Contents

Capital Relief Trades

Italian SRTs finalised

Third-party risk-sharing prospects raised

The EIF has completed two synthetic securitisations with Banca Monte dei Paschi di Siena (BMPS) and Banco BPM (BBPM). The transactions were the last significant risk transfer trades to be carried out with the supranational as the Juncker plan came to end in December 2020. Consequently, this opens the junior tranche segment to private investors and hence the possibility of more risk-sharing transactions (SCI 9 January 2019).

The BMPS trade is a €100m guarantee that references a €1.5bn portfolio, with tranches that amortise over a three-year WAL and a time call that can be triggered after the WAL. According to Nils Boesel, structurer at the EIF: “Our guarantee for MPS is under the SME initiative, so it covers virtually the whole stack - including the mezzanine and junior tranche - while MPS retains the senior. This enables substantial lending to SMEs, since it reduces the margin for SME loans in Italy. However, close to 30% to around 40% of the portfolio is subject to payment holidays and that was something that our SME approach had to adjust for.”

Meanwhile, Banco BPM’s €76m mezzanine trade references a static €1.8bn Italian SME portfolio that amortises over a two-year portfolio WAL and features a time call that can be exercised after the WAL has run its course. Further features include synthetic excess spread and a 1% retained first loss tranche.

Karen Huertas, structured finance analyst at the EIF, comments: “Unlike the MPS trade, the BBPM transaction doesn’t fall under the SME initiative but under the Juncker plan, so it only covers a mezzanine tranche and does feature excess spread in line with most of the more traditional EIF SRTs. According to the terms of the agreement, the bank will have to originate new loans at six times the size of the mezzanine tranche. Most of the additional lending will go to the most Covid-affected Italian regions, such as Lombardy.”

The transaction was arranged by UniCredit. Banco BPM has only issued two capital relief trades until now and both have been with the EIF, although it has confirmed that it is open to transactions with private investors.

A bank source notes: “We are open to transactions with private investors, although the extent to which we will tap the market will depend on market conditions. According to our capital management plan, we intend to issue more than one synthetic securitisation over the next three years.”

Looking ahead, Giovanni Inglisa, structured finance manager at the EIF, concludes: “The Juncker plan has come to an end in December 2020, so now we aren’t in a position to do single-B deals, but only double-B transactions. Nevertheless, this opens the junior segment to private investors. I would expect more risk-sharing deals this year, where we guarantee an upper mezzanine tranche, but a private investor takes on the junior or lower mezzanine piece.”

Stelios Papadopoulos

Documentation

Libor lives on

Likely postponement of USD Libor expiry gives structured finance market breathing space

The demise of USD Libor seems likely to be delayed until mid-2023, which gives the structured finance market another two and a half years to gets its house in order - but the time must be used wisely, stress well-placed market observers.

A December 1 announcement by the ICE Benchmark Administration, which administers Libor, that it was seeking an extension of life for the benchmark was immediately endorsed by key regulators like the Financial Conduct Authority (FCA) and the Federal Reserve. The alacrity with which such support was offered gave the impression to onlookers that the ICE announcement was did not come as a surprise to regulators, and consequently it is deemed very likely that there will be a stay of execution for the venerable benchmark.

The tenors to be granted a reprieve are overnight dollar Libor, one-month Libor, three-month Libor, six-month Libor and 12-month Libor. One-week Libor and two-month Libor will expire as planned at the end of 2021, but these benchmarks are rarely used.

This news is particularly pertinent to the structured finance market. Firstly, a high proportion of structured finance instruments use dollar Libor as a benchmark. Fitch reported last year that around 2500 structured finance notes and covered bond programmes which it rates have legacy exposure to USD Libor or GBP Libor.

The US RMBS market makes especially heavy use of dollar Libor, and it is a very large market. The MBS market comprises over a third of all US dollar fixed income issuance (more than Treasuries) and total issuance was over $4trn at the end of 2020, according to the most recent SIFMA quarterly report. The CDO market is also largely priced against Libor.

But the format of most structured finance transactions is also often rigid (“brain dead”, in the words of one source) so that the balance of liabilities and assets cannot be easily altered without risking a mismatch. In most cases, if there is no transition rate put in place then notes will simply pay the Libor rate at the last published rate, meaning, in effect that they will become fixed rate deals. Assets backing the transaction would remain floating, however.

Moreover, most structured finance trades in the US are governed by the Trust Indenture Act, passed in the 1930s to protect investors. This means any change in payment of interest must be approved by 100% of noteholders, which will be difficult to achieve.

Given the size of the difficulties and the fact that they have been largely unaddressed by the US structured finance market means that the delay of the expiry of US dollar Libor is welcome. But it has not been cancelled, only postponed. Unless the issue is taken in hand, the difficulties have been merely kicked down the road.

There are two areas that need to be addressed: the primary markets and the treatment of legacy bonds. Unless issuance is moved to SOFR, the recognised substitute rate, in short order, then the pile of legacy bonds which will need adjustment gets larger and larger. The Alternative Reference Committee (ARRC), a body of private market participants convened by the New York Federal Reserve and the Fed to help manage the transition, recommended in May 2020 that all CLOs cease using Libor from September 30 2021 while all other securitizations cease by June 30 2021.

“The industry now needs to shift the primary market away from Libor because every day that you don’t you’re basically creating more legacy bonds. This has to be done by the industry itself,” says Andreas Wilgen, group credit officer, structured finance, at Fitch Ratings in London.

In the MBS market, a healthy lead has been provided by Freddie Mac, and it began pricing STACR bonds against SOFR in 4Q 2020. JP Morgan also sold its first SOFR-referenced mortgage securitization at the end of last October.

Fannie Mae was unavailable for comment on whether it will transition issuance to SOFR as well.

In its review of the structured finance and securitization markets in 2020, leading law firm Hunton Andrews Kurth stresses “US financial institutions should stop using Libor as soon as practicable, but no later than December 31, 2021 and before then should include robust Libor fallback language.”

The bigger issue is the treatment of the trillions of dollars of legacy bonds, the great majority of which have no transition language and assume a world in which Libor goes on for ever and ever. It is a monumental task to re-arrange every single deal, so regulatory intervention is required, say onlookers.

“It needs a legislative approach. They need to say, ‘If you haven’t transitioned, the new floating rate will be SOFR plus a margin,” says one market source. Most deals are governed by New York state law, so action should proceed from New York lawmakers, and there are sign of progress in this regard.

Governor Andrew Cuomo’s fiscal 2022 budgetary proposal, released this week, incorporates proposed legislation whereby the use of the benchmark replacement recommended by the Federal Reserve, the New York Fed, or the ARRC would be required wherever existing contract language is silent or the contract’s fallback provisions prescribe the use of Libor. Where the fallback provisions are discretionary, the proposed legislation’s safe harbour is intended to encourage the selection of the recommended benchmark replacement.

Commenting on the proposal, which will now be considered by the state legislature, the CEO of the Structured Finance Association Andrew Bright commented, “We welcome inclusion of this language, which provides clarity and promotes financial stability, and we are hopeful this proposal will become law once the legislature analyzes the governor’s budget.”

However, in MBS deals, while issuance is governed by New York law, the constituent assets are often governed by the states in which the loans were made. So, at some stage, federal action is likely to be  required. This is more difficult to attain, particularly in the first year of a new administration.

At the moment, SOFR is at 20bp while three month Libor is 22bp, so bonds which incorporate SOFR as the new rate are likely to have to incorporate a thin credit margin.

All other Libors will cease publication as planned at the end of this year, including the widely used GBP Libor. The transition has gone more smoothly thanks, on the one hand, to a more centralised regulatory regime in London but also because the FCA has taken the issue in hand more authoritatively than its US counterparts, say sources.

In a document published in March last year, when it seemed that dollar Libor was due to expire at the scheduled date, Fitch Ratings wrote “.. the BoE and FCA have told market participants to prioritise transition even when factors such as the lack of a term rate have not been fully addressed, on the basis that this avoids bigger, potentially systemic, risks.” This no nonsense approach has, in the case of sterling Libor, yielded dividends.

Simon Boughey

ABS

Litigation on the cards?

SLABS default rates causing concern

Rising US student loan ABS default rates have sparked concern among securitisation investors. In order to recover losses, investors may resort to lawsuits.

Philip Stein, partner and litigation practice group leader at Bilzin Sumberg, says:  “Some uptick in litigation is likely as investors may want to use lawsuits, or at least the threat of lawsuits, as recourse to recover the investment losses that we are likely to see.”

In the short term, rising defaults are expected to place a significant amount of pressure on investors. “I think there is growing uncertainty about the market overall. There have been increasing default rates and student loans, unlike mortgages, are not collateralised so investors are especially vulnerable to defaults. The current low interest rates make investing in SLABS less enticing at the moment,” Stein says.

He also acknowledges the tone of uncertainty within the market caused by the resurgence of coronavirus cases and the impact this may have on the overall economy domestically and globally. A further issue is that some borrowers are finding it increasingly difficult to repay their outstanding student loans.

At the same time, dicussions regarding what legislation could potentially be proposed by the new Biden administration continue to take place. Stein says: “I think there is going to be a push for increased tuition funding: larger grants for students. The dischargeability in bankruptcy of student loan debt will likely be revisited. Loan forgiveness, if any, will probably be in a fairly modest amount, perhaps around US$5,000 to US$10,000.”

He concludes: “In the long term, there is likely to be increased tuition funding and stricter underwriting and tighter guidelines. We will therefore eventually see a safer and more stable market for SLABS, in all likelihood.”

Jasleen Mann

Structured Finance

SCI Start the Week - 18 January

A review of securitisation activity over the past seven days

Last week's stories
Canadian CRT in the wings
Canadian bank said to ready CRT
Capital boost
Greek banks eye CRTs to tackle NPLs (Premium Content)
Expanding footprint
Hayfin answers SCI's questions
Forbearance falters
Decline in loan removal from forbearance suggests large unknowns ahead
Libor linkage
UK RMBS transition risks highlighted
Strong opening
UK RMBS market update
QM queue
New seasoned QM category could open door to increased MBS

On December 10, the Consumer Finance Protection Bureau (CFPB) issued the final rule for the criteria which define a Qualified Mortgage, and the introduction of an innovative seasoned loan category could provide a route for increased lending and greater MBS issuance, say market observers.

Under the new ruling, mortgages which do not initially meet the qualification benchmarks for QMs may become a QM if, over a 36-month period, they demonstrate the capacity for full and timely repayment. The loan must not have been delinquent for more than two 30-day periods and cannot have been delinquent for more than 60 days in the previous 36 months.

But there are exceptions. For example, if the loan is considered to have become delinquent due to a disaster or pandemic-related national emergency, then the borrower may be allowed an accommodation and his or her loan still considered a QM.

To be eligible to become a seasoned QM, a loan must be a first-lien, fixed-rate loan with no balloon payments and must meet certain other product restrictions. "This seasoned QM Final Rule will ensure access to responsible, affordable credit in the mortgage market through responsible innovation," says CFPB director Kathleen Kraninger.

"The big unknown is the seasoned QM status. This is a new category which has been carved out and which has the potential for growth. If people have a lot of seasoned loans they are looking to get off their books through securitization, this gives them an avenue," says Timothy Willis, an md and head of the governance and controls practice at RiskSpan, the data analysis and risk consultancy firm.

Moreover, the abolition of Appendix Q will perhaps increase ease of access to mortgage credit to a wider range of borrowers, thus increasing the pool of assets for the MBS market. The original ruling that defined QMs, as part of the Dodd-Frank legislation conceived in the aftermath of the financial crisis of 2008/2009, stipulated a wide range of detailed documentary evidence the creditor had to gather from the borrower before QM status was granted, known as Appendix Q.

This ruling tended to discriminate against those in self-employment or part of what has become called the gig economy, and also those who are asset rich but income poor. "Appendix Q was outdated and had lots of holes. It was stifling for many borrowers and prevented consideration of many types of stable income," says Kris Kully, a partner in Mayer Brown's Washington DC office.

Replacing Appendix Q is the new Regulation Z, which throws the onus for determination of capacity to repay upon the creditor. The latter must now "consider and verify" loan underwriting requirements. This means the borrower's assets and expected income should be assessed and verified, but it is not nearly as prescriptive as the former ruling.

So, once again, this could open the door to increased lending. Additionally, MBS deals which incorporate only QM loans are exempt from risk retention rules. This would be an incentive to greater issuance. "There could be greater creativity and variability in the types of loan that are included in MBS deals which are exempt from risk retention rules," suggests Kully.

One of the central platforms of the new rules is the removal of the so-called GSE Patch. This allowed all loans that were sold to Fannie Mae and Freddie Mac to be considered QM whether or not they satisfied the criteria for QM status that applied to private label bonds. From now on, all mortgages will considered alike, whether or not they are sold to a GSE or not. From June 30, all loans sold to the GSEs will be subject to the general QM rule.

"My sense is that if I were a regulator my concern with the Patch was that it basically outsourced responsibility for confirming what a QM is and just said 'whatever Fannie and Freddie say, that's good.' The CFPB has got out from under that," says Willis.

The great advantage of QM qualification is that it provides a shelter for the creditor against possible legal action by borrower for non-compliance. In the febrile post-crisis climate, with legal suits for unfair selling abounding, this was an important consideration for lenders.

Hand in hand with the elimination of the GSE Patch is the replacement of the 43% debt-to-income (DTI) ratio established in the 2010 rules and its replacement by a pricing criterion. Hitherto, a mortgage with an annual percentage rate (APR) of 225bp or less over the average prime offer rate (APOR) meets the threshold for QM status. This is the level beyond which loan performance deteriorates, according to ample statistical research conducted by the CFPB.

The substitution of the DTI ratio qualification with the pricing qualification addresses the concern that the removal of the GSE Patch would mean reduced availability of mortgage credit as the GSEs buy loans in which the DTIs are above 43%. Some of these loans may have an APR of less than 225bp over APOR and so will now qualify as QMs.

Of course, new White House administration might extend the GSE Patch beyond the slated June 30 expiration. The incoming government is perhaps less likely to want to reduce the role of the GSEs in the US mortgage market and create a level playing field - but this remains to be seen.

Simon Boughey

Other deal-related news

• MS Amlin Underwriting has launched Phoenix 1 Re, the first locally issued ILS to provide capacity to a local cedant, solely focused on the Pan-Asia region (SCI 11 January).
• AFME has called on market participants to actively transition as many transactions as possible to identify and reduce the stock of legacy securitisations well in advance of the cessation of Libor at end-2021 (SCI 11 January).
• KBRA recently reviewed appraisal reduction amounts (ARAs) across the US CMBS 2.0 conduit universe and found that 409 ARAs were effectuated year-to-date through November 2020, versus 111 in full-year 2019 (SCI 11 January).
• The EIB Group and BNP Paribas have executed a synthetic securitisation to support French SMEs and mid-caps hit by the coronavirus fallout (SCI 11 January).
• Argentic Real Estate Finance has transferred its horizontal risk retention interests in 13 previously issued US CMBS into 14 newly formed trusts that are majority-owned affiliates (SCI 12 January).
• DFG Investment Advisers has changed its name to Vibrant Capital Partners, unifying the firm with its CLO business and several of its investment vehicles, which have operated under the Vibrant brand since 2012 (SCI 12 January).
• RCB Fund Services, the distribution agent for the ICP Asset Management Fair Fund, has opened the claims process for the fund (SCI 12 January).
• Lloyd's has established London Bridge Risk PCC, the first UK ILS structure to be approved by the PRA for use for multiple, market-wide transactions for Lloyd's members (SCI 14 January).
• Blackstone Private Credit Fund (BCRED) - Blackstone's non-listed BDC - has broken escrow with approximately US$814m in net proceeds for its continuous public offering (SCI 14 January).
• illimity Bank has finalised two non-performing loan transactions, including the sale to Phinance Partners and SOREC involving a €129m GBV portfolio related to around 4,500 debtors (SCI 15 January).
• The FHFA and the US Treasury have amended the GSE preferred stock purchase agreements (PSPAs) to allow Fannie Mae and Freddie Mac to continue to retain earnings until they satisfy the requirements of the 2020 Enterprise capital rule (SCI 15 January).

Company and people moves

• Onex Corporation has acquired Falcon Investment Advisors, with the aim of expanding its credit platform and solidifying its market position in tradeable, opportunistic and private credit (SCI 11 January).
• US Bank is set to purchase the debt servicing and securities custody services client portfolio of MUFG Union Bank (SCI 11 January).
• The European Leveraged Finance Association has appointed Sabrina Fox as its first ceo (SCI 11 January).
• Juan Carlos Martorell is now responsible for origination, structuring and distribution of securitisations and risk transfer at Munich Re (SCI 11 January).
• Onex Credit has recruited Conor Daly to lead its European CLO platform, beginning in April 2021 (SCI 11 January).
• Harry Noutsos has joined PCS as md within its outreach team (SCI 11 January).
• Rabobank has promoted Serdar Özdemir from executive director to head of structured asset distribution - portfolio management (SCI 11 January).
• Cadwalader has promoted seven attorneys to special counsel, including Alexander Collins and Kevin Sholette respectively of the firm's capital markets and real estate practices (SCI 11 January).
• PACE originator Renovate America last month filed for Chapter 11 bankruptcy, as a result of coronavirus economic disruption, underwriting legislation passed in California in 2018 and lawsuits filed against the company (SCI 11 January).
• Simon Mullaly has joined Guggenheim Securities as md, to expand its fixed income credit trading capabilities (SCI 11 January).
• European DataWarehouse has submitted an application to become a securitisation repository in the UK registered and supervised by the FCA (SCI 11 January).
• Ocwen Financial Corporation has issued a statement expressing its disappointment that settlement discussions with the CFPB have not been resolved (SCI 12 January).
• dv01 has acquired Pragmic Technologies, an early-stage company focused on the data infrastructure of the agency MBS market (SCI 12 January).
• Kartesia has created a full-time CSR & ESG position, to be filled by Coralie De Maesschalck, who has been head of portfolio and ESG at the firm since 2015 (SCI 12 January).
• Tikehau Capital has hired Laura Scolan as head of France and coo within its private debt strategy (SCI 12 January).
• SoFi is set to go public by merging with a SPAC, Social Capital Hedosophia Holdings Corp V, which is run by Social Capital founder Chamath Palihapitiya (SCI 12 January).
• Nassau has received an initial strategic investment of US$100m from Wilton Reassurance Company and Stone Point Credit (SCI 12 January).
• A pair of property finance executives, backed by funds managed by Oaktree Capital Management, have launched Silbury Finance - a platform providing bespoke senior development finance solutions for the structurally undersupplied UK residential, retirement and student accommodation sectors (SCI 14 January).
• Intermediate Capital Group has appointed Philippe Arbour as md, Senior Debt Partners, which is one of its flagship strategies (SCI 14 January).
• Scope has appointed Guillaume Jolivet as coo, responsible for the rating agency's analytical activities and governance, including compliance and internal audit for Scope's subsidiaries (SCI 14 January).
• Reed Smith has promoted 31 associates and counsel to partner, including two with structured finance experience (SCI 14 January).
• Damien Dwin has launched Lafayette Square, an impact-driven minority owned investment platform (SCI 14 January).
• Michael Zampetti, md, has joined Greystone's commercial finance team in New York (SCI 14 January).
• Home Point Capital has appointed Andrew Bon Salle as its chairman (SCI 14 January).
• Natixis has named Emmanuel Issanchou head of global markets Americas and global head of credit markets (SCI 14 January).
• Pollen Street has recruited Daniel Khouri to lead its team in New York, advancing the firm's credit strategy to develop partnerships with best-in-class specialists in the non-bank lending sector to provide capital and strategic insight (SCI 14 January).
• Former Magnetar Capital fixed income strategist Tom Rutledge has co-founded a rideshare firm called Wapanda (SCI 14 January).
• Luxembourg-based MC Invest has added Daniel Clarke and Tom Sterling as mds, as well as John Aldershot, Jamie Stratton and Peter Northwood as directors in its MBS and rates division (SCI 15 January).
• TIG Advisors has acquired a minority revenue share interest in Arkkan Capital, a Hong Kong-based alternative asset manager with approximately US$1bn of assets under management, from a fund managed by a Blackstone advisor (SCI 15 January).
• Elementum Advisors has hired Todor Todorov as vp, business development & investor relations (SCI 15 January).

Data

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

Upcoming events
SCI's 2nd Annual Middle Market CLO Seminar
25 February 2021, Virtual Event
SCI's 5th Annual Risk Transfer & Synthetics Seminar
March 2021, Virtual Event
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May 2021, Virtual Event

Structured Finance

Eviction limitations extended

New law poses risk for Spanish asset quality

Royal Decree-Law 37/2020, introduced last month by the Spanish government, extends the limitations on evictions of vulnerable residential tenants until May 2021. The regulations are expected to negatively impact RMBS and non-performing loan ABS performance by prolonging the time lag until property repossession, as well as reducing the incentive for private-sector investment in Spanish residential real estate and adversely affecting recoveries from repossessed properties.

The new law is an extension of regulation implemented in March 2020 (RDL 11/2020) at the outset of the coronavirus crisis and aims to protect vulnerable tenants affected by the pandemic. RDL 37/2020 widens the scope of the protection to include: any vulnerable tenant, regardless of whether the hardship is a consequence of the pandemic; and illegal occupants of properties owned by companies or individuals that own more than 10 properties.

Under the new law, evictions are allowed only if public authorities provide alternative housing. However, the stock of public social housing owned by regions is limited, accounting for 1.6% of total housing (2.5% including housing owned by municipalities), according to Moody’s.

The new law provides for some compensation to owners. However, this does not apply automatically and in the case of illegal occupants, the owner must prove that the ban on evictions has caused an economic loss.

Moody’s suggests that the legal changes will be particularly negative for NPL securitisations because they fully rely on cashflow from repossession and the subsequent sale of properties, and those with properties previously belonging to real estate developers are even more at risk. Such properties tend to have high levels of illegal occupation, around 5%-10% before the pandemic, and the crisis has increased these levels.

Furthermore, the capacity of banks to make improvements regarding asset quality by selling problematic asset portfolios will be impacted negatively.

Jasleen Mann

Capital Relief Trades

Risk transfer round-up - 18 January

CRT sector developments and deal news

JPMorgan is believed to be arranging a corporate capital relief trade for an undisclosed Canadian bank. Dubbed Project Ward, the transaction was initially expected to close this month, but has now been postponed.

Scotiabank is also understood to be prepping a Canadian risk transfer deal (SCI 6 January).

Capital Relief Trades

Italian green SRT debuts

GARC programme broadened further

Intesa Sanpaolo has finalised an Italian synthetic securitisation that references a €1.3bn portfolio of green assets. The deal is the first green Italian capital relief trade and was printed alongside the bank’s third corporate CRT from the GARC programme.

Biagio Giacalone, head of the active credit portfolio steering team at Intesa Sanpaolo, notes: "This is the first synthetic securitisation in Italy dedicated to the green economy and has attracted the interest of many international investors, who are particularly sensitive to environmental issues. It is part of Intesa Sanpaolo's dynamic credit risk management initiatives, which aim to optimise the bank's resources and boost business access to credit through the capital markets.”

The transaction was originated via the GARC programme and transfers the long-term risk of a portfolio of 42 project finance contracts for the construction of wind (representing 50% of the pool), solar (40%) and biomass (10%) power plants. According to Intesa, the clean energy generated by the plants included in the securitised portfolio amounts to around 7.2 GW, enough capacity to meet the annual needs of six million households and reduce CO₂ emissions by an amount equivalent to that produced by three million cars.

Additionally, in the first two years from closing, the lender will be able to include new green assets in the portfolio and thus free up further resources for green energy investments by firms.

The green transaction was completed alongside the third corporate capital relief trade from the GARC programme. Dubbed GARC Corp-3, the trade references a €3bn portfolio. The loan management and advisory desk of the IMI corporate and investment banking division acted as arranger on the deal.

The green securitisation represents the latest broadening of the scope of the GARC programme, which initially began as an SME initiative. But in 2018, its remit widened to include corporate loans and in 2019 and 2020, it expanded to residential mortgages and leasing assets respectively (SCI 15 July 2020).

Stelios Papadopoulos

Capital Relief Trades

Risk transfer return

Commerzbank inks private SME SRT

Commerzbank has placed a €330m mezzanine tranche that references a €6bn revolving portfolio of primarily German corporate and SME exposures. The transaction marks the lender’s return to the private capital relief trades market, following a five-year hiatus, and is one of only a handful of private SME SRTs to be finalised post-coronavirus crisis.

Most blind pool SME SRTs, such as Commerzbank’s latest deal, have been executed with the EIF - as opposed to private investors - and this has been even more true following the coronavirus outbreak. SCI data shows that Commerzbank and Societe Generale are the only issuers to have carried out post-Covid private SME deals. 

Over the past five years, the German lender has only tapped the EIF for its synthetic SME transactions. The bank’s last such transaction with the fund was finalised in September (SCI 2 October 2020).

SME exposures typically feature several challenges, following the coronavirus crisis - such as high take-up rates of payment holidays and a general lack of financial disclosures - making it harder for investors to form a view on the underlying portfolio. Nevertheless, the quality of portfolios ultimately depends on several factors, including the underlying asset class and jurisdiction.

Indeed, in this case, Commerzbank was able to leverage its Mittelstand portfolio, which is known for its long and strong track record of performance. In fact, investors were willing to gain sizeable exposure to the risk, as evidenced by the ultimate size of the transaction.

The bank has confirmed that synthetic securitisation remains an important part of its capital management toolbox and, subject to market conditions, will consider tapping the market on an ongoing basis.

Stelios Papadopoulos

CMBS

CMBS sailing

Stormy waters ahead and astern, but the US CMBS market has avoided the iceberg

Although performance of the US CMBS sector has been better than would have been predicted at the start of the pandemic lockdown, there are still areas of acute concern, say analysts at Fitch Ratings, speaking to SCI as the CRE Finance Conference begins.

"We have bonds on negative outlook and have already downgraded a number of classes in deals, especially those below investment grade level. That trend will continue as we see what assets, particularly hotel, can come out of this more positively and those that can’t,” says CMBS analyst Mary MacNeill.

At the end of September, the Fitch CMBS team had placed 900 tranches from 340 transactions on negative watch outlook or ratings watch negative since the start of the pandemic. Since the beginning of December it has taken another 25 ratings actions involving placing multiple deals on ratings watch negative and downgrading others.

To no-one’s great surprise, the two sectors most affected are those bonds with high exposure to retail or hotels. The decline of the US retail mall was well in progress before the onset of the pandemic and the events of the last few months have accelerated a well-nigh irreversible trend.

The hotel sector is expected to recover to a large extent as the effect of more widely disseminated vaccines is felt, but no one is sure when this will be. “In theory, in the second half of the year, if vaccines take hold, there should be candidates for financing where at the moment there is no real appetite,” says analyst Robert Vrchota.

One of the big unknowns is to what extent the working from home revolution will affect financings with exposure to office space. It is now thought likely that the pre-pandemic model will not return and many firms have become a lot more relaxed about employees working fully, or partly, from home.

This development is likely to result in tenants seeking less space or shorter leases when renewal looms. As yet, however, the effect of these trends has yet to be experienced as most office tenants are locked into long-term leases.

However, despite these fault lines and uncertainties, the performance of the CMBS sector has been considerably better than one might have predicted 10 months ago. Though there are certainly clouds on the horizon there are shafts of blue sky as well.

Fitch forecasted a delinquency rate of between 8.25% and 8.75% in the CRE sector by year end 2020 when the pandemic began, and in fact a rate of only 4.69% was recorded. “We are nowhere near where we predicted as a result of the stimulus measures introduced and because servicers are willing to work with committed borrowers to keep loans out of delinquency,” says analyst Melissa Che.

The incoming Democratic administration, which takes office today (January 20), appears determined to maintain the stimulus effort, if not more fulsomely than that of the previous administration, and will now not be stymied by a Senate in Republican hands so it seems the faucet will not be switched off.

Moreover, this bout of market stress has been caused by an external factor rather, as in 2008/2009, by fundamental flaws in the financial markets. Balance sheets are in much better shape than a decade or more ago and this has also helped the market keep afloat.

Vrchota notes that in 2009 there was no new conduit issuance in the CMBS sector for a full year, whereas in 2020 there were 20 multi-borrower conduit securitizations that were priced after the pandemic hit. “In the last crisis, lenders were in rough shape and had all kinds of issues. Lenders are in much better shape this time around and this has helped a great deal. There is a huge difference in liquidity versus the last downturn,” he says.

So, there is no doubt that there are still pockets of the CMBS landscape about which ratings agencies have grave concerns, and there is every reason to expect defaults and losses to continue in 2021. But things could look a lot worse, and, back in March 2020, there was also every reason to expect that a nuclear winter would engulf the market. That hasn’t happened.

Simon Boughey

Structured Finance

Euro CLO equity yields dip

Sector developments and company hires

Euro CLO equity yields dip
Annualised equity dividend yields across European CLOs averaged 12.9% in 2020, down from 15.1% in 2019 and below the 15% yearly average for the 2014-2020 2.0 era, according to research from Bank of America. However, the research suggests that in light of the pandemic disruption, the dip was moderate and mainly driven by a drop in Q2/Q3 payments amid collateral trading losses and some equity cashflow diversions (either forced by OC/ID test breaches or by discretionary decisions of CLO managers).

The BofA CLO analysts note: “We observe significant variability across deals, with the vast majority of equity notes receiving annualised yields between 4% and 20%, depending on quarter, deal and vintage. 2017/2018 cohorts continued to perform better, thanks to the lowest coupon levels ever printed for European CLO 2.0. Equity NAVs have improved back to nearly pre-pandemic levels after they turned negative in March 2020, but dispersion still remains somewhat scattered and is expected to persist.”

In other news…

APAC
Jennifer Law has joined Aon’s Asia Pacific capital advisory unit within its reinsurance solutions business. Reporting to Rupert Moore, ceo of Japan for reinsurance solutions, Law will work with insurance company clients across Asia Pacific on strategies aimed at improving their capital through the utilisation of Aon’s products and services, as well as customised reinsurance programmes. She was previously md of global non-bank financials equity research at Haitong International Research in Hong Kong, with a primary focus on insurance companies in Greater China.

Auto SRT notes upgraded
Moody's has upgraded the ratings of two CLNs and three credit protection deed tranches of Santander’s UK synthetic auto securitisation Motor Securities 2018-1, reflecting increased levels of credit enhancement for the affected notes. The agency notes that total delinquencies with 90 days plus arrears currently stand at 0.50% of current pool balance, while cumulative final losses currently stand at 0.11% of original pool balance. The current default probability is 3.25% of the current portfolio balance, the fixed recovery rate is 40% and the portfolio credit enhancement is 12%.

Sequential amortisation led to the increase in available credit enhancement. For instance, the credit enhancement for the most senior tranche affected by the rating action – the class B tranche - increased to 14.11% from 9% since closing.

North America
Loomis Sayles has promoted Kyra Fecteau to portfolio manager for securitised credit strategies managed by its mortgage and structured finance (MSF) team, which helps oversee US$30.4bn in securitised investments across both dedicated mandates and as part of broader investment strategies. Fecteau co-manages the Loomis Sayles Investment Grade Securitised Credit strategy with Alessandro Pagani, head of the MSF team.

Fecteau also co-manages the Loomis Sayles High Yield Securitised Credit strategy, alongside Pagani and Stephen L’Heureux. She remains an investment strategist for securitised credit.

Structured Finance

CLO team finds new home

Sector developments and company hires

CLO team finds new home
Fidelity International has established a new private credit capability with experienced hires from AnaCap-owned MeDirect Bank. Concurrently, the firm has been awarded the delegation of management for the €400m Grand Harbour CLO 2019-1 transaction. Fidelity says it will continue to engage with MeDirect to explore further strategic opportunities.

The private credit team will continue to be led by Michael Curtis, who has over 20 years’ experience in European private credit markets, having worked for ICG, 3i and Alpstar Capital. He is joined by credit portfolio manager Camille McLeod-Salmon and CLO structurer Cyrille Javaux. McLeod-Salmon has 14 years’ experience investing in credit, having worked for BNP Paribas IM and Fortis prior to MeDirect. Javaux brings 17 years’ experience in CLO structuring, investing and trading, having worked at StormHarbour, Hayfin and Cairn Capital.

The trio is joined by an operations head and a team of six credit analysts with over 70 years of combined experience. The team will transition to Fidelity in March.

Curtis will become head of private credit strategies at Fidelity and his team will report directly into Fidelity’s global cio Andrew McCaffery.

Using the team’s specialist skills, track record and experience, Fidelity intends to enhance its broader alternatives ambitions by developing a full range of private credit strategies.

In other news…

BTV inks SME SRT
The EIB Group has guaranteed a mezzanine tranche of a synthetic securitisation issued by Bank für Tirol and Vorarlberg (BTV). The transaction was arranged by Erste Bank and is expected to provide capital relief under the EU CRR framework.

It employs the use of a synthetic excess spread equivalent to the one-year expected loss of the reference portfolio. The capital relief provided by the transaction will enable the bank to originate a new portfolio of eligible loans to SMEs and mid-caps of up to €435m, mainly in Tirol, Vorarlberg, Vienna and southern Germany.

The transaction was made possible by the support of the European Fund for Strategic Investments (EFSI). Under the deal, the EIF will issue a guarantee covering two mezzanine tranches of a total of €130.53m. This consists of an upper mezzanine tranche to be guaranteed by the EIF on an own-risk basis for €44.20m and a lower mezzanine tranche to be fronted by the EIF and counter-guaranteed by the EIB for €86.33m. The €690m portfolio is a granular pool of SME and mid-cap loans.

Cornerstone investment
Integral ILS has received a cornerstone investment from New Holland Capital. Integral has now secured US$600m of signed commitments for its new dedicated ILS strategy. NHC will also provide Integral with strategic support.

LendingClub, Radius merger approved
LendingClub has signed a definitive agreement to acquire Radius Bancorp and its wholly owned subsidiary Radius Bank in a cash and stock transaction valued at US$185m. By combining Radius and LendingClub, the online lender intends to create a digitally native marketplace bank at scale, enabling consumers to both pay less when borrowing and earn more when saving. LendingClub provides a digital asset generation platform, while Radius contributes a leading online deposit gathering platform.

The combination will also deliver regulatory clarity through a direct relationship with a primary regulator. The transaction is subject to customary closing conditions and is expected to close in the next 12-15 months.

North America
New York finance partner Bonnie Neuman has been appointed head of Cadwalader’s real estate finance practice. Neuman focuses on commercial real estate finance and represents lenders, investors and servicers in domestic and cross-border transactions. This includes the origination of mortgage and mezzanine loans, loan syndication, loan servicing, CMBS and non-performing loan securitisations, loan restructuring and bankruptcy-related matters.

Reperforming RMBS prepped
Morgan Stanley is in the market with an Irish RMBS that securitises a portfolio of 2,405 owner-occupied and buy-to-let predominantly reperforming loans. Dubbed Shamrock Residential 2021-1, the €425.4m deal features an innovative yield supplement overcollateralisation of 4% that is included to mitigate the low weighted average rate of 1.7% on the loans. It can be utilised to enhance the portfolio weighted average coupon by as much as 0.4% per annum, according to Rabobank credit analysts.

The pool comprises two purchased portfolios: Monaco, acquired from Cerberus; and Nore, acquired from Lone Star. Some 22.8% of the pool is currently in arrears of more than one month, while 47.8% of borrowers have had their loans restructured in the past.

Structured Finance

'Unique' CMBX reflects Covid trends

Sector developments and company hires

‘Unique’ CMBX reflects Covid trends
The IHS Markit CMBX.14 index is expected to launch on 25 January, uniquely referencing 25 conduit CMBS issued between September 2019 and December 2020. All five of the 2019 deal constituents are also referenced in CMBX.13, creating collateral overlap between the two series.

Morgan Stanley CMBS strategists note that on average, CMBX.14's original credit enhancement is 29bp, 52bp, 31bp and 59bp higher than CMBX.13, CMBX.12, CMBX.7 and CMBX.6 respectively. By comparison, it is lower than CMBX.10 to CMBX.8 by an average of 35bp, 84bp and 74bp respectively. CMBX.14 tranches are also thinner than all other series of the index, on average.

Meanwhile, underwritten credit metrics are stronger relative to CMBX.13, with a Top 10 LTV of around 55% and an NOI debt yield of 10.6%. “Our measure of 'pro forma' underwriting improved versus CMBX.13 and remains favourable when compared to Series 12 and 11,” the Morgan Stanley strategists observe.

Finally, CMBX.14's concentration in properties located in the top 25 MSAs increased slightly to 63.1% compared to 62.2% for CMBX.13, and remains elevated relative to older indices. Office and multifamily concentration rose to 31.4% and 16.5%, while lodging and retail declined to 4.4% and 16.2% respectively. Indeed, CMBX.14 currently has the lowest concentration of lodging and retail properties across all CMBX series.

In other news…

EMEA
Jan Petersen is set to succeed Michael Curtis as head of corporate credit at MeDirect Bank, based in its London office (SCI 20 January). Petersen has over 20 years of experience in the European corporate loan markets, most recently in special situation lending at NatWest Markets in London.

Prior to that, he worked in the private credit group of Deutsche Bank and before that built and managed a €3bn loan portfolio for BAWAG in Austria. He has also worked in the direct lending area of Cerberus Capital Management and the leveraged finance area of RBS, in each case based in Frankfurt.

First post-Covid aircraft ABS prints
Castlelake has priced Castlelake Aircraft Structured Trust 2021-1, its seventh aircraft ABS and the first such transaction to be completed since the beginning of the Covid-19 pandemic. Proceeds from the US$595m transaction will be used to finance a diversified portfolio of 26 commercial passenger aircraft and one freighter, on operating leases with 11 different lessees in 10 different countries. The aircraft in the portfolio have a weighted average age of 9.3 years and a remaining lease term of approximately 7.8 years, with no scheduled remarketing in the first two years of the deal.

CLAS 2021-1 features several structural enhancements designed to address some of the challenges of the current environment, including an equipment note-style structure that allocates advance rate and amortisation on an asset-by-asset basis, expanded covenants, lower starting leverage, faster amortisation and increased cash sweeps. The deal comprises two tranches: US$476m class A notes, which priced at 3.474% (yielding 3.5%); and US$119m class B notes, which priced at 6.656% (yielding 6.75%). Moody's - in its first aircraft ABS rating in over a decade - has indicated the class A notes will be rated A2 and the class B notes will be rated Baa2, while KBRA has indicated the notes will be rated single-A and triple-B respectively. 

With this deal, Castlelake has sponsored approximately US$5.3bn in aircraft ABS since beginning the programme in 2014. The firm says that the class A and B notes of all four of its outstanding transactions are outperforming and ahead of their repayment schedules by an average of 6.5%, as of December 2020.  

Goldman Sachs was the lead structuring agent and left lead bookrunner on the transaction.

North America
Varagon Capital Partners has named Edward Kung as an md in the business development and investor relations team. Previously, Kung was head of business development at Evolution Credit Partners, marketing its direct lending and opportunistic credit funds. Prior to that, he was an md at Barings and has also held roles with PanAgora Asset Management, Columbia Management Group and Russell Mellon Analytical Services. 

Transitional CRE venture
Lionheart Strategic Management has entered into a loan acquisition agreement with Schroder Investment Management North America, targeting US$250m in transitional and distressed real estate credit investments. The venture will co-originate transactions and source and service loan opportunities through Lionheart Real Estate Credit Strategies.