Contents

ABS

Unexpected impact

Business interruption claims weigh on cat bonds

The ILS market has not been immune to the turbulence created by Covid-19 this year. However, the fallout from the pandemic has affected the sector in somewhat unexpected ways.

Given the mortality risk associated with the coronavirus, the impact of the diseases on the life book of Leadenhall Capital Markets, for instance, has been negligible. “The insured population tends to be between 30 to 55 years old, while the mortality of the pandemic affects older people, who no longer have life insurance,” explains the firm’s ceo Luca Albertini. “This year hasn’t been as bad as expected for medical claims either, since non-critical surgeries were put off and people avoided going to the doctor. As such, the pricing outlook has significantly improved for this segment of the ILS market.”

In contrast, the virus has had a more problematic impact on Leadenhall’s non-life book, due to the volume of cases in connection with business interruption (BI) insurance claims. Most BI insurance contracts exclude communicable diseases from the cover. However, while some commercial property owners have been willing to pay the additional premium in order to secure Covid-19 cover, some have tried to find what Albertini describes as “wriggle room” in the documentation and sued in the hope of a settlement.

“How much our non-life book will be impacted by BI claims is the big unknown at this stage. Insurers’ need to reserve for their potential exposure to these cases has, in turn, taken collateral away from the ILS market. Still, the sector has shown a lack of correlation with the credit and equity markets this year,” he notes.

The life segment has shown slightly more correlation with the credit and equity markets due to the Covid-19 fallout, albeit continues to behave differently to the non-insurance markets.

Against this backdrop, Leadenhall has raised US$600m since July, pushing its AUM passed US$6.2bn this month. The money is from a combination of existing investors increasing their allocations and new investors in the firm’s strategies. Albertini suggests that a number of new pension consultants opening up to the sector has helped drive appetite for catastrophe bonds, as well as demand for yield.

Leadenhall’s book is split fairly equally between life and non-life ILS. On the life side, the firm typically pursues structured lending opportunities with bespoke features over a medium-term horizon. On the non-life side, it seeks a balance between existing and new perils to create diversification.

Nevertheless, when considering new perils, Albertini points to the need for reliable third-party models that correctly represent the risk. He cites a wildfire catastrophe bond as an example where the model underestimated the expected loss, with investors suffering a full loss following the Camp wildfire in 2018 (SCI 13 December 2018).

“When a new peril emerges with an untested model and there is a loss, you are exposed to lots of downside for little upside. We prefer to employ a traditional underwriting approach and add new perils where it makes sense to do so, but sometimes investors don’t reward you for adding them,” says Albertini.

He adds: “In the immediate future, given that Covid-19 has provided its fair share of surprises for investors, we’re not planning to add anything to our portfolio that isn’t bread and butter for us. But we may consider creating a specialty fund in the future that invests in new perils, such as cyber.”

The firm is also exploring whether to create a rated balance sheet, which would complement its current offering and enable it to aggregate portfolios more efficiently.

Corinne Smith

Capital Relief Trades

Synthetic CMBS returns

Barclays reopens CRE CRT market

Barclays has completed three capital relief trades from the Colonnade programme that reference the same mixed portfolio of corporate, commercial real estate and social housing loans. The lender has hedged more than US$450m of combined first loss tranches under the transactions.

The trio of deals are the first post-Covid synthetic securitisations to be backed by commercial real estate loans, but the mixed nature of the pool reflects the broader risk-off sentiment in the CMBS market. Indeed, the coronavirus crisis poses a number of challenges for CRE CRTs.

First, payment holidays and reduced rent collections constitute a short-term challenge, given that the value of CRE loans resides in those rent payments. Yet the greatest concern is the long-term impact of the crisis for collateral values, assuming a long-term reduction in the demand for office space. In particular, the reduction in market rates for rents implies lower debt service coverage and higher LTV ratios, which in turn lowers collateral values (SCI 9 July).

Nevertheless, the market showed signs of light in early 4Q20 as prominent investors publicly confirmed that they were eyeing synthetic CMBS opportunities (SCI 6 November). Yet the mixed pool of the Barclays deals demonstrates how tentative the first steps appear to be, as risk-off sentiment in the broader CMBS market persists.

Leverage is expected to remain moderate amid conservative underwriting and lower valuations as the economic fallout from the pandemic continues. According to Moody’s, of the seven CMBS that were issued in 2020, only one had an LTV ratio at closing of above 70%, reversing a rising trend in 2019.

Although LTVs among senior debt appear moderate, mezzanine debt is increasingly being used to enhance total leverage. Mezzanine loans generally hinder the ability to refinance and reduce the incentive for sponsor support. More than half of the deals issued to date in 2020 have a mezzanine facility.

Second, investors will continue aiming for a diversification of properties as they look for alternatives to office and retail. Moody’s notes that “new deals will increasingly have exposure to multifamily residential, single-tenanted and specialised properties. Multifamily residential properties provide investors with stable and secure income streams. The UK build-to-rent sector will approximately triple over the coming years, based on the number of units under construction and those which have planning permission.”

Finally, gauging the future of tenant demand is still far from straightforward. Looking ahead, Moody’s concludes: “Over the coming years, factors such as space density, public transportation efficiency, digital competitiveness, existing working from home practices, cultural particularities and new labour regulations will be key determinants for tenant demand.”

Stelios Papadopoulos

Capital Relief Trades

Trilogue agreement finalised

Excess spread concerns highlighted

The trilogue agreement on the European Commission’s ‘quick fix’ proposals was finalised last week and has received an overall positive reception from capital relief trades players, given that it extends the STS framework to synthetic ABS structures and provides greater standardisation. However, market participants have raised concerns about the proposed treatment of excess spread as a first loss tranche.

The European Commission initiated its quick fix proposals in July, which consist of two legislative acts pertaining to amendments to the Securitisation Regulation and the CRR, both of which are critical for introducing an STS label for synthetic securitisations (SCI 11 November). The agreed changes will free up bank capital for further lending and allow a broader range of investors to fund the economic recovery from the Covid-19 crisis.

Nevertheless, the transactions must be cost-effective if issuance is to pick up and the trilogue paper’s recommendations on synthetic excess spread can create challenges in that respect. According to Jo Goulbourne Ranero, consultant at Allen & Overy: “The EBA’s SRT report envisages future changes to the CRR to impose a capital requirement for unrealised synthetic excess spread, but the trilogue agreement front-runs this proposal, requiring synthetic excess spread to be treated as a first loss tranche. The definition of synthetic excess spread in the CRR amendments is broad and prescriptive.”

Indeed, it covers all lifetime excess spread without, for example, provision for discounting. The UK’s PRA, on the other hand, asks originators to come up with a reasoned and prudent estimate of the provided credit enhancement. Nevertheless, the EBA has been given a mandate to produce technical standards on the calculation of the exposure within six months of the CRR changes coming into force.

The new charge will negatively impact the economics of the transactions and this is particularly relevant to the EIF’s SME-backed transactions. Steve Gandy, md and head of private debt mobilisation, notes and structuring at Santander, notes: “The final quick fix law delegates to the EBA the task of determining the capital treatment of synthetic excess spread (SES). However, if the EBA decides to recommend applying capital to lifetime SES, even if ‘use it or lose it’, this will go beyond current ECB guidance and could have a severe negative impact on current deals, especially EIF/EIB transactions.”

The impact will also be greater for banks that use the full deduction option, assuming that the charge applies in that case or SEC-ERBA, since “a related adjustment to the attachment point of the originator’s other retained securitisation positions - which offers some limited offset - is unavailable. Again, the full deduction option is common in EIB/EIF deals,” explains Ranero.

The collateral requirements are another concern. Compared to earlier drafts, the collateral downgrade requirements have been softened slightly. Competent authorities can agree with the EBA to allow originators in their jurisdiction to hold cash collateral where they are rated CQS3 or better, instead of the standard requirement for CQS2.

However, this derogation must be justified by market difficulties, objective impediments related to the credit quality step assigned to the member state or significant potential concentration problems in the said state. Yet there is also an alternative, that is not jurisdiction-specific, involving reciprocal collateralisation by the originator and investor. The latter echoes existing market structures in which a lower rated originator enters a repo with the investor, essentially providing collateral to the investor in respect of its obligation to return the collateral.

However, unlike such structures, “the reciprocal collateralisation alternative in the on-balance sheet STS framework requires cash collateral to be held by a third-party credit institution. This is prudentially disadvantageous for the originator, compared to a transaction in which the originator holds the cash - with or without a repo - and has certain structuring implications,” states Ranero. 

The Parliament and the Council will now be called on to formally adopt the amendments without further discussion, possibly by February 2021. 

Stelios Papadopoulos

Structured Finance

SCI Start the Week - 21 December

A review of securitisation activity over the past seven days

Last week's stories
Agricultural SRT prepped
Lloyds readies Fontwell II
Baltic SRT finalised
First synthetic under Luxembourg law
Bellemeade 2020-4 comes in at $337m
3-tranche MILN has higher than usual LTV pool
Call for further improvement
'Unambitious' NPL strategy launched
CRT super spreader
Asset manager ArrowMark, a long-time investor in CRT, sees increased US usage
Delayed defaults
German auto ABS support weighed
Full stack resilience
Volumes down, but not out
Leasing debut
NPL ABS expected to benefit from GACS
Leasing, SME SRTs executed
Unusual capital relief trade completed
Margin call
CLO equity arbitrage doubts raised
On the cards
2020 credit card spending low, suggesting slim ABS issuance to continue
STACR 2020-DNA6 prints
All tranches of new STACR print well inside guidance
UK corporate SRT inked
NatWest finalises capital relief trade
Improving sentiment
Opportunities rebound in aircraft ABS market (Full story as follows)
Aircraft ABS secondary market activity all but dried up with the onset of Covid-19, until trading began picking up in September and October. At the same time, investors with capital began sourcing higher yielding opportunities in the sector.

Some aircraft ABS class A notes that were trading in the low-70s in April and May are now trading in the mid/high-90s, while some B tranches are showing price improvements from the high-30s to the high-70s.

"If you look at what happened in the A, B and C debt tranches, during April/May time, there was quite a drop in the prices and that has since rebounded. This is mainly due to an improving sentiment regarding contracted lease and maintenance reserve payments coming into the structures, as well as positive news regarding a vaccine," says Mark Rogers, md at Floreat Aviation Capital.

He continues: "In all ABS deals, the lessors will have agreed lease deferrals with a number of the lessees within the structure. This will impact cashflows coming into the ABS. In addition, as many aircraft have either been parked or suffered reduced utilisation rates, the maintenance reserve payments coming into the structure have been markedly reduced, ultimately impacting principal and interest revenues to all tranches."

Consequently, for many aircraft ABS, interest is being paid on the A and B tranches, with partial principal payments on class A tranches only. "It is important to look at each ABS in isolation," Rogers notes. "The wider aviation industry and, in particular, investors in ABS structures - as Floreat is - is hopeful that everyone is going to start flying again. We want lease deferrals and 'Power by the Hour' (PBH) agreements to be behind us and revenues coming back into the ABS structures."

Nevertheless, the winter months are identified as being particularly challenging for airlines and it is possible that some may fail. Rogers identifies 'survivor' airlines as those with government or strong shareholder support, with a strong positioning in their particular market, access to the capital markets and the ability to draw on liquidity. Airlines are also restructuring fleets and strengthening their balance sheets.

Against this backdrop, those with capital have the ability to source higher yielding opportunities in the sector. For example, Castlelake recently formed a partnership with Boeing to provide financing solutions for new commercial aircraft deliveries (SCI 1 December) and PIMCO is collaborating with GECAS on an aviation leasing platform (SCI 21 October).

"PIMCO has seen there is an opportunity to invest in the market now. This period of dislocation - where there is a great need by lessees and lessors for capital, combined with a lack of bank and institutional capital available - is an investment opportunity. The greatest investment opportunities arise after periods of market disruption, as was seen in the 2-3 years post the 2008/2009 GFC," notes Rogers.  

Floreat, for one, believes that Q1/Q2 next year will be the right time to invest. "It is exactly how we are positioning our capital," Rogers concludes.

Jasleen Mann

Other deal-related news

• Brit has printed its debut catastrophe bond, dubbed Sussex Capital UK PCC Series 2020-1 (SCI 14 December).
• The EBA has published an opinion on the amendments proposed by the European Commission in connection with the EBA's final draft RTS specifying the methodology competent authorities should follow when assessing institutions' compliance with the requirements to use the internal ratings-based (IRB) approach laid down in the CRR (SCI 14 December).
• When managers acquire CLOs, the underlying portfolios become more like the existing portfolios of the acquiring manager, according to a new report from Fitch (SCI 16 December).
• Freddie Mac has closed its debut social impact M-Deal, a first-of-its-kind multifamily securitisation secured by 27 mission-focused properties for low-income residents, many of whom are disabled, seniors with disabilities or homeless veterans (SCI 16 December).
• ESMA-listed STS securitisations have seen a year-on-year increase of 90%, according to PCS figures (SCI 16 December).
• The Bank of England has extended by six months the TFSME, covering both the drawdown period and the reference period of the scheme (SCI 18 December).
• Fitch has taken various rating actions on 1427 classes of notes from 67 GSE credit risk transfer RMBS issued between 2013 and 2020 (SCI 18 December).
• Following an RFC issued in July, Moody's has updated its methodology for rating auto loan and lease ABS, which will result in rating actions for approximately 162 tranches across 100 transactions backed by auto loan pools (SCI 18 December).

Company and people moves

• Alter Domus has appointed Tim Houghton coo and a member of its group executive board, based in Luxembourg (SCI 14 December).
• CLSA Capital Partners has closed its first secured private debt strategy - the Lending Ark Asia Secured Private Debt Fund (SCI 14 December).
• Josh Eisenberger, md at Sculptor Capital Management, has been promoted to co-head of Sculptor's US CLO management business, with a focus on portfolio management and fundamental credit analysis(SCI 16 December).
• S&P and IHS Markit have unveiled the future divisional structure of the combined company, effective upon completing their pending merger (SCI 18 December).
• Michael Gramins has been sentenced by US District Judge Robert Chatigny to two years of probation, after defrauding MBS customers of Nomura Securities International during his employment there (SCI 18 December).
• The FHFA is seeking comments on a notice of proposed rulemaking regarding liquidity requirements for Fannie Mae and Freddie Mac, which build on existing FHFA guidance and the experience gained from managing the enterprises' liquidity positions in conservatorship (SCI 18 December).

Recent research to download
CLO Case Study Autumn 2020
Autumn 2020 CRT Report

Upcoming events
SCI's 2nd Annual Middle Market CLO Seminar
21 January 2021, Virtual Event
SCI's 5th Annual Risk Transfer & Synthetics Seminar
March 2021, Virtual Event
SCI's 3rd Annual NPL Securitisation Seminar
May 2021, Virtual Event

Structured Finance

Secondary supply

Euro ABS trading set to dominate

European ABS secondary spreads have completed a three-quarter circle from their coronavirus-related spike in March, relative to their tightest levels observed in February. The market saw a notable rise in trading volumes, following the coronavirus shock, with secondary activity expected to dominate in the early part of 2021.

“There has been significant BWIC activity in the last few weeks, prior to the seasonal slowdown, and spreads are back at tight levels. We are probably almost back at the levels seen before the virus, in terms of European RMBS and auto ABS,” notes one trader.

He continues: “In March, the market went quiet: there was value, but not many offers. But slowly and surely it came back. ABS is always the last to follow other credit markets.”

BofA Research highlights a rise in secondary trading volumes this year, particularly in UK RMBS and European CLOs. Notably, BWIC volumes in Europe are estimated to be in the range of €30bn-€40bn for ABS/MBS and €24bn-€30bn for CLOs. Analysts at the bank suggest that secondary volumes could increase by 120% year-on-year in 2021.

Meanwhile, they forecast 2021 full-year placed supply to reach €88bn - around 20% up on 2020 - and likely back-loaded in the year. Relative value is expected to be found in ABS and MBS senior mezzanine tranches and CLO lower mezzanine tranches.  

The effects of the coronavirus vaccine, economic recovery and payment holiday and insolvency suspensions are among factors that will influence market sentiment next year. The trader concludes: “Libor is unlikely to have a big impact on the European securitisation market, but this will play out late in 2021. Brexit could impact UK assets in the case of negative macro developments; for example, price depreciation or unemployment.”

Jasleen Mann

Capital Relief Trades

Slovakian SRT finalised

Erste Group completes synthetic ABS

Erste Group has completed a €48m mezzanine guarantee for its Slovakian subsidiary Slovenská sporitelňa (SLSP) with the EIF. The synthetic securitisation references a €755m portfolio of roughly 2,500 Slovakian SME borrowers and is Erste’s first Slovakian capital relief trade.

The transaction is structured according to the standard EIF layout, with a mezzanine cover, replenishment period and synthetic excess spread. In particular, the deal features a two-year replenishment period and a 2.5-year portfolio weighted average life. The senior and mezzanine tranches amortise on a pro-rata basis, while the retained junior piece does so sequentially.

Further features include a time call that can be exercised after 4.5 years - once the weighted average life and the replenishment period have run their course - an 85bp use-it-or-lose-it excess spread mechanism and a replenishment stop trigger. The pool includes exposures to Covid-affected industries, as well as exposures subject to payment holidays.

The operation is backed by the European Fund for Strategic Investment (EFSI), the central pillar of the Investment Plan for Europe. Indeed, it is part of a wider €2bn EU asset-backed security programme managed by the EIB Group to address working capital, liquidity needs and the investment constraints of EU SMEs and mid-caps affected by the Covid-19 outbreak in Europe.

Looking ahead, Harald Weiser, head of solutions at Erste Group, notes: “After executing two inaugural transactions in the Czech Republic last year and Slovakia this year, we look forward to continuing our strong cooperation with the EIF and the EIB in the future with further Erste Group subsidiaries.”

Stelios Papadopoulos

Capital Relief Trades

Agricultural SRT priced

Lloyds finalises Fontwell II

Lloyds has priced the second transaction from its Fontwell programme. Dubbed Fontwell II Securities 2020, the eight-year synthetic securitisation is backed by a static £1.4bn portfolio of UK agricultural mortgages (SCI 17 December). Despite significant headwinds from the Brexit negotiations, the notes were successfully placed with UK and international investors.

Rated by Fitch and KBRA, the transaction consists of £32.2m BBB-/BBB rated class A notes (which priced at SONIA plus 4%), £28.6m BB+/BB rated class B notes (SONIA plus 6.25%) and £67.98m unrated class Z notes. The loans were originated by Lloyds via its wholly owned subsidiary Agricultural Mortgage Corporation (AMC). The last Fontwell transaction was completed four years ago (SCI 3 January 2017).

Lloyds was expected to close this latest deal in September, but pricing expectations between the originator and investors with respect to the mezzanine tranche were not aligned. The bank has confirmed market speculation that it was aiming for a mezzanine pricing of below 5%, but could not confirm that investors were targeting anywhere above that figure. Consequently, Lloyds looked at re-optimising or re-tranching the deal into two rated mezzanine pieces to make it work.

The underlying portfolio is risk weighted with a standardised model, so seeking a rating allowed for a more optimised structure. Furthermore, ratings render the tranches more liquid for investors. The bank utilised the same approach for previous transactions, including the latest synthetic RMBS from the Syon programme (SCI 19 November).

Lloyds sold the tranches to a syndicate of asset managers, insurers and hedge funds.

Fitch’s analysis shows a portfolio that performs well. Indeed, the annual average PD is derived from a long history of data that covers the stress period of the foot and mouth crisis in 2001. The transaction annual PD is lower than the UK SME sector, at 2.5%, and is supported by the low default rates in the originator’s farming book.

Nevertheless, investors have raised concerns about the impact of Brexit on the agricultural industry and particularly the withdrawal of subsidies from the EU’s common agricultural policy (CAP) and its replacement with the UK government’s environmental and land management scheme (ELMS) post-Brexit. However, as evidenced by the execution of the Fontwell transaction, the focus shifted to the performance of the portfolio, since CAP was expected to be phased out. More saliently, when the underlying portfolio performs well, subsidies turn out to be just one part of the overall picture.  

Stelios Papadopoulos

RMBS

Fed frenzy

Ongoing Fed bid for GSE paper stronger than faster prepayments in 2021

Price action in GSE-issued MBS in 2021 will be dominated by the opposite pressures of faster prepayments on the one hand and continued Fed action on the other, but of these two the latter will be the stronger, says Brendan Doucette, portfolio manager with GW&K Investment Management.

The Boston-based investment firm has $47bn under management, and of that 1.37bn is invested in securitized assets.

The Fed has had a ferocious appetite for MBS in 2020, peaking at $300bn of buying per month in March and April. Since then, it has settled down to around $100bn-$120bn per month, which equates to a net addition of around $40bn per month once prepayments are taking into account.

It will continue to add around $40bn a month in 2021, believes Doucette, which will keep prices buoyant and yields low. However, it will need to shift to new areas of the curve and different coupons. At the moment, for example, it is buying more 2.5% coupon 30-year bond than are being created so it will be required to relocate to different coupons.

There is likely to considerable refinancing in the 1.5% and 2% coupons, so this is where there is likely to be excess capacity for future Fed buying.

Moreover, Doucette believes the Fed has learnt the lesson of 2013, when then Fed-chairman Ben Bernanke announced a “taper” of quantitative easing - thus triggering what was subsequently dubbed the “taper tantrum”. Whenever Fed buying is slimmed down, it will tread carefully so not to spook the market. This is unlikely to be before 2022 anyway.

In addition to the Fed, there are three main categories of MBS investors: banks, money managers and REITs. Of these, banks should increase their holdings of MBS paper over the next year as they have been in receipt of increased account balances in 2020 while the loan market offers limited opportunities.

Money managers are expected to be net sellers, however, while REITs have had well-publicised funding issues this year and they have not come back into the market in any scale nor are predicted to do so in the foreseeable future.

GSE reform has faded into the shadows a little in recent weeks and a return to conservatorship in the near to medium term seems highly unlikely. However, a Biden administration, particularly if Federal Housing Finance Authority (FHFA) Mark Calabria is replaced, might push for a reduction or abolition of the Adverse Market Refinance Fee, which took effect on December 1.

The fee has been highly controversial and the GSEs have been accused of using it to merely jack up capital buffers. If it were rescinded, refinancing would become even more attractive, thus initiating higher prepayment rates.

Nonetheless, while increased prepayments deter investors, the hand of the Fed is expected to remain all-powerful. Moreover, low volatility also makes MBS attractive.

Despite the enormous market dislocation of 2020, nominal 30-year spreads are currently around 15bp tighter than where they started the year and 105bp tighter than the widest prints seen in late March. They are also 20bp inside the five year average.

Option-adjusted spreads (OAS) in 30-year MBS are 24bp wider than the start of the year, but 60bp tighter than the March wides.

“In March we were overweight in MBS but cut that back to neutral as we saw better opportunities in corporates. There are no current plans to increase the weighting in MBS, but we are being opportunistic as our outlook for rates evolves,” says Doucette.

Simon Boughey

Structured Finance

Romanian NPE deal sealed

Sector developments and company hires

Romanian NPE deal sealed
National Bank of Greece (NBG) has entered into an agreement with Bain Capital Credit for the disposal of a Romanian-risk corporate non-performing loan portfolio. Dubbed Project Danube, the transaction has a total GBV of circa €174m (€102m of allocated collateral value).

The deal is being implemented in the context of NBG’s NPE deleveraging strategy and in accordance with the operational targets submitted to the Single Supervisory Mechanism. The transaction has a neutral capital impact on the bank.

Closing is subject to standard conditions, including the approval of the Competition Council of Romania, as well as the consent of the Hellenic Financial Stability Fund.

In other news…

North America
Shore Capital Partners has appointed Justin Bentley as head of capital markets, responsible for the financing activities of all new investments and portfolio companies, as well as developing and managing banking and intermediary relationships. Bentley joins Shore with 16 years of leveraged finance experience, most recently as a director at Vista Credit Partners. Prior to that, he was a director at Madison Capital Funding, responsible for all aspects of direct lending investments and building the firm’s CLO platform.

Paulenier Sims has joined Two Harbors Investment Corp to lead its investor relations department. Sims joins from JPMorgan, where she was executive director, leading the investor relations function for the corporate and investment bank. Previously, Sims held a senior position in the investor relations department at CIT Group.

Structured Finance

RBS settles RMBS claims

Sector developments and company hires

RBS settles RMBS claims
The securities division of Maryland Attorney General Brian Frosh has entered into an US$18m settlement with RBS Financial Products, resolving claims that RBS misled investors in its issuance and underwriting of financial crisis-era RMBS. RBS offering documents for these transactions made representations that the underlying loans generally complied with the lender’s underwriting guidelines and applicable laws, and had certain loan-to-value ratios. However, due diligence reviews performed by RBS revealed that certain loans did not conform to these representations.

Further, third-party diligence vendors hired by RBS provided reports that graded a sample of loans and noted those that did not meet underwriting guidelines and lacked compensating factors, did not comply with applicable laws or were based on insufficiently supported appraisals. RBS often purchased and securitised loans that were not part of the diligence sample without additional review. At times, the lender even agreed with mortgage originators to limit the number of loan files it could review during its due diligence.

A description of these agreements with originators were not disclosed in the offering documents. The offering documents also did not disclose findings of the due diligence reports.

Eligible state agencies and local governments will be able to submit claims for reimbursement of losses as a result of the settlement.

Strategic partnership formed
Tikehau Capital and Churchill Asset Management have formed a strategic partnership to expand their respective cross-border direct lending footprints in Europe and the US. The partnership includes mutual investments by Tikehau Capital and Churchill investment funds, as well as closer cooperation on private credit investment opportunities in each manager’s respective market. The aim is to develop customised financing solutions to middle market private equity firms and their portfolio companies across the capital structure.

Structured Finance

RFC issued on GSE living wills

Sector developments and company hires

RFC issued on GSE living wills
The US FHFA is seeking comment on a notice of proposed rulemaking that would require Fannie Mae and Freddie Mac to develop resolution plans (or ‘living wills’) that would facilitate a rapid and orderly resolution, should the authority have to be appointed their receiver under the Housing and Economic Recovery Act of 2008. The proposed rule is similar to those issued by the US Fed and the FDIC under the Dodd-Frank Act, which requires many large financial institutions to submit living wills.

Under the proposed rule, the GSEs must demonstrate how core or important business lines would be maintained to ensure continued support for mortgage finance and stabilise the housing finance system, without extraordinary government support to prevent an enterprise from being placed in receivership, indemnify investors against losses or fund the resolution of an enterprise.

Comments on the proposed rule should be submitted within 60 days of its publication in the Federal Register.

In other news…

BDC merger completed
Barings BDC has closed its merger with MVC Capital. The combined company - which will remain externally managed by Barings - is expected to have more than US$1.5bn of assets under management on a pro forma basis.

Approximately 17,354,372 million Barings BDC shares will be issued to MVC Capital shareholders in connection with the merger, resulting in MVC Capital shareholders and Barings BDC shareholders owning 26.6% and 73.4% of the combined company respectively. In addition, following the closing of the merger, Barings and Barings BDC entered into an amended and restated investment advisory agreement that, among other things, reduced the annual base management fee payable to Barings from 1.375% to 1.250% of Barings BDC's gross assets.

Barings BDC also increased the size of its board of directors from seven directors to eight directors, appointing former MVC Capital director Robert Knapp to serve as an independent member of the board. He will serve on each standing committee of the board.