Contents

RMBS

Robust sentiment

Positive outlook for Dutch RMBS market

Sentiment in the Dutch RMBS market remains robust, according to panelists in a recent DBRS Morningstar webinar. While government support has been helpful in shoring up the sector during the Covid crisis, inflation is a growing concern among market participants.

“House prices didn’t fall as widely as expected during the pandemic,” said Ketan Thaker, svp and head of European RMBS and covered bonds at DBRS Morningstar. “That might be because of all the government support ensured negative outcomes never materialised. Jobs were preserved and people’s appreciation for their homes was greater, as people were locked in.”

Nevertheless, Covid-19 has meant that people appreciate being in the centre of the city with more space. Thaker explained: “Looking at historic house price movements, apartments have done quite well, due to the phenomenon of people moving to larger city centres. Apartments have clearly outperformed other property types; we will have to wait to see whether this will continue. This trend may change going forward and we may see a shift there.”

Meanwhile, the buy-to-let investment market in the Netherlands has been growing strongly (SCI 26 January). But given the limited supply, there is a reasonable amount of political pressure to pursue policies for those who need houses, rather than those who want to invest in them.

For example, the residential real estate transfer tax was raised from 2% to 8%, effective from 1 January 2021. “We have seen that due to tax changes, the number of people buying properties for investment increased towards the end of last year in the Netherlands,” Thaker observed. “We are still to see a lot of hard data, but I expect to see a dip in investment activity in the new year, given what happened in the UK when tax changes were introduced. Instead, I think there will be more first-time buyers coming into the market.”

Overall, Gordon Kerr, svp and head of structured finance research at DBRS Morningstar, said: “The economy has been performing well. Dutch unemployment levels prior to the pandemic were steadily decreasing, but have spiked upwards.”

He added: “There has been a degree of recovery in terms of unemployment. There is positive economic activity as lockdowns have come to an end and employment is picking back up.”

Government support levels are “helpful”, but Kerr is keeping a close eye on how the situation develops over the coming months. In particular, inflation is a growing concern among market participants.

He concluded: “We have seen signs of inflation creeping up and many think it will be temporary. But when we look at Europe, the Netherlands is one of the countries at the high end of the inflation uptake. While this is a concern, it is a positive sign of momentum that we will be watching over the coming months.”

Angela Sharda

ABS

Servicing hitch

Italian NPL ABS collections drop

Median gross collections for Italian non-performing loan securitisations in 2020 were 21% lower, compared to 2019, according to the latest estimates. The situation is further complicated due to a ban on evictions that will slow cashflows for some months. However, note sales could partially compensate for delays in judicial recoveries (SCI passim).

Starting over a year ago, European governments imposed a series of nationwide measures to contain the spread of Covid-19. Court appraisals, property inspections and auctions were frozen and had to be rescheduled, creating an additional backlog of legal proceedings that has not yet been fully resolved.

As a result, gross recoveries for NPL securitisations have slowed down. According to Moody’s, median gross collections for Italian NPL ABS deals were 21% lower in 2020 - with most down by more than 10%, but some by as much as 50%.

During lockdown, servicers managed to achieve some collections from cash-in-court proceeds that were in the pipeline. Even where courts are now operating, the backlog of legal proceedings has increased, exacerbated by measures such as prohibitions on evicting individual borrowers from their primary residence.

Additionally, social risk - especially for housing - is gaining relevance for policymakers, raising the prospect of a longer-term erosion in creditor rights. “In most markets and because of reputational risk, servicers will rely less on repossessions and more on forbearance, which can extend recovery timelines and reduce the incentive for private-sector investment,’’ says Moody’s.

Consequently, the rating agency expects slower cashflows for some months. But Moody’s qualifies that note sales partially compensate for the delays in judicial recoveries and the firm will continue to assess the use of this strategy and whether faster collections are achieved at the cost of lower recoveries.

Nevertheless, the coronavirus crisis is not affecting all asset types in the same manner. For example, the increase in e-commerce because of lockdowns is positive for light industrial buildings that can be transformed for logistics use. Prime logistics properties and supermarkets have low vulnerability to pandemic stresses.

Stelios Papadopoulos

ABS

Benchmark issuance

PPC finalises NPL ABS

Greece’s Public Power Corporation (PCC) has finalised a €325m non-performing loan securitisation backed by 90 days past due receivables. Such a benchmark transaction is highly unusual for a corporate entity and paves the way for future NPL ABS to be issued in Greece.  

The landmark transaction has a total duration of five years and includes a two-year replenishment period. PCC’s securitisation journey began in 2017 when a consortium led by Finacity and Qualco was tasked with creating a solution to enhance the power company's working capital and enable it to manage the arrears of its clients (SCI 19 December 2017).

Finacity conducted a feasibility study to evaluate the extent to which PPC would be able to raise funds using its receivables portfolio as collateral, while Qualco was responsible for the portfolio management and debt servicing of current, non-current and non-performing receivables. Indeed, Qualco will act as servicer on the resultant deal.

The rationale for using securitisation has typically been the diversification of funding sources and the flexibility that the technology offers in terms of maximising recoveries.

Stelios Papadopoulos

Structured Finance

Shifting trends

Differing ESG impacts on credit quality considered

ESG considerations pose higher credit risk to certain securitisation asset classes and certain global regions, with evolving regulations and shifting consumer demand exposing transactions to potential declines in asset values or cashflow. Nevertheless, structural features, short loan tenors and asset diversification can help minimise such credit negative effects.

ESG credit considerations include a broad range of qualitative and quantitative aspects that have a material impact on a transaction's credit quality. Moody’s notes that environmental considerations encompass environmental hazards and the credit consequences of regulatory or policy initiatives that seek to reduce or prevent hazards.

Social considerations address the risks to, and potential benefits for, a transaction's credit quality as a result of its interactions with or dependencies on employees, customers, supply chain partners, counterparties and society at large. Finally, governance relates to the framework and processes through which decisions are made and related actions carried out.

“Environmental and social risks vary across structured finance asset classes, reflecting the sector's diverse array of transaction types and assets. Governance considerations, in contrast, are generally issuer-specific,” says Moody's vp Inga Smolyar.

For securitisations, alignment of interests, the strength of asset quality and amendment controls laid out in the transaction documentation and transaction parties' adherence to the documentation are critical to governance. As such, they do not lend themselves to sector-level analysis.

Meanwhile, transactions are more likely to feature moderate social risk than moderate environmental risk, given that social risks represent a broader range of considerations.

Roughly two-thirds of the approximately US$4trn of outstanding structured finance debt rated by Moody’s belongs to sectors that feature low environmental risk and moderate social risk, according to the agency. Most of the remaining rated structured finance debt outstanding is represented by sectors with low environmental and low (or uncategorised) social risk.

The agency reports that the only sector that faces high social risk, FFELP student loan ABS, represents about 2% of structured finance debt outstanding. The three sectors with moderate environmental risk – aircraft ABS, tobacco settlement ABS and project finance/infrastructure CDO/CLOs - represent less than 1% of outstanding rated debt.

Nevertheless, securitisation collateral that is the target of emissions standards and other environmental rules face asset value risk. Similarly, severe weather resulting from climate change can damage asset values and lead to disrupted collections that weaken transaction performance. Further, evolving policies, litigation and shifting consumer demand expose transactions to cashflow disruptions.

“Our evaluations of overall risk levels can change over time as trends change and our assessments of their credit impacts evolve. For example, social risk in RMBS could be lower than the ‘moderate’ score we last published in 2019, given effective mitigants to the credit impact of broad societal trends on RMBS,” Moody’s concludes.

Corinne Smith

Structured Finance

SCI Start the Week - 12 April

A review of securitisation activity over the past seven days

Last week's stories
Collection boost?
NPL sales increase pending amid uncertain timing
Inclusive approach
ABCP to facilitate sustainable asset transition
Positive prospects
Margin loan CRTs on the agenda
Pockets of value
Patient investors can find bargains in depressed CMBS sector
No area of the US securitisation market has been as severely punished by the events of the last year as the CMBS market, and prices for large quantities of bonds incorporating hotel, office space and retail assets have fallen off a cliff. Yet, amid the general maelstrom, there are rich rewards for the discerning investor.

"Within the CMBS fallout, there are pockets of value. The key is to find a bond which is unloved but investor friendly," explains Karlis Ulmanis, portfolio manager at Dupont Capital. Ulmanis manages a $800m structured finance and RMBS portfolio. 

For example, only a couple of weeks ago, Ulmanis was able to pick up a split rating BBB/BB legacy CMBS bond with a price discount of some 15% and yields approaching 20%. Pre-Covid, he estimates that this deal would have yielded in the region of 3% or 4%.

Moreover, the weighted average life of the note is only 18 months, so the value of the price discount is realised very quickly. The defeasance was 20%.

The transaction incorporated 32% retail assets, 15% office space assets and 8% hotel assets, so clearly there risk was entailed. Nonetheless, all collateral was current, there had been no delinquency for four years and the average LTV was 55%.

"This bond was very appetising. I look through 18 to 20 bonds before I find one that I like. This was a really clean bond, and even after running stress tests and reducing collateral by 48%, there were no losses," he says.

As a rising tide lifts all boats, a falling tide drops all boats, and quantities of perfectly good CMBS bonds have been depressed by the negative press the sector has received. Morgan Stanley reported last week that CRE transaction volumes decreased by 59% YoY in February and 53% on a YTD basis. Office, industrial, retail, apartment and hotel volumes declined by 71%, 69%, 66%, 33% and 49% YoY respectively.

It was also reported last week that the Houston hotel market has suffered a dramatic reverse and grave uncertainty faces many properties which back numerous CMBS deals. This is not an outlier, but  representative of the difficulties faced by the sector across the country.

Asset managers are trying to offload large quantities of deals with substantial hotel, retail and office collateral which are then offered into the secondary market by boutique brokers. It is here that the bargains can be found, but investors have to be careful and sift through the yards of poor quality assets.

"I've seen a lot of brokers trying to unload their stuff. The thing is, there is some really bad stuff out there and you have to pick through it," says Ulmanis.

But, within the acres of toxic waste, it is possible to find conduit deals which enjoy a good track record, robust credit enhancement and healthy debt service coverage ratio. These transactions have become undervalued in the sell-off.

He also believes that the mall sector is due for a revival as vaccinations become more widespread and the country emerges from lockdown. While the revival might be only short-lived as long-term structural issues could erode profitability, there may well be a 2021 bounce which will lift currently undervalued CMBS transactions with lots of mall assets.

"As Covid subsides, I expect a temporary uptick, especially in malls. People want to get out and go to the mall, to see things and see people. Longer term, however, they might have problems," he says.

Simon Boughey

Other deal-related news

• The Securitisation Capital Markets Recovery Package measures have been published in the EU Official Journal, meaning that the STS synthetics framework and improved non-performing loan ABS rules will come into force on Friday (SCI 6 April).
• Judge Maryellen Noreika of the US District Court for the District of Delaware has dismissed a lawsuit brought by the CFPB against National Collegiate Master Student Loan Trusts, finding that the suit was constitutionally defective due to the CFPB's untimely attempt to ratify the prosecution of the litigation in the wake of the Supreme Court's decision in the 'Seila Law LLC v. Consumer Financial Protection Bureau' case (SCI 6 April).
• Colony Capital subsidiary CLNC Manager has signed definitive agreements with Colony Credit Real Estate to consensually axe their management agreement (SCI 6 April).
• A sum of eight new GACS non-performing loan securitisations priced in late 2020, with a cumulative balance of €3.4bn (securitising a cumulative original GBV of €13.4bn of NPLs), according to JPMorgan's latest Italian NPL Performance Tracker report (SCI 7 April).
• The growth of ESG investment criteria will have limited impact on CLOs and manager flexibility, according to a new report from Moody's
• LocalTapiola Finance is in the market with a rare Finnish prime auto ABS, dubbed LT AutoRahoitus or 'Tommi 1' (SCI 7 April).
• UK Mortgages has signed a new warehouse facility - called Cornhill Mortgages No.7 - arranged by Santander to fund the forward flow purchases of newly originated buy-to-let mortgage loans under the company's ongoing arrangement with Keystone Property Finance (SCI 7 April).
• Banco delle Tre Venezie has amended its Magnolia BTV securitisation to provide for the transfer of an additional €140m portfolio to the SPV, financed with a further issuance of €116m class A and €24m class J notes (SCI 7 April).
• DBRS Morningstar has taken rating actions on 50 European securitisations, following the finalisation of its European legal criteria (SCI 7 April).
• Brighten Home Loan is readying its inaugural RMBS - the A$250m Solaris Trust 2021-1 - which is backed by loans predominantly to non-Australian resident borrowers (SCI 8 April).
• STS Verification International has developed a new verification report template and introduced an amended fee schedule to reflect the specifics of on-balance sheet synthetic securitisations, in light of the publication of the new STS Regulation and CRR amendments in the EU Official Journal (SCI 8 April).
• illimity Group asset management company illimity SGR has completed the first closing of its illimity Credit & Corporate Turnaround fund, dedicated to investments in unlikely-to-pay loans to SMEs with revival and relaunch prospects (SCI 9 April).
• The number of mortgages in forbearance dropped in the last week by the biggest amount in six months, according to Black Knight
• The US securitisation industry has welcomed the signing into law by New York governor Andrew Cuomo of a new statute that should ease the transition from Libor to SOFR for contracts governed by New York law (SCI 9 April).
• Marston's reports that it has secured waivers and amendments to its bank, private placement and securitised facilities for the financial periods up to and including 1 January 2022 (SCI 9 April).

Company and people moves

• Peter Hancock has joined the board of ILS marketplace Ledger Investing (SCI 6 April).
• Ira Reid has joined McLaughlin & Stern as special counsel to the bankruptcy and restructuring group (SCI 6 April).
• Morgan Lewis has strengthened its structured transactions practice with the addition of partners Steven Becker and Alex Velinsky, who will be resident in New York and Washington, DC respectively and arrive from Hunton Andrews Kurth (SCI 6 April).
• Stuart Kovensky has stepped down as Onex Credit's co-ceo and cio, but will remain on the firm's board. Co-ceo Jason New has been named head of Onex Credit as a result (SCI 6 April).
• Channel Capital Advisors has appointed Ian Watson as group coo, reporting to Walter Gontarek, ceo and chair (SCI 7 April).
• Winstead has promoted nine associates to of counsel, including Erika Larson and Norene Napper (SCI 7 April).
• Digital-lending platform auxmoney has secured a €250m investment for its marketplace loans from Citi and Chenavari Investment Managers (SCI 8 April).
• Elementum has promoted Lynette Pirilla Walter to chief legal officer (SCI 9 April).
• Additionally, Elementum (Bermuda) has recruited John Drnek as general counsel (SCI 9 April).
• US Bank has promoted John Stern to president of its global corporate trust and custody business, within the firm's wealth management and investment services unit (SCI 9 April).

Data

Recent research to download
The Collins Amendment - March 2021
CRT 2021 Outlook - March 2021
Synthetic RMBS - March 2021
CLO Case Study - Spring 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

Leverage boost

Dual-tranche SRT prepped

Credit Suisse is marketing a synthetic RMBS dubbed Elvetia Finance Series 2021-1. The capital relief trade is a refinancing of a 2018 deal, but unlike the previous one, the new transaction has been sliced into a mezzanine and junior tranche.

The original transaction, named Elvetia Finance Series 2018-2, was a Sfr300m CLN that referenced a Sfr5bn Swiss mortgage portfolio (see SCI’s capital relief trades database). The new structure splits the tranche into a Sfr100m mezzanine and a Sfr200m junior piece.

The tranches amortise sequentially following a three-year replenishment period. Further features include 20% risk retention, which is standard practice for Elvetia transactions.

The rationale for splitting the tranches is twofold. First, Credit Suisse as the originating bank benefits from the lower mezzanine pricing that insurers are willing to offer.

Second, the thinner first loss piece boosts leverage and hence returns for junior tranche investors. The slicing of the junior tranche - or ‘re-tranching’ - is a technique that Credit Suisse first implemented (SCI 26 January 2018).   

The transaction follows a rise in synthetic RMBS issuance last year from banks including Lloyds and Raiffeisen. Synthetic RMBS can’t typically be justified from a cost of capital perspective, given the low risk weights of the asset class, but they can work if the volumes are sufficiently large or if originators are seeking to hedge risk limits in order to expand their lending capacity (SCI 3 March).

Stelios Papadopoulos

Capital Relief Trades

Risk transfer round-up - 12 April

CRT sector developments and deal news

Credit Agricole is believed to be readying a corporate capital relief trade that is expected to close this year. The bank’s last corporate SRT was finalised last year (see SCI’s capital relief trades database).

Capital Relief Trades

Risk transfer round-up - 14 April

CRT sector developments and deal news

Credit Suisse has closed an innovative bilateral significant risk transfer transaction. The deal references a portfolio of predominantly sub-investment grade corporate loans that were originated by Credit Suisse’s Swiss Corporate Bank and provided to Swiss and European companies.

Given single name concentrations of up to 3%, the transaction comprises a thick equity tranche between 20% and 30% and features a unique FX-management structure. Credit Suisse aims to ramp up the portfolio over three years to a target size of €1bn.

The bank intends to issue another similar transaction in Q3.

Capital Relief Trades

Trailing Texas

Banks with large warehouse loan books set to follow TCBI

Regional banks with large warehouse mortgage lending books will be soon following the lead of TCBI in the CRT market, suggest analysts that follow the sector closely.

In particular, First Horizon, headquartered in Memphis, Tennessee, Flagstar Bank, based in Michigan, Texas-based Independent Bank Corporation and Veritex Community Bank, headquartered in Dallas, Texas, have been singled out as especially likely suspects.

“I bet we see some others explore something similar to TCBI. Any bank with a larger mortgage warehouse I believe could all explore a CRT deal like TCBI,” Brady Gailey, md of equity research at boutique investment bank Keefe, Bruyette and Woods, in  Atlanta, told SCI.

He adds that TCBI was always a likely candidate for the debut regional bank CRT transaction in the US as warehouse loans constitute around 40% of all assets. According to data from Inside Mortgage Finance and quoted by S&P Market Intelligence, the most active warehouse lenders in 4Q 2020 were JP Morgan, Flagstar, TIAA Bank of Jacksonville, Florida, Merchants Bank of Indiana and Wells Fargo.

Mortgage warehouse loans carry a 100% risk weighting under the standardized approach to RWA rather than the 40% or 50% risk weighting ordinary home loans carry, so there is every incentive to package them into CRT deals. Moreover, loss rates in the warehouse loan market are very low as banks generally fund the underlying mortgages for only a few weeks before selling on the loan.

TCBI’s CRT deal was a three-year CLN paying Libor plus 450bp on a $2.2bn portfolio of mortgage warehouse loans, with a first loss position of $275m, or 12.5%. This first loss tranche was risk weighted at zero, while the remaining $1.925bn of loans carries a risk weighting of 20%. Thus, the risk weighting on the entire pool of $2.2bn drops from 100% to 17.5%, reducing RWA by $1.815bn.

According to analysis carried out by Keefe, Bruyette and Woods, this drastic reduction of risk weighting will have boosted TCBI’s Tier One capital ratio by 73bp from 10.92% to 11.66% while total risk-based capital ratio will have increased by 85bp from 12.76% to 13.61%.

This significant creation of excess capital could be used to increase the size of the mortgage warehouse by up to $500m, suggests the research report.

Simon Boughey

RMBS

Income opportunities

Clayton Triick, CFA, senior portfolio manager at Angel Oak Capital Advisors, answers SCI's questions

Q: How and when did you become involved in the securitisation market?
A: Angel Oak Capital Advisors has a long history within the US securitised markets. Originally as a distressed credit investor during the global financial crisis, Angel Oak was able to invest capital targeting deeply discounted private-label RMBS.

As markets continued to improve over the subsequent decade, we were able to bring the talented portfolio management team to the mutual fund world by creating a series of open-end funds targeting primarily US securitised assets. These funds fill a specific void in the mutual fund marketplace by investing within institutionalised assets and helping investors earn attractive income with a modest correlation to traditional fixed-income markets.

Alongside the build-out of the mutual fund strategies, Angel Oak invested in the re-emergence of the private-label RMBS asset class, specifically sectors within non-QM and post-crisis mortgage credit. Various sectors of mortgage credit look very different than they did during the pre-financial crisis era and Angel Oak helped drive the standardisation of new-issue mortgage credit. The firm is one of the top originators of non-QM loans and established a best-in-class mortgage trust series, Angel Oak Mortgage Trust.

Q: What are the firm’s key areas of focus today?
A: There are significant opportunities still available within US securitised markets. In short-duration markets, a combination of RMBS, ABS, CLOs and agency-backed bonds provide elevated income and limited volatility in 2021.

Spreads are still attractive, as many markets have not fully recovered from the Covid-19 shock. Investors are in need of yield in this low interest-rate world, particularly in areas with less duration risk.

Total cash within money market funds is still above the global financial crisis peak, creating a largely unmet need for short-duration income north of money market yields. In our view, traditional short-duration markets are not offering enough yield per unit of risk. Within securitised markets, we have positioned portfolios to produce a higher level of income while there is still limited expected market volatility.

Q: How does the firm differentiate itself from its competitors?
A: The asset management team is a diverse and deeply experienced group that integrates multiple areas of structured-credit security analysis, including origination, securitisation, servicing, secondary market trading and portfolio management. Risk management practices are strongly embedded in the firm’s processes, which drive long-term performance by maintaining consistency in fundamental analysis and best execution.

Angel Oak Capital Advisors manages various fixed-income funds, including private hedge funds and public mutual funds. Angel Oak Capital Advisors’ independence, mortgage expertise and market intelligence create a significant differentiation within the asset management industry.

The team’s deep experience in evaluating the multiple levels of risk inherent within structured credit is a result of cumulatively managing more than US$25bn of similar RMBS, CMBS, CLOs and ABS at prior firms. This level of structured-credit expertise at a fee-based asset management company is very unique in the industry. The degree of detailed analysis conducted by portfolio managers enables the firm to achieve attractive risk-adjusted total returns.

Our team has significant experience and expertise in origination, sourcing, structuring and underwriting within fixed income generally and structured credit, in particular. Our team has been in the market consistently since the mid-1990s, developing deep industry relationships spanning many counterparties and market participants. These relationships facilitate security sourcing and best execution to enable alpha creation.

Q: What is your strategy going forward?
A: The investment team continues to believe the mortgage and consumer credit markets remain very attractive. Limited supply within US residential housing, alongside significant fiscal stimulus for US consumers, continues to bolster the positive credit fundamental views within these markets.

Income should be king in 2021 and beyond. For income-focused investors, we overwhelmingly favour short-duration opportunities in US structured credit backed by residential mortgage and consumer collateral, select high-yield issuers, select CLO tranches and financials rather than longer-duration areas of fixed income.

We remain cautious about non-agency CMBS due to structural changes to the commercial real estate market as a result of Covid-19. We remain focused on higher-quality subsectors within CMBS and are avoiding risk down in the capital structure.

Not only will income be a critical component of total return in the coming year, but less interest-rate sensitivity at the long end of the curve will also be a differentiating factor, considering the brisk growth ahead.

Q: Which challenges/opportunities do you anticipate in the future?
A: Looking forward, many uncertainties continue to surround Covid-19. Will the vaccines be as effective in a massive, nationwide inoculation campaign as they have been in clinical trials? Will a new strain of the virus make current vaccines irrelevant? Questions like these could be subject to debate for years within the health care and economic arenas.

What we do know is that fiscal and monetary policy is here to support the US economy. So far, the data has been quite strong related to vaccine effectiveness, while fiscal policymakers have created so much stimulus that consumer spending and savings rose above pre-Covid levels. The support from both Congress and the Fed cannot be understated.

This policy support has provided a powerful tailwind to the reopening of the US economy and the consumer is in excellent shape. Credit markets within housing and the consumer performed well throughout the pandemic and have truly shined as the markets recover. Home prices rose by approximately 10% in 2020, a stark contrast to the circa 40% drop following the Great Recession of 2008.

As we position our portfolios within value-driven securitised credit for the future, we see many markets are still recovering from the Covid-19 macroeconomic shock. The short pause in capital markets activity in early 2020 initially created significant secondary market opportunities in US credit securities. As markets have begun to normalise in early 2021, we are looking across the global opportunity set to find high income over the next two to five years.

We see opportunities within both liquid and illiquid markets of securitised credit. In the liquid space, a targeted mix of housing and consumer credit within opportunistic allocations of discounted CLOs provide high income with upside price-return potential as the economy reopens.

Mark Pelham

Structured Finance

Multi-dealer CLO platform unveiled

Sector developments and company hires

Multi-dealer CLO platform unveiled
Citi and Bank of America have announced they are working together on building a new data and execution platform, initially focused on CLOs and syndicated loans. The proposed multi-dealer platform, which is currently in a testing phase, is expected to launch later this year.

BofA and Citi say they initiated the project to address challenges seen throughout the fixed income markets for both dealers and the buy-side – including efficiency, liquidity and cost of execution – and lead the sector’s switch to electronification. The venture ultimately plans to develop into an independent industry-wide trading, data and analytics platform for all structured credit and underlying collateral markets.

In other news…

Auto loan refi partnership agreed
SoFi has launched auto loan refinancing services in partnership with auto fintech start-up MotoRefi through its network of trusted lenders. The move allows borrowers to choose from a selection of pre-qualified competitive offers that fit their financial situation and goals, quickly. It also enables borrowers to view determine eligibility without any impact to their credit score.

CRE servicing tie-up
Mission Peak Capital (MPC) has made a significant financial investment in the US operations of Mount Street Group. Mount Street is seeking to grow its US presence while providing more customised, bespoke servicing by leveraging MPC's understanding of commercial real estate cycles. Together, the companies are aiming to lead the industry in high-touch servicing, combined with a holistic perspective of a commercial real estate investment's lifecycle. 

The partnership will expand beyond its Atlanta and New York offices and add up to 20 new, seasoned servicing and asset management professionals in Atlanta and its new office in Kansas City. 

Digital bank acquired
Avant has acquired Zero Financial and Level, the company's neobank and banking app assets. The move will enable Avant to expand its reach by offering best-in-class digital banking experiences to US consumers.

Level's branchless, all-digital platform focuses on the customer experience. It was built in-house by a team of engineers, product designers and others who will join Avant and continue development, fully integrating deposits into Avant's suite of digital banking and credit products.

EMEA
Privatam is adding to its investment solutions team with the hire of Jason Rodrigues as sales director for the Southern African market, based in the firm’s Zurich office.

Rodrigues was previously associate principal for Standard Chartered Bank in South Africa. He has over 10 years of experience working for a number of financial institutions, such as Investec and Absa Capital, in South Africa in structuring and sales roles.

Esoteric finance team formed
DBRS Morningstar has launched a new dedicated esoteric finance team. With a global and cross-sector mandate, the team will focus on esoteric and innovative finance transactions in evolving asset classes, industries and risk areas that haven’t been the focus of credit ratings before.

The approach will consist of a cross-franchise team with known specialists from the agency’s corporate credit, non-bank financial, legal and credit policy units, as well as experienced analysts from various structured finance asset classes. The initiative is overseen by Chuck Weilamann, chief credit officer, and is consistent with the agency’s mission to bring more analytical transparency, diversity of opinion and investor-oriented responsiveness to the marketplace.

HVF II ratings affirmed
Fitch has affirmed and removed its rating watch negative placement on the outstanding ratings of the rental car (RC) ABS issued by Hertz Vehicle Financing II (HVF II), reflecting Hertz’s ongoing management of its business and fleet through Chapter 11 bankruptcy. The class A note ratings have been assigned a stable rating outlook, while the class B and C note ratings have been assigned a negative rating outlook. The class D notes are currently rated triple-C and do not have an outlook.

Fitch notes that the performance metrics of the HVF II ABS fleet remain in line with its expectations. The rating actions nevertheless encompass the current challenging coronavirus environment and unprecedented impact on the travel sector, including rental car demand, which remains a risk for the ABS notes.

The ratings cover US$2.47bn of outstanding ABS notes issued from 11 HVF II series, which have amortised down in the past 10 months from the US$6.04bn original balance, since the company declared bankruptcy in May 2020. The class A notes have thus far received all principal paydown and now stand at less than 25% of their original balance, thus benefitting from notably higher credit enhancement (CE) as a percent of total assets versus in 2020 and initially at close. All series class A notes have 60%-65% CE today, in some cases nearly double or more enhancement versus closing levels.

The class B, C and D notes remain at 100% of their original balance and have lower relative enhancement levels that have not increased materially, when compared to Fitch's base-case scenario.

Although it is yet to be approved by the court and shareholders, Hertz’s emergence from bankruptcy is expected to occur earlier than the previously planned 30 September 2021 date implied by its debtor settlement agreement (SCI passim).

Infrastructure data offering enhanced
Fitch Solutions has released enhanced infrastructure key projects data (KPD), together with a project risk metric that enables users to quantify and gauge infrastructure project completion risk. The KPD is part of the Fitch Solutions country risk and industry research service and provides project information for 36,000 energy, utilities, transport and social infrastructure projects with a combined value of US$17trn.

The KPD covers infrastructure projects across 200 markets and gives users access to crucial information, including construction status, timeframe, cost and key stakeholders for each project. The project risk metric draws on the country risk and industry research team's data, forecasts and analytics to quantify the likelihood of a project moving through the lifecycle phases to reach completion in a timely manner.

Other enhancements to the KPD include more granular data for project sub-sectors, new dashboards and project pages, advanced search functionality, regional project pipeline reports and excel add-in capabilities.

North America
Horseshoe has appointed Kathleen Faries as its new ceo, effective on 15 April. Based in Bermuda, she will work closely with Andre Perez, the founder and current ceo of Horseshoe. Following a short transition period, Perez will assume the new role of executive chairman, acting as an advisor to the business, with a focus on strategic business opportunities and mergers and acquisitions.

Faries was previously the head of Tokio Millennium Re, Bermuda. She has more than 30 years of experience in the re/insurance and ILS industry, across property and casualty broking, captives, underwriting and insurance management.

Synthetic notification templates released
ESMA has published interim STS notification templates for synthetic securitisations following amendments to the Securitisation Regulation (SECR). The interim templates allow originators to notify ESMA of synthetic securitisations that meet the STS criteria. As with traditional securitisations, only those synthetic securitisations that meet pre-defined STS requirements will be published on ESMA’s website.

Until the date of the application of the Regulatory Technical Standards (RTS) specifying the content and the format of STS notifications for synthetic securitisations, originators can make the necessary information available to ESMA in writing during the interim period. The interim STS notification templates may be used by originators on a voluntary basis, which may be subject to possible changes following the entry into force of the RTS.

Structured Finance

Green auto feasibility assessments underway

Sector developments and company hires

Green auto feasibility assessments underway
CO2 emissions data reporting by auto loan lenders is likely to be crucial to classifying auto loan securitisations as ‘sustainable’ or ‘green’, in order to tap demand from ESG-oriented investors, Fitch says. However, the rating agency notes that discussions with lenders imply that creating the basis for detailed CO2 emissions reporting is challenging, as the relevant information is typically stored in different systems from those used by the lender.

For captive lenders, this means the related manufacturer’s systems. For non-captive lenders financing a wide range of car brands, accessing information would be even more cumbersome and will partly depend upon dealers correctly inputting vehicle emissions data at the point of sale.

Nevertheless, some captive lenders have begun feasibility assessments on reporting their asset portfolio’s emissions by connecting their own systems and those of their related manufacturer, often in response to investors requesting ESG-related information, including emissions data. Non-green auto ABS may ultimately see lower investor demand, a factor which Fitch expects will significantly influence auto loan lenders’ efforts to introduce reporting disclosures.

Emissions reporting will be further incentivised by European regulators’ response to the European Commission’s call for advice on disclosure by credit institutions of economic activities that qualify as environmentally sustainable in accordance with the draft EU Taxonomy. To be considered ‘green’, an auto loan needs to come under the category of ‘funding taxonomy relevant sectors’, as set out in the draft EU Taxonomy’s first two defined objectives on climate change mitigation and adaptation.

The Technical Annex by the EU Technical Expert Group on Sustainable Finance, published in March 2020, does not explicitly define the requirements for a green vehicle loan. However, various elements in the report are linked to the EU Clean Vehicle Directive, which provides clear guidance for low- and zero-emission vehicles (LZEV).

Until end-2025, vehicles emitting less than 50g/km CO2 will be considered LZEV, but from 2026 only zero-emission cars will qualify. Fitch expects this to form the basis for the definition of a green auto loan that could be considered in a bank’s green asset ratio.

Furthermore, by November the EBA will draft a proposal for the integration of sustainability aspects into securitisation regulation, which should add clarity on originators’ reporting requirements and other factors for securitisations to be considered sustainable. This could eventually result in favourable capital treatment for sustainable securitisations, although Fitch does not expect this to occur any time soon.

HNWI allocation disclosed
Connection Capital has raised a £3m commitment to allocate to SCIO Capital’s European Secured Credit Fund III. Connection Capital’s high net-worth clients were able to invest in units of £25,000.

North America
Bellwether Asset Management has hired Cara Leonard-Munn as svp, debt asset management. Munn will be responsible for leading the Bellwether debt asset management team, which oversees a wide variety of real estate debt investments, both private loans and public securities. She joins Bellwether from CBRE, where she provided structured finance advisory services.

Lafayette Square has appointed Seren Tahiroglu as cfo of its credit strategy, overseeing the platform’s accounting and financial reporting functions. Tahiroglu has over 14 years of public accounting experience, primarily focused on the financial services industry. He spent the last 10 years at Ernst & Young, where he was most recently a senior manager in the wealth and asset management audit practice, specialising in serving both traded and non-traded BDCs, private equity funds and credit funds.

Structured Finance

Second IIG exec charged with fraud

Sector developments and company hires

Second IIG exec charged with fraud
International Investment Group (IIG) managing partner and coo Martin Silver has pled guilty before US District Judge Alvin Hellerstein to investment adviser fraud, securities fraud and wire fraud offenses in connection with an over US$100m scheme to defraud IIG’s investment advisory fund clients and investors (SCI 29 January). In connection with his plea agreement, Silver has also agreed to cooperate with the government’s ongoing investigation. Sentencing before Judge Hellerstein has been scheduled for 16 November.

In other news…

North America
Andy Phelps has joined Lafayette Square as md, head of capital markets. He was previously head of structured product business development at Black Diamond Capital Management and has also worked at Natixis, Stifel, Merrill Lynch, Goldman Sachs and JPMorgan.

Search and surveillance platform Pre-Rec has appointed securitisation industry veteran Saul Sanders to its board of strategic advisors. In this role, Sanders will advise on business development and strategy. He is a retired founding partner, board member and co-ceo at Shellpoint Partners and has previously served at New Penn Financial, C-BASS, Goldman Sachs and Citi.

EMEA
Trade finance boutique CFE Finance has strengthened its UK team with two new recruits. Anna Sizova joins the firm as svp in emerging markets trading and portfolio management, while Marina Ryabokon joins as svp in sales/trading and fixed income EM. Sizova was previously director in financial markets at Finantia UK and Ryabokon was previously head of business development at Oktritie. Signe Lazdina will be joining the pair in the UK as fixed income trader, having worked at CFE Montecarlo for a number of years.

Structured Finance

Federal preemption challenges continue

Sector developments and company hires

Federal preemption challenges continue
Two US courts have heard actions that are of significance to marketplace lenders and their funding sources so far this month, Chapman and Cutler reports. In Maryland, a state regulatory action purporting to require licensing of a sponsor bank and its fintech service providers has been removed to federal court. Conversely, a California federal court has dismissed an action challenging a marketplace lending programme.

In the first case, Salazar versus Fortiva Financial, the Maryland Office of the Commissioner of Financial Regulation alleged that a Missouri state chartered bank and its fintech partners engaged in a bank partnership programme violating various Maryland licensing and credit-related statutes. “Depending on the outcome of this matter, it could significantly change how banks and their fintech partners approach such Maryland requirements,” Chapman and Cutler notes.

In the charge letter, the Commissioner alleged the bank made unsecured consumer loans without complying with the regulatory provisions found in the Maryland Consumer Loan Law. The Commissioner also alleged the bank violated the installment loan licensing requirements by making unsecured consumer loans pursuant to Maryland’s credit grantor closed end credit provisions without a license or an exemption.

As for the bank’s fintech partners, the Commissioner alleged they failed to obtain a license under the Maryland Credit Services Businesses Act, which is required to solicit or arrange unsecured consumer loans for others such as banks. As such, the state alleges that both the non-bank service provider and the out-of-state bank are subject to licensing and credit requirements. 

The defendants have removed the matter to federal court on the grounds that the federal court has federal question jurisdiction over the Commissioner’s claims against the bank and federal law preempts the Commissioner’s claims.

Meanwhile, the second case – Sims versus Opportunity Financial - challenged the validity of loans and business practices associated with a bank partnership programme between FinWise Bank and its non‑bank service provider Opportunity Financial. Originally filed in state court, the defendants removed the action to federal court and filed a motion to dismiss.

The plaintiff - a California consumer - alleged that the defendants operated a “rent-a-bank” scheme to issue high-cost loans, although the bank was listed as the lender on the loan. The plaintiff claimed the bank was lender in name only, with the service provider marketing the loan, purchasing the loan and then servicing and collecting the loan, which the plaintiff alleged was to evade California interest rate restrictions.

The defendants challenged all claims based on the doctrine of federal preemption and alternatively that if preemption failed, the action failed to state a cognisable claim under state law. The court found that all of the plaintiff’s claims failed on the merits and, as a result, did not need to address or resolve the issue of federal preemption.

SME SRT notes upgraded
Scope has affirmed the class A notes and upgraded by a notch classes B to D issued by Santander’s York 2019-1 CLO, in light of positive portfolio performance. As of the 15 March 2021 calculation date, the outstanding nominal balance of the synthetic securitisation was £1.54bn from £3.08m at closing, referencing 1,749 obligations granted to 881 SMEs, self-employed and mid-size corporate borrowers.

After the 20 June 2020 payment date, the transaction breached a subordination event (only 10% of the pool can have a one-year probability of default of greater than 5%). As a result, all classes now amortise on a sequential basis.

Nevertheless, the classes benefit from significant credit enhancement build-up due to the fast repayment of the reference obligation portfolio. As of 15 March 2021, credit enhancement on classes A, B, C and D has respectively increased to 39.5%, 27.5%, 23.2% and 15.1% from the closing levels of 23%, 14.5%, 11.5% and 7.5%.

Scope notes that York’s portfolio performance has been positive due to a combination of UK government financial support and the significant amount of payment holidays offered by Santander.

Since the closing date, only one reference obligation has been subject to a transaction credit event, which occurred in early February 2021 and was reported to the protection seller on 31 March 2021. York’s pool weighted average one-year probability of default deteriorated to 7.8% in March 2021 from 1.8% at closing. Further, debtors flagged as being under close monitoring and on the serious watch list respectively account for around 28% and 6% of the portfolio, as of 15 March 2021.

Structured Finance

GSE Patch to end

Sector developments and company hires

GSE Patch to end
Fannie Mae and Freddie Mac have announced that any loans purchased after 1 July must meet the standards set out in the most recent amendments to the Preferred Stock Purchase Agreements, which stipulate that the GSEs will only purchase qualified mortgage loans that meet the new general ATR/QM Rule. The move effectively ends the use of the temporary GSE qualified mortgage rule (the ‘GSE Patch’). However, these guidelines contravene the CFPB’s most recent notice of proposed rulemaking, which proposed delaying the mandatory compliance date of the revised QM rule until 1 October 2022 (SCI 4 March). 

In other news…

Call for green standardisation
Uniform standards - including a clear green asset definition and a minimum percentage of green assets in a pool for securitisations to be classified as green - would lead to broader investor confidence and participation in the market, Fitch says. Any regulatory capital or similar incentives for green securitisations should also include grandfathering for securitisations that could cease to be considered green, due to the evolution of green standards in order to prevent a sudden impact on deal pricing and liquidity (SCI 12 March 2020).

Fitch notes that the ESG aspects of a securitisation may be positive or negative for the ratings. The agency says it does not apply an analytical adjustment in its credit analysis based on the green features of these transactions, as it would want to see improved and more granular historical data showing differences in cashflow and collateral performance between green and non-green assets.

Some transactions are green by nature, such as wind, solar or PACE ABS. Other transactions - such as auto ABS, RMBS, CMBS and CLOs - can be considered green, depending on specific asset attributes or use of proceeds.

Meanwhile, green RMBS are generally backed by mortgage loans for properties with energy-efficient features, although there is still a lack of standardisation in energy efficiency requirements for residential property within and across jurisdictions. Fitch views some green building features as potentially credit positive for CMBS, helping support occupancy and property value over time.

CRE JV agreed
Avant Capital Partners has formed a programmatic commercial real estate joint venture with an undisclosed Connecticut-based investment management platform with assets under management in excess of US$10bn. The platform is an active investor across several credit strategies, including real estate debt, and has tapped Avant to originate, underwrite, close and manage loan investments from US$5m to US$75m on a nationwide level.

The JV will originate bridge loans secured by property types that include multi-family, light industrial, warehouse, office and select hospitality and retail. The loan programme is designed to finance properties that are being repositioned, newly constructed and in lease-up phase, improved or otherwise redeveloped, or need a quick close.

Each loan will be underwritten to a clear exit strategy through conventional bank, agency or CMBS refinance.

EMEA
Fairwater Capital has hired Eric de Sangues as head of structured credit, responsible for the strategic development of credit strategies alongside his role as fund manager, reporting to cio and founding partner Orlando Gemes. Sangues has had a 20-year career in investing focused on macro credit trading, relative value, index tranches and options, where he utilised his engineering background to develop proprietary investment tools to extract value. He was most recently a senior portfolio manager at Chenavari Investment Managers, responsible for cross-asset trading, credit relative value and structured credit investing.

North America
Allianz Global Corporate & Specialty (AGCS) has promoted David Brown, currently the firm’s head of insurance-linked markets, to head of its capital solutions unit effective from 1 July. He succeeds Richard Boyd, who is leaving Allianz and moving back to the UK from Bermuda for family reasons.

Brown joined Allianz Risk Transfer in 2007 and became head of insurance linked markets in 2015, after which he was appointed president of Allianz Risk Transfer (Bermuda) in 2020. Prior to AGCS, he spent his early career at Marsh, where he focused on structuring alternative risk transfer and captive solutions.

Monroe Capital has recruited Jayro Yoo as director, serve on its marketing and investor relations team based in Texas. Prior to Monroe, Yoo was a vp at DWS Asset Management, where he focused on raising capital for the firm’s alternative investment platform. He has also served at MainStay/New York Life, Wells Fargo Global Alternative Investment Services and Salient Partners.