Contents

ABS

ILS innovation

UK platform to support additional capacity, emerging risks

London Bridge Risk PCC is the first UK ILS structure that has the PRA’s approval for use for multiple, market-wide transactions (SCI 14 January). The platform can be used for investors to support underwriting at Lloyd's through acquiring ILS.

“This platform - which has been sponsored by Lloyd's but is independent of the Society - can be used in multiple transactions for different groups of investors to back different Lloyd's corporate members, but with each transaction ring-fenced from the other,” says Katherine Coates, corporate and insurance partner at Clifford Chance.

Currently, the platform does not cover all types of ILS. Nevertheless, by funding the activities of a corporate member in return for participating in its results, investors are able to bring additional capacity to the market.

“The monies raised by a cell will therefore be applied to provide funds at Lloyd's on behalf of a corporate member and the cell will reinsure a quota share of the member's underwriting, thereby participating in a pro-rata share of its profits or losses. The loss participation is limited to the assets of the cell, being the funds raised from the investors and the premium receivable from the cedant," notes Coates.  

The London Bridge Risk platform can be used by a single investor, a small number of investors in a joint venture, as a private placement or for a broader public offering of the securities to sophisticated investors. It can be used to support a single year or multiple years of a member's underwriting.

The PCC is regulated by the PRA and the FCA under the new regulations in 2017 derived from Solvency 2. The regulations ensure that each cell is fully funded upfront, in order to meet its maximum liability and to ensure it will be able to remain fully funded.

Coates says: “Its liabilities to the cedant and other creditors are required to be limited recourse to the value of its assets from time to time. But to protect the cedant, the regulators assess whether - ignoring the limited recourse - the cell has sufficient assets. The rights of the investors to be repaid must also be subordinated to the obligations of the cell towards the cedant.”

At Lloyd's, for each annual period, any residual risk outstanding after three years is reinsured into the syndicate as it exists in the fourth year - a reinsurance to close. “This provides some certainty to investors that they will know at that point what profit or loss has been made on the business which they supported in the first year and in the case of profit that it can be distributed to them," says Coates.

Having a market platform for investors to support corporate members is beneficial. In particular, having been approved by the regulators with template documentation for individual transactions, the individual transactions can now be completed quickly and efficiently using the templates and without requiring further pre-approval from the PRA and the FCA.

Coates says: “Lloyd's itself will have more confidence in the structure being used by such investors, as they have been involved in creating it."

The innovation demonstrates that the UK ILS market is able to grow into new areas and can be used for endeavours other than the well-established types of catastrophe bonds and side cars. “This is a time when the ILS market generally is being looked to play a part in covering broader risks and particularly emerging risks, such as cyber and climate, and investors are increasing their appetite for insurance risk which is non-correlated with other risks and adequately diversified. We are hoping that this will give people confidence to come up with other new structures and risk types in the UK market,” Coates concludes.

Jasleen Mann

RMBS

Structural change

Restructuring eyed for Covid-impaired mortgages

The UK non-conforming and buy-to-let RMBS market is expected to continue to benefit from the positive supply technical of TFSME. Nevertheless, the Covid-19 fallout appears to have precipitated structural change across the sector.

With respect to the BTL segment, ‘generation rent’ drives performance, according to Galen Moloney, head of securitised product strategy at NatWest Markets. An uptick in unemployment was seen within the cohort post-financial crisis (between 2009-2011), but arrears trended more in line with prime rather than non-conforming performance.

“It’s different this time around: rents have dropped in London and increased elsewhere. However, a push to get workers back to the office post-coronavirus could reverse this trend. Nevertheless, the BTL market is supported by rental streams and landlords dipping into their own pockets,” Moloney says.

High UK rental yields versus other investments, notably commercial real estate, suggests that the BTL market should remain solid for some time. In fact, Moloney estimates that the market could endure a 15% dent in LTVs before performance is impacted.

“It depends on what happens once lockdown restrictions ease and whether life returns to normal. If it does, there will be a boost in Covid-impacted industries, in which generation rent is typically employed,” he observes.

Meanwhile, given widespread mortgage payment holidays, foreclosure is arguably being replaced by forbearance. Moloney agrees that the social considerations around eviction are increasing in importance.

“Viewed through a regulatory lens, banks have been told to release their capital buffers due to the Covid fallout, so they should be resisting evictions,” he adds.

He suggests instead that to address Covid-impaired mortgages, UK lenders may follow the example of Irish lenders post-financial crisis, where loans were restructured – typically via arrears capitalisations and maturity extensions - rather than foreclosed on. “Portfolios can be recycled from non-performing to reperforming to performing, with a securitisation exit, like Lone Star’s European Residential Loan Securitisation deals. This is the year when issuers can bring diverse deals, due to the pressure investors are under for yield.”

In terms of extension risk, there appears to be a degree of confidence among investors about issuers calling deals, since there was only one minor extension in 2020 (Oat Hill No. 1). “QE liquidity in the system translates into less volatility and greater assurance around redemptions. Additionally, the major political events – Brexit, US elections, German, Italian elections – have either passed or do not seem to provide cause for concern and there is a more stable environment, which is supportive, as long as monetary easing continues,” Moloney comments.

Overall, he expects UK non-conforming/BTL RMBS will continue to benefit from the positive supply technical of TFSME. “This comes at an opportune time, as we predict some £7bn of refinancing due to NCF/BTL calls this year, coupled with circa £9bn of front book issuance - including the next UKAR trade - given we believe specialist mortgage lending is only marginally down year-on-year.”

Corinne Smith

ABS

Lockdown exposure gauged

Geographic footprint to shape pub performance

The estate securing the Mitchells & Butlers Finance transaction has the most diversified geographic footprint of the UK pub whole business securitisations S&P rates, while Marston’s Issuer’s is the least diversified. Approximately 56% of the Marston’s pub estate is spread across the East and West Midlands, with additional pockets in the North West, Yorkshire and the Humber, according to data compiled by the rating agency.

The data focuses on the location of pubs within the pub estate backing each securitisation, which is generally not the whole of each parent company's pub estate. The overall risk to each pub estate's trading performance will be shaped by its geographic footprint, the regional progression of coronavirus cases across the UK and the consequent restrictions put in place by the government. Should a tiering system be imposed once the national lockdown ends, the exposure of pub estates to regional restrictions will differ.

In terms of exposure to Greater London, Mitchells & Butlers Finance, Spirit Issuer and Unique Pub Finance have far greater exposure than Marston’s Issuer and Greene King Finance, with Marston’s having just one pub in Outer London and none in Inner London. Spirit has the highest exposure to Greater London, followed closely by Mitchells & Butlers, as both have over 10% of their estates within Inner London.

Meanwhile, Greene King’s estate is heavily centred in the south east and the east of England, with another concentration in Scotland. At the end of November 2020, with the introduction of the UK government’s tiering system, Greene King’s concentration gave it some distance from the Midlands hotspots and those areas facing the most stringent restrictions, while Marston’s was the most exposed to local restrictions that hampered its ability to trade.

However, S&P notes that as regional coronavirus hotspots continue to flare up, it is now the south east that is exhibiting the highest levels of new cases and Greene King has replaced Marston’s as the most exposed.

In terms of population centre concentration - which is an indicator of the availability of outside space that helps to lessen the impact of restrictions on both social distancing requirements and bans on standing and drinking indoors - over a third of Marston’s estate is situated in a rural setting, compared with around 14% for Mitchells & Butlers and Spirit, 20% for Unique and 25% for Greene King.

S&P’s ratings on 14 classes of notes from four UK pub securitisations are currently on credit watch negative, reflecting the ongoing significant uncertainty surrounding the timing and robustness of the Covid-19 recovery and each issuer’s available liquidity.

Corinne Smith

Structured Finance

SCI Start the Week - 8 February

A review of securitisation activity over the past seven days

Last week's stories
Beware the ides of March
The end of mortgage forbearance schemes is ominous for MBS
Big Brother Biden
Democrat control of key committees puts securitised market on alert
Origination innovation
Fintechs, specialist mortgage lenders gaining traction
Euro CLO shift
Primary market comes into focus
A buoyant start to the year for the European CLO market has been supported by strong secondary market activity driving spreads to new tights in January. Meanwhile, the primary market got off to a slow start, but over the past week has begun to attract increasing attention.  

"The overall recovery in the European CLO market from the Covid-driven price collapse has been remarkable in its speed in comparison to 2008 and it seems to keep accelerating," says one CLO investor. "It wasn't that long ago we were talking about 10% defaults and now it's 2% and the belief in rising rates is pushing the appeal of floating rate assets, such as CLOs. So, we're suddenly back to a par market, with demand outstripping current supply."

So far this year, secondary has been doing all the heavy lifting, with healthy activity underpinning a strong rally and spreads throughout the stack now comfortably inside 2020 tights. However, last week saw a dip in BWIC volumes and some softening in spreads, particularly for weaker names. See SCI's Daily Cover or PriceABS for more detail.

Conversely, the European primary market got off to a slow start in 2021, with the first deal not pricing until 20 January, but has picked up speed to month-end. Even so, year-to-date it has only seen three new issues, two resets and three partial refinancings.

The new deals were consecutively RRE 6, Henley CLO IV and Avoca CLO XXII, which saw their triple-As print at +87bp, +90bp, +83bp, respectively, much tighter than the 105bp level seen for deals at the end of 2020. Meanwhile the resets, for Penta CLO 5 and Euro-Galaxy V, came in at +95bp for the top of the stack and the triple-As for the latest partial refi, Contego CLO IV, printed last Friday at +64bp.

"For now, if you bring a deal you're pretty much guaranteed to get good pricing. In fact, what we're seeing is a bit of a bun fight for paper," notes the investor.

He continues: "But the big difficulty for issuers is that loans are very strong at the moment, so they need to see liabilities widen. That has slowly begun to happen in the past week and should lead to increased issuance."

Indeed, the visible pipeline of soon to be priced deals now contains a further four CLOs - Anchorage Capital Europe CLO 4, Neuberger Berman Loan Advisers Euro CLO 1, Oak Hill European Credit Partners VIII and Palmer Square European CLO 2021-1. In addition, over 20 deals have already released cleansing notices this year, indicating their intention to reset or refi and dozens of warehouses are already underway.

However, as the investor concludes: "One cautionary note for CLOs is that while demand is there now, can it be sustained for more than a few weeks when 10 or more deals have been priced and there are so many more in the pipeline? That could cause some overall softening in the market, especially if secondary picks up on the back of primary activity and rotation trading."

Mark Pelham

Other deal-related news

• The EIB Group has completed its first synthetic securitisation in Romania with a financial services partner (SCI 1 February).
• Net purchases by the ECB's ABSPP totalled only €1.1bn in full-year 2020, the lowest annual tally since the start of the programme in 4Q14, according to JPMorgan international ABS analysts (SCI 1 February).

• NewDay became the first European securitisation issuer to publicly market a US dollar-denominated SOFR-linked bond with its latest UK credit card ABS, Newday Funding Master Issuer - Series 2021-1 (SCI 1 February).
• Multi-strategy life sciences investment firm Catalio Capital Management has launched a credit opportunities strategy to meet the growing demand for non-dilutive growth capital within the biomedical sector (SCI 2 February).

• GoldenTree Asset Management has closed US$725m in commitments on a second CLO strategy, dubbed GLM II, under its GoldenTree Loan Management programme (SCI 4 February).
• Aon Securities 4Q20 ILS Update notes that US$11bn of property catastrophe bond limit was placed last year, the highest total on record, versus US$5.4bn placed in 2019 (SCI 4 February).
• The cumulative collection ratio for the DUERO 1 non-performing loan securitisation has consistently breached its trigger level for an interest subordination event - which is set at 90% - since the April 2020 reporting period (SCI 5 February).

Company and people moves

• DSW Debt Advisory has appointed Lynn Li as manager (SCI 1 February).
• AGL Credit Management has appointed David Preston as head of structured credit research (SCI 1 February).
• Bob Sherman has joined Marble Point Credit Management as global director of strategic development, a newly created position (SCI 1 February).
• Canadian pension investment manager Public Sector Pension Investment Board and Pretium have launched a joint venture that will initially invest US$700m in single-family rental properties across major markets in the southeastern and southwestern US (SCI 1 February).
• CQS has recruited Bob Paterson as a portfolio manager (SCI 2 February).
• Conor Downey has joined Gunnercooke as real estate finance partner, based in London (SCI 2 February).
• Hayfin Capital Management has appointed Daniel Bird as a portfolio manager in the private credit team (SCI 2 February).
• AXA XL has promoted Niraj Patel to lead alternative capital activities as head of AXA XL ILS Capital Management (SCI 2 February).
• Cairn Capital Group is set to acquire and merge with Bybrook Capital, a specialist distressed credit manager based in London (SCI 3 February).
• UK specialist motor insurer ERS Group is set to launch an integrated ILS offering as part of its plans to progress its commercial expansion(SCI 4 February).
• Funds managed by Stone Point Capital and Insight Partners are to acquire all outstanding shares of CoreLogic for US$80 per share in cash, representing an equity value of approximately US$6bn and a premium of 51% to CoreLogic's unaffected share price on 25 June 2020 (SCI 5 February).
• Intermediate Capital Group has appointed Lionel Laurant as md, co-head of special situations and co-portfolio manager for its Recovery Fund II (SCI 5 February).

Data

Recent research to download
Greek CRTs - January 2021
Insurer Involvement in SRT - December 2020
CLO Case Study - Autumn 2020

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
SCI's 3rd Annual NPL Securitisation Seminar
May 2021, Virtual Event

Capital Relief Trades

Muskoka called

BMO exercises call option

Bank of Montreal has decided to call a capital relief trade backed by senior secured and senior unsecured US and Canadian corporate loans. Dubbed Muskoka Series 2017-2, the transaction was finalised in 2017 and was first eligible to be called in September 2020.

Capital relief trades often feature time calls, which allow banks to call their trades following the end of the non-call period and are often aligned with the end of a deal’s replenishment period. The feature helps banks maintain the efficiency of transactions by either enabling them to issue new trades with better pricing or terminate deals early when they start to amortise.

Nevertheless, there is no evidence of any deals being called in 2020, most likely due to the coronavirus crisis. Indeed, due to the crisis, pricing following a call would not have been optimal and calling a transaction would have eliminated the credit protection afforded by the transaction.

The 2017 Muskoka deal was among the first in the series. Since then, BMO has issued six deals from the programme (SCI capital relief trades database). 

Stelios Papadopoulos

ABS

Fly or goodbye - can airlines survive without taking to the skies?

Contributed thought leadership by Ocorian

As once profitable airlines look to survive and raise liquidity to weather the turbulence of the Covid-19 pandemic, Ocorian director Abigail Holladay and Watson Farley & Williams aviation partner Patrick Moore assess the use of alternative assets as a means to raise finance.

With airlines having lost an estimated US$118.5bn in 2020, it's easy to forget the aviation industry had been enjoying an extended super-cycle prior to the Covid-19 pandemic. There was a boom in new and emerging markets, populations were becoming more mobile, low-cost airline models were well-established and growing competition between lenders was driving down financing costs and lease rates for aircraft.

The pandemic put a swift halt to this progress. Travel restrictions and national lockdowns converged to deliver a significant and prolonged economic shock to the industry, forcing airlines to operate heavily reduced flight schedules and ground significant proportions of their fleets.

By September, the International Air Transport Association (IATA) had been expecting full-year traffic levels for 2020 to be down 66% on 2019. The impact has been, and continues to be, severe - particularly for those in the northern hemisphere that have been unable to rely on strong summer revenues to sustain them through winter.

Governments have provided various financial support packages for airlines in an aggregate amount totalling an estimated US$173bn. The availability, level and form of support has varied from one country to another.

In some cases, support has been subject to conditions that airlines would likely resist in other times – stipulations as to equity stakes, restrictions on dividend payments, reductions in carbon emissions, the implementation of cost-cutting measures, the renegotiation of existing liabilities and adjustments to employment conditions. Nevertheless, those airlines that receive support are often better placed to raise additional capital in the markets, as a result of increased confidence from investors that they will be able to survive.

Governments’ ability to support airlines, however, is not unlimited. As the pandemic and airlines’ pain continues, governments have to weigh the merits of providing further support to airlines against the many other competing priorities.

Although there is optimism that the recent approval of vaccines signals the beginning of the end of the pandemic, the emergence of new strains of the virus and renewed lockdowns in the UK and abroad have dampened hopes that airline revenues are likely to rebound in the near term. Many speculate that there will be a greater number of airline restructurings and insolvencies in 2021 and going into 2022 than we saw last year. Securing liquidity remains key to airlines trying to ride out the storm.

Airlines need to spread their wings to survive
When lockdowns took effect around the globe, airlines were quick to try and stop the bleeding of cash and to raise funds to enable them to ‘trade through’ a period of supressed revenues. In a climate of depressed aircraft values and with many established lenders in the market putting a pause on lending to the sector, however, airlines have been forced to look beyond their usual sources of finance – loans secured against their aircraft, sale and leaseback transactions, bank facilities and unsecured bond issuances.

They have had to become more innovative in finding ways to leverage their assets and revenue streams. One trend that has emerged, particularly in the US, has been the use of intangible assets, frequent flyer programmes, brand IP rights and airport landing slots to raise finance. New lending has also been secured on various non-aircraft assets, such as hangars, spare parts, equipment and flight simulators.

Raising capital against these ‘alternative assets’ is not a new concept. Prior to the pandemic, for example, several airlines in the US had secured their slots, gates and routes as part of a broader collateral package for corporate loan facilities.

In Europe also, there had been a handful of slot financings. These included Virgin Atlantic’s £250m securitisation of its Heathrow slot portfolio in 2015, a ‘first of its kind’ transaction. The value of slots in the restructuring context had also already been seen in 2019 with Norwegian Air Shuttle’s rollover of bonds, achieved by offering indirect security over its slots at Gatwick.

Since the onset of the pandemic, a series of large-scale transactions by airlines in the US has demonstrated the attractiveness of these asset classes among investors. In April 2020, Delta Air Lines raised US$5bn under a package of loans and bonds secured by slots at airports in New York and at Heathrow. American Airlines borrowed US$2.5bn against its own New York and Heathrow slots, before issuing a further US$1.2bn of debt secured against its brand and domestic slot portfolio.

The largest of these transactions, however, were those secured against the airlines’ loyalty programmes. United Airlines raised US$6.8bn in June, offering up its MileagePlus programme as security. In September, Delta Air Lines followed suit with the industry’s largest debt issuance to-date, raising US$9bn of new debt secured against its SkyMiles frequent-flyer programme, having initially only sought to raise US$6.5bn from the transaction.

When compared to aircraft, these intangible assets are less homogenous, less liquid and more difficult to value. However, an airline can readily replace its aircraft should it need to, whereas these assets are critical to the airline’s continued operations.

An airline will not be able to operate flights without landing slots. Without its loyalty programme, it is unable to contact its database of customers, and it would be unrecognisable to consumers without its brand or website. This critical nature of the collateral provides the investor with influence and leverage in any subsequent restructuring of the airline, in addition to its realisation value on enforcement.

While a number of these transactions have taken the form of secured lending provided directly to the airline itself, such a structure carries the risk that enforcement against the asset may be frustrated by a stay on enforcement or other consequences of an insolvency process affecting the airline. Many of these transactions have therefore been structured as on-balance sheet securitisations, with the collateral assets being transferred to a bankruptcy-remote subsidiary which acts as the borrower or issuing entity.

The jurisdiction of incorporation for that subsidiary may be different to the airline’s home jurisdiction as a result of various insolvency and tax considerations. In that case, or in the case of an off-balance sheet structure involving an ‘orphan’ borrower, a professional corporate servicer may be required to manage the entity or to provide local directors. 

Investors in transactions involving these assets typically include institutional investors and, in the current market with higher returns on offer, private equity and alternative investment funds. They will be represented by a trustee or agent, who will carry out the administrative functions of communicating with the airline throughout the life of the transaction and who will distribute notices and information and coordinate with the investors.

The post-Covid horizon
Having received limited attention in better times, the assets underpinning some of the largest capital raises ever to be seen in the industry are now firmly in the spotlight. The successes of airlines in the US have set a strong precedent and cleared the path for others in Europe and further afield to follow suit.

With travel disruption continuing into 1Q21 and pre-Covid flight numbers not expected to return until 2024, further airline restructurings and insolvencies appear inevitable. For some, however, these alternative assets may just prove to be the vital lifeline that keeps them airborne.

Specialists in structured finance
Abigail Holladay is a director of transaction management in Ocorian's structured finance and restructuring team. The team has nearly 20 years’ experience in the domiciliation and administration of all types of funding structures used in transportation (aviation, rail and maritime) and securitisation, corporate debt funding, holding companies and cross-border transactions. In addition, Ocorian provides security trustee and facility agency services to support the debt financing associated with each purchase/sale or lease.

Get in touch via Abi’s details below to discuss how Ocorian can support your funding structure.

Abigail Holladay, Director - Transaction Management, Ocorian

T +44 20 7052 7721

E abigail.holladay@ocorian.com

Patrick is a partner in the assets and structured finance group at Watson Farley & Williams. He specialises in finance transactions and restructurings in the aviation sector. Patrick’s recent work includes acting for creditors to Virgin Atlantic Airways in its recent £1.2bn restructuring by way of a UK Restructuring Plan and advising on the Norwegian Air Shuttle bond restructuring.

Patrick Moore, Partner, Watson Farley & Williams

T +44 20 7814 8000

E pmoore@wfw.com

Structured Finance

Constructive outlook

Deborah Shire, global head of structured finance at AXA Investment Managers and deputy head of AXA IM Alts, answers SCI's questions

Q: What were the drivers behind restructuring the AXA IM business into two key divisions – the Alts unit and the Core unit?
A: The business was restructured in March last year (SCI 11 March 2020), with the objective of developing two strategic businesses and boosting the commercial momentum behind them. The aim was to create a dedicated salesforce to bring deeper industry coverage, deliver more value to clients and increase our visibility.

We are especially pleased about the increased proximity with our clients that the restructuring has facilitated. Our AUM increased by €5bn during the six months following the restructuring and we’re on target to deliver strong results in our first full year, despite a complex market environment.

Q: What are the Alts unit’s key areas of focus today?
A: AXA IM Alts brings together our real assets business, our structured finance platform and our Chorus hedge fund business. The division has €153bn AUM, 16 offices with 700 staff and 350 clients.

We provide investment solutions across the spectrum of underlying asset classes and in both the private and public markets, with teams on the ground in a number of jurisdictions. In principle, we’ll consider anything – whether it is up or down the capital stack, in corporate, consumer or commercial real estate assets – providing we understand it and have market conviction. We tend to avoid asset classes where we feel we don’t have an edge such as commodities or shipping.

Our real assets franchise comprises an open-ended fund range, including diversified as well as sector-focused funds dedicated to residential and logistic property. The private debt and alternative credit franchise includes commercial real estate and infrastructure debt, corporate debt and consumer exposure, and our second fund in infrastructure debt. We also reached key milestones in our CLO business and regulatory capital strategies, with the launch of the Allegro CLO XII transaction in December and our eighth partner capital solutions fund a year ago (SCI 21 February 2020) respectively.

Within senior CLOs, we prefer European paper due to the benefits of the Libor floor. Within investment grade consumer ABS, we prefer paper with short-dated profiles. We like diversifying asset classes, such as Australian RMBS, because it offers good fundamentals and diversification.

Generally, we were overweight on revolvers and reg cap investments last year.

Q: From your perspective, what makes capital relief trades so attractive?
A: Synthetic securitisation is receiving more recognition these days, but we’ve been active in the segment for 20 years. Regulatory capital is a high-return strategy, where we can provide an edge in sourcing and structuring investments while providing diversification among direct lending, whose attractiveness has not been hampered by Covid-19. Our eight partner capital solutions funds are on track to deliver or have already delivered 7%-10% IRR since launch, for example.

We favour capital relief trades because they allow access to stable cashflows while being exposed to among the best assets that it is possible to find – the core performing loan portfolios of banks. The market has momentum, particularly in the current environment, because it provides a capital management solution that makes sense to banks, thus they’re willing to pay, and providing advantageous spread pick-up.

The market has seen reduced competition post-Covid, which has provided us with an improved ability to negotiate higher quality portfolios, more defensive structures and higher pricing. We always request full transparency over assets and currently have a nice pipeline in large cap corporates.

Q: What is your strategy in other sectors going forward?
A: CLO equity is a strategy we have a long-term track record in and remain focused on, driven by the fact that the market is providing ideal conditions in which managers can outperform. CLOs are arbitrage vehicles, so playing in the equity space requires a certain configuration of returns and liabilities.

We believe the best timing for equity is when liabilities are tighter; CLO equity tranches from active CLO managers can be considered as well to benefit from extra value once being able to refinance or reset CLO debt.

Q: How do you differentiate yourself from your competitors?
A: One way we differentiate ourselves is by completely integrating ESG considerations into our investment platform and processes. We already rate over half of our loan portfolio across specific ESG criteria and plan to increase that proportion to 80% rapidly. We also undertake a due diligence questionnaire with prospective borrowers and are finding that more and more corporates are willing to participate.

Both client demand and regulatory pressure to do more in the ESG arena have become real – it’s no longer a ‘nice to have’, but a necessity. Now is the time for action. We can drive real, concrete change within the alternative market.

For instance, exclusion within CLOs really took off in 2020 in Europe. As a leading alternatives asset manager, we have been very active in embedding ESG in the way we do business, and we want to have an active role in driving the agenda for the whole industry.

We also have a long-established impact fund range, now in its fourth generation, with 10 years of experience and more than US$700m of assets under management and more than 40 transactions executed. Our two focused dimensions with dedicated strategies are climate change and biodiversity (where we deployed close to US$200m in commitments to various projects last year), as well as healthcare and basic needs.

Q: Which challenges/opportunities do you anticipate in the future?
A: The Covid crisis has demonstrated the resilience of the securitisation market, due to robust transaction structures and stable cashflow streams. We’re seeing a strong interest in senior bonds, which offer a significant pick-up compared to traditional fixed income.

In terms of technicals, because there is so much governmental and policymaker support for the market, we’re not too concerned. Even if we have a second or third wave of Covid-induced lockdowns and the widespread payment holidays come to an end, they should be counterbalanced by economic flows.

We don’t expect the macro situation to be the main challenge to credit markets in 2021.

At the same time, we don’t like the current ‘lower yields for longer’ scenario, which drives spread contraction and is challenging for performance. Against this backdrop, credit selection and smarter sourcing are key.

We anticipate further rating action activity, although it should be more balanced than during the height of the coronavirus crisis. Overall, we have a constructive outlook on the securitisation market.

Corinne Smith

Structured Finance

NPL SRT agreement inked

Sector developments and company hires

NPL SRT agreement inked
Hoist Finance has signed a co-operation agreement with Magnetar Capital that provides for new portfolio investments on a pan-European level and will create a framework for future purchases in the current regulatory environment. The aim is to make securitisation an integral part of a sustainable business model for Hoist and strengthen its purchase capabilities.

The programme is structured with a view to achieving significant risk transfer and will target unsecured non-performing loan portfolios, for a total investment volume of approximately €1bn. As co-investor, Magnetar has committed to invest €150m in mezzanine and junior notes in future securitisations for a combined IRR of 14% over a 24-month investment period. Hoist Finance will subscribe to the senior notes.

Any surplus collections from the securitised assets will support the outstanding notes and, upon full repayment, be paid to Hoist under the relevant servicing agreements. The partnership will cover all the jurisdictions where the firm is active.

Hoist Finance (London branch) and Deutsche Bank acted as arrangers in designing the programme. White & Case acted as legal advisor to Hoist Finance and Clifford Chance as legal advisor to Magnetar.

In other news…

EMEA
Strategic Risk Solutions (SRS) is establishing operations in Guernsey. Peter Child has been appointed md, SRS Guernsey Management and will be responsible for the development and oversight of the firm’s business, including in connection with ILS. Child will take up his new position with SRS in July, but recruitment efforts to staff the Guernsey office will begin immediately. He was previously head of European operations and md, Guernsey at Artex Risk Solutions, and has also worked at Aon, Guernsey Financial Services Commission and Euler Hermes.

Jumbo DPR ABS closed
BCP Securities, Credit Suisse and Jefferies have purchased US$500m of diversified payment rights securitisation notes, in what is believed to be the largest-ever Latin American cross-border remittance transaction. A multi-disciplinary team in the Maples Group’s Luxembourg office supported the banks as legal counsel, while the firm’s fiduciary services team provided domiciliation, directorship and accounting services.

North America
Jason Merrill has joined Kuvare Insurance Services as vp, structured securities. Previously, Merrill held the position of investment specialist at Penn Mutual Asset Management, where he was responsible for trading, analysis, research and model development for CLOs, ABS and non-agency RMBS.

Spanish regulation revisited
The Bank of Spain has published draft regulation - that is open to consultation until 23 February - to prevent and mitigate risks to financial stability, which Moody’s suggests would be credit positive for RMBS, as the limits would tighten loan underwriting. The draft regulation allows the central bank to establish prudential limits on sector concentration and credit origination.

Meanwhile, the Spanish government has extended the deadline to request loan payment deferrals, given the longer-than-anticipated economic challenges caused by the Covid-19 pandemic. Households, the self-employed and firms related to the tourism and transport sectors are now allowed to request a moratorium on the capital and interest of their mortgage and unsecured loans up to 30 March 2021 for a maximum period of nine months. In addition, borrowers currently benefitting from a payment deferral on their loans can request an additional extension of the loan moratoria for a maximum cumulated period of nine months.

The extension of loan moratoria in Spain will not prevent loan underperformance for RMBS, says Moody’s. The extension is expected to provide some relief to the most vulnerable borrowers impacted by the renewed restrictions in Spain.

A second round of loan repayment moratoria or extension of payment deferral is most likely to be requested by those who are in weaker financial shape than they were in spring 2020. For this reason, higher roll rates are expected to default, with these measures failing to prevent the formation of problem loans once payment deferral schemes close.

Structured Finance

Special situations strategy launched

Sector developments and company hires

Special situations strategy launched
Bardin Hill Investment Partners has announced the final close of the Bardin Hill Opportunistic Credit Fund and a parallel side-car vehicle, with total commitments of approximately US$600m. The firm’s flagship closed-end strategy received backing from new institutional investors globally, as well as from existing Bardin Hill clients.

The strategy identifies and executes on stressed, distressed, process-driven and special situations investments less correlated to global debt and equity markets, with a focus on control-oriented opportunities in smaller and medium-sized capital structures. The fund is designed to leverage Bardin Hill’s experience investing across multiple market cycles and niche credit strategies to maximise returns for investors while mitigating downside risk.

In other news…

ABSF proposals requested
The AOFM has invited market participants to submit proposals to be considered for investment by the Australian Business Securitisation Fund (ABSF) by 31 March. The AOFM expects to announce its decision for this round of ABSF investments late in 2Q21. Decision timing will be a function of the number and complexity of proposals received.

EMEA
Reed Smith has hired Jason Richardson as partner in its financial industry group, based in the London office. Richardson joins Reed Smith from Sidley Austin, where he was a partner. Richardson acts for both lenders and sponsors on commercial mortgage lending transactions, as well as for arrangers, investors, servicers and rating agencies in relation to various types of securitisation transactions, including CMBS, synthetic securitisations and NPL portfolio transactions.

North America
John McElravey has joined the Boston Fed as a markets specialist within the credit risk management unit of the bank’s supervision, regulation and credit department. He was previously md, structured products research at Wells Fargo, having joined the bank in 2007. Before that, McElravey worked in ABS trading, research and ratings at AAM, Banc One and Duff & Phelps, and was an economist at the Chicago Fed and Cleveland Fed.

TALF investment manager sought
The New York Fed has launched a prequalification process for cash investment management services for its TALF programme, as part of a multiphase competitive procurement process commenced in October 2020. When the Federal Reserve launched a number of emergency liquidity facilities in 2020, some vendor roles were filled through direct negotiations with service providers to expedite programme implementation. The New York Fed did so with a view that once the immediate need to commence operations of the facilities had passed, those roles - as well as any new roles that were identified for the ongoing operations of the facilities - would be reviewed and potentially be subject to a competitive procurement process.

Consequently, it is seeking to select firms to participate in a potential request for proposals for the newly identified role of cash investment manager for the TALF for the duration of the facility’s life. The TALF’s authorisation ceased on 31 December 2020, but maintains a cash investment management account to hold all fees, earnings from TALF loan interest and additional investments.

The prequalification form should be submitted by 23 February 2021.

Structured Finance

UK industrial CMBS prepped

Sector developments and company hires

UK industrial CMBS prepped
Bank of America is in the market with a £340.1m CMBS sponsored by Blackstone. Dubbed Taurus 2021-1 UK, the transaction is backed by a two-year floating rate loan (with three one-year extension options) secured by the borrower’s interests in 45 industrial assets across the UK totalling 4.1 million square-foot of floor area.

The largest asset is 7.1% by allocated loan amount, while the 10 largest assets account for approximately 44.6% of the pool, according to KBRA. The properties are leased to approximately 180 individual tenants, of whom the largest represents 12.1% of passing rent and the top 10 represent 37.6%.

The tenants consist of a variety of multinational, regional and local firms, concentrated in Greater London (accounting for 42.1% of the pool) but spread across nine different regions. The largest tenant is logistics company DSV Road, which makes up approximately 12.1% of the portfolio’s passing rent and 8.1% of total square-footage. KBRA notes that the rent roll is fairly granular, with the remaining top two tenants accounting for 4.2% and 3.3% of passing rent.

Five classes of notes (class A through E) will be issued, together with an issuer loan, which will constitute an eligible vertical interest under the EU, UK and US risk retention rules.

In other news…

EMEA
Channel Capital Advisors has named its senior advisor Daouii Abouchere head of ESG and sustainable finance. The firm says it is committed to making ESG a cornerstone of its investment process. As such, Abouchere will be responsible for implementing Channel’s ESG framework and for driving its sustainable finance strategy across the group, working with clients to develop and execute new ESG and sustainable financing solutions.

North America
Blackstone has hired Shary Moalemzadeh as a senior md and senior partner, based in New York, for the firm’s opportunistic investing platform Blackstone Tactical Opportunities. He will start in April and report to David Blitzer, global head of Blackstone Tactical Opportunities.

Moalemzadeh joins Blackstone after spending over 17 years at Carlyle, where he was most recently co-head of Illiquid credit strategies and co-head of Carlyle Strategic Partners, its special situation business. Prior to that, he was a principal and founding member of Jacksons and has also worked at Vestar Capital Partners and Merrill Lynch.

Kuvare Holdings has recruited Jason Powers as head of credit investments, responsible for investments in the private credit, CLO, ABS and corporate debt sectors. He was previously md and co-head of corporate debt finance at Wells Fargo and, before that, worked at Bank of America.

Structured Finance

EIF supports impact lending platform

Sector developments and company hires

EIF supports impact lending platform
Tikehau Capital has completed the first closing for its private debt impact lending investment platform, raising circa €100m from the EIF - backed by the European Commission’s Investment Plan for Europe - as anchor investor, alongside other key institutional investors. Tikehau Capital intends to contribute to a sustainable European economy while providing investors with competitive returns by investing primarily in European SMEs that contribute to a sustainable economic transition in Europe through their offering, their resource management or their processes. EIF participation in the fund is expected to facilitate fundraising from other institutional investors, helping the fund to reach a target size of €350m-€400m.

Tikehau Capital’s impact lending strategy provides more favourable financing conditions, such as lower interest rates, to companies that meet their sustainability goals and positively contribute to at least two out of five targeted Sustainable Development Goals (SDGs). These SDGs relate to climate action, innovative growth and social inclusion.

The EIF says it seeks to support Tikehau Capital by fostering more private capital towards the lower end of the market and creating a catalytic effect in attracting new investors seeking investment opportunities for their SDG allocations.

Structured Finance

UKML tender offers mooted

Sector developments and company hires

UKML tender offers mooted
Coventry Building Society subsidiary Godiva Mortgages is set to purchase from UK Mortgages Corporate Funding two buy-to-let mortgage portfolios originated by Godiva and currently financed within the Cornhill No. 6 and Malt Hill No. 2 RMBS vehicles. Subject to successful completion, the timing of these sales is expected to coincide with the transactions’ payment dates in February and May 2021 respectively.

The move is part of UK Mortgages’ strategy to free up capital, to enable capital to be returned to shareholders by way of a tender and to fund a second Keystone BTL loan investment. This follows a shareholder vote in December in favour of an updated strategy for UKML.

The first objective under the strategy was achieved last month through the successful securitisation of existing Keystone BTL loans in the inaugural Hops Hill No. 1 transaction.

TwentyFour Asset Management has mandated a warehouse provider for the second Keystone investment and has commenced documentation work with an expectation of completing during March.

The sale of the two Coventry portfolios is expected to release capital enabling two tenders to be carried out, returning an aggregate at the higher end of a £35m-£40m range. These tenders are expected to take place following the February and May payment dates at 75p per share.

In other news…

Direct lending JV formed
Bain Capital Specialty Finance (BCSF) has formed a joint venture with the private credit business of Pantheon, to provide private direct lending solutions to middle market borrowers primarily across Europe and Australia. The joint venture will invest through the International Senior Loan Program (ISLP), in which BCSF and Pantheon have agreed to purchase equity interests.

The equity ownership of ISLP is expected to be approximately 70.5% for BCSF and approximately 29.5% for Pantheon, with investment decisions requiring approval by representatives of both firms. ISLP’s investment portfolio is expected initially to consist of approximately US$320m in investment principal of senior secured loans contributed by BCSF.

The strategic partnership is expected to provide BCSF with enhanced balance sheet flexibility to expand its global capabilities and greater capacity to continue to invest in new senior secured loan investments to middle market companies. The transfer of the initial portfolio to ISLP is expected to occur by end-February.

North America
Pagaya has hired Peter Silberstein as head of capital development. Silberstein joins from Figure Technologies, where he was head of capital markets, leading the capital markets division and managing the company’s funding and execution strategies. He previously held roles at Social Finance, Goldman Sachs and Morgan Stanley. Pagaya is expanding into point-of-sale products, credit cards and single-family rentals.

NPL marketplace promoted
Italy’s Unione Nazionale Imprese a Tutela del Credito (UNIREC), the national union of credit protection enterprises, and Debitos have signed an agreement aimed at providing a marketplace for non-performing loans to companies in the sector. The number of investors registered on the platform is already more than 1,000, representing €21bn of capital.

Under the agreement, Debitos will be presented to all UNIREC member companies that provide multiple services - including commercial information, collection and purchase of credits - and which may decide to use the platform as a seller, buyer or arranger of NPL transactions. The association brings together about 200 companies and almost 17,000 professionals, representing 80% of the Italian credit management market.

The total positions managed by UNIREC members amounted to approximately €132bn in 2019, 81% of which were credits originated in the banking or financial sector, about 11% to the utility and telco sector and only 2.5% to trade receivables.