Contents

Capital Relief Trades

Residential rise

Mortgage SRT motivations examined

An increase in European synthetic RMBS volume is anticipated, following the issuance of three mortgage risk transfer deals in the last two months of 2020. In this latest CRT Premium Content article, we examine the different issuer motivations for executing synthetic RMBS.

The motivation for an issuer to execute a residential mortgage significant risk transfer deal differs from internal unit to internal unit and from jurisdiction to jurisdiction, and depends on a bank’s internal systems regarding the treatment of mortgages, as well as whether they are operating under an advanced or IRB model approach. In principle, risk transfer works for residential mortgages in the same way as for other asset classes. The key question is how high the ingoing risk weight of the pool is before securitisation.

The average risk weight for corporate loan pools is typically 50%-70%. In contrast, the average risk weight for mortgage pools under the standardised approach is 35%, while under the IRB approach it is lower - potentially even in single-digits.

Post-securitisation, the risk weight ends up at 15% (or 10% under the STS synthetics framework). The bigger the difference between the ingoing and outgoing risk weights, the more efficient the transaction is.

There also are drivers for executing synthetic RMBS in addition to, or other than, achieving regulatory capital relief; for example, risk management. Risk objectives could include managing risk exposures in particular buckets, such as higher LTV loans, or portfolio performance under certain stress conditions - in each case, providing protection payments that will offset impairments going through P&L. For instance, Pillar 2 expected losses under stress may be a binding constraint, rather than Pillar 1 unexpected losses.

Protection can be designed to offset either or both. In most cases, the underlying objective is to create balance sheet capacity for additional lending.

However, while certain mortgage portfolios – including high LTV or low DTI pools – can be more appropriate for synthetic RMBS, the risk factors don’t necessarily drive higher overall economic or regulatory capital for specific mortgages. This is because many lenders will compensate with tighter criteria in respect of other underwriting criteria or collateral requirements.

A synthetic RMBS can also be executed for economic capital purposes, albeit few banks currently attach value to economic risk transfer independent of regulatory capital relief. Nevertheless, regulatory constraints can force conservative structural choices that are not necessarily efficient for some issuers, increasing their costs and reducing commercial flexibility. In these cases, a transaction targeting economic capital only can be calibrated to the specific requirements of risk teams.

At its simplest, lenders will compare the marginal cost of protection against the marginal benefit of redeploying the capacity freed by that protection - whether that is regulatory capital, economic capital or risk limits.

Notably, three synthetic RMBS closed in 4Q20. Together with the third transaction from Lloyds’ Syon programme (SCI 19 November 2020), AXA Bank Belgium priced CASPR-1 - which references a static €730m portfolio of Belgian prime mortgages (SCI 2 December 2020) – and Raiffeisen completed ROOF Mortgages 2020, a €182m unfunded mezzanine guarantee referencing a static €3.3bn portfolio of Austrian residential mortgages (SCI 7 December 2020).

Salim Nathoo, partner at Allen & Overy, notes that risk transfer isn’t normally utilised in the context of prime mortgages, since they are low risk weighted assets. “SRT is more commonly undertaken with riskier mortgages, such as non-conforming or subprime, and high LTV mortgages because they have higher risk weights. However, even high LTV mortgages have a low default history, and losses correlate to a decline in property values. They are relatively fungible pools and so are typically easy to model and work out the loss exposure.”

Furthermore, residential mortgages have historically been somewhat overlooked among SRT issuers because corporate loan portfolios have created better efficiencies. However, the coronavirus pandemic has created greater uncertainties in corporate loan pools.

Against this backdrop, residential mortgage pools are granular - which is attractive to investors - and the loans are collateralised. Additionally, house prices continue to perform well and so seeking optimisation opportunities in the sector is becoming more appealing - especially since banks have to begin incorporating through-the-cycle (TTC) PDs (rather than point-in-time PDs) when modelling risk weights under Basel 4. Over time, TTC risk weights tend to rise in certain pools, including residential mortgages.

Indeed, the introduction of capital floors under Basel 4 – which will increase mortgage risk weights - is expected to increase the attractiveness of capital management tools for banks. Nathoo confirms that a number of prospective issuers are ensuring they have the ability to execute SRT deals over the next few years and are having conversations with regulators in preparation for this.

He suggests that there are a couple of drivers for banks in this regard. First is pricing: it is clear that there is an investor base for mortgage SRT, especially with insurers increasingly entering the market.

Second, when Covid support schemes end, there will be a number of distressed businesses and borrowers, and bank capital will come under pressure. “Banks will need to begin provisioning and thinking about balance sheet management. This will likely take the form of a combination of strategies, including SRT,” Nathoo says.

Further, the STS synthetics regime - which is expected to come into force this summer - could also make residential mortgage SRT more attractive. Residential mortgage pools tend to be homogeneous and will therefore meet the strict homogeneity criteria of the STS label – unlike corporate pools, for example, which often combine SME, project finance, mid-cap and large cap exposures.

However, another issue triggered by the Covid fallout is that portfolios are behaving in unexpected ways – meaning that it is difficult for both originators and investors to commit to deals. “Depending on the moratoria that apply to the underlying assets, issuers may not be able to call defaults, so there is potentially less incentive to execute SRT transactions. Static deals aren’t as efficient because issuers are unable to replenish the pool,” Nathoo observes.

Indeed, the big question for issuers at present is whether they can execute deals, especially in the corporate loan space. While investors are pushing for fully disclosed pools, given uncertainties around the Covid fallout, many issuers are more comfortable with blind pools – albeit they are willing to provide information on large concentrations and so on.

A further issue is investors requesting issuers to exclude Covid-sensitive industry exposures from pools. If too many names are carved out of a portfolio, it may end up being too uneconomical to execute an SRT. Against this backdrop, more synthetic RMBS are expected to be executed, but in limited volumes.

Nathoo agrees that further synthetic RMBS issuance is likely going forward, especially given the policymaker push towards making mortgages more available to borrowers that can’t afford a deposit. “For instance, the market is seeing a greater push in the UK for higher LTV products typically up to 95% as an alternative to help-to-buy. The higher the associated risk weights are, the more it becomes worthwhile bringing a synthetic or full-stack RMBS that obtains capital relief.”

Some providers are providing alternative solutions to allow higher LTV lending or accommodate first-time buyers, such as second-charge mortgage products typically lending on the 75%-95% portion of a mortgage or providing cheaper longer-dated fixed rate mortgages, with prepayment penalties falling away after a fixed period. “Non-bank mortgage lenders are building capital markets strategies and increasingly entering the high yield segment. Banks, for their part, are exploring opportunities to partner with these non-bank lenders and share the risks and rewards,” Nathoo observes.

At the same time, the cost of buying protection is potentially lower than for other asset classes and investors are interested in gaining exposure to residential property because of the yield on offer. For many, the choice is to buy mezzanine or equity positions in cash securitisations or provide protection in synthetic securitisations.

Giuliano Giovannetti, md at Granular Investments, agrees that there are certainly opportunities for issuers to undertake risk transfer deals on residential mortgages. However, he suggests that they are unlikely to compensate for corporate SRT deal volume, should that dry up.

“The vast majority of residential portfolios earn low spreads and are under IRB, with risk weights near or below even the 10% STS senior risk weight floor, so releasing capital is difficult. There are pockets of more appropriate pools here and there under IRB, as well as opportunities on mortgages under the standardised approach,” he notes.

Similarly, while Basel 4 suggests increasing RWAs - in particular, for high LTV loans - he points to uncertainty over how the regime will be implemented in Europe. “European banks aren’t going to allow their capital to be devastated by an egregious increase in risk weights, especially on mortgages, where the culprit is clearly the US. Any BIS proposals are unlikely to be automatically ratified by the European Parliament, which has already submitted substantial amendments in the opposite direction,” Giovannetti indicates.

Overall, Allen & Overy senior associate Robert Simmons suggests that the proliferation of risk transfer technology into the residential mortgage sector is a natural progression of the market. “Risk transfer technology is tried and tested in the SME and corporate loan spaces, and we have been seeing it expand across more asset classes – a continuation of the trend from, amongst others, auto loans. New areas where the technology makes sense continue to emerge. Executing an SRT transaction still remains challenging for first-time issuers, but as the technology is increasingly proven, it will become more common.”

Corinne Smith

Structured Finance

Benchmark legislation

Congress to rescue Libor-based contracts, but questions remain

Federal Reserve chairman Powell’s endorsement last week of federal legislation to ease the transition to non-dollar Libor benchmarks has been hailed as a positive step for the structured finance industry. Powell was speaking in front of the House of Representatives Financial Services Committee and predicted that there will be a “hard tail” to the exit from Libor, to which federal legislation represents the “best answer”.

While New York is preparing state laws to mandate a transition from Libor, this will apply only to bonds issued under New York state law. Those outside New York law would be left orphaned, and there are also more constitutional challenges that can be mounted to state laws than are possible against federal laws, so legislation provides a robust backstop.

It also provides a safe harbour against litigation, should noteholders want to sue the issuer for a change of terms. The great majority of legacy structured finance deals require 100% assent from noteholders before material changes to the terms of payment are made.

“The safe harbour is key for contracts like securitisations, indentures and trust agreements, where you cannot as a practical matter go out and get consent from noteholders,” says Amy Williams, a partner who specialises in structured finance at law firm Hunton Andrews Kurth.

The structured finance market makes particularly heavy use of Libor. The RMBS market, for example, comprises over a third of all US dollar fixed income issuance and the great majority of bonds are indexed against Libor.

Powell’s endorsement of federal legislation as the big hammer needed to make sure the market moves away from Libor smoothly also represents a volte-face. In February 2020 he told Congress that the markets had not reached the point where legislation would be necessary; now he clearly feels that point has been reached.

When further questioned on whether the private sector could be left to come up with an alternative to Libor, he said: “No, federal legislation creating a path for a backup would be the best solution, we think.”

Most legacy structured finance deals are silent on the possibility of a cessation of Libor. Others refer to, for example, taking a poll from banks to derive a rate, should Libor not be published for a month or two, or moving to a fixed rate structure. None of these solutions are acceptable, so federal legislation, which would mandate a shift to SOFR, is seen as the only solution to significant market disruption.

It is also rumoured that any potential bill will have bipartisan support in Congress, say experienced Hill-watchers. “The hope is that once urgent matters surrounding Covid-19 are behind us, then the administration will push to get this through. I would love this to be the first piece of fully endorsed bipartisan legislation to occur under this administration,” says Williams.

Dollar Libor is already supposed to be a thing of the past, but it is an open secret in the market that the December 1 proposal by the ICE Benchmark Administration to delay its demise until mid-2023 will be accepted in the near future.

Federal legislation does not, however, have any bearing upon new issuance and to date introduction of a non-Libor rate has been sluggish, to say the least. Freddie Mac and Ginnie Mae now sell MBS benchmarked against SOFR, while Freddie and Fannie no longer accept Libor-based loans, but private label non-Libor issuance is very thin on the ground.

This is worrisome for many in the market, and now that the date for the implementation of SOFR has been delayed for another 27 months or so, there has been a relaxation of pressure. “The fire was lit under people and now it has moved off, but it’s still necessary for people to see this as an important and even urgent matter. I am afraid that because the date has been moved back, people will take their eye off the ball,” says Williams.

There are also many in the market who see SOFR as a deeply unsatisfactory replacement for Libor. The two rates are very different. Libor is based on an average of bank borrowing rates, while SOFR reflects risk-free borrowing.

There are also a variety of terms for Libor, three-month and six-month being the most popular for benchmarking purposes in structured finance. SOFR, on the other hand, refers to only overnight risk.

These differences are reflected in pricing. Yesterday (2 March) in New York, SOFR dealt at 3bp, while three-month Libor was 18bp - a whopping 15bp differential. Where trillions of dollars of securitised issuance are concerned, this translates to some very large sums indeed. Clearly, some margin will need to be added to SOFR in legacy deals, but how this will be calculated and how often it will be calculated remains to be determined.

But SOFR seems the only game in town now. “Those who criticise SOFR are correct. It’s not a great replacement for Libor, in that it operates very differently. But we’ve gone down one path now and SOFR is the best we’ve got,” says a market source.

Simon Boughey

Structured Finance

Stepping up

Indian banks change gear on Libor transition

The State Bank of India and ICICI Bank undertook their first alternative risk-free rate transactions in January. This utilisation of SOFR is expected be instructive in helping the Indian securitisation market move towards Libor cessation, having initially been slower to react than other jurisdictions.

“Libor is a central issue in Europe and the US, but the impact is felt far beyond London,” says Nathan Menon, senior associate at Reed Smith. “The Indian market is a key market in Asia and, increasingly, a key market globally. The sheer size of the market is significant.”

Europe and the US are perceived as being proactive in terms of the Libor transition, compared to India, due to the extent of their exposure to the benchmark. Essentially, those markets have the most to gain and the most to lose.

“With India, there has been a question of who is going to make the first move - the regulator or the banks? At the end of last year, the RBI pushed the agenda,” Menon notes.

He continues: “The bulletin from November 2020 was a wake-up call. The Indian market will benefit, in the long term, from being cautious and watching what other markets do. Diving straight in would not benefit anyone.”

The RBI’s November bulletin revealed the extent to which progress still had to be made with regards to the Libor transition. It is estimated that India’s exposure to the benchmark is around US$331bn. In order to make further progress, banks have been tasked with identifying exposures, determining risks and taking steps to complete the transition.

Menon highlights the significant link between Libor and the Indian economy, as the Mumbai Interbank Forward Offer Rate (MIFOR) is calculated using US dollar Libor. Commercial borrowings, derivatives, government loans and trade contracts are also calculated this way.

The Libor working group established by the Indian Banks’ Association (IBA) shares the approach which has been used in Europe and the US, with a holistic view of what issues are present. Menon says: “In terms of contractual clauses and fallback language, attention will be needed by those that are deficient. It is a process of noteholders working with other participants and operational parties to come to a consensus about what they want the deal to look like in the future.”

He adds: “What is in the documentation? I think there is going to be a whole slate of amendments. The only way to amend them would be in such a fashion.”

There is also the question of whether political factors, such as the farmer protests in India, will negatively impact the economy. “However, the Indian government has emphasised that it is business-friendly, so the Indian economy is not currently seeing any negative side effects,” Menon suggests.

Despite the unique challenge of the coronavirus pandemic in 2020, the Indian market continues to be viewed as counter-cyclical to some extent. Menon concludes: “The pandemic had ramifications in terms of changes to how economies function. More generally, the crisis has shown that such fundamental amendments will not be easy. The collective will of financial institutions and regulators is necessary.”

Jasleen Mann

Capital Relief Trades

Promising pipeline

STS synthetic securitisations slated

Appetite for STS synthetic securitisations is emerging ahead of the publication of the final legislative text, which is anticipated in April, with several transactions expected to hit the market this year. Indeed, panellists at IMN’s recent Virtual Investors’ Conference on Significant Risk Transfer agreed that the deal pipeline – and overall environment for SRT - is promising.

Pascale Olivie, director, asset-backed products advisory at Societe Generale, expects 2021 to be an active year in terms of SRT issuance. “The pipeline looks promising. Many banks will use SRT to address capital constraints and de-risk parts of their book.”

She anticipates new issuance across the typical asset classes – corporate and SME loans - as well as the scope of the market to widen to include concentrated, lumpy pools, such as specialised lending assets with high levels of disclosure and low default pools.

Given that specialised lending portfolios are often lumpy, not homogeneous and typically have lower coupons because they’re more defensive lending products, they require more work and higher levels of disclosure, according to PAG partner James Parsons. Nevertheless, he noted that SRT is being applied in some interesting and innovative ways to these types of assets.

On one hand, SRT supply is being constrained by banks’ accumulation of capital because they’re unable to distribute dividends, resulting in some postponing their issuance plans. On the other, the STS synthetics framework is expected to encourage new entrants to tap the market, as well as open SRT up to standardised banks in the private sector as an alternative to executing with the EIF.

Indeed, it emerged during the IMN conference that at least one large bank has been mandated to arrange a handful of deals this year, the majority of which are for EU issuers that are interested in executing under the STS synthetics regime.

Galen Moloney, head of securitised products strategy at NatWest Markets, believes that the STS synthetics label will in some ways “right a wrong”. “The stated policy objective of introducing the STS framework was to encourage banks to securitise, in order to facilitate liquidity for the real economy. But so far, placed issuance has largely been from non-banks, given TFSME and TLTRO are taking up prime bank collateral,” he explained.

He continued: “In addition, the level of HQLA eligibility has not been compelling enough to encourage bank treasury investment in STS product. The STS synthetics regime should achieve policy objectives more efficiently and get credit flowing through the economy.”

While the STS synthetics framework doesn’t have a meaningful impact on the buyside, one panellist noted that the regime incentivises issuance, which ultimately provides greater choice for investors. The quality assurance associated with the label may also make a difference for less specialised investors that are interested in dipping their toes into the market.

From the EIF’s perspective, meanwhile, the organisation is seeking to execute more risk-sharing deals that combine private (hedge fund, credit fund and insurer) and public money. “We have term sheets and back-to-back arrangements in place and are ready to execute,” confirmed Martin Vojtko, senior counsel at the EIF.

He noted that there are opportunities for all parties involved in such transactions. “Protection buyers will face a triple-A rated entity and benefit from standardised documentation and simple structures. There is an obvious benefit for insurers in that they gain access our client base, while we achieve our policy goals in funding more SMEs and transferring the risk back to the market, where it belongs.”

Looking ahead, despite most banks not needing funding, true sale SRT deals may remain the preferred execution route for higher income/higher risk assets - including consumer assets - given the regulatory changes regarding excess spread. The deduction of lifetime excess spread under the CRR amendment defeats the benefit of including synthetic excess spread in deals. As such, cash execution may be more attractive than synthetics for consumer deals.

“Overall, it remains a promising environment for SRT,” Parsons concluded. “European banks are now well capitalised and appear to be in a position to enter into a steady state of capital generation versus distribution to shareholders. Against this backdrop, the utility of SRT can evolve from outright RWA reduction to inventiveness across different products to solve various problems, including IFRS 9 provisioning, improving ROE and economic hedges.”

Corinne Smith

CLOs

Middle market opportunities

MM CLOs still offer relative value and continued innovation

One of the key attractions of middle market CLOs is the relative value opportunity they offer investors. While the sector has rallied in recent months alongside broader markets, it still offers trading opportunities, according to the participants in the Trading Opportunities Roundtable at SCI's 2nd Annual Middle Market CLO Seminar last week.

MM CLOs are positioned favourably against broader credit, according to Mark Fontanilla, founder of Mark Fontanilla & Co. “Assuming a flattening credit curve, and leaving aside liquidity and getting in and out from a total return perspective, the risk/reward proposition for what you’re getting on the coupon carry is wider on MM CLOs than other asset classes. It is one of the sectors that still lags, relatively speaking, the spread compression/return seen elsewhere in the credit markets.”

Further, there is typically relative value versus the rest of the CLO sector. Reginald Fernandez, executive director and head of GSCS Credit Trading at Natixis, said: “At the triple-A level, MM CLOs currently offer a spread pick-up from BSLs of about 50bp, though that widens as you move further down the stack. Historically, we’ve seen that tighten to as little as 30bp, so there is potentially still a way to go.”

Indeed, Milen Shikov, md and portfolio manager at AIG Investments, said: “Historically we have looked at relative value based on spread basis or what spread differentials have been over different time horizons. But I think we have to now knock that out of the window, given the global hunt for incremental absolute yield. Simply because what previously has been an appropriate compensation for illiquidity – the 30bp mentioned for triple-A MMCLOs, for example – is outdated.”

He continued: “I think we might go inside of that basis this time around, as the incremental yield that investors are willing to accept for risk-remote tranches has narrowed. We’re already seeing that taking place in the corporate bond space and we’re seeing it in the CLO space, where the triple-A-double-A basis and, to an even greater extent, the double-A-single-A basis are as tight as they have ever been.”

As Shikov concluded: “Clearly MM CLOs are a laggard; clearly they offer opportunity and our anticipation is that the sector is going to continue to compress this year. It’s probably going to test the all-time tights, in terms of that incremental liquidity spread premium.”

Later in the day, the conference session on the future for the market echoed those views on the continued narrowing of the BSL-MM basis. The panel went on to discuss prospects for innovation in the sector.

The view was that innovation is coming from two directions. First, in the way direct origination platforms are seeking to differentiate themselves in the increasingly mature and competitive environment by focusing on specific areas, such as a particular industry technology or impact investing, or even energy, now that banks are leaving that particular space.

Second, the growing potential investor base is increasingly open to new ideas, which is facilitating innovative MM transactions, such as tech-focused CLOs, late-stage lending recurring revenue ABS and infrastructure CLOs. While a seismic change in 2021 was thought unlikely, expectations were that there would be more and more unique transactions – whether privately offered to a handful of investors or more broadly distributed, given that the willingness of the market to look at different stories is now very high.

Mark Pelham

These panels and the rest of the conference can now be viewed here.

ABS

NPL ABS inked

Vega securitisation underway

Piraeus Bank and Intrum are proceeding with the implementation of a non-performing loan securitisation. Dubbed Vega, the transaction references a €4.9bn portfolio of secured and unsecured SME loans and residential mortgages. The trade is Piraeus Bank’s largest NPL ABS and, unusually for a HAPS guaranteed deal, it references unsecured SME exposures.

The receivables have been allocated over three distinct SPVs, one for each asset class. According to Vasilis Kosmas, partner at Alantra, the allocation over three SPVs allows the bank to optimise the size of the senior notes and therefore attain a better rating.  

The binding agreement involves the sale of 30% of the mezzanine notes and follows Piraeus Bank’s February 2021 application for the inclusion of the Vega securitisation in the Hercules Asset Protection Scheme. The application pertains to the provision of a €1.4bn state-backed guarantee for the senior notes.

The implied valuation of the portfolio is based on the anticipated fair value of the senior notes and the sale price of the mezzanine notes corresponds to approximately 31% of the total gross book value of the pool. Following the finalisation of the deal, Piraeus Bank’s NPE ratio will be reduced to around 36% from 47%.

Piraeus is contemplating the distribution of 65% of the mezzanine notes of the Vega securitisation to its shareholders and will retain 100% of the senior notes.

UBS, JPMorgan and Alantra acted as arrangers on the transaction.

Stelios Papadopoulos

Structured Finance

SCI Start the Week - 1 March

A review of securitisation activity over the past seven days

Last week's stories
Democratising access
Debut Indian wealth-tech bond repaid
Morgan mulled
Latest JP Morgan CRT trade cited as fresh evidence of US take-off
Pandemic uplift
Covid-19 boosts NPL note sales
Record fundraising
Chorus exceeds SRT fund targets
Strong pipeline
European ABS market update
Supply issues
STS volumes concentrated in auto loans
Through thick and thin
JPMorgan set to price its new CRT at wafer thin margins
US CLOs stay strong
Resets active as participants also address other issues
Galaxy securitisation finalised
Alpha and Davidson Kempner sign deal

Alpha Bank has signed a definitive agreement with Davidson Kempner with respect to its €10.8bn Galaxy portfolio (SCI 24 November 2020). The deal is the second largest rated non-performing loan securitisation in Europe and will reduce the lender's NPE and NPL ratio in Greece by 24% and 13% respectively.

According to the terms of the transaction, Alpha Bank will sell 51% of the mezzanine and junior tranches to an entity managed by Davidson Kempner for a consideration payable in cash. The total proceeds for Alpha Bank - including the senior notes and the sale price of the mezzanine and junior tranches - correspond to approximately 35% of the total gross book value of the portfolio.

The Greek lender will retain 5% of the mezzanine and junior notes - in line with risk retention rules - and intends to distribute 44% of the remaining notes to shareholders, subject to regulatory and corporate approvals.

The agreement also stipulates the sale of 80% of Alpha's loan servicing subsidiary Cepal Holdings. The bank will then enter into an exclusive long-term servicing agreement with the newly acquired entity for the management of its existing €8.9bn retail and wholesale non-performing exposures in Greece, as well as any future flows of similar assets and early collections. The practice of selling servicing platforms to third-party investors is common in the European NPL market, since investors can provide expertise and permits them to maximise recoveries.  

The servicing agreement will last for 13 years, with a right to extend. The new entity will manage €10.8bn of exposures from the Galaxy portfolio and a €4.6bn portfolio from third-party investors. The enterprise value of the new Cepal is valued at €267m, with the bank benefiting from a further upside through an earn-out of up to €68m linked to the achievement of certain targets.

The consideration includes a contingent element of up to €17m if the transaction is on a levered basis. The bank, acting as an arranger of a financing syndicate, has agreed with Davidson Kemper on the key terms of a long-term funding facility of up to €120m, which may be drawn at the sole discretion of Davidson Kempner. 

The transaction is expected to close in 2Q21, subject to all applicable corporate, regulatory and governmental approvals. Deutsche Bank and Alantra acted as joint lead arrangers on the deal.   

Stelios Papadopoulos

Other deal-related news

• AIB Group is set to sell a non-performing loan portfolio in long-term default to Mars Capital Finance Ireland as part of a consortium arrangement with Mars and affiliates of Apollo Global Management (SCI 22 February).
• The CFPB is considering whether to initiate a rulemaking to revisit the Seasoned QM Final Rule (SCI 24 February).
• Polis Fondi has launched an Italian multi-compartment closed-end mutual fund, with the aim of investing €2.5bn GBV in non-performing and unlikely-to-pay loans (SCI 24 February).
• Bank of America has preplaced another European CMBS, following significant demand for its UK last-mile logistics transaction (SCI 24 February). Golub Capital Partners, one of 17 partner managers in the Dyal Capital Partners IV fund, has brought a lawsuit against the fund, Neuberger Berman Group and NB Alternatives Advisers, seeking an injunction against the Blue Owl transaction (SCI 25 February).
• Geolocation data provider Advan Research Corporation has launched a CMBS foot traffic counts product (SCI 25 February).
• Citi has preplaced a pair of UK non-conforming RMBS backed by a portfolio it acquired from UKAR (SCI 26 February).
• Judo Bank is in the market with its debut securitisation (SCI 26 February).

Company and people moves

• Churchill Asset Management has announced a swathe of promotions across its senior lending and junior capital and private equity solutions investment teams, as well as its investor relations and operations departments, effective from 1 March (SCI 22 February).
• Schroders has expanded its securitised credit team with the appointment of a senior portfolio manager in a newly created role, bolstering its management of assets in the CLO market and underlying syndicated corporate loans (SCI 22 February).
• European consumer credit platform auxmoney has appointed Boudewijn Dierick md of auxmoney Investments, a newly established investment arm of the company based in Dublin (SCI 23 February).
• AlbaCore Capital Group has strengthened its team with a number of new appointments to support the growth of the firm and new investment strategies (SCI 23 February).
• Tikehau Capital has recruited Christoph Zens as head of its CLO business, based in London (SCI 23 February).
• Strategic Risk Solutions has appointed Anna Pereira to the newly-created position of svp, ILS, based in its Bermuda office (SCI 23 February).
• Aon has hired Marcus Foley to the Bermuda operations of Reinsurance Solutions, subject to Bermuda immigration approval, and Tim Radford to its London capital advisory team within Reinsurance Solutions (SCI 24 February).
• Teresa Bryce Bazemore, an independent member of the Chimera Investment Corporation board, has notified the company that she will resign effective as of 28 February (SCI 24 February).
• OptiAssets and Privatam have formed a joint venture designed to allow asset and wealth managers better access to securitisation services and securitised assets (SCI 24 February).
• Hildene Capital Management has nominated two director candidates for election to the CIB Marine Bancshares board, in connection with the company's 2021 annual shareholder meeting (SCI 25 February).
• Briarcliffe Credit Partners, a placement agency fully dedicated to private credit, has launched (SCI 25 February).
• HIG Capital has expanded its European WhiteHorse direct lending team with the hiring of Ignacio Blasco as md (SCI 26 February).
• Latham & Watkins has elected 19 counsel to its partnership, effective 1 March (SCI 26 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 5th Annual Risk Transfer & Synthetics Seminar
21-22 April 2021, Virtual Event
SCI's 3rd Annual NPL Securitisation Seminar
26 May 2021, Virtual Event
SCI's 1st Annual CLO Special Opportunities Seminar
29 June 2021, Virtual Event

Capital Relief Trades

Risk transfer round-up - 3 March

CRT sector developments and deal news

Santander is allegedly expected to call a capital relief trade dubbed Nansa this year, as the deal approaches its scheduled call date. The transaction was finalised in 2018 and references large corporate loans.  

Capital Relief Trades

Risk transfer round-up - 5 March

CRT sector developments and deal news

Alpha Bank is rumoured to be readying a synthetic securitisation, rendering it the third Greek bank to debut a capital relief trade this year, along with Piraeus Bank and Eurobank.

Greek banks are eyeing synthetics as part of their non-performing loan deleveraging plans. The rationale is to use synthetic technology to generate enough capital to offload their NPL portfolios (SCI 25 February).

CLOs

Pattern recognition?

New issue and secondary CLO double-B disparity discussed

SCI publishes regular case studies and reports on the CLO market in addition to our usual news stories on the sector and the latest can be found here.

This time, we examine the double-B pricing patterns in CLO primary and secondary markets amid November to January’s textbook new issue boom and rally. Read this free report to discover the shifting relationship between new issue and BWIC DMs supported by an intuitive visualisation of market activity and tone.

While this report is available for free, all future additional reports will only be accessible to premium subscribers. To enquire about SCI’s premium content, new subscribers should email Jon Mitchell and existing customers should contact Tauseef Asri.

Structured Finance

General QM delay proposed

Sector developments and company hires

General QM delay proposed
The CFPB has released a notice of proposed rulemaking (NPRM) to delay the mandatory compliance date of the General Qualified Mortgage (QM) final rule from 1 July 2021 to 1 October 2022 (SCI 24 February). The CFPB is proposing to extend the compliance date to ensure homeowners struggling with the financial impacts of the Covid-19 pandemic have the options they need. If this NPRM is finalised as proposed, the old DTI-based General QM definition, the new price-based General QM definition and the GSE Patch would all remain available as long as a lender receives a consumer’s application prior to 1 October 2022. Comments on the NPRM must be received by 5 April 2021.

In other news…

Capital formation group launched
Arrow Global Group has established a clients and capital formation group within its Arrow Capital Management business. The new unit will partner with Arrow’s clients to provide differentiated investment solutions and world-class insights from Arrow’s core areas of expertise in European non-performing and non-core debt. The group will be responsible for setting Arrow’s capital formation strategy and broadening the firm’s investor set, by enabling global capital pools to access the opportunities presented by the European NPL market through Arrow Capital Management.

To lead this new function, the Group has appointed Kamran Anwar as global head. Anwar brings a wealth of experience in financial services, having spent 23 years at Citi in leadership roles across the Middle East, Europe and Asia, covering M&A, transaction banking, private equity, real estate and corporate strategy. Most recently, he led SS&C Technologies’ private equity services franchise in EMEA.

Anwar will be based in London and report to Zach Lewy, founder, group cio and ceo, fund management.

EMEA
Andy Murphy has rejoined DMS Governance as md, head of strategy - structured finance, based in Dublin. Murphy was formerly md at Trustmoore, having previously served as director at DMS Governance, which he joined in 2016. Before that, he worked at BNY Mellon, Citco, Citi and Computershare.

Holger Kapitza has been named director, sales, institutional clients at Wealthcap, based in Munich. Kapitza was formerly director, credit and high yield strategy, securitisation and real estate at UniCredit. He joined the firm in 2007 and previously served as portfolio manager, structured real estate and senior credit analyst, securitisation/ABS.

Equity stake sold
Monroe Capital has sold a passive minority equity stake to Bonaccord Capital Partners, a division of Aberdeen Standard Investments. Bonaccord's investment will provide Monroe with additional resources to scale its platform and pursue strategic initiatives, without impacting its day-to-day management or operations. The investment is non-voting and the firm's decision-making processes will remain unchanged.

North America
Peter Dailey has joined Aeolus Capital Management in the new position of head of research. He will report to Frank Fischer, partner and chief analytics officer. Dailey joins from Risk Management Solutions, where he was vp of model development.

Insurtech platform Arbol has named Hong Guo evp and chief insurance officer, responsible for leading all insurance-related strategy and operations for the company. He most recently served as an md at GC Securities. His 23-year career at Guy Carpenter touched on many different businesses areas, including reinsurance broking, product innovation, global client management, strategic advisory and ILS. Hong began his insurance career with PICC in Beijing.

Thomas Parcell has joined Lockton Re’s new Bermuda platform as chief broking officer. He joins Lockton Re from Aon Benfield, where he was most recently global head of the ILW practice.

RenRe rebrand
RenaissanceRe has rebranded its ventures business as ‘RenaissanceRe Capital Partners’. Chris Parry, svp, global head - capital partners, will lead this business and report to president and ceo Kevin O’Donnell. The unit will remain focused on managing RenaissanceRe’s third-party capital relationships, joint ventures and managed funds, including DaVinci, Medici, Top Layer, Upsilon and Vermeer.

As part of this rebranding, the strategic investments pillar of the business has been renamed ‘RenaissanceRe Strategic Investments’. Jonathan (JJ) Anderson, svp, global head - strategic investments, will report to cfo Bob Qutub and be responsible for managing public and private investments that generate attractive risk-adjusted returns while advancing RenRe’s business objectives.

Structured Finance

Libor announcements to 'accelerate' transition

Sector developments and company hires

Libor announcements to ‘accelerate’ transition
The UK FCA has confirmed that all Libor settings will either cease to be provided by any administrator or no longer be representative immediately after 31 December 2021 - in the case of all sterling, euro, Swiss franc and Japanese yen settings, as well as the one-week and two-month US dollar settings – and immediately after 30 June 2023, in the case of the remaining US dollar settings. Based on undertakings received from the panel banks, the FCA does not expect that any Libor settings will become unrepresentative before these dates, with publication of most of the Libor settings ceasing immediately after these dates.

The FCA says that regulated firms should expect further engagement from their supervisors to ensure these timelines are met.

ISDA has confirmed separately that the spread adjustments to be used in its IBOR fallbacks will be fixed as a result of this announcement, thereby providing clarity on the future terms of the derivative contracts that now incorporate these fallbacks. Meanwhile, the FCA is taking steps to help reduce disruption in legacy cases. 

Finally, the authority will consult in Q2 on using proposed new powers under the Benchmarks Regulation (BMR) to require continued publication on a ‘synthetic’ basis for some sterling Libor settings and, for one additional year, some Japanese yen Libor settings. It will also consider the case for using these powers for some US dollar Libor settings.

Moody’s suggests that the announcements by the FCA and ISDA will likely cause an acceleration in securitisations moving away from Libor, in part caused by the activation of certain contractual ‘pre-cessation’ triggers. Without transition, the rating agency estimates that US$700bn of global structured finance debt it rates would still reference Libor at end-2021.

In other news…

Benchmark switch for RMBS duo
Dentons has advised two UK banks in relation to switching their RMBS to SONIA from Libor. Principality Building Society completed a consent solicitation process, where the issuer - Friary No 4 - invited class A noteholders to consent to the modification of the terms and conditions of the notes and related amendments to the transaction documents, such that the existing three-month Libor benchmark used to calculate the rates payable was replaced by compounded daily SONIA. Noteholder consent was successfully achieved at the initial noteholder meeting, with related amendments to the class B notes made by way of a noteholder written resolution.

Meanwhile, Atom Bank completed a negative consent process in relation to the Elvet Mortgages 2018-1 class A and class Z notes. The transaction was undertaken in accordance with the AFME recommended base rate modification provisions set out in the terms and conditions of the notes and enabled the issuer to successfully transition the benchmark for the notes from Libor to SONIA and to amend the terms of the relevant transaction documents accordingly. In line with the AFME provisions, Atom Bank was able to proceed without express noteholder consent on the basis that sufficient notice was provided to noteholders of the intention to transition the notes from and that less than 10% of noteholders objected to the proposed amendments.

EMEA
HIG Capital has expanded its European WhiteHorse team with the hire of Michael Lucas as an md, based in London. He joins HIG Capital from Bridgepoint Credit, where he was a founding partner and head of the UK operation.

Securitisation reporting instructions updated
ESMA has published four new Q&As and modified 11 existing Q&As in connection with its securitisation reporting instructions. The authority also updated its XML schema for the templates set out in the technical standards on disclosure requirements.

The new Q&As include instructions on how to report split and merged underlying exposures. The updated Q&As include revised instructions on how to report income fields for buy-to-let residential mortgages.

Meanwhile, the revised reporting instructions address technical issues identified by stakeholders since August 2020. To facilitate the smooth implementation of the updated rules, ESMA says reporting entities may choose to use version 1.2.0 or version 1.3.0 of the XML schema and of the validation rules until 1 September 2021. As of that date, reporting entities may only use the latest version.

The updated XML schema concern the two standard reports that a registered securitisation repository (SR) must provide: the end-of-day report, which contains summary information about all securitisations reported to an SR and must be made available on a daily basis; and the rejection report, which contains information about data submissions that were rejected by an SR because they failed to meet one or more requirements. The rejection report must be made available by SRs on a weekly basis.