Contents

ABS

Diversification play

MPL platforms broadening product offerings

The consumer loan marketplace lending ABS segment has proved to be resilient through the coronavirus-induced downturn. However, concerns are emerging regarding how performance might change after stimulus and borrower relief measures come to an end in the US. 

“KBRA placed many ratings in the sector on watch at the onset of the pandemic; however, due to favourable performance and transaction structures, all the placements were subsequently resolved with affirmations,” says Bill Carson, director at KBRA.

KBRA notes that in terms of performance, delinquencies were lower than anticipated. Extension rates peaked in April as servicers provided temporary payment relief to those borrowers who were impacted by Covid-19 stress.

“In terms of credit underwriting adjustments, we have seen companies respond by tightening requirements and increasing income and employment verifications. As the impact of the pandemic comes into focus, we have seen a rebound in origination volume. However, this increase has not been consistent across all platforms in the sector,” notes Eric Neglia, senior md at KBRA.

Against this backdrop, several MPL platforms are broadening their product offerings. “Several MPL platforms are continuing to diversify their product offerings in order to diversify revenue and deepen customer relationships. For example, Upgrade launched the Upgrade Card, a hybrid product that combines personal loan and revolving credit card features. Several other platforms are expanding into the auto space as well,” says Alla Mikhalevsky, director at KBRA.

A further growing area of consumer finance highlighted by KBRA is the point-of-sale or buy-now-pay-later sector. These alternative delivery methods utilise technology to enable fast credit decisions, thereby allowing customers to finance online or instore purchases.

Another recent trend has been the interest shown by fintech companies in obtaining banking licenses, as a means of originating loans through their platform as opposed to relying on partner bank relationships or state licences. Notably, this has been demonstrated by Square, LendingClub and most recently SoFi (SCI 15 March).

“Having a banking license allows the company to operate under a clearer set of rules regarding true lender and exportation of interest rates, offer more products to their customers and possibly reduce their cost of funds,” says Neglia.

The move follows positive regulatory developments within the sector (SCI passim). “In August, the OCC and FDIC issued final rules addressing confusion caused by the Madden decision. Around the same time, the Colorado Attorney General reached a settlement with the platforms regarding true lender and exportation of interest rates,” Neglia concludes. 

Jasleen Mann

CLOs

Bank boost

US CLO triple-As see strong bank demand, but for how long?

Significant support from US banks has contributed to the 2021 rally at the top of the stack. Inevitably, though, that level of support will be finite.

Notwithstanding the slight wobble seen in the last few sessions, the primary-secondary basis in US triple-A spreads has compressed significantly in recent months and looks likely to continue at similar levels for a while yet. That, in part, is thanks to the broad-based participation of US banks and the all but unprecedented position in which they find themselves.

“We haven’t seen an environment like this for the banks for all but five decades,” says Charlie Wu, strategist at Morgan Stanley. “Deposit growth in 2020 clocked in at 23% (on an end of period basis), the highest annual growth rate experienced since 1974. And it isn’t slowing down.”

A recent report from the US CLOs and Large Cap Banks teams at Morgan Stanley Research expects that in 2021 deposit growth will increase 30% faster than in 2020 due to QE and the roll-off of the Treasury General Account, which it estimates will increase bank reserves by US$2trn, 30% above 2020’s US$1.5trn. At the same time, consumers, corporates and investors are not spending all of their QE or government-funded stimulus. As a result, savings are high and operating deposits are growing.

According to Morgan Stanley this is critical, as it means banks can take duration and credit risk with operating deposits. Last year, when the pandemic hit, banks weren’t sure how quickly these new savings would be spent, so they kept the reinvestment of these deposits short and liquid. But now, as the period of high savings has stretched on, banks could boost their assumptions for how much of this savings is operational and start to take more duration and credit risk.

Consequently, the report adds: “Banks are more flush with deposits than they have been in 50 years, with the loan-to-deposit ratio at 63% for all commercial banks in the US, and even lower at 56% for the largest 25 banks. They are obviously keen to find reinvestments that deliver more than the 10bp generated from overnight reserves at the Fed.”

However, the banks’ resultant demand for triple-A CLO paper will not be sustained at current levels forever. Morgan Stanley believes that lower CLO demand will be a function of two factors. Either loan growth re-emerges faster than deposit growth, or QE ends, whichever comes first. They expect loan growth to pick up in 2H21, slowing bank demand for securities in the back half of the year. But demand for securities will likely remain higher than normal until QE ends, which economists pencil in for mid-to-late 2022.

The report continues: “The wild card is if loan demand surges above forecast, so watch that space. Typically, we would also highlight rising credit risk as an offset to reinvesting bank liquidity in CLOs, but we are in unprecedented times with US$1.9trn stimulus a credit positive event, reducing risk in many asset classes including CLOs.”

In any event, banks reducing demand is unlikely to have as major an impact as their increased uptake has had so far this year. As Wu concludes: “Banks are obviously an important investor in the CLO triple-A space, but they’re by no means the only investor. We’re not saying they are the only driver of recent spread tightening; they are just part of the puzzle.”

Mark Pelham

Capital Relief Trades

Legislative hoops

Multiple layers of regulatory assent hinders US CRT development

Texas Capital Bank confirmed last week that it sought approval from three different US regulators before selling its debut capital relief trade (SCI 12 March). For many banks, this process represents a deterrent to issuance.

The OCC, the US Fed and the FDIC all had to give the thumbs up to TCDI before it felt able to proceed with its transaction. This negotiation took four months, confirmed the bank.

But it could have been even worse. If TCBI were not a federally organised institution, it would also have been obliged to go to the state regulator, adding a further layer of complexity to an already labyrinthine process.

Moreover, as a result of the Dodd-Frank regulations, introduced after the financial crisis of 2008/2009, certain CRT structures have to be blessed by the CFTC as well, says Joseph Buonanno, a partner at Hunton Andrews Kurth.

“You don’t want the CFTC to regulate the issuing entity as a commodity pool and require registration of a commodity pool operator. This would have dire consequences. So you have to have a conversation with the CFTC to make sure that no-action letter guidance will apply,” he says.

European banks have a much simpler system to negotiate, which is one reason why the market has developed so much more quickly than in the US. All the US regulators involved in the process make their decisions on a case-by-case basis, so even though potential issuers might draw comfort from approval granted to a transaction by a rival, it does not mean that if they were to bring a similar deal to the table it would receive the green light.

“What works for one bank doesn’t work for all because their circumstances may differ. I know of some banks that recently couldn’t get past the regulators. The ability to get capital relief is not universal,” says Buonanno.

The need to negotiate such difficult waters prevents some deals from being done and makes the preparation needed for others much longer. It also can add considerably to the costs of executing a CRT. Texas Capital Bank completed a lot of the necessary negotiation with regulators in-house, but it also hired outside consultants.

Other banks might decide to pass all the paperwork over to a law firm, and this is when costs can become onerous. “Transaction costs can be that much higher, the more regulators are involved in CRT transactions, as you have to involve lawyers at an earlier stage - who then spend a lot of time documenting and negotiating the relevant approvals with multiple regulators,” adds Buonanno.  

The objective is to get a conversation going with the regulators at the same time, so that they start talking to one another, rather than initiating a separate negotiation with each in turn. Nevertheless, the process remains convoluted and extended.

None of this is impossible, of course, as TCBI has proved. Nonetheless, the fragmented nature of US financial regulation has not aided the development of the CRT market and remains a brake on its further development.

Simon Boughey

Capital Relief Trades

Record breakers?

Chart-topping CRT issuance volumes anticipated

The capital relief trades market is set to break issuance records in 2021 after a challenging 2020, as banks seek ways to improve their return on equity and following pent-up issuance from last year. In this CRT Premium Content article, we examine the conditions that the coronavirus crisis has laid out for a surge in risk transfer volumes this year.    

According to SCI data, overall tranche notional issuance reached €10.7bn in 2020, surpassing the 2019 record (€9.2bn). However, EIF transactions accounted for close to a third of 2020 volumes versus approximately 3% for 2019. Furthermore, overall private CRT issuance dropped from €8.9bn to €7.5bn between the two periods.

Nevertheless, given the severity of last year’s crisis, the market seems to have weathered the storm well. Government and central bank support, static pools or tough replenishment criteria and the focus on large corporate exposures among other factors kept the ball rolling. Large corporate exposures as opposed to SMEs benefit from access to capital markets, diversified balance sheets and greater disclosure that allows investors to form a view on the underlying risk.

In fact, the coronavirus crisis has laid out the conditions for a surge in volume this year. First, as with other alternative asset classes, CRT trades offer yield along with high quality collateral after another round of rate cuts and quantitative easing. More saliently though, it is arguably the most significant tool that banks have for boosting their return on equity in a low rate environment.

Stuart Graham, partner at Autonomous Research, states: “EU banks have low ROEs and the bulk of the credit RWAs are allocated to low ROE corporate and SME credits. This is where SRT comes in because you can use it to free up capital and boost ROEs.”

He continues: “Now as opposed to 2009, there aren’t any black holes in bank balance sheets, but investors don’t believe they can make an adequate return in a negative rate environment. You can try to pass on those negative rates to consumers or reduce your costs, although that is always problematic. SRTs, on the other hand, are much more cost effective.”

Crucially, SRTs free up capital for share buybacks. Graham notes: “Share buybacks will become more important over the next two years, given the dearth of investment opportunities in a low rate world, since it doesn’t offer many opportunities to deploy capital profitably thanks to 10% equity investor thresholds. Dividend payments will be limited to circa 2% yields, so right now there is not much of an incentive to do an SRT to free up capital for buybacks. Consequently, it’s after 1 October that things begin to get interesting.’’

In December 2020, the ECB asked all banks to consider not distributing any dividends or execute share buy-backs or to limit such distributions until 30 September 2021, given persisting uncertainties over the economic impact of the Covid-19 pandemic. In particular, the central bank stated that it expected banks to keep dividends and share buy-backs below 15% of cumulated profit for 2019-2020 and not higher than 20bp of the CET1 ratio.

Additionally, although regulators have talked about a return to normal on dividends and buy-backs from 1 October, what this means precisely is unclear. Still, Autonomous believes that it is unlikely that it will be anything other than a viable medium-term capital plan where CRTs play an important role.

Second, deals that were planned for 2020 have been postponed for 2021. Kaelyn Abrell, partner and portfolio manager at Arrowmark Partners, notes: “The uncertainty surrounding the pandemic last year rendered it more expensive to issue in 2020, since investors applied more conservative underwriting assumptions and sought to remove Covid-sensitive sectors or required additional compensation to offset the risk. As a result, transactions that were planned for 2020 have now been pushed to 2021.”

Another issuance driver unrelated to Covid-19 is scheduled call dates. Another investor comments: “We expect a lot of deal refinancing this year. As portfolios remain at the same size throughout the replenishment period, then RWAs remain the same as well. So once replenishment comes to an end, you have to replace the trades to get the same level of capital relief. Some banks have made a practice of calling deals to be predictable, yet other banks do not follow that practice, which does affect the pricing.’’

However, questions remain over several issues, most notably payment holidays, IFRS 9 provisioning and other regulatory headwinds. Arguably the most salient development for capital relief trades following the coronavirus crisis has been the emergence of loan exposures subject to payment moratoria. Payment moratoria raise several concerns for the trades, chief among them being the challenge of estimating expected losses.

The typical practice following the pandemic was to prohibit the inclusion of moratoria at closing or over the length of the replenishment period. Alternatively, for other trades, banks ditched replenishment altogether and opted instead for a static pool. Further measures included liquidity reserves for whatever excess percentage of the pool is subject to moratoria and shorter replenishment periods.

Nevertheless, based on 2020 deal data, it’s clear that private investors have for the most part shied away from asset classes with high take-up rates of payment moratoria, such as SME loans. According to EBA data, as of June 2020, around 16% of total SME loans were reported to be under moratoria, while the share stood at less than 5% for loans to large corporates and 12% for commercial real estate loans.

“Investors continue to struggle with the analysis of the expected performance of exposures subject to payment holidays. We believe the wide use of payment holidays contributed to the decline in SME and consumer transactions in 2020 and early 2021,” confirms Abrell.

Yet investors disagree on the extent to which payment holidays can be problematic, since SME pools have benefited the most from payment holidays, but historically they have performed well and governments will keep supporting them as long as they can.

Besides, SMEs are more vulnerable to macroeconomic shocks. Hence, as the virus subsides and the vaccine distribution programmes move forward, SME issuance will likely increase.

“Issuance will go up, although some sectors will suffer, following an end to government support. The EIF will also scale back its activity this year, so we expect the private market to fill in the gap,’’ adds Terry Lanson, md at Seer Capital.

The uncertainty over expected losses due to moratoria extends to IFRS 9 loan loss provisioning. According to Autonomous Research, EU bank loss provisioning was 38bp of loans pre-Covid, but it was 85bp in 2020 and 33bp of that was for Stage One and Stage Two assets. But given the differences with which banks classify Stage Two assets, gauging the impact of the current crisis for provisioning remains unclear.  

Graham remarks: “If you look at the analyst consensus for 2021, it goes down to 60bp. Clearly the market is betting that non-performing loans will go up in 2021, but also that some of that 33bp can be released because of the vaccine rollout and the economic recovery. If that’s the case, then things look pretty good for the synthetic market.”

Arrangers have indicated that 2021 could be the year of the IFRS 9 provisioning hedge, as banks attempt to manage provisioning increases following the coronavirus crisis for long-term assets. Nevertheless, this idea has been considered over the last four years and it remains to be seen, due to costs and structural complexities.

Robert Bradbury, head of structuring and advisory at StormHarbour, explains: “There is a material difference between hedging current provisions and targeting potential future provisions arising due to credit migration. The latter is essentially an ‘out of the money’ hedge, which is understandably cheaper. Under this structure, the bank would typically expect a payout during specified stress periods; however, challenges to issuance include the potential lack of recognised benefit at closing, difficulties in recognition of the relevant benefit at a future date, as well as matching investor and bank expectations on pricing.”

However, the most important regulatory development whose impact for capital relief trades remains to be seen is the EBA’s final SRT report, and particularly the provisions pertaining to the treatment of synthetic excess spread. The EBA paper treats synthetic excess spread as a retained first loss tranche, which means that banks have to apply a 1250% risk weight or a full capital charge plus deduction (SCI 27 November 2020).

Effectively, the transactions will most likely be rendered uneconomical due to the higher capital deduction. Nevertheless, most transactions do not use synthetic excess spread, so the impact of the new rules is not expected to be severe, although the EIF is a frequent user of the structural feature.

Meanwhile, when it comes to new asset classes, one that is emerging and will likely capture the attention of banks and investors going forward is significant risk transfer trades referencing ESG loans (see SCI’s capital relief trades database). According to Molly Whitehouse, director and portfolio manager at Newmarket: “ESG SRTs as an asset class offer a positive contribution to environmental, social and economic development, although the criteria can differ between fund managers. We have innovated several ESG and impact structures, including requiring liberated capital to be recycled into ESG assets, allowing banks to lend more to certain key sectors of the real economy.”

She continues: “Lending to renewable energy will have to grow significantly to meet international climate goals. Luckily, investors are increasingly considering the ESG aspects of investment opportunities and overall there’s been positive momentum in this direction. What is especially powerful and exciting with SRTs is the ability to not only underwrite the portfolio for ESG metrics, but also to partner with banks to improve the cost of capital for green assets on a look-forward basis.’’

Additionally, SRT provides an opportunity for large institutional investors to make ESG investments at scale through partnerships with the most established bank lenders. Nevertheless, although green bonds have gained traction, ESG assets are less prevalent in the broader ABS market.

Emile Boustani, head of asset-backed products UK at Societe Generale, explains: “Green bonds are now the most developed ESG asset class within the capital markets, but we do see potential in ABS. For example, auto ABS can comply with green finance frameworks by refinancing green collateral, such as electric cars, or by having issuers use proceeds from the deals to invest in the development of electric cars. Similar mechanisms can be envisaged for consumer ABS, among other asset classes.”

However, not all ABS sectors are created equal. Synthetic securitisations referencing concentrated pools of corporate loans may likely benefit more from the shifting focus to ESG versus other ABS sectors.

Boustani notes: “Corporate loans - just like with corporate bonds - can be structured according to an ESG action plan and initiatives that must be executed by the borrower. However, in the ABS world, the underlying obligors tend to be multiple, so the ESG angle cannot be based on the specific undertakings of these obligors.”

ESG analysis is in its infancy insofar as bank credit risk is concerned and will depend on the design of future regulatory requirements. The notion of ESG factors as potential financial stability risks is growing among bank regulators. Banks will need to demonstrate to their regulators and supervisors that ESG is firmly on their agendas and particularly their management of climate risks.

The challenge is that supervisory expectations and eventual requirements are still being determined. The EBA has consulted on the risks to which banks are exposed from the impact of ESG factors on their counterparties, while the European Commission has engaged external capital market advisors to study how ESG factors can be integrated into the EU banking prudential framework.

The issue is further complicated by the lack of a securitisation framework that incorporates sustainability-related transparency requirements, although the EBA - in cooperation with ESMA and EIOPA - is expected to publish one by 1 November 2021.

Stelios Papadopoulos

Capital Relief Trades

Target recalibration

UK SME synthetics to regain traction

NatWest is believed to be readying a synthetic securitisation referencing UK SME loans. The transaction would be the capital relief trade market’s first post-Covid UK SME deal, as issuers and investors begin to re-engage with the asset class.

UK SME significant risk transfer issuance took a dive last year along with the broader SME market, due to higher take-up rates of payment holidays and other vulnerabilities, such as reduced access to capital markets. Indeed, according to SCI data, the only confirmed transactions from last year were trades from Commerzbank and Societe Generale (see SCI’s capital relief trades database).

However, the UK market was further clouded by Brexit uncertainties. Consequently, following last year’s EU-UK trade deal and a successful vaccination programme, SME SRT issuance is expected to pick up.

A structurer at a large European bank notes: ‘’Certainly, now that Brexit is done, we expect that some investors who were holding back from investing late last year will return to the market now that the uncertainty factor has been significantly reduced. In the UK, as in the rest of Europe, the success of vaccination campaigns will have a significant impact on investor attitudes to the extent lockdown restrictions are reduced or eliminated.’’

Similarly, an investor states: ‘’There has been more uncertainty for SMEs as opposed to large corporates. Stimulus measures, payment holidays and job retention mechanisms that exist in several countries make it hard to estimate future defaults. However, in the UK, you also must add Brexit uncertainty.’’

He continues: ‘’More fundamentally, there was less need for capital management, since dividends were constrained, and actual losses were lower than what banks had estimated in the early days of the pandemic. Yet the UK economy is expected to return to growth once the economy reopens due to vaccinations. The quicker reversal of government support measures should allow investors to gauge which borrowers will survive.’’

The UK government will be replacing CBILS and other guarantee schemes with the Recovery Loan Scheme in early April. Market sources note that banks are expected to use this less, due to a higher guarantee fee - which should incentivise greater UK SME issuance, although ramping up is likely to take time. Overall, until the aftermath of the coronavirus pandemic is further clarified, SME SRTs are anticipated to remain a bit more expensive than other asset classes.

One question is whether full-stack deals are a better option going forward, since they enable banks to use more excess spread and thus absorb more potential losses. However, originators caution that this will remain unlikely, since rating agency methodologies for rating cash SME deals are overly punitive compared to the tranching that banks can achieve via a synthetic transaction, even if rated. 

Most SME synthetics are executed through the sale of just a first loss and/or mezzanine tranche, because this structure provides the optimal level of capital relief at a cost that makes sense for banks. The exception is smaller EIF deals, which can offer coverage of mezzanine and senior tranches at a price that makes economic sense for banks.

Stelios Papadopoulos

Structured Finance

SCI Start the Week - 15 March

A review of securitisation activity over the past seven days

Last week's stories
Alignment issues
EEM performance concerns emerge
Cladding issues
Fire-safety requirements to have 'marginal' impact on RMBS
CLOs/CBOs solid
US CLO primary rumbles on as CBOs perform strongly
Collection hitch
January NPL collections fall
Strategic expansion
Capital Four answers SCI's questions
Supply fatigue?
European ABS market update
Texas blazes the trail
The first CRT deal from a US regional fires the starting gun
Texas two-step
TCBI's debut is the curtain raiser for a new CRT strategy
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

Other deal-related news

• 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 (SCI 8 March).
• ICE Benchmark Administration has finalised the delay of Libor retirement until mid-2023 (SCI 8 March).
• 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 (SCI 10 March).
• SCIO Capital has launched a new sterling share class within its SCIO European Secured Credit Fund III offering (SCI 10 March).
• 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 (SCI 11 March).
• 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 (SCI 11 March).

Company and people moves

• Ocorian has acquired Emphasys Technologies, a capital markets service provider specialising in tax reporting and calculation agency services to asset-backed transactions (SCI 8 March).
• The European Parliament's Economic Governance Support Unit has published a study on Asset Management Companies 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 at an EU level (SCI 8 March).
• 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 (SCI 9 March).
• Administration solutions provider Crestbridge has opened an office in Ireland and hired Andrea Lennon as director and head of funds, Ireland (SCI 9 March).
• 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 (SCI 9 March).
• Moody's ESG solutions group has appointed Rahul Ghosh to the newly created role of md of ESG outreach and research (SCI 9 March).
• Capital Four has hired Jim Wiant as partner, ceo of Capital Four US and portfolio manager (SCI 9 March).
• Barclays has appointed Steven Penketh as head of securitised products solutions for Europe and the Middle East (SCI 11 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
SCI's 7th Capital Relief Trades Seminar
13 October 2021, In Person Event

Capital Relief Trades

Risk transfer round-up - 15 March

CRT sector developments and deal news

Credit Suisse is expected to close a synthetic securitisation from the Orient programme in 2Q21. The capital relief trade will reference Asian Lombard loans. 

Capital Relief Trades

Risk transfer round-up - 16 March

CRT sector developments and deal news

Last month it was revealed that Deutsche Bank is readying a mid-market corporate capital relief trade for a Maltese bank (SCI 19 February). However, the identity of the issuer has remained a mystery until now. According to multiple sources, the issuer is believed to be MeDirect Bank.

Capital Relief Trades

Greek synthetic debuts

Piraeus Bank finalises capital relief trade

Piraeus Bank has finalised its long-awaited synthetic securitisation with CRC. The approximately €100m financial guarantee references a €1.4bn portfolio of Greek corporate and SME loans and is the Greek market’s first capital relief trade.

According to Holger Beyer, md at Alantra, which acted as arranger on the transaction: “It’s the first synthetic SRT from a Greek bank, so it will open up the market both for Greek and standardised banks, who would like to use the technology for their capital management.’’

The Greek lender will purchase credit protection on a portfolio that corresponds to €800m of risk weighted assets. As a result of this transaction, the bank will release around €100m of regulatory capital.

The deal features a pro-rata amortisation structure, time calls and excess spread that is limited to the expected loss of the portfolio. The trade complies with Article 270 of the CRR, so the bulk (70.4%) of the pool comprises SMEs.

Executing a Greek synthetic securitisation until now has been a difficult proposition, due to asset quality issues and the high cost of protection that rendered deals uneconomical (SCI 14 January). Vasilis Kosmas, partner at Alantra, notes: “Investors react well to asset and data quality amid growing confidence in the Greek economy, following the country’s return to the capital markets.’’

Another driver has been timing. Given another pending non-performing loan cycle after the coronavirus crisis, Greek banks will be utilising synthetic technology to generate enough capital to offload NPLs via outright sales and NPL securitisations. Indeed, Piraeus plans to complete a second transaction in late 2021 to release a further €1.2bn of RWAs.

Stelios Papadopoulos

CMBS

Performance indicators

Footfall data, CMBS spread correlation highlighted

Advan Research Corporation plans to create more sophisticated applications, such as bond calculators, for US CMBS market participants over the next three to six months. The move follows the release of the firm’s CMBS foot traffic counts data product last month (SCI 27 February).

“Our focus at present is on integrating the data with client modelling processes and third-party analytics providers,” confirms Grigorios Reppas, coo at Advan. “The next step after that is to enhance our property-specific analytics and revenue forecasts.”

The firm collects location data - including latitude and longitude, as well as a time stamp of observation - from tens of millions of smart phones across thousands of apps, with each device observed 100 times a day. Reppas notes that this equates to around ten billion data points per day.

Advan then maps company addresses with location data by establishing a geofence around a given property on a point-in-time basis. Once normalised, the data provides insights into footfall at the location on a property, loan and deal level.

Metrics include how many visitors there are to a property, how many remain at the property for over four hours – indicating that they are employees - dwell times indicating how long the visitor stayed at the property, where the visitors are coming from and where they’re going to. This enables Advan to create a scorecard for each building, which provides quantitative insights into its performance on a daily basis. In contrast, occupancy rates for buildings securing CMBS transactions are typically reported once or twice a year.

Reppas attributes the catalyst for the growth of the firm’s CMBS offering to the ‘Covid effect’. “Investors and property operators were searching for insights into how retailers and hotels were performing during the pandemic, as well as for any indications of economic recovery. Since our technology can capture any geographical area – whether it is car dealerships, gas stations or ports – there are many different use cases, including forecasting production rates,” he explains.

The data can also impart early warning signs in connection with delinquencies. For instance, Solve Advisors shared with the firm spreads from the last two years on 200 single-asset/single-borrower CMBS, which - when overlaid with Advan’s foot traffic data – suggested a strong correlation. As foot traffic declined at the underlying properties, the spreads of the associated CMBS widened.

Another example of how the data can be used as a performance indicator emerged last week, when AMC Entertainment Holdings posted better-than-expected revenues of US$162.5m, topping the consensus estimate of US$142.5m and moving in the same direction as Advan's forecasted sales. Revenues were down 89.1% from the prior-year quarter's levels, while Advan captured a decrease in foot traffic of over 79.3% year-on-year.

Advan’s projected attendance was 4.66 million for the quarter and AMC reported attendance of 4.82 million. In fact, the firm states that its footfall data has over a 0.95 correlation with AMC’s top-line revenue on a year-over-year basis over the last 13 quarters.

Corinne Smith

Structured Finance

Defence Bank debuts Aussie RMBS

Sector developments and company hires

Defence Bank debuts Aussie RMBS
Defence Bank (DBL) is prepping its inaugural public Australian prime RMBS, the A$300m DBL Funding Trust No. 1 Salute Series 2021-1. DBL provides financial products and services to members of the Australian Defence Force (ADF), as well as the broader community.

DBL is one of three lenders selected to provide home loans to ADF members under the Defence Home Ownership Assistance Scheme (DHOAS). This scheme, supported by the Commonwealth government and administered by the Department of Veterans' Affairs, subsidises a material portion of monthly home loan interest payments.

Around 75% of loans in the pool are to borrowers who at the time of origination were ‘uniformed’ employees of the ADF. As such, Moody’s notes they have a lower default risk than an average borrower, given their employment stability. Furthermore, 37% of these loans benefit from the DHOAS.

The weighted average scheduled loan to value ratio of the pool of 71% and it has a weighted average seasoning of around 33 months.

As of December 2020, DBL had total assets of over A$2.8bn, with Australian residential mortgage assets representing A$2.3bn.

In other news…

Aircraft ABS issuers to merge
AerCap Holdings has entered into a definitive agreement with General Electric to acquire 100% of GE Capital Aviation Services (GECAS), both regular aircraft ABS issuers. The combined company will have over 2,000 owned and managed aircraft, over 900 owned and managed engines, over 300 owned helicopters and approximately 300 customers worldwide. The combined entity would lease to 25% of the world’s airlines, according to JPMorgan figures.

German CMBS refi prepped
Bank of America is in the market with its third European CMBS in the space of a month, following Taurus 2021-1 UK and Taurus 2021-2 SP (SCI passim). The latest deal, Taurus 2021-3 DEU, is backed by a €497.89m pari passu portion of two cross-collateralised loans together totalling €547.98m.

Both loans are refinancing loans previously securitised in the Taurus 2018-3 DEU CMBS. The largest loan is secured by a mixed-use office and hotel property connected to Frankfurt International Airport Terminal 1. The smaller loan is secured by the corresponding parking complex.

According to S&P, the total market value of the asset is €832.6m, as of September 2020, and the LTV ratio is 65.8%.

MPL acquisition to ‘accelerate’ bank charter
SoFi is set to acquire for US$22.3m Golden Finance Bancorp and its wholly owned subsidiary Golden Pacific Bank, a California-based community bank that is regulated by the OCC. The transaction is expected to complete before year-end, subject to regulatory approvals, and will expand SoFi’s book of assets by US$150m.

Although SoFi applied for a national bank charter with the OCC in October, this acquisition accelerates its route to a bank charter because change of control applications are typically faster to complete than de novo applications. Golden Pacific and its community bank business will continue to operate as a division of SoFi Bank.

Structured Finance

'Unprecedented' Moroccan CRT closed

Sector developments and company hires

‘Unprecedented’ Moroccan CRT closed
Moroccan fertiliser giant OCP Group has subscribed to the notes issued by the first synthetic securitisation in Morocco. The transaction involved the establishment of a collective securitisation vehicle dubbed Fonds Damane Tamayouz, which has been structured to facilitate access to credit for the suppliers that make up OCP's industrial ecosystem.

Clifford Chance, which advised on the deal, describes it as an “unprecedented operation” in Africa. “Morocco has an established and increasingly innovative legal and regulatory financial framework and is now the first African country to facilitate the setting up of guarantee funds that allow banks to transfer credit risk from their balance sheets and thus reduce their regulatory and capital requirements,” the firm notes.

OCP was also advised by CDG Capital and Maghreb Titrisation on the arrangement and financial structuring of the fund.

In other news…

EMEA
British Business Bank has recruited Jeremy Hermant as a senior manager. Hermant was previously a vp in Santander’s private debt mobilisation team, involved in the structuring and issuance of capital relief trades. Before that, he worked at Mariana UFP, AXA Investment Managers, HSBC and IRSAM.

North America
KBRA has appointed Stacie Olivares as its newest independent board director. Olivares is currently serving her first appointment on the CalPERS board of administration. Previously, she was the senior advisor on impact investments and blockchain at the California Department of Insurance, having also served at the California Organized Investment Network, Morgan Stanley and the California Commission for Economic Development.

Structured Finance

Gemgarto delinked from Libor

Sector developments and company hires

Gemgarto delinked from Libor
Kensington Mortgage Company has delinked its Gemgarto 2018-1 RMBS from its tie to three-month sterling Libor by amending the asset, liability and hedge sides of the deal, which matures in September 2065. The changes allow the servicer to gradually migrate the underlying borrowers to an alternative reference rate and away from Libor.

Included in Gemgarto's amendments, the notes' reference rate was updated to compounded daily Sonia from Libor, while the floating leg of the issuer's swap was amended to return daily compounded Sonia instead of Libor. These changes enable the issuer to limit potential future cashflow mismatches, which Moody’s notes is a credit positive.

“Aiding the switching process were clearly drafted mortgage loan contracts that specifically allowed the servicer to substitute the reference rate upon Libor cessation, as well as certain industry and legislative initiatives, such as the Libor Task Force and the Financial Services Bill. Older securitisations containing mortgage loans with less flexible contractual language may not be as easy to transition to a new reference rate,” the rating agency observes.

In other news…

Acquisition
Scope Group has acquired Euler Hermes Rating, a unit of Allianz SE’s credit insurance arm Euler Hermes. Euler Hermes Rating will operate under the new name of Scope Hamburg and is primarily focused on SMEs and infrastructure project finance.

Jumbo MPL ABS completed
Pagaya has completed the largest-ever consumer loan marketplace ABS – the US$900m Pagaya AI Debt Selection Trust 2021-1. Upgrade, Marlette, Prosper and LendingClub are servicers for the deal, marking the first time that Marlette has participated in a PAID transaction. The transaction was multiple times oversubscribed.

North America
Freddie Mac has named board member Mark Grier as its interim ceo. Grier served as vice-chair and board member of Prudential Financial until his retirement in 2019. He joined the Freddie Mac board in February 2020 and will continue to serve on the company’s board during his tenure as interim ceo.

Special situations fund closed
Signal Capital Partners has held a final closing for a new €900m fund targeting European credit and real estate special situations investments, completing the fundraising between August 2019 and February 2021. The fund attracted participation from investors including pension funds, insurance companies, financial institutions and single-family offices across EMEA and North America.

The fund targets transactions of €25m-€75m across Europe and has made seven investments to date, totalling €330m. The aim is to leverage Signal’s network of relationships and proprietary technology to identify credit investments in complex, private bilateral situations and highly illiquid public market instruments.

Signal was launched in 2015 by Elad Shraga, Amit Jain and Gad Caspy, a team of experienced special situations investors who previously led similar businesses at Deutsche Bank. The firm now has total assets under management (AUM) of €1.7bn and employs 32 staff, including 26 investment professionals.

Structured Finance

Chip shortages 'credit positive' for auto ABS

Sector developments and company hires

Chip shortages ‘credit positive’ for auto ABS
Sizable auto production cuts due to semiconductor shortages in the US will provide support for used vehicle values, a credit positive for securitisations and captive auto finance companies, according to Moody’s. The rating agency notes that such shortages – which are expected to last at least into next quarter - could result in North American production falling by 300,000 vehicles or more this year, at a time when dealer inventories are already low. Higher used vehicle values will aid ABS collateral performance and lower deal risks.

Moody’s suggests that transactions poised to benefit from the production slowdown include auto loan and lease, rental car, fleet lease and auto floorplan ABS. Meanwhile, vehicle dispositions from Hertz Vehicle Financing II - which is winding down after its sponsor's bankruptcy (SCI passim) - could slow as a result of the more limited availability of new vehicles to add to the company's fleet.

Chip shortage benefits for ABS and lenders will likely be temporary and modest. “The chip supply situation remains highly fluid, with General Motors Company, Ford Motor Company and other manufacturers taking a range of actions to mitigate the negative effects. In addition, chip manufacturers are aggressively moving to ramp up production. Consumer preferences and the larger size of the used vehicle market than the new vehicle market will also limit the effects,” Moody’s observes.

Fed’s agency CMBS purchases to end
The New York Fed’s Open Market Trading Desk says it will no longer conduct regular operations to purchase agency CMBS at the conclusion of the current schedule, in light of the sustained smooth functioning of the markets. As such, the agency CMBS purchase operation currently scheduled for 23 March is expected to be the last regularly-scheduled purchase operation. However, consistent with the most recent FOMC directive, the desk remains ready to conduct agency CMBS purchase operations as needed.

North America
Scott Bommer has joined Blackstone as cio of the new Blackstone Horizon platform, an initiative being launched by Blackstone Alternative Asset Management (BAAM). He joins Blackstone after managing his family office, having founded SAB Capital Management.

Blackstone Horizon is a new investment business that targets strong absolute returns by investing in and forming strategic partnerships with high-performing investment managers. Bommer will work with BAAM senior management on asset allocation, risk-management, stakes/seeding investing and other strategic initiatives.

PIMCO has promoted a number of its staff to the position of md, including two professionals with securitisation experience. Harin de Silva is a portfolio manager in the firm’s New York office and is responsible for sourcing, underwriting and managing opportunistic specialty finance investments in the US. Prior to joining PIMCO in 2009, he was an md at Merrill Lynch with a focus on structured credit, having previously worked at Credit Suisse and Prudential Securities, focusing on structured finance.

Jason Mandinach is head of alternative credit and private strategies within PIMCO’s product strategy group, based in the Newport Beach office. Prior to joining the firm in 2010, he worked in business development for the Chicago Climate Futures Exchange, having previously been a vp on the agency CMO desk at Bear Stearns.

Structured Finance

MPL acquisition to accelerate auto financing

Sector developments and company hires

MPL acquisition to accelerate auto financing
Upstart Holdings is set to acquire Prodigy Software, a provider of cloud-based automotive retail software. Upstart says it is seeking to reduce the cost of auto financing by creating a modern multi-channel purchase experience. Auto retail is among the largest buy-now-pay-later opportunities, according to the firm, and together with Prodigy it aims to help dealers create a seamless and inclusive experience.

The first AI-enabled auto loan was originated on Upstart’s platform in September 2020. In this initial phase, the lender is enabling consumers to refinance expensive and mispriced auto loans and continues to roll this programme out across the country.

With the acquisition of Prodigy, Upstart will accelerate its efforts to offer AI-enabled auto loans through the tens of thousands of auto dealers nationwide, where the majority of auto loans are originated.

Prodigy provides end-to-end sales software that bridges the gap between how dealerships operate and the new way that people are shopping for cars. More than US$2bn in vehicle sales have been powered by Prodigy at franchised dealers from top brands, such as Toyota, Honda and Ford.

The transaction is expected to close in 2Q21, subject to customary closing conditions.

In other news…

EMEA
Credit Suisse has named Ulrich Körner ceo, asset management and a member of its executive board, effective 1 April. From that date, the asset management business will be separated from the international wealth management division and managed as a new separate division.

Körner will report directly to the group ceo, Thomas Gottstein. The current global head of asset management, Eric Varvel, will work alongside Körner in the coming months to facilitate the transition and will then focus on his other roles as ceo Credit Suisse Holdings (USA) and chair of the investment bank. Philipp Wehle will continue to lead the international wealth management division as a member of the executive board. 

Körner most recently served as senior advisor to the ceo of UBS Group from 2019 to 2020. Prior to that, he served as ceo of UBS Asset Management from 2014 to 2019. He was previously an executive at Credit Suisse and held roles that included cfo and coo of Credit Suisse Financial Services and ceo Switzerland.

The move follows Credit Suisse Asset Management’s recent announcement that it is winding down its managed supply chain finance funds.

Zenith Service has appointed Stefano Corbella as head of real estate and UTPs, with responsibility for real estate and unlikely-to-pay stranded credits. Corbella has 20 years of experience with a career that began at Ernst & Young Consultants, then continued with Pirelli Real Estate, FBS RE (now IFIS NPL) and Duff & Phelps REAG, dealing mainly with debt restructuring of real estate companies and NPL and UTP transactions.

At Zenith Service, he will bridge the consolidated services of the firm dedicated to credit securitisations and those recently developed, including real estate securitisation vehicles pursuant to Article 7.2 of Italy’s Law No 130/99.