s says. “As long as economic conditions and collateral metrics continue to improve though, bolstering investor confidence and tightening CLO spreads, new CLO issuance volume will likely increase moderately.”

In other news…

Dutch guarantee signed
Dutch National promotional institution Invest-NL has signed a new guarantee agreement with the EIF to cover a lending portfolio to innovative Dutch SMEs. As a result of this agreement, Invest-NL will be able to provide up to €66m in loans under 10 new operations to innovative SMEs.

The loan guarantees are provided by the InnovFin SME Guarantee Facility under the EU Framework Programme for Research and Innovation Horizon 2020, launched by the European Commission to improve access to finance for innovative SMEs and midcaps. The agreement falls under the InnovFin SMEG COVID-19 Support Measures enabled by a top-up from the European Fund for Strategic Investments (EFSI).

EMEA
ARA Venn has recruited Oriane Auzanneau to lead loan investments for its social housing strategy as a director and deputy portfolio manager. She joins from M&G Investments, where she spent 12 years involved in corporate lending and was a director in its social housing team.

North America
Alston & Bird has deepened its structured and warehouse finance capabilities with the addition of a three-lawyer team from Cadwalader. Joining the firm’s New York office are partners Joseph Gambino and Peter Williams, who have worked together as a team for nearly 10 years and have extensive experience in the post-crisis market for CLOs and other structured products. Also arriving as part of their team is associate Elizabeth Walker, who focuses her practice on structured finance transactions, with an emphasis on CLOs.

Newmarket Capital has hired Thierry Adant as cio, responsible for leading the firm’s investment process, shaping its strategy and developing new pathways for institutional investors to gain access to innovative and impact-oriented alternative investments. Adant joins Newmarket from Willis Towers Watson, where he was head of private debt and a member of the alternative credit fund investment committee. During his tenure at Willis Towers Watson, Adant designed innovative investment solutions amounting to more than US$4bn per annum, including a number of impact investments.

Structured Finance

Dark fibre first

Sector developments and company hires

Dark fibre first
Summit Issuer Series 2020-1, the first securitisation backed by dark fibre communication infrastructure assets, is being marketed by Barclays on behalf of sponsor and manager Summit Infrastructure Group (SummitIG). The deal comprises four classes of notes: US$50m (notional maximum) A1 VFN, US$122.7m A2, US$18.9m B and US$33.6m C.

SummitIG is able to draw on the Class A1 variable funding notes up to the maximum amount to add additional dark fibre assets or networks, as well as for general corporate purposes, provided certain criteria and tests are met. However, the tranche’s outstanding principal balance on the closing date (expected to be 31 December 2020) will be zero, as the issuer anticipates that it will not have the ability to make a draw on the notes at that time due to its inability to satisfy the leverage ratio required. Interest payments on the class C notes will be fully subordinated to principal payments on the class A and B notes when the notes are amortising, except after an event of default.

The assets backing the ABS consist of a dark fibre network primarily located in Northern Virginia (NoVA); related leases and licenses; dark fibre underlying rights agreements; and certain equipment. SummitIG is currently the largest owner and operator of a dark fibre network in the NoVA regional area, the world’s largest data centre hub.

In other news…

Acquisition
Ziegler Capital Management has acquired a minority stake in GIA Partners. Based in New York City, GIA Partners is an asset manager focused on fixed income and credit strategies, with over US$2.4bn in assets under management in separately managed accounts as of 24 November. Eduardo Cortes leads its portfolio management team, which will continue to manage all of GIA’s strategies.

APAC
Equity Trustees has strengthened its corporate trust and securitisation team with the recruitment of Pei Cai Pan, who will be based in Sydney as a manager in the middle office team. He has more than 10 years of experience in securitisation and structured finance, most recently as a vp and client services manager with the Bank of New York Mellon.  

Euro CLO RWNs resolved
Fitch says that it resolved its negative rating watch on 47 European CLO tranches in November. All these tranches were affirmed and assigned a negative outlook.

The total number of Fitch European CLO downgrades since the beginning of the pandemic remains stable at 41, while the number of tranches on negative watch fell to 11. “A large majority of sub-investment-grade CLO ratings are now on negative outlook, reflecting the risk of credit deterioration over the medium term, due to the economic fallout from the pandemic,” the agency says.

Green ABS treatment weighed
The EU Securitisation Regulation is unlikely to incorporate beneficial bank capital treatment for green securitisation holdings until the EBA has completed a similar analysis of the bank prudential framework, Fitch suggests. This may not happen until June 2025, although the agency believes that the EBA may accelerate its timetable to support the ambitious transition to a sustainable economy envisaged under the European Green Deal.

From Fitch's structured finance rating perspective, detailed data and disclosures - ideally based on a harmonised regime - are key for any credit analysis of green assets. Historical and loan-by-loan level data showing any differences in collateral and borrower quality would be needed to assess the relative performance of green and non-green assets.

Article 501c of the CRR mandates the EBA to assess prudential treatment for assets associated substantially with environmental and/or social objectives. Amendments to the EU Securitisation Regulation proposed in the European Parliament on 10 November call for the EBA to report on the development of a specific framework for sustainable securitisation by 1 November 2021.

This report would assess: the introduction of sustainability factors; the implementation of proportionate disclosure and due diligence requirements; the content, methods and presentation of information on negative ESG-related impacts; and any potential effects on financial stability, the development of the EU securitisation market and banks' lending capacity - and hence whether preferential capital treatment could be justified for green securitisations. However, Fitch notes that there is no guarantee that the Parliamentarians' request will make it into the final amendments to the Securitisation Regulation.

Merger under discussion
Owl Rock Capital Group and Dyal Capital Partners have disclosed that they are in discussions regarding a potential strategic combination. The founders of Owl Rock and Dyal would lead the stand-alone firm, with the investment teams and processes remaining unchanged.

The Owl Rock and Dyal founders, alongside Dyal’s parent Neuberger Berman Group, would own meaningful positions in the combined business. The parties have signed a non-binding letter of intent and are engaged in exclusive negotiations with Altimar Acquisition Corporation, a special purpose acquisition company, to facilitate the potential combination.

North America
Marina Meyers has joined Polar Asset Management Partners as strategy lead, head of global credit, based in New York. She was previously portfolio manager and head of fundamental relative value credit at Citadel. Prior to that, Meyers worked at BlueMountain Capital Management, Bridgewater Associates and McKinsey & Co.

Allison Adornato has joined Wingspire Capital as md and national head of underwriting, overseeing the underwriting of asset-based lending (ABL) products. These products range from US$20m to US$200m in transaction size and include revolving lines of credit, fixed asset term loans and cashflow stretch term loans. Adornato joins from Garrison Investment Group, where she was md and underwriting manager with a focus on direct lending.

Open market operation due
The New York Fed is undertaking a small value agency MBS sale open market operation on 10 December. The total current face value of sales in the operation will not exceed US$90m.