Contents

Capital Relief Trades

Texas blazes the trail

The first CRT deal from a US regional fires the starting gun

Texas Capital Bank has become the first US regional bank to issue a credit risk transfer deal, breaking the ice in what is expected to be an increasingly active area of the US CRT market.

A $275m CLN references a $2.2bn mortgage loan exposure and the deal was oversubscribed, says the bank. It closed on March 9.

The deal was structured and placed by Citigroup - a pioneer of the CRT market itself - and Clifford Chance acted as legal counsel.

“This CRT is a notable transaction for Texas Capital Bank, and advances our proactive efforts to optimize our balance sheet. As we are the first regional bank in the US to enter into this type of sophisticated transaction and in partnership with leading financial institutions, Texas Capital Bank is demonstrating its ability to lead the market with its innovative approaches to capital and risk management to the benefit of our company, our clients and our shareholders,” says Rob Holmes, president and ceo.

The bank also described the transaction as an “important step forward” which allows it to expand the warehouse lending programme

The arrival of a US regional bank into the CRT arena has been predicted for some time, so the importance of this debut transaction can hardly be overstated. While it has been always acknowledged that the CRT market would make sense for many US regional banks to reduce RWAs, there have been many difficulties for these institutions to overcome.

For example, there is a series of regulatory hurdles for any regional bank to clear, including the assent of its state regulator. This means the intervention of lawyers at an earlier stage in the whole process. Moreover, it has been sometimes assumed that the technical sophistication required for such transactions lay beyond the savvy of most regional banks.

Yet Texas Capital Bank, with this deal, has shown that these assumptions do not represent insuperable barriers to the participation of US regional banks in the CRT market. The doors have been opened.

Simon Boughey

RMBS

Alignment issues

EEM performance concerns emerge

The European Mortgage Federation-European Covered Bond Council (EMF-ECBC) last month formally launched its Energy Efficient Mortgage (EEM) label. However, concerns are emerging that the label is being driven forward potentially at the expense of environmental performance.

Across the 27 European Member States, 200 million dwellings were built last century, representing a significant challenge in terms of renovating existing housing stock to meet the EU’s climate neutrality targets by 2050. Further, buildings are responsible for 40% of the EU’s energy consumption, while the mortgage sector accounts for a third of bank portfolios and 44% of EU GDP.

EEMs are intended to finance the purchase, construction or renovation of both residential and commercial buildings where there is evidence of: energy performance that meets or exceeds relevant market best practice standards, in line with current EU legislative requirements; and/or an improvement in energy performance of at least 30%.

Such evidence should be provided by way of a recent EPC rating, supported by an estimation of the value of the property according to the standards required under existing EU legislation.

As coordinator of the EEM label, the EMF-ECBC says it is seeking to act as a market catalyst, channelling private capital towards energy efficient buildings and energy saving property renovations. The label is part of the EU’s Horizon 2020 funded Energy Efficient Mortgages Initiative, which aims to mobilise capital markets and implement ESG best practices in the financial sector.

The aim is to provide a clear quality label for consumers, lenders and investors in connection with EEMs and drive a gradual implementation of the EU taxonomy for environmentally sustainable economic activities across the mortgage sector. Ultimately, the objective is to maximise portfolio regulatory alignment with the Mortgage Credit Directive and CRR, thereby facilitating favourable mortgage financing.

So far, 23 lending institutions from 11 countries have adopted the label, including BNP Paribas Fortis, Intesa Sanpaolo and Swedbank.

Nevertheless, Ted Kronmiller of SMARTER Finance for Families – also a Horizon 2020 initiative, implementing green mortgage programmes across European countries – suggests that the label is being driven forward potentially at the expense of environmental performance. “The EU taxonomy has ambitious sustainable finance goals for the residential building sector, including thresholds to ensure substantial contribution to climate change mitigation and adaptation for new construction, renovation as well as ownership and acquisition activities. Yet some at the ECBC argue that the EU taxonomy standards are too high,” he explains.

In particular, the EU taxonomy has a threshold under the energy demand criteria, where a property developer must prove that they are ‘doing no significant harm’ to any of the environmental objectives set out in the taxonomy. These objectives include: sustainable use and protection of water and marine resources; transition to a circular economy; pollution prevention control; and protection and restoration of biodiversity and ecosystems.

This is in order to avoid investments qualifying as environmentally sustainable in cases where the economic activities benefitting from those investments cause harm to the environment to an extent that outweighs their contribution to an environmental objective. The criteria take into account the lifecycle of the products and services provided by that economic activity, in addition to the environmental impact of the economic activity itself, including by considering their production, use and end of life.

Kronmiller argues that alignment on these issues is necessary in order to create an industry benchmark that would engender comparability and transparency when measuring environmental performance. This would, in turn, spur the issuance of EU green bonds.

“An EU-wide benchmark is necessary because there are different economic conditions and property standards across the various member states. A benchmark would also facilitate a suite of environmental performance data to track the operational performance of buildings and enable creation of an industry-wide database,” he explains.

He continues: “Investors are pushing for this as a way of understanding banks’ exposure and contribution to climate change. When combined with climate scenario analysis, this data could be translated into a range of risk characteristics pertaining to green financial instruments, including securitisations.”

The SMARTER Finance for Families consortium comprises 17 green building, green energy, research and other organisations from 14 countries. The initiative provides third-party certification for green homes, with the key objective of bringing financial partners and residential developers together to launch co-branded discounted green mortgage products for the acquisition of new build properties.

The SMARTER certification system includes seven assessment criteria that align with the EU taxonomy: environmental leadership; ongoing performance; site and location; water efficiency; materials and resources; human health and wellness; and energy optimisation and innovation. Crucially, these standards meet or exceed the taxonomy’s technical screening criteria for mitigation and adaptation activities and align with the ‘do no significant harm’ criteria.

Corinne Smith

Capital Relief Trades

Texas two-step

TCBI's debut is the curtain raiser for a new CRT strategy

Texas Capital Bank’s (TCBI) debut in the CRT market - making it the first US regional bank to successfully execute such a deal (SCI 11 March) - is not a none-off but the beginning of a long-term strategy, Madison Simm, evp, business optimisation in Dallas, told SCI yesterday (11 March).

The deal carries a three-year term, but the bank has no intention of providing a shock to the balance sheet upon its maturity, so at that juncture will likely extend the programme further, probably for a longer maturity. “This is a strategy, not a single deal. We see this as an opportunity to add more issues, whether in terms of expanding the programme or extending the programme further out in time,” says Simm.

The US$275m deal references a US$2.2bn pool of residential mortgages, all of which qualify for purchase by Fannie Mae, Freddie Mac and the Federal Housing Association. It consists of a single tranche with an attachment point of 0% and a detachment point of 12.5%. Thick tranches are a hallmark of deals seeking capital relief from RWAs calculated under the standardised approach.

It priced in the low 400bp over Libor, confirms Simm, though he expects future issuance to be priced more tightly.

There are two investors, both of which are large, well-recognised US names and both of which have considerable prior experience in the CRT market. Both also wanted to be seen at the forefront of the market and had the appetite for large tickets.

The issue represents the culmination of a nine-month process. The first and most pressing hurdle was to ensure the planned deal would secure regulatory capital relief, according to the 2014 capital rules. This meant extended negotiations with the FDIC, the US Fed and the OCC.

“We spent four months researching every attribute of the capital rules to make sure that this deal would qualify. And then we spent time, with outside counsel, consultants or in direct communication with the regulators, making sure this transaction would meet all the requirements. This was the first and the most sizeable obstacle,” says Simm.

The difficulty of securing regulatory approval has always been cited as a principal reason why US regional banks would be reluctant to try CRT issuance, but Texas Capital Bank has shown this does not represent an insuperable barrier. It would be a surprise if more regional banks did not follow suit.

CRT transactions conducted in the last couple of years alerted TCBI to the possibility that this structure could be applicable to warehouse exposures. But it was the 2014 capital rules, that incorporated the new and stiffer standardised approach to RWA calculation for US banks, from which the bank sought relief.

“The 2014 rules moved the risk weighting on warehouse exposures from 50% to 100%. That was a sizeable increase. While the underlying instruments are resi mortgages, they are still deemed exposure to commercial counterparties,” says Simm.

Citi was arranger and structurer on the deal. TCBI picked Citi, after talking to a number of different advisors, for the experience and expertise both as an arranger of CRT deals over many years in Europe but also as an issuer itself.

Simon Boughey

ABS

Collection hitch

January NPL collections fall

Italian non-performing loan collections in January have plunged, following a December boost (SCI 26 February). Given a third pandemic wave that is about to hit the Italian economy, NPL ABS collections are still 46% below pre-Covid levels - a trend that is not expected to revert in the medium term.

According to Scope Ratings, January collections were among the worst since the Covid-19 outbreak began, showing a dramatic fall of 59% versus December volumes - although the comparison needs to be made in the context of the plus 71% seasonality boost in December 2020. Most transactions (86%) registered lower collections in January, compared to the six-month pre-pandemic average (September 2019-February 2020).

January’s decline was a repeat of last year, where January 2020 collections were 58% lower than December 2019. Yet again, December 2019 also witnessed a 77% seasonality boost. Year-over-year January 2021 versus 2020 collections fell 22%, a sign of pandemic-linked erosion.

Scope notes that for 2020 versus 2019, January collections were 12% lower. Both note sales and DPOs saw a decrease in their share of monthly collections, falling to 1.85% and 24.96% respectively.

The share of note sales in monthly proceeds is the lowest since March 2020, with only three transactions registering note sales. The data shows the performance of Italian NPL securitisations rated by Scope on a deal-by-deal basis, based on monthly servicing reports available to January 2021.

Stelios Papadopoulos

Structured Finance

SCI Start the Week - 8 March

A review of securitisation activity over the past seven days

Last week's stories
Benchmark legislation
Congress to rescue Libor-based contracts, but questions remain
Ever-changing moves
Euro CLOs remain fluid
Middle market opportunities
MM CLOs still offer relative value and continued innovation
NPL ABS inked
Vega securitisation underway
Pattern recognition?
New issue and secondary CLO double-B disparity discussed
Promising pipeline
STS synthetic securitisations slated
Residential rise
Mortgage SRT motivations examined
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

Other deal-related news

• The CFPB has released a notice of proposed rulemaking (NPRM) to delay the mandatory compliance date of the General Qualified Mortgage final rule from 1 July 2021 to 1 October 2022 (SCI 4 March).
• 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 (SCI 5 March).
• Dentons has advised two UK banks in relation to switching their RMBS to SONIA from Libor (SCI 5 March).
• ESMA has published four new Q&As and modified 11 existing Q&As in connection with its securitisation reporting instructions (SCI 5 March).

Company and people moves

• Arrow Global Group has established a clients and capital formation group within its Arrow Capital Management business (SCI 4 March).
• Andy Murphy has rejoined DMS Governance as md, head of strategy - structured finance, based in Dublin (SCI 4 March).
• Holger Kapitza has been named director, sales, institutional clients at Wealthcap, based in Munich (SCI 4 March).
• Monroe Capital has sold a passive minority equity stake to Bonaccord Capital Partners, a division of Aberdeen Standard Investments (SCI 4 March).
• Peter Dailey has joined Aeolus Capital Management in the new position of head of research (SCI 4 March).
• Insurtech platform Arbol has named Hong Guo evp and chief insurance officer, responsible for leading all insurance-related strategy and operations for the company (SCI 4 March).
• Thomas Parcell has joined Lockton Re's new Bermuda platform as chief broking officer (SCI 4 March).
• RenaissanceRe has rebranded its ventures business as 'RenaissanceRe Capital Partners' (SCI 4 March).
• HIG Capital has expanded its European WhiteHorse team with the hire of Michael Lucas as an md, based in London (SCI 5 March).

Data

Recent research to download
Synthetic RMBS - March 2021
CLO Case Study - Spring 2021
Greek CRTs - January 2021                           

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

Structured Finance

Supply fatigue?

European ABS market update

Execution for the two UK securitisations priced last week indicated a limited appetite for paper, following the heavy supply seen in previous weeks (SCI 23 February). A weaker tone in European ABS secondary spreads also emerged.

“The market is a little bit softer, due to a combination of factors - the amount of supply that we have been seeing, but also as a result of general market volatility and concerns about inflation. However, generally the market remains pretty positive,” says one trader.

Coverage ratios for the latest UK buy-to-let RMBS print – Canada Square Funding 2021-1, which marks the fifth BTL deal sold this year – last week stood at 1.1x, 0.5x and 0.5x for the class B to D notes. Further, the class C and D notes priced with the widest DMs so far in 2021, at SONIA plus 190bp and 278bp respectively.

Meanwhile, the Together Asset Backed Securitisation 2021 - CRE1 granular UK CMBS priced wide to IPTs across the capital structure. For example, the class A notes came at SONIA plus 150bp (versus IPTs of plus 125bp-135bp) and the class D notes at plus 315bp (versus IPTs of 300bp area).

Distributed UK securitisation issuance has reached €11.9bn so far this year – equivalent to nearly three-quarters of total year-to-date European supply and almost 60% of placed volume seen in full-year 2020, according to JPMorgan figures.

Of the transactions marketing this week, Ford’s German auto ABS Globaldrive Auto Receivables 2021-A priced today. The spread for the €500m class A notes is set at one-month Euribor plus 13bp (versus final guidance of plus 13bp-14bp with a 3.3x coverage ratio), while the €19.1m class B spread is set plus 80bp (versus final guidance of plus 75bp-80bp with 1.5x coverage). The €27.4m class C notes will be retained.

Elsewhere, IPTs for the €500m class A notes of Obvion’s prime Dutch RMBS - Green Storm 2021 – have been released at three-month Euribor plus 20bp/low 20s. The deal is expected to price as soon as tomorrow.

The remaining European ABS deals in the pipeline comprise French auto lease ABS Bavarian Sky French Auto Leases 4, Irish buy-to-let RMBS Glenbeigh 2 and UK non-conforming RMBS Tower Bridge Funding 2021-1. “From a pipeline perspective, we are not seeing many deals. But this is not too concerning, since demand still feels reasonably healthy,” the trader concludes.

Corinne Smith and Jasleen Mann

Capital Relief Trades

Third wheels

JPMorgan takes to the road again with another auto-linked credit note

JP Morgan Chase is to issue its third auto loan-linked CRT transaction in the last eight months, designated Chase Auto Credit-Linked Notes Series 2021-1, in another indication of the growth of the CRT market in the US.

The note references 161,885 reference obligations for a notional amount of $3.98bn.

The pool is composed of high quality credits, as is common for US CRT trades. The weighted average (WA) FICO score is 780, the WA LTV ratio is 96.1% and the pool has strong vehicle model, brand and geographic distribution.

It was last November when JP Morgan Chase issued its last auto-linked credit note, following its debut in this sector in August.

The pool contains both used and new cars, and the minimum obligor FICO score in the pool is 680. Borrowers with a FICO score of 750 or higher comprise more than 68% of the pool. This credit quality is strikingly higher than when this borrower issued in the auto credit-linked market in 2006, before its recent series of issues.

The trade consists of seven tranches, and the largest, referencing $3.49bn of assets with a 12.5% credit enhancement, is retained by the borrower. The final maturity for all tranches is September 2028.

The remaining tranches include a $311m AA-rated piece with a negative rating outlook and a 4.68% CE, an A-rated 43m slice with a 3.58% CE, a $43m BBB-rated tranche with a 2.48% CE, a BB-rated $21.9m tranche with a 1.93% tranche, a B-rated $15.3m tranche with a 1.54% CE and an unrated $61m piece. Coupons have yet to be determined.

It is statistically similar to the 2020-2 deal issued in August, in terms of credit quality of the pool. There is a high seasoning of 14 months compared to 18.3 months in 2020-2, while the FICO score of 780 is slightly higher than the 772 seen in the 2020-2 trade.

Simon Boughey

Capital Relief Trades

Risk transfer round-up - 8 March

CRT sector developments and deal news

Citi is believed to be arranging capital relief trades for a German bank and a Greek bank, which would render it the latest of the large banks to expand their foothold as third-party arrangers, along with Deutsche Bank, JPMorgan and BNP Paribas (SCI 19 February). Large banks are becoming more active as third-party arrangers, since smaller banks need their expertise to tap the significant risk transfer market following a boost in IFRS 9 provisions last year and the implementation of the new Securitisation Regulation.

Large banks are also targeting relatively untapped jurisdictions, such as Malta, Greece and Canada. Citi is expected to close these transactions this year. 

Capital Relief Trades

Risk transfer round-up - 9 March

CRT sector developments and deal news

Details have emerged regarding a synthetic securitisation backed by project finance contracts that Santander finalised in December 2020. The capital relief trade consists of a €1.4592bn senior tranche, an €89.5m placed mezzanine tranche and a €78.1m placed junior tranche. The transaction was one of two project finance deals completed last year, along with Intesa Sanpaolo’s green significant risk transfer trade under the GARC programme (see SCI’s capital relief trades database).  

RMBS

Cladding issues

Fire-safety requirements to have 'marginal' impact on RMBS

DBRS Morningstar has investigated the pervasiveness of the impact on UK mortgage borrowers of cladding on high-rise apartment blocks, following the Grenfell Tower fire in June 2017. The study is based on an analysis of 64 securitised UK mortgage portfolios, comprising 670,000 loans.

“Fallout from the Grenfell fire tragedy continues to be felt by tenants and leaseholders across the country. Moreover, fire safety-related issues continue to impact property owners through increased costs in the form of higher insurance, safety patrols and remediation work; difficulty remortgaging or selling properties; and potential decreases to the property value of flats in high-rise buildings,” the rating agency states.

The research finds that roughly 1.5 million flat owners might be affected by flammable building cladding and other fire safety-related issues. Further, due to reduced resale value or an increased burden of funding fire safety repairs, borrowers potentially face higher monthly mortgage payments when remortgaging. The increase in most cases ranges from £15-£140 per month, but can be higher.

There also appears to be a North/South divide, as borrowers in Northern England with lower value properties are likely to face large bills relative to the property’s value. For example, a £35,000 repair bill translates to around 36% of median property value for a flat in Newcastle. The same amount would represent only 7% of the median West London apartment value.

“Therefore, if we assumed property values would be reduced by £35,000 due to fire safety defects, only 0.3% of West London flat mortgages would be in negative equity, versus 56% of flat mortgages in Newcastle,” DBRS Morningstar notes.

The majority of the flat owners analysed have an LTV ratio below 75% and in many areas below 60%. “Our analysis finds that house prices would need to decline more than 20% of their current value for a meaningful number of mortgage borrowers to end up in negative equity. However, mortgage borrowing costs may increase, even if borrowers are not in negative equity,” the agency adds.

Overall, cladding issues are anticipated to have a marginal impact on expected losses in RMBS pools. Flats across DBRS Morningstar’s sample of 64 RMBS deals account for roughly 16% of total properties.

Assuming a 10% lower realisation for repossessed flats, the expected loss increase ranges from less than 0.1% to 0.4% at the upper end of the agency’s expected case scenario. This may be further reduced as flats clear fire safety inspections; or, as defects are fixed over time, fewer flats may be affected by these issues.

Around 28.5% of all flats across the UK are located in London. Other hotspots for flats include Glasgow (3.7%), Edinburgh (3.2%), Manchester (2.4%), Brighton (2%), Birmingham (1.9%), Newcastle upon Tyne (1.8%), Bristol (1.4%), Portsmouth (1.2%), Bournemouth (1.1%), Liverpool (1.1%) and Southampton (1%).

Corinne Smith

CLOs

Strategic expansion

Capital Four ceo Sandro Naef and Capital Four US ceo Jim Wiant answer SCI's questions

Q: How and when did Capital Four become involved in the structured credit market?
A: We have been investing in CLO liabilities for more than a decade. In terms of managing CLOs ourselves, it was a natural evolution a couple of years ago to also start managing CLOs ourselves, as we have been managing senior loans and bonds a long time.

Q: What are your key areas of focus?
A: For us, we look at the loan market quite broadly. In the case of Europe, the size of our assets under management of €15bn allows us to cover the entire leveraged finance market very effectively.

We have more than 20 research analysts and follow the leveraged finance markets. We are quite active on the new issuance side.

Q: What is your strategy going forward in terms of developing Capital Four’s US presence?
A: We have not yet entered the US market, but our approach will be similar in terms of strategy and focus. The US loan market has recovered quite strongly from the 2020 volatility. The focus is understanding individual corporate issuers’ liquidity going forward, as we exit this period of fundamental volatility.

Q: Why are you seeking to expand to the US now?
A: Our expansion is very strategic. It is not related to a short-term investment opportunity that we see. That would not be the right way to approach it.

It is about long-term investment. Whether the market was cheap or expensive, it would not have mattered. To plan correctly takes a long time. While we were planning this, the markets have at certain times been more cheap or rich, without impacting our strategic view on developing our business.

Q: Can you elaborate on your CLO issuance plans, if any?
A: Entering the US CLO business is a high priority. We are looking to be active issuers within that market later this year.

In Europe, we will continue to issue CLOs according to our strategy and established platform and track record. Our US strategy will create synergies on investing, distribution and investments in technology.

Q: How will you differentiate yourselves from competitors?
A: We provide capital across the entire capital stack. We can pick instruments, as we have various strategies. We look at where the opportunities are and which instruments offer attractive value.

Credit management will enter the next stage in terms of technology and enhancing the complexity of investment processes. Loan managers need to embrace those developments.

Jim has a leading investment track record and shares our view on investment philosophy and process. Our investment process is repeatable and sustainable, and continuing investments in technology allows us to further develop our process and keep delivering value to our clients.

Q: Which challenges/opportunities do you expect to arise in the future?
A: We think the current environment is enormously active. There are benefits, such as low interest rates.

The trend for concentrated ownership is a strong and powerful movement. The private equity approach is built on concentrated ownership, which translates into highly incentivised management and employees.

Leveraged finance is an important enabler of the private equity model and the growth of the CLO market will go hand-in-hand with the private equity growth. We think, as a company working closely with investors to deploy capital, we can fill important gaps in many companies’ funding structure. 

Jasleen Mann

Structured Finance

Loyalty programme financing prepped

Sector developments and company hires

Loyalty programme financing prepped
American Airlines is prepping an unusual US$7.5bn secured financing backed by license-payment obligations from American and cashflow generated by the AAdvantage Loyalty programme. AAdvantage Loyalty IP is an SPV incorporated under the laws of the Cayman Islands and has a maximum programme capacity of US$10bn.

As part of the financing structure, the intellectual property (IP) assets associated with the AAdvantage loyalty programme and AAdvantage agreements - including co-branded agreements with Citi and Barclays Bank Delaware - are transferred to the AAdvantage IP SPV, which grants a worldwide license to American and its subsidiaries to use the IP to operate the loyalty programme. In return, the licensee – American - will pay a monthly license fee equivalent to all the cash collections generated by the sale of miles to American, under an intercompany agreement.

Fitch has assigned preliminary double-B ratings to the class A and B notes, as well as a term loan. The proceeds of the issuance will be used to pay down a US Treasury loan under the CARES Act and to fund the reserve account.

In other news…

Acquisition
Ocorian has acquired Emphasys Technologies, a capital markets service provider specialising in tax reporting and calculation agency services to asset-backed transactions. The move marks Ocorian’s entry into the US and provides a foundation for the development of its capital markets services suite in the country. The deal is expected to complete later this month and provides for the Emphasys Technologies business to continue to be led by Jeff Stone and David Anthony.

Report addresses AMC preconceptions
The European Parliament’s Economic Governance Support Unit has published a study on Asset Management Companies (AMCs) that examines the opportunities and risks presented by such vehicles, with the aim of exploring potential solutions for the expected Covid-related surge in non-performing loans (NPLs) at an EU level. The report, entitled ‘Non-performing loans – new risks and policies?’, was prepared at the request of the European Parliament’s Committee on Economic and Monetary Affairs.

The main finding of the report is that the conceptual framework to assess AMCs is relatively compartmentalised; in other words, AMCs are perceived as a mechanism “opposed to” or “alternative to” securitisation or the handling of NPLs by single banks. They are also seen as “microprudential” (focusing on individual bank behaviour), short-to-medium term in terms of returns - with little data to calibrate recovery rates - and focused on rates of recovery and disposal, with less attention paid to social impact or side-effects.

The study indicates that a more comprehensive approach to the sector is possible. This could include: key principles to provide clarity in AMC design; a role for AMCs that exploits their advantages, such as centralisation and lower funding costs; combining synergies with other mechanisms, such as securitisation pooling and tranching to facilitate NPL distribution; and inserting the vehicles within a more comprehensive NPL strategy. The report suggests that ultimately such a strategy could reconcile the emergence of EU-sized secondary NPL markets with a technically sound approach, in order to maximise economic and social returns and focus on long-term value.

US dollar Libor retirement postponed
ICE Benchmark Administration has finalised the delay of Libor retirement until mid-2023 (SCI 7 December 2020), covering all US dollar Libor tenors aside from one-week and two-month US dollar Libor. ICE's announcement represents a ‘pre-cessation trigger’ for some contracts that will serve to lock in the spreads between Libor and other benchmarks, a step that provides more clarity and encourages further transition progress, according to Moody’s. These spreads will be used in transitioning the contracts to new rates.

Moody’s expects the delay in US dollar Libor transition to allow a greater share of outstanding Libor instruments to mature or otherwise pay off. The delay will also provide extra time for issuers and transactions with more challenging longer exposures to address the risks or benefit from developments, such as legislative action.

Nevertheless, the rating agency notes that potential remains for negative effects from changes in cashflows, litigation costs or other disruptions, especially in areas exposed to tough legacy exposures. However, the creation of synthetic Libor rates may lessen those risks.

Structured Finance

Asset and liability origination tie-up agreed

Sector developments and company hires

Asset and liability origination tie-up agreed
Apollo and Athene have entered into a definitive agreement to merge in an all-stock transaction that implies a total equity value of approximately US$11bn for Athene. Upon closing of the merger, current Apollo shareholders will own approximately 76% of the combined company on a fully diluted basis and Athene shareholders will own approximately 24%.

The merger of Apollo and Athene combines two growth companies providing products and services that are in high demand – investment returns and retirement income. The aim is to allow the company to rapidly scale asset and liability origination, broaden distribution channels and act as a leading global solutions provider.

The combined company will be led by incoming Apollo ceo Marc Rowan, while Apollo’s business will continue to be led by co-presidents Scott Kleinman and James Zelter. Athene will continue to be led by ceo Jim Belardi, with his current management team and full workforce.

The board of the combined company will comprise 18 members that are two-thirds independent. Four directors of Athene are expected to join, including Jim Belardi. Chairman Leon Black, co-founder Josh Harris and lead independent director Jay Clayton will continue to serve in their respective roles.

The transaction is expected to close in January 2022, pending customary closing conditions.

In other news…

EMEA
Administration solutions provider Crestbridge has opened an office in Ireland and hired Andrea Lennon as director and head of funds, Ireland. The move aims to facilitate the firm’s ability to support US investment into Europe and it initially intends to focus on supporting clients with multi-jurisdictional structures.

Lennon has over 20 years’ experience in the investment funds industry, working across the full end-to-end value chain, including product development and lifecycle. She was previously a director at FundRock Management Company and has also worked at Brown Brothers Harriman, Link Group and BNY Mellon.

Lennon is joined by Áine Hickey, as head of risk and compliance, Ireland. She has over 13 years’ financial services experience across fund administration, asset management, banking and capital markets. Hickey was previously a chief risk officer at Intertrust Group and has also worked at PwC and Northern Trust.

HIG Capital has further expanded its European WhiteHorse team with the addition of Laurent Vaille and Charles Bourgeois as principals, based in the firm’s London office and Paris office respectively. With 13 years of experience in direct lending and corporate finance, the pair were previously executive directors in the private debt division of Tikehau Capital in Paris. Prior to that, Vaille worked for Ernst & Young and Deloitte Finance, while Bourgeois was previously with GE Capital, SG and LD&A Jupiter.

Moody’s ESG solutions group has appointed Rahul Ghosh to the newly created role of md of ESG outreach and research. He will oversee MESG’s outreach activities with global sustainability stakeholders and manage its thought leadership.

Ghosh joined Moody’s in 2014 from BMI Research. Most recently, he was svp, global emerging markets, responsible for the origination and publication of thematic research on global emerging market credit trends.

North America
Capital Four has hired Jim Wiant as partner, ceo of Capital Four US and portfolio manager. He will establish and lead the firm’s US efforts. Wiant joins from MidOcean Credit Partners, where he was a senior member for 12 years. Before that, he worked at Deerfield Capital Management, Golub Capital, Deutsche Bank and Salomon Smith Barney.

Structured Finance

ESG engagement underway

Sector developments and company hires

ESG engagement underway
All EU-based open-ended funds managed by Leadenhall Capital Partners have been categorised as being investment products that promote environmental and social characteristics in accordance with the criteria recently set out in Article 8 of the EU’s Sustainable Finance Disclosure Regulation (SFDR). The firm says it has committed to embed ESG considerations in its investment process for a number of years, having signed up to the UN Principles for Responsible Investment (PRI) in 2018, and has an ESG committee team chaired by its chief underwriting officer Jillian Williams.

Leadenhall’s management of ESG policies will be a balance between principle-based criteria developed by the firm and navigating various rules and regulations applicable to the firm and its investors. The new SFDR regime provides a framework in the EU for investment managers to be able to classify their funds as promoting environmental and social characteristics, rather than having a passive approach or disregarding them.

While the data required by the SFDR is currently made available by a number of the largest counterparties in the ILS market, it is not always the case. Leadenhall states that one of its roles as promoters of environmental and social characteristics under Article 8 of the SFDR will be to actively ask its counterparties and their intermediaries to start making this data available with the submission or the offering circular, and it is actively engaging with the broker community to explain these requirements.

Sterling share class added
SCIO Capital has launched a new sterling share class within its SCIO European Secured Credit Fund III offering. Qualified investors now have two currency options – sterling and euro – when accessing SCIO’s European secured private credit strategy. The firm has secured an anchor investor in the sterling share class that is a prominent London-based fund of funds.

Structured Finance

BDC fair value assessed

Sector developments and company hires

BDC fair value assessed
On the back of tightening BDC spreads and growing investor interest, JPMorgan CLO research analysts have published a report aiming to assess fair value in the sector. In addition, they compare BDCs to their closest relative – middle market CLOs.  

“Differentiating between BDCs is a challenge; thus, we used attachment points as a reference point to understand the risk behind the structures,” the JPMorgan analysts say. “We estimate around 50bp of spread pick-up for unsecured debt of BDCs as compared to the triple-A tranche of middle market CLOs, highlighting that there is still some value left in the BDC structure.”

They continue: “The average attachment point for BDCs under coverage of 52% at the sector level and considering the level of secured debt compares favourably to the historical triple-A tranche attachment point of MMCLOs of around 45%. We estimate a 2.72% return over a five-year period for the triple-A tranche of recent MMCLOs, compared to an average YTM at 3.20% for the three-to-five-year notes of BDCs under coverage.”

The JPM analysts observe that the CLO structure has notable advantages to investors, compared to BDCs from the standpoints of disclosure, covenants, term funding, liquidity and depth of the market. On the other hand, they say that the BDC structure for unsecured bonds also has significant advantages relative to structured instruments.

“The ability to raise equity or de-lever the structure, combined with the fact that BDCs don’t default but are basically acquired by other managers at below NAV, lower the risk for unsecured bond holders in our view,” the JPM analysts conclude. “As well, CLOs have more duration uncertainty (call risk) as compared to BDC senior unsecured debt, which is typically issued in bullet structure.”

EMEA
Barclays has appointed Steven Penketh as head of securitised products solutions for Europe and the Middle East. Penketh will report to Scott Eichel, global head of securitised products. He will work alongside individuals across the investment bank to provide securitisation and structuring solutions, financing and arranger services to institutional clients in Europe.

Remote working implications stressed
Fitch has stressed the potential credit implications of hypothetical declines in demand, rent and net cashflow on the 2012-2020 vintage office single-asset/single-borrower CMBS it rates, due to Covid-induced remote working. Under scenarios of moderate and severe stresses, 4.4% and zero respectively of 114 SASB bonds maintain their current ratings.

The moderate stress scenario assumes employees work remotely 1.5 days per week, resulting in a 20% decline in office workers and a 10% decline in office space demand, reflecting the agency’s expectation that space may not shrink in direct proportion to the reduction in workers in the office. The severe scenario doubles these assumptions. Fitch assumes that rents decline at 1.25x the decline in space demand, as increased vacancies magnify declines in rent levels.

The stresses result in declines in net cashflow of 15% and 30% under the moderate and severe scenarios respectively. The two scenarios use cap rates from Fitch's most recent surveillance review - 7.23% on average - which are significantly higher than the appraisal cap rates at loan origination, which are 4.73% on average.

These assumptions result in average market-value declines from at-origination appraised values of approximately 44% and 54% respectively for moderate and severe scenarios. Were these declines in value to occur, Fitch suggests that downgrades are possible, with 25% and 55% of investment-grade bonds potentially moving to below investment-grade under the moderate and severe scenarios respectively. The stresses applied in its current rating analysis already reduce property values by 38% on average.

US office property values fell approximately 43% during the 2008 Great Recession and recovered over a three-year period. The secular shift to working from home may prolong the recovery in values following this recession, however.