Contents

ABS

Forgive and forget

Student loan forgiveness heralds widespread prepayment in student loan ABS, but is credit positive

Some form of student loan forgiveness now looks likely to happen, and the effects upon the Federal Family Education Loan Program (FFELP) ABS market will be considerable, as a large percentage of bonds in circulation will be paid down.

“We estimate loan forgiveness of $10,000 per borrower could result in 22% of the outstanding balance of FFELP loans being repaid, with 40% of borrowers no longer owing a balance, while $50,000 per borrower could result in 64% of the outstanding balance being repaid with at least 73% of borrowers no longer owing a balance,” says Theresa O’Neill, senior ABS strategist at Bank of America in New York.

Loan forgiveness means full prepayment for whoever holds the loan. Any proposed loan forgiveness programme consistently states that the private lender needs to be repaid.

This suggests that 22% of currently outstanding FFELP ABS would be paid down if $10,000 per borrower is written off, and 64% of FFELP ABS paid down is $50,000 is written off, as $1 of loans is assumed to be the equivalent of $1 of ABS.

President Biden favours loan forgiveness of no more than $10,000 per borrower and, in comments made in his CNN town hall on 16 February, asserted clearly he “will not make that ($50,000 written off) happen.” Senators Elizabeth Warren and Chuck Schumer, however, are vehement advocates of the $50,000 ceiling and have said that they will continue to fight for this, in spite of the president’s comments last night.

"Cancelling $50,000 in federal student loan debt will help close the racial wealth gap, benefit the 40% of borrowers who do not have a college degree, and help stimulate the economy. It's time to act. We will keep fighting,” they said in a joint statement today.

But whichever ceiling figure is adopted for the write-off, a large percentage of outstanding ABS will be paid down. So, prepayment rates will soar. But, if distressed borrowers are targeted through the loan forgiveness programme, it also means defaults should decline.

“Debt forgiveness should be credit positive for the student loan ABS market, including in-school private student loans, as borrowers would have incremental free cashflow,” says O’Neill.

How investors react to much elevated prepayment is largely a function of the price at which they bought the notes in relation to current valuation. “If I owned the bonds at a discount, the prepayment would be positive, but if you purchase at a premium you get an unexpected prepayment and you lose the premium,” explains one source.

There is approximately $1.57trn of student debt outstanding, according to figures from the Federal Reserve Bank of New York, and the average debt per person is over $37,500. Some 14% of Americans possess a student loan.

According to Department of Education data, over three million borrowers owe $10,000 or less, but a significant share of the debt outstanding is owed by a much smaller number of borrowers who owe $100,000 or more. For example, less than 200,000 student loan holders have average balances in excess of $200,000 and owe more than $45bn.

The FFELP scheme began in 1996 as a system whereby private lenders made loans subsidised and guaranteed by the federal government. Virtually all this debt ended up in student loan ABS.

It was replaced in 2010 by the Federal Student Loan Direct Program, in which loans are made directly by the federal government. These loans cannot be securitised - but they may be if the borrower negotiates a refinancing through a private lender.

Simon Boughey

ABS

NDBI risk eyed

Economic resilience bonds in the works

Political risk and social volatility became headline news last month, with the storming of the US Capitol. One firm is attempting to connect such non-damage business interruption risks to the capital markets via ILS structures.

“Over the last decade, I’ve become increasingly interested in political risk and social volatility as a function of the internet. Technology has been proven to be an exacerbating factor in wealth disparity, exclusionary behaviours and nationalism. What we’re attempting to do is quantify the impact of certain ideas jumping from online to real life,” explains David Soloff, founder of OTT Risk.

The coronavirus pandemic is another example of the nexus between political risk and social volatility, with a secondary fallout being the economic impact of lockdown restrictions on small businesses. “The impact is worsened by these business owners not being covered by their insurance and insurers not knowing how to write this type of cover. As such, there needs to be greater understanding of the volatility around these events and the ability to price the associated risk appropriately,” Soloff observes.

The first step is to model the likelihood of disruptive events occurring and track their impact by leveraging macroeconomic and microeconomic data, in order to quantify the risk. OTT Risk then aims to create an index where, once a certain threshold is breached, a payout would be triggered. The trigger could be binary – reflecting a one- or two-sigma event - or provide for graded payouts with different loss positions.

“We’re taking the approach that multiple perils are increasingly likely to be triggered at the same time – such as regime change, supply chain disruption and reputational damage – so the payouts could be triggered at a geographical or industry level. The key is to create a mechanism whereby certain events can be clustered under certain triggers,” says Soloff.

This would, in turn, form the basis for an insurance product through which insurers could offload business interruption risk in their portfolios, in return for a percentage of the premium. “If we can collect capital from multiple participants, we envisage creating SPVs to transfer and syndicate the risk. We would like to involve multiple pools of traditional and non-traditional capital, tranche out different positions and pay corresponding coupons, in a similar way to catastrophe bonds,” notes Soloff.

But rather than cat bonds, he believes that ‘economic resilience bonds’ is a more appropriate moniker for the instrument, especially given that social responsibility is an increasingly compelling argument for investors. “It is becoming increasingly difficult for small businesses to operate. The people who can least afford this type of coverage typically need it the most, so our aim is to make it more affordable. We’re prepared to write contracts at low margins, since we’re also establishing an asset manager to generate outsized returns through an alternative investment strategy to subsidise the insurance side of the business.”

A Bermuda-based reinsurer will write the coverage, which will resemble a swap and can be purchased as an add-on to or as part of an insurance contract. The contracts will, in turn, be collateralised by OTT Risk capital - with the aim of making them more accessible.

Corinne Smith

Structured Finance

Private role?

Benefits of tokenisation weighed

As investment trends shift more towards private financings, tokenisation could play an important role in facilitating transactions. However, obstacles remain to a more widespread adoption of blockchain technology.

“A small revolution is going on that could significantly improve the investment process in the private industry, in particular. As the focus is shifting from public financing to private financing, tokenisation could facilitate transactions in currently highly illiquid assets,” says Stéphane Blanchoz, head of SME alternative financing at BNP Paribas Asset Management.

He continues: “The tokens - digital assets - could represent loans that are complimentary to bank financing, providing additional financing possibilities for borrowers and transparent opportunities for investors. The process would also save time for investors involved in direct lending, where lots of private information needs to be digested before making an investment case.”

Indeed, blockchain technology has a number of advantages. For example, if standardised, there would be cost benefits for borrowers.

“It is faster, cheaper, better integrity of data and a shared system of records. There are some small steps that can be taken with some underlying information managed using DLT, culminating with the actual assets being truly digital, not just a pdf, which is the real opportunity for innovation,” says Charlie Moore, ceo of Acorn Labs.

He adds: “There is a degree of confidence when able to look at the same updates across all deal parties. It is a simple way of using DLT as a database as an initial entry point. Parties should not care about the exact underlying database technology.”

There are various challenges involved in the utilisation of tokenisation, however. For example, the need to modify all of the components in the blockchain is likely to be time consuming and standardised formats would be required.

“Loans are, for instance, complex instruments, often requiring different covenants to closely monitor and mitigate risks. It would probably be a challenge to track all these tailor-made features in a blockchain,” notes Blanchoz.

In any given transaction, multiple parties are involved and part of the challenge is to get all of them comfortable with change. “It is not about an individual company; it is about the industry adopting it. I do not think much of the traditional structured credit market will move into this space any time soon,” says Moore.

He concludes: “There are some new Silicon Valley players which help to access capital in emerging asset classes using private markets. They may demonstrate the full potential of digital receivables and start to look at tokenisation of these asset in the next 12 to 18 months. Legacy companies in the securitisation ecosystem will need to think about how to avoid being cut out of that equation and stay competitive.”

Jasleen Mann

ABS

Seasonal effects

Servicer boost for Italian NPL collections

Seasonality effects gave Italian non-performing loan collections a significant boost for the second year in a row, even though Italy went into a second lockdown in November. Volumes were 71% higher in December 2020, similar to the 77% rise seen in December 2019, when comparing respective April-to-November averages.

However, according to Scope Ratings, December 2020 collections were still 13% lower than December 2019. Month-over-month, December collections were 55% higher.

Extra-judicial strategies peaked at 37.5% of overall collections after eight months averaging 23.6%. Judicial volumes increased by 27%, compared to November.

Scope notes that December’s extra-judicial spike is mainly driven by servicers achieving good year-end results based on their internal incentive schemes, year-end corporate accounting requirements - such as clean-ups of past-due debts - and better affordability, due to bonuses and thirteenth or fourteenth salary instalments.

Judicial collections rose as the courts managed to reorganise after the Covid-19 outbreak. Proceedings continued online, despite the November lockdown. Scope believes collections will remain below pre-Covid levels in the medium term because of Italy’s slow economic recovery in the context of the pandemic, coupled with delays to the vaccination rollout.

Indeed, judicial activity is far from being at pre-Covid levels. For instance, foreclosure proceedings on borrowers’ primary residences are suspended until June 2021, while courts are still trying to clear backlogs.

Stelios Papadopoulos

Structured Finance

SCI Start the Week - 15 February

A review of securitisation activity over the past seven days

Last week's stories
Constructive outlook
AXA Investment Managers answers SCI's questions
Fly or goodbye - can airlines survive without taking to the skies?
Contributed thought leadership by Ocorian
ILS innovation
UK platform to support additional capacity, emerging risks
Lockdown exposure gauged
Geographic footprint to shape pub performance
Muskoka called
BMO exercises call option
True to form
Top tier CLO managers lead the way, but some distinguish themselves further
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

Other deal-related news

• 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 (SCI 8 February).
• 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 (SCI 8 February).
• 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 (SCI 9 February).
• Bank of America is in the market with a £340.1m CMBS sponsored by Blackstone (SCI 10 February).
• 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 (SCI 11 February).
• 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 (SCI 12 February).

Company and people moves

• 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 (SCI 8 February).
• Strategic Risk Solutions is establishing operations in Guernsey (SCI 8 February).
• Jason Merrill has joined Kuvare Insurance Services as vp, structured securities (SCI 8 February).
• The AOFM has invited market participants to submit proposals to be considered for investment by the Australian Business Securitisation Fund by 31 March
• Reed Smith has hired Jason Richardson as partner in its financial industry group, based in the London office (SCI 9 February).
• 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 (SCI 9 February).
• 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 (SCI 9 February).
• Channel Capital Advisors has named its senior advisor Daouii Abouchere head of ESG and sustainable finance (SCI 10 February).
• 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 (SCI 10 February).
• Kuvare Holdings has recruited Jason Powers as head of credit investments, responsible for investments in the private credit, CLO, ABS and corporate debt sectors (SCI 10 February).
• 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 (SCI 12 February).
• Pagaya has hired Peter Silberstein as head of capital development (SCI 12 February).
• 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 (SCI 12 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

Consumer SRT prints

Santander finalises capital relief trade

Santander has priced Santander Consumo Four, its latest full-stack capital relief trade. Backed by a €1.5bn Spanish consumer loan portfolio, the transaction is significant for its size and can only be matched by a German full-stack deal that the lender completed in October 2020 (SCI 29 January).

Rated by DBRS and Moody’s, the transaction consists of €1.26bn class A notes (which priced at three-month Euribor plus 48bp), €105m of preplaced class B notes (plus 115bp), €41.5m class C notes (2.20%), €47.8m class D notes (3.70%), €42.9m class E notes (4.90%) and €30m class F notes (6.50%). Garnering a final order book size of €2.9bn, all classes printed at the tight end of or tighter than guidance, with a final coverage ratio of 1.4x for the class A notes and coverage ratios of 4.2x to 8.1x for the fixed rate subordinate tranches.

Asset managers made up 41.1% of the accounts, with central banks/supranationals and banks making up 40.2% and 18.7% respectively. In terms of distribution, 38.6% of the investors were located in Spain, 23.4% in Benelux, 13% in Germany, 12.4% in France and 7.1% in the UK.

The transaction benefits from high excess spread, as evidenced by a portfolio weighted average interest rate of approximately 7.2%. If sufficient, any excess spread - after covering principal and interest for the more senior tranches - will be used to amortise the class F bonds by 10%.

The feature is included in many of Santander’s deals and aims to shorten the average life of the tranche, thereby lowering the coupon that investors would otherwise demand for a longer maturity tranche. 

Stelios Papadopoulos

Capital Relief Trades

Risk transfer round-up - 16 February

CRT sector developments and deal news

Getin Noble Bank is believed to have postponed its planned synthetic RMBS transaction. The deal - which references a portfolio of foreign exchange mortgage loans - was anticipated to close in 1Q21, marking the bank’s first synthetic securitisation (SCI 30 November 2020).

Capital Relief Trades

Growing trend

Third-party CRT arrangers gaining traction

Deutsche Bank is believed to be arranging a capital relief trade referencing mid-market corporate loans for an undisclosed Maltese bank. Expected to close this quarter, the transaction would mark the first significant risk transfer trade out of the jurisdiction. The alleged deal is in line with a growing trend over the last two years where large CRT originating banks are becoming more active as third-party arrangers.

Indeed, JPMorgan is currently working on a transaction for a Canadian bank and was until recently arranging a synthetic RMBS for Getin Noble Bank before the deal was eventually postponed. BNP Paribas is also among the banks that increased their foothold as third-party arrangers last year via a synthetic RMBS that the lender executed for AXA Bank Belgium. SCI data shows that 10 and 11 transactions were arranged by third-party banks in 2020 and 2019 respectively.  

According to Juan Grana, md at ArrowMark Partners: “Smaller banks within the large global banking universe have become more active CRT issuers and they are the main users of third-party arrangers. Overall, these banks are not normally early adopters and their access to the market is generally less developed. However, with the CRT market maturing and following a boost in IFRS 9 provisions last year, we expect smaller banks to be more active issuers, as their options for capital issuance may be more limited beyond synthetics.”

Another investor adds: “The 2019 implementation of the Securitisation Regulation has made it easier for banks regulated under the standardised approach to issue CRTs. However, they may require external arrangers, as they often lack structuring expertise and the ability to connect with investors.”

Before the advent of the new Securitisation Regulation in January 2019, banks using the standardised approach suffered a more punitive treatment for the unrated tranches of their synthetic securitisations. Until then, all such banks had to consider a more costly rating.

But if they could not get ratings on a retained tranche, they had to apply a 1250% risk weight and a corresponding deduction from capital. Hence, to avoid the rating option, their alternative was to execute transactions with the EIF.

Under the old framework, EIF transactions were the most cost-effective deals, given that the supranational guaranteed close to the whole capital stack for a small spread. Nevertheless, thanks to the application of the SEC-SA formula, the new regulation has freed standardised banks from the rating requirement.

The SEC-SA formula usually results in a bank needing to sell a thicker tranche because if they don’t have an accurate assessment of expected loss, they need to build in a cushion so the regulator can get comfortable with the loss variability. More saliently, the formula allows standardised banks to assign risk weights to unrated tranches and reduces risk weights for retained tranches. In effect, this means that the EIF does not have to guarantee close to the whole capital stack to render the transactions cost-effective.

Stelios Papadopoulos

RMBS

Faster Fannie, faster

GSEs grew appreciably in 2020 and can now retain earnings

Fannie Mae’s net worth increased by US$10.7bn last year to reach US$25.3bn, the GSE reported in its 4Q20 results. Under an agreement reached last month, it will be allowed to retain extra earnings in a bid to build up capital.

Hitherto, any excess earnings beyond a designated buffer layer had to be surrendered to the US Treasury to compensate the US taxpayer for the bailout of 2009. But now GSEs have a mandate to grow in preparation for an exit from conservatorship.

Fannie acquired US$1.4trn in mortgages in 2020, an increase of 135% from 2019 and the largest mortgage acquisition in its history. This number represented an increase in refinancing of US$664bn, and some 38% of its single-family book at the end of 2020 was acquired during the course of the year.

“2020 presented the nation with an historic test and Fannie Mae rose to the challenge, delivering a record US$1.4trn in mortgage liquidity to meet home purchase, refinancing and rental housing needs,” comments ceo Hugh Frater.

Interest income for 2020 was US$900m higher than in 2019. Fannie Mae attributes portfolio growth to faster prepayments due to low interest rates.

Freddie Mac, meanwhile, reported that its net worth also increased sizeably - from US$9.1bn at the end of 2019 to US$16.4bn 12 months later. "In 2020, Freddie Mac continued to serve the important role for which it was founded: supporting the housing market in all economic conditions. In the face of extraordinary economic uncertainty caused by Covid-19, we provided record liquidity, enabling millions of borrowers to purchase or refinance homes at historically low interest rates,” comments cfo Christian Lown.

Like Fannie, Freddie Mac is now entitled to retain earnings to build up capital.

Simon Boughey

Structured Finance

MBIA litigation settled

Sector developments and company hires

MBIA litigation settled
MBIA Insurance Corporation has entered into an agreement to settle the litigation it filed in 2009 against Credit Suisse and certain affiliated entities (SCI passim). The settlement follows a post-trial decision by the Court awarding MBIA Corp approximately US$604m in damages and, pursuant to the settlement, Credit Suisse has paid MBIA Corp US$600m.

This amount materially exceeds the amount of recovery recorded in the company’s 3Q20 financial statements. Following the agreement to settle the case, the Court dismissed the action.

North America
DLA Piper has hired Jay Williams as a partner in its structured finance practice, based in New York. Williams represents issuers, underwriters, investors and other market participants in a wide variety of structured finance transactions, including CLOs and synthetic securitisations. He joins DLA Piper from Schulte Roth & Zabel.

Structured Finance

Maritime financing facility agreed

Sector developments and company hires

Maritime financing facility agreed
Maritime and offshore alternative capital provider Fleetscape Capital has entered into an innovative financing structure with Macquarie that provides a more efficient offer to vessel owners seeking higher leverage situations. The structure utilises securitisation principles and enables Fleetscape to provide sale-and-leaseback or unitranche financing on competitive terms. Coupled with Fleetscape’s transaction execution capabilities and streamlined documentation, the facility is designed to enable mid-sized and smaller vessel owners and operators to raise innovative asset-backed financing beyond the capabilities of their existing banking relationships.

Eight tankers have already been financed via the new structure and it is anticipated that in the future the vehicle will also include exposures to container ships and bulk carriers. The total number of vessels financed is expected to rise to double figures this quarter, with growth further accelerating through 2021.

The small and mid-sized shipping segment has suffered from significant retrenchment from traditional commercial banks, resulting in many operators being underbanked.

In other news…

EMEA
SCOR has promoted Peter Nowell from global head of structuring - financial solutions to global head of financial solutions. Nowell joined the firm in 2015, having previously been head of ABS and ILS trading at BNP Paribas in London. Before that, he worked at RBS, Nordea, CDC IXIS and RBC.

Michel Büker has joined Willis Re in a dual role as head of Lloyd’s capital, Willis Re Specialty and head of production, customised solutions, EMEA. Büker will extend Willis Re’s relationships with the Lloyd’s sector and assist the Specialty team in developing bespoke solutions for clients. He joins from PartnerRe, where he was the ceo of the entity that provided capital to Lloyd’s syndicates.

North America
Allen & Overy has appointed Jake Mincemoyer as partner and head of its US leveraged finance practice, based in New York. Mincemoyer joins A&O from White & Case, where he served as regional section head of its Americas banking section. He has broad experience representing commercial and investment banks, as well as private credit funds and corporations in a wide range of leveraged and corporate finance transactions, including asset-based lending facilities, bridge facilities, debtor-in-possession (DIP) financings and restructurings. 

Richard Barrent has joined Compass Mortgage as svp - special projects. Previously, he was founder and president of mortgage consultancy Dux Advisory. He has also worked at SitusAMC and Wells Fargo Home Mortgage, as well as founding The Barrent Group in 2008.

Eagle Point Credit Management has recruited Seth Weinstein as director of business development, a newly created position where he’ll be responsible for strengthening the firm’s existing relationships in the institutional investment community. Based in Greenwich, Connecticut, Weinstein will report to Kyle McGrady, principal and head of marketing and investor relations. Prior to joining Eagle Point, Weinstein was svp of business development at CQS, having previously worked at HFR Asset Management, Man Investments, UBS Global Asset Management, BNP Paribas Asset Management and Bankers Trust.

Shadow banking study published
A new Bank of England Staff Working Paper, entitled ‘Banks, shadow banks and business cycles’, presents a theory that links investor sentiment to credit spreads via the non-bank financial sector. In the BoE model, shadow banks operate alongside commercial banks to produce standardised ABS, which investors – in purchasing them - perceive to be nearly as safe as traditional bank deposits. That, in turn, allows banks to expand lending by charging lower spreads.

In periods of stress, however, the ‘nearly’ qualification becomes crucial and the imperfect substitution between securities and deposits grows apparent. “Securities suddenly command a higher premium, enough to curtail the capacity of shadow banks to engage in securitisation. This spills over to commercial banks: no longer able to offload part of their portfolio at the same price, they resort to increasing spreads on consumers and businesses alike,” the paper observes.

As spreads rise, credit becomes dearer. Indebted households must cut back on goods and housing purchases. Indebted firms must cut back on capital purchases. Employment, consumption and investment fall as a result, causing a recession. “Thus, a drop in investor confidence - we call it a market sentiment shock - produces strong and positive co-movements among the main macroeconomic variables, credit quantities and asset prices, as well as countercyclical movements in household and business credit spreads,” the paper concludes.

Structured Finance

'Unique' CLN deal readied

Sector developments and company hires

‘Unique’ CLN deal readied
JPMorgan Chase Bank (JPMCB) is prepping the debut CLN issuance from the JPMorgan Wealth Management Mortgage (JPMWM) platform to transfer credit risk to noteholders through a hypothetical tranched CDS on a reference pool of mortgages. Dubbed JP Morgan Wealth Management Reference Notes Series 2021-CL1, principal payments on the notes are based on the performance of a US$2.36bn reference pool consisting of 2,471 fully amortising fixed-rate prime jumbo non-conforming mortgages, with original terms to maturity of 30 years.

The notes are uncapped SOFR floaters and are unsecured obligations of JPMCB. Unlike principal payment, interest payment to the notes is not dependent on the performance of the reference pool, except for loss mitigation modification.

The deal is believed to be unique in that the source of payments for the notes will be JPMCB's own funds and not the collections on the loans or note proceeds held in a segregated trust account. As a result, Moody’s capped its ratings on the notes at JPMCB's senior unsecured rating of Aa2.

The agency has assigned provisional ratings to five tranches, ranging from Aa3 to B1.

In other news…

Acquisition
Nuveen is set to acquire Greenworks Lending, a C-PACE financing provider. The acquisition gives Nuveen a foothold in the clean energy and energy efficiency lending market and will provide its clients with access to an innovative and attractive clean energy investment. 

Founded and led by Jessica Bailey and Alexandra Cooley, Greenworks' mission is aligned with one of the key tenets of Nuveen's responsible investing platform: reducing the carbon footprint of commercial real estate. The transaction is expected to close during 1H21, subject to regulatory approval.

CMBS ratings action filed
The US SEC has filed a civil action alleging that Morningstar Credit Ratings violated disclosure and internal controls provisions of the federal securities laws in rating CMBS. According to the complaint, in 30 CMBS transactions totaling US$30bn that Morningstar rated from 2015 to 2016, the credit rating agency permitted analysts to make undisclosed adjustments to key stresses in the model that it used in determining the rating for that transaction. The complaint also alleges that Morningstar failed to establish and enforce an effective internal control structure governing the adjustments for a total of 31 transactions.

According to the complaint, analysts frequently made these undisclosed adjustments to reduce the stress applied in the model and, by easing the stresses, Morningstar lowered the credit enhancement it required for many of the ratings it awarded classes of the CMBS transactions. This, the complaint alleges, in certain instances benefited the issuers that paid for the ratings because it enabled those issuers to pay investors less interest than they would have without the adjustments.

The SEC’s complaint, filed in federal district court in the Southern District of New York, charges Morningstar with violating disclosure and internal control provisions of the Securities Exchange Act of 1934 and seeks injunctive relief, disgorgement with prejudgment interest and civil penalties.

EMEA
NPL Markets has strengthened its advisory board and management team, as the company embraces new opportunities in the burgeoning illiquid and distressed loan market. The newly appointed senior advisors will complement the existing advisory board by bringing additional in-depth expertise on data, technology and financial markets, as well as relationships with senior decisionmakers with leading banks and institutional investors.

Richard Prager joins as a member of the advisory board, having formerly been global head of the trading, liquidity and investment platform at BlackRock and a member of its global executive committee. Joining as senior advisors are: Joachim Sonne (formerly co-head of the EMEA TMT investment banking group at JPMorgan); Nedelcho Nedelchev (formerly ceo at Fibank and member of the supervisory board); Ian Tyler (currently also senior advisor at Alvarez and Marsal); and Carlos Lopez Jall (formerly co-founder and head of corporate finance at BEKA Finance).

Finally, Rodolfo Diotallevi - who was previously a member of NPL Markets’ advisory board - joins the management team as chief business officer.

North America
Jeff Pirhalla has joined Greystone as a director for the firm’s agency lending platform, focusing on bank correspondent and lending relationships intended to drive volume for Greystone’s small loans and overall agency lending platforms. Based in Atlanta and Charlotte, Pirhalla reports to Rick Wolf, head of Greystone’s small loan and East Coast agency lending platform.

Pirhalla comes to Greystone after five years at CBRE, where he founded the wholesale and bank correspondent lending divisions. Previously, he worked at Sabal Financial, Wells Fargo, Impac Commercial Capital Corp, SunTrust Banks and JPMorgan.

Sabal Capital Partners has added 14 new hires to support its strategic growth as a provider of a comprehensive range of multifamily and commercial real estate debt solutions. The new team members span the firm’s agency and non-agency programmes, as well as its CMBS programme. 

In particular, Owen Bouton and Michael Cozza – based in Atlanta and New Jersey respectively - have been hired as mds of Sabal’s CMBS group, which provides non-recourse loans up to US$50m on commercial real estate properties nationwide. With more than 15 years of experience, Bouton is a skilled CRE loan originator and most recently served as an executive director of loan production at CIBC, where he headed southeastern balance sheet and CMBS origination efforts for floating and fixed rate loans totalling US$100m. He has also worked at Hunt Mortgage Group and LStar Capital.  

With more than 25 years of experience, Cozza previously served as executive director and senior loan originator at CIBC World Markets, where he generated more than US$19m in revenue across all property types and closed approximately US$1.1bn in fixed and floating rate CRE loans. Before that, he worked at Northfield Bank and JPMorgan.

On the agency lending side, Christopher West joins Sabal as production manager of term lending sales, where he originates loans through Freddie Mac and Fannie Mae. With 10 years of experience, West previously served at Greystone Servicing Co, Basis Investment Group, Walker & Dunlop and CBRE. He is based in Atlanta. 

SFR debut for Starwood
Starwood Capital is in the market with its first single-family rental securitisation. Dubbed STAR 2021-SFR1 Trust, the US$312.5m transaction is backed by a single loan secured by 1,612 SFR properties, consisting of 1,586 single housing units and 26 2-4 housing units.

The properties were acquired by affiliates of the sponsor between November 2018 and October 2020. The pool has properties located in eight MSAs across five states, with about 80.8% of the pool by count in the top three MSAs and approximately 57.4% in Atlanta.

Moody’s has assigned provisional Aaa ratings to the deal’s class A notes and Aa3 ratings to the class B notes.

Structured Finance

Small balance UK CMBS prepped

Sector developments and company hires

Small balance UK CMBS prepped
Together Commercial Financial Services is marketing an unusual securitisation backed by small balance commercial assets. Dubbed Together Asset Backed Securitisation 2021-CRE1 (TABS 2021-CRE1), the £328.8m transaction is backed by 1,482 loans provided to 1,399 borrowers.

The average outstanding principal balance per borrower is £235,020 and approximately 41.9% of the underlying properties are either fully or partially borrower-occupied, with 49% of the loans provided to self-employed borrowers. The portfolio comprises first- and second-lien mortgage loans, secured by commercial, mixed-use and residential properties located in the UK. Loans with a prior County Court Judgement comprise 9.6% of the pool and no loans are three months or more in arrears.

According to DBRS Morningstar, the mortgages have a weighted-average seasoning of 21.2 months. The weighted-average current loan-to-value (CLTV) ratio of the portfolio is 57%, with 1.8% of loans exceeding 75% CLTV.

The issuer is expected to issue five rated tranches of CMBS - class A to class E notes - to finance the purchase of the initial portfolio.

In other news…

Denizbank’s DPR return
The EBRD is providing US$100m in new funds to Denizbank to finance Turkish companies’ investments in green technologies and support women-led businesses. The financing is made available through an investment under its existing diversified payment rights (DPR) programme.

Denizbank is planning to issue a total of US$435m, marking its return to DPR securitisation under the Emirates NBD Bank’s ownership. The issuance has attracted a number of investors, including the IFC, Credit Suisse and Emirates NBD Bank.

The EBRD funds for Denizbank will be equally split between the Women in Business programme to finance women-led SMEs and the Turkey Sustainable Energy Finance Facility programme in support of resource efficiency and small-scale renewable energy investments. The EU is supporting both initiatives with grant funding, while women-led businesses will also benefit from risk-sharing through the Turkish Credit Guarantee Fund and Turkey’s Ministry of Treasury and Finance.

Private credit JV agreed
American Equity Investment Life Holding Company and Adams Street Partners are forming a joint venture for co-developing insurer capital-efficient products in middle market credit, with American Equity initially committing up to US$2bn to the investment strategy. Under the terms of the agreement, American Equity and Adams Street will form a new management company that intends to sponsor and manage investment vehicles established primarily to invest in secured loans to US middle market private companies backed by private equity sponsors. The partnership is intended to be operational in 1H21.