Contents

CLOs

Investor interest

European CLOs attracting new investors to mezz and equity

European CLO primary activity continues to roll, with seemingly unwavering investor demand supporting prices at the top of the stack. Now, investor interest is growing across the capital structure, as new players look to enter the lower tranche space.  

As of yesterday’s close, an impressive 87 European CLOs had priced this year. Nevertheless, the three resets that printed last session all effortlessly came in at current levels, with triple-As printing at Euribor plus 83bp to 85bp.

Throughout this year triple-As have been strongly supported by strong widespread demand, notably including large investors, such as US banks and Japanese institutions – including Sumitomo and a number of life insurers. Should other major players return, as is widely expected – not least Nochu and continental funds, which have stepped out as spreads have tightened, but may come back to play catch-up – senior spreads are likely to move another leg tighter.

However, market focus is now moving down the capital structure. “Further down the stack is where we are seeing increasing and broadening investor interest,” says Miguel Ramos Fuentenebro, co-founder of Fair Oaks Capital.

He continues: “Quite a few people have been talking about oversupply in mezzanine lately, but we have been more constructive. Softer average spreads in CLO mezzanine may have been due more to the preponderance of resets, with seasoned portfolios rather than lack of demand.”

Paper below mezz is also being seen in a positive light, Ramos Fuentenebro adds. “Current loan fundamental and spreads support an interesting arbitrage for equity. We are getting good interest in both primary and secondary equity opportunities from investors.”

At the same time, investors that are new to the mezz and equity spaces are becoming increasingly evident. For example, Ramos Fuentenebro says: “We have been supporting a number of investors in Europe and Asia in their due diligence of what is a new sector for them. These are sophisticated institutions and large family offices, comfortable with alternative credit, who are considering the current opportunity in CLOs. The performance of the CLO market in 2020, volatile but fundamentally sound, supports a compelling case study.”

He notes that the pick-up in interest in mezz and equity CLO paper is the result of a number of drivers. “Triple-As are an efficient asset for certain investors, with significant spread pick up versus alternatives. Alternative credit investors are also looking at potentially more innovative ways of defining allocations to credit, and they see CLOs as a good potential fit.”

Ramos Fuentenebro adds that some funds are also becoming more flexible and looking at a wider range of investments. “We have seen certain alternative allocations starting to include specifically CLOs, which is a new and promising step for our market.”

Mark Pelham

Capital Relief Trades

Uncertainty highlighted

UK banks unclear on project finance slotting

The application of the slotting approach to synthetic securitisations referencing project finance assets remains unclear. The other option for UK banks is ratings, but that approach is accompanied by its own challenges.      

According to Steve Gandy, head of private debt mobilisation, notes and structuring at Santander Corporate and Investment Banking: ‘’The PRA has stated publicly that it has long had concerns about banks using the SEC-IRBA approach for SRT deals because it believes the formula may not capture all the risk elements in a particular portfolio, particularly non-credit risk characteristics and complex features. It also states publicly that for this reason it may request banks to get the deal rated to demonstrate that the protected tranches are calibrated according to rating agency criteria, which will capture non-credit risk as well as credit risk characteristics.’’

He continues: ‘’Under the old rules or before the new securitisation framework came into force in January 2019, project finance, CRE and other slotted assets were not eligible for the old Supervisory Formula; the equivalent of today’s SEC-IRBA approach. Hence, under the old rules, UK or European banks could not do an SRT on slotted assets without external ratings. The new securitisation framework, on the other hand, explicitly states that the SEC-IRBA approach may be used for slotted assets.’’

In the UK, banks can either use the slotting approach or ratings. Under the slotting approach, idiosyncratic exposures are assigned to categories - or slots - depending on how risky they are perceived to be. This information is then used to calculate how much capital a bank must hold against the assets. According to PRA guidance, banks should assume up to 50% LGD for slotted assets - which translates into less RWA relief and thicker first-loss tranches.

Nevertheless, this forces UK banks into a difficult dilemma since both options come with their own challenges. First, ratings are a hard pill to swallow for several reasons.

Asset analysis for project finance exposures is difficult, given the idiosyncratic risks, and although Scope Ratings has noted in the past that it has counteracted this through a deep-dive analysis of the asset class and the originator in question (SCI 3 October 2018), UK originators remain sceptical of ratings. Second, for some UK issuers, using the slotting approach for project finance assets remains questionable.  

According to one UK bank source: ‘’The issue with project finance deals is that you have to disclose to the PRA the risk transfer methodology underpinning the KIRB for a single asset class which is subject to slotting. Furthermore, there’s the correlation between the PD and LGD for each obligor - since they have to end up in one of three buckets within slotting - and how such risk is transferred through an AIRB tranching. The other option is an external rating, but with that you may end up with a thicker tranche that makes the deal more expensive and time consuming, considering the extensive rating agency due diligence.’’

Similarly, another UK bank source states: ‘’For UK banks, the question is whether you get a rating or use a mapping to the slotting approach to determine risk retained. But it’s not clear how to use the slotting approach for project finance assets and whether you should use ratings.’’

The same source adds: ‘’Ratings for a traditional project finance pool may well be on an asset-by-asset basis, so can be time consuming - even though some rating agencies say that they can adopt a mapping to internal ratings. Investor discussions around the selection of significant risk transfer pools involve lots of negotiations and if you must move assets in and out of the pool, then that is going to be laborious where rating agency discussions are running in parallel.’’

The PRA has responded to these concerns by noting that in line with the SS 9/13 guidance, it expects banks to engage with it at an early stage with regards to SRT deals that are material or have complex features. The latter refers to transaction features that could potentially hinder significant risk transfer. 

The regulator further confirms that the supervisory statement does not cover all cases, due to the often-bespoke nature of each SRT. Consequently, as part of the notification and permission process, the PRA expects an originator to inform it of the methodology it intends to use to calculate securitisation capital requirements. As such, the supervisor concludes that originators should engage with it, particularly when they have concerns.

Stelios Papadopoulos

ABS

Regional resilience

Structural enhancements for debut aircraft ABS

Falko Regional Aircraft has priced its debut aircraft ABS, marking the first post-pandemic securitisation to be exclusively backed by regional aircraft assets. Dubbed Regional 2021-1, the deal includes new structural features designed to address market concerns resulting from the adverse impact of Covid-19 on the aviation sector.

“The regional aircraft segment has demonstrated resilience in the last year, which has grabbed the attention of investors; the recovery is being seen first in the domestic and short haul segments that are the core markets for regional aircraft. We feel that this deal reflects positively on the regional aircraft sector and Falko in particular, as a proven servicer with a track record through a number of aviation cycles,” comments Jeremy Barnes, ceo of Falko.

Rated by KBRA, the securitisation comprises US$255m of triple-B plus rated series A loans that pay an interest rate of 5.75%. Approximately US$210m of the loans will be advanced to the borrowers on the closing date and the remainder will be advanced on up to two delayed draw dates within 120 days of the closing date.

Regional 2021-1 represents the core element of a refinancing package for an aircraft leasing portfolio funded by the Falko Regional Aircraft Opportunities Fund. The portfolio has an initial value of approximately US$529.8m, in line with the average of the half-life base values provided by third-party appraisers as of December 2020, which were adjusted for maintenance conditions in March.

The portfolio comprises 25 regional jets (accounting for 76.2% of the portfolio by value) and 14 turboprop aircraft that are expected to eventually be leased to up to 12 operators across 12 countries. The assets include Embraer E190/E195, ATR 72 and Dash-8 Q400 aircraft, with a weighted average age of 10.7 years and WA remaining lease term of approximately 3.7 years.

At closing, 27 aircraft are on lease to seven obligors, which are located in seven jurisdictions. While the remaining aircraft (35.4% by value) are off-lease, letters of intent have been executed for six of them.

Rental payments for five of the initial lessees (45.5% by value) associated with 19 aircraft have been deferred, due to Covid-19 industry disruption. These deferred payments are scheduled to be repaid in installments during the course of the applicable lease term. One of the lessees associated with two of the aircraft is paying based on ‘power-by-the-hour’ terms.

To mitigate leasing risk, the transaction features a hold-back account, in which a portion of the proceeds will be deposited in an amount equal to the expected monthly lease payments. To the extent an aircraft is not paying monthly lease rent according to the expected lease rent, the hold-back amounts will be transferred to the collections account.

Additionally, Regional 2021-1 has a number of features designed to help mitigate uncertainty in the aircraft sector and improve the resiliency of the cashflow available to the rated loans versus pre-Covid aviation ABS. These include a collections test, a minimum number of aircraft test, a remaining lease term test and a lessee event test.

Furthermore, certain structural features have been enhanced, including more reactive DSCR tests, lower initial LTVs, a higher utilisation test and a faster loan amortisation profile relative to other recent KBRA-rated aviation ABS. There are also full and partial cash sweeps, more favourable security deposit account changes, an LTV test and a 12-month liquidity facility.

Finally, the loan benefits from significantly lower leverage compared to every aviation ABS issued since 2015, and one of the lowest leverages of all KBRA-rated aviation ABS securities at issuance. The leverage is approximately 11% points and 26% points lower than that of Castlelake 2021-1’s class A and B notes respectively.

Citi acted as sole structuring agent and bookrunner on the deal. “Falko’s expertise extends beyond regional aircraft leasing into spare engine leasing, part-outs and in-house maintenance, repair and overhaul experience. This provides investors with confidence in their investment decision, especially when looking beyond the underlying assets and towards a brand and platform, such as Falko, that they trust to execute in a challenging environment,” says Matt Simonetti, md at Citi.

Sun Life Assurance Company of Canada is the liquidity facility provider and Canyon Financial Services is the managing agent on the transaction. Falko will act as servicer.

Corinne Smith

ABS

Bottoming out

EU NPL ratios improve

Despite the significant decline in economic activity since the coronavirus outbreak, European banks are not at this point facing an asset-quality shock, according to the latest analysis. Non-performing loan ratios have improved and, indeed, they are expected to bottom out in 2021.

According to Scope Ratings estimates and EBA data, the EU NPL ratio declined from around 3% to approximately 2.5% between 1Q20 and 4Q20. According to the rating agency, several factors explain the resilience of asset-quality indicators.

First is considerable public support preventing a general economic collapse, as well as a credit crunch. This means that loan books, as the denominator of NPL ratios, continued to expand despite the slow-down.

State-guaranteed loan programmes put in place at the time of the first lockdowns were intended to boost corporate liquidity positions. Among the large EU countries, recourse to large-scale lending programmes was significant in France, Spain and Italy. Support measures kept increasing until the end of 2020, but Scope qualifies that they will stabilise as eligibility criteria limit the possibility of expanding the scope of beneficiaries or the amount borrowed.

The agency adds: “Paying back loans intended to boost liquidity is due to take place over extended periods, with significant grace periods. This approach will delay the identification of problem loans or the most fragile borrowers. In countries where the truly exceptional support measures of these ad hoc programmes were offered to a very small portion of borrowers, banks have tended to classify the exposures as Stage Two loans.’’

The second factor is proactive management of the stock of existing problem loans, in anticipation of a deterioration in asset quality. Stage Three loan ratios have remained well under control across the largest EU economies.

This results from banks’ proactive efforts to reduce the stock of pre-crisis NPLs, notably in Italy. Active balance-sheet management explains why the EBA weighted average NPL ratio fell throughout the year from 7% in 4Q19 to 5% in 4Q20.

Third, accommodating regulatory forbearance measures - especially moratoriums - delayed the recognition of new problem loans. Scope states: ‘’So far, the performance of loans exiting moratoria has been comforting. Repayment according to schedule has been massive, moving from €811bn in June 2020 down to €318bn at end-2020.”

The agency continues: “French and Spanish banks, which granted the largest share of moratoria, have rapidly seen portfolios expire. The decision to extend moratoria in Italy explains the larger amount of loans under non-expired moratoriums still outstanding.’’

Nevertheless, the rating agency concludes: ‘’But the quality of the loans under moratoria will likely deteriorate as moratoria expire. The borrowers that are still benefiting from moratoria are likely to prove more fragile than those who exited the schemes earlier. Whether loans under moratoria are skewed towards households or corporates will influence the overall performance of these loans.’’

Stelios Papadopoulos

Structured Finance

SCI Start the Week - 19 April

A review of securitisation activity over the past seven days

Last week's stories
Income opportunities
Angel Oak Capital Advisors, answers SCI's questions
Leverage boost
Dual-tranche SRT prepped
Robust sentiment
Positive outlook for Dutch RMBS market
Servicing hitch
Italian NPL ABS collections drop
Shifting trends
Differing ESG impacts on credit quality considered
Trailing Texas
Banks with large warehouse loan books set to follow TCBI
Consumer warriors
Setback for CFPB, but warning shots at securitisation market fired
The March 26 dismissal of a lawsuit brought by the Consumer Financial Protection Bureau (CFPB) against a student loan trust is good news for the securitisation market, but may be only the first skirmish between it and a more bellicose CFPB.

In fact, the manner in which CFPB appears to interpret elements of the 2010 Dodd-Frank Act now means that the structured finance industry stands squarely in its cross hairs. While the Delaware district court rejected the arguments made by the CFPB in its suit against the National Collegiate Master Student Loan Trusts, which hold more than 800,000 student loans, the alarm bell has sounded.

The suit was brought due to the actions of the debt servicers, who, among other failings, had pursued student debtors and their families in an often hostile manner. The CFPB claimed that the trust is responsible for this behaviour, and, further, that trusts qualify as "covered persons" as defined by the Dodd-Frank Act and so are subject to the CFPB. If an entity is not deemed a covered person, then the CFPB has no jurisdiction over it.

Crucially, in its rejection of the suit against National Collegiate, the Delaware court did not make ruling on the question of whether a trust used in a securitisation can be legitimately deemed a covered person. Neither is it thought that a district court would be able to make a final judgement on this topic anyway. It remains hanging in the air, unanswered.

"Who is a covered person is one of the most important and least explored aspects of Dodd-Frank, and the CFPB has chosen to be aggressive in its interpretation. They can take the position that purchasers of consumer receivables are covered persons. We haven't seen the end of this. The comments made by the judge were favourable but the issue is not resolved," says Rachel Rodman, a partner and member of the white collar defence and investigations practice at Cadwalader, Wickersham and Taft, in New York.

Last September, the CFPB won a case against PEAKS Trust 2009-1 for what it deemed unfair and coercive lending practices. The trust incorporated loans made by the ITT Educational Services. In this case, the trust did not put up a fight but accepted the verdict.

Cases like these suggest that any structured finance vehicle which incorporates consumer debt, like ones used for credit card deals, auto loans or student loans, could be on the hook for the actions of the debt originators and servicers. The trust is, of course, not an active entity, but rather an operational device.

"To the extent that securitisations will be now held liable for the conduct of third parties, then this will have an impact. This becomes a risk that any consumer credit product seeking financing in the ABS markets will have to acknowledge," says Neil Weidner, a partner in the capital markets group at Cadwalader.

The Delaware court rejected the suit against National Collegiate on a constitutional technicality. In Seila Law LLC versus Consumer Financial Protection Bureau in June 2020, the Supreme Court ruled that the structure of the CFPB was unconstitutional in that the director of the bureau could only be removed "for cause" rather than by presidential edict, and this represented was deemed a violation of separation of powers.

Following that landmark decision, the director can now be removed on the orders of the executive. Previous actions initiated by the CFPB - when it was, in fact, an unconstitutional body - were allowed to proceed under an order of ratification. However, in the verdict delivered on March 26, the Delaware judge ruled that in the case under consideration ratification had occurred after the statute of limitations had passed and thus the suit was invalid.

The chances of an increasingly interventionist CFPB have increased with a new regime in Washington DC and the likelihood that President Biden's nominee Rohit Chopra will be confirmed as the new director. Chopra, currently a commissioner at the Federal Trade Commission, is a darling of the leftist wing of the Democrats. "The CFPB was designed to be the cop on the beat policing the financial system for consumer abuses. If confirmed, Chopra will take aggressive action," Aaron Klein, senior fellow of economic studies at the Brookings Institution, said recently.

"We're seeing a return to form in terms of the CFPB being much more aggressive and asserting the full panoply of its authority - at least as the CFPB thinks were granted to it under Dodd-Frank," affirms Rodman.

She was previously a senior legal counsel at the CFPB when Richard Corday was the body's first director. Corday, who was the Democratic nominee for the governorship of Ohio in 2018, was a notoriously combative director, and Rodman believes those days are here again.

A trust is more likely to defeat a suit if it is able to hire expensive lawyers who are experts not only in securitisation but also in the minutiae of litigation. This could be beyond the means of most trusts, which have a priority of payments and those are often capped.

Of course, many will argue that it trusts have to pay closer attention to loan origination and the actions of debt servicers, then that is no bad thing. But, as is the case with a great many high-minded undertakings, a law of unintended consequences may apply.

"If you're hurting consumer securitisation, you're hurting the flow of money into consumer lending, and you wouldn't want to do that in a recovery," says Weidner.

Simon Boughey

Other deal-related news

• Fitch has affirmed and removed its rating watch negative placement on the outstanding ratings of the rental car ABS issued by Hertz Vehicle Financing II, reflecting Hertz's ongoing management of its business and fleet through Chapter 11 bankruptcy (SCI 12 April).
• Fitch Solutions has released enhanced infrastructure key projects data together with a project risk metric that enables users to quantify and gauge infrastructure project completion risk (SCI 12 April).
• ESMA has published interim STS notification templates for synthetic securitisations following amendments to the Securitisation Regulation (SCI 12 April).
• 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 (SCI 13 April).
• 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(SCI 15 April).
• 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 (SCI 16 April).
• 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 (SCI 16 April).

Company and people moves

• 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 (SCI 12 April).
• SoFi has launched auto loan refinancing services in partnership with auto fintech start-up MotoRefi through its network of trusted lenders (SCI 12 April).
• Mission Peak Capital has made a significant financial investment in the US operations of Mount Street Group (SCI 12 April).
• Avant has acquired Zero Financial and Level, the company's neobank and banking app assets (SCI 12 April).
• 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 (SCI 12 April).
• DBRS Morningstar has launched a new dedicated esoteric finance team (SCI 12 April).
• Horseshoe has appointed Kathleen Faries as its new ceo, effective on 15 April (SCI 12 April).
• Connection Capital has raised a £3m commitment to allocate to SCIO Capital's European Secured Credit Fund III (SCI 13 April).
• Bellwether Asset Management has hired Cara Leonard-Munn as svp, debt asset management (SCI 13 April).
• Lafayette Square has appointed Seren Tahiroglu as cfo of its credit strategy, overseeing the platform's accounting and financial reporting functions (SCI 13 April).
• International Investment Group 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 (SCI 14 April).
• Andy Phelps has joined Lafayette Square as md, head of capital markets (SCI 14 April).
• Search and surveillance platform Pre-Rec has appointed securitisation industry veteran Saul Sanders to its board of strategic advisors (SCI 14 April).
• Trade finance boutique CFE Finance has strengthened its UK team with two new recruits (SCI 14 April).
• 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 (SCI 15 April).
• 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 (SCI 16 April).
• 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 (SCI 16 April).
• 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 (SCI 16 April).
• Monroe Capital has recruited Jayro Yoo as director, serve on its marketing and investor relations team based in Texas (SCI 16 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

Texas template

TCB CRT establishes blueprint for US banks, say SCI speakers

The recent $275m 3-year CLN capital relief trade from Texas Capital Bank (TCB) has established a precedent that all US banks in the US should be scrutinizing, agreed panellists involved in the roundtable discussion of the deal at SCI’s fifth annual risk transfer and synthetics seminar.

The seminar was held April 21-22, and the speakers at the roundtable were Madison Simm, evp in the mortgage finance division at TCB, Mark Kruzel, director in strategic risk solutions at Citigroup and David Felsenthal, a partner in the capital markets group at Clifford Chance.

Citi and Clifford Chance advised TCB on the structuring and development of the deal. Citi is also responsible for bringing CRT technology to TCB in mid-2020.

“CRT should now be thought of as a capital tool alongside Tier II. Every bank should now be doing cost benefit analysis. This is coming not just from Citi with a $2trn balance sheet but from Texas Bank with $40bn. That’s the whole gamut of the banking market,” said one of the panellists.

The mechanism now has proven worth in boosting capital, thus opening up new avenues of business, and augmenting ROE. This is achievable at a cost lower than that of equity capital.

The fact the principal banking regulators, the Office of the Comptrollers of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC), gave the deal their blessing bodes well for the future of the market, concurred the panellists. In the words of one, “The blueprint has been created.”

Regulatory approval is the key piece of the jigsaw, and the US market is immature compared to its European counterpart. Regulatory guidance is consequently far less detailed and specific than  is furnished by the European banking regulators.

The process continues to be thus much more ad hoc. Nonetheless, the TCB experience demonstrates that US regulators are becoming both more familiar and favourably disposed towards the structure.

However, regulators will need to see that the proper infrastructure is in place to ensure that issuance of this kind can be part of an ongoing programme rather than a one-off.  This is not the sort of transaction that can be done opportunistically, they said.

The missing member of the party at the roundtable discussion was KPMG, who played a decisive role in advising TCB on the minutiae of regulatory policy regarding this area of the market in the summer of last year, according to panellists.

Texas Capital Bank’s trade has also raised the profile of the CRT market so that more investors are now familiar with the structure. With a wider circle of potential investors, subsequent deals should be able to be brought to market faster.

CRT trades also of course offer investors a wider yield than most other asset classes. The TCB deal paid Libor plus 450bp, but this is considered meagre by European standards. A yield of Libor plus 10% or 12% would not be uncommon in the securitization of European loans - a much more risky asset class than the mortgage warehouse loans that comprised the reference portfolio in the TCB trade.

Simon Boughey

Capital Relief Trades

Risk transfer round-up - 19 April

CRT sector developments and deal news

NatWest is rumoured to be readying a synthetic securitisation backed by mid-market corporate loans. The transaction is expected to close in 2Q21.

Capital Relief Trades

CRT seminar line-up finalised

Workshop and roundtable discussion on the agenda

SCI’s 5^th Annual Risk Transfer & Synthetics Seminar is taking place tomorrow and Thursday. Hosted virtually, one highlight of the event is a roundtable discussion between Citi, Clifford Chance and Texas Capital Bank, regarding the latter’s debut mortgage warehouse capital relief trade. Another highlight is a Mark Fontanilla & Co workshop exploring mortgage credit risk transfer strategy ideas.

The seminar begins with a market overview panel, outlining recent trends and activity in the synthetic securitisation market. The regulatory landscape panel will focus on the North American regulatory framework for risk transfer deals, while the emerging trends panel will explore the emergence of new asset classes and jurisdictions.

Additionally, there is a panel examining the prospects for incumbent issuers and entrants to the North American CRT market, as well as one focusing on the evolving investor base for CRTs. Finally, the mortgage risk transfer panel covers the GSE capital rules and the US Treasury’s reform programme.

The event concludes with networking sessions powered by an AI matchmaking algorithm.

The seminar is sponsored by Allen & Overy, Arch MI, ArrowMark Partners, Citi, Clifford Chance, Guy Carpenter, Mark Fontanilla & Co and Newmarket. Speakers also include representatives from Barclays, Christofferson Robb & Company, DE Shaw, Deutsche Bank, IACPM, Freddie Mac, JPMorgan, PGGM, Santander, Seer Capital and Systima Capital Management.

For more information on the event or to register, click here.

Capital Relief Trades

Third 2021 STACR prints

With Fannie Mae still on the sidelines, Freddie corners CRT space

Freddie Mac yesterday (April 19) printed its third STACR deal of the year, designated STACR 2021-DNA3, via joint book-runners Nomura and Barclays.

The $910m trade consisted of four tranches. The $211m M-1 tranche, rated BBB+/A- by KBRA and S&P, was priced to yield SOFR plus 75bp, has a 2% credit enhancement (CE) and a 1.72 year weighted average life (WAL).

The $317m M-2 tranche, rated BBB/BBB-, yields SOFR plus 210bp, with a 1.25% CE and a 4.27 year WAL. The BB/BB- $211m B-1 tranche pays SOFR plus 350bp, has a 0.75% CE and a 7.87 year WAL.

Finally, the $211m B-2 tranche is unrated, has a 0.25% and an 11.83 year WAL, and pays SOFR plus 650bp.

Fannie Mae, which was jointly responsible for the development of the GSE CRT market, has absented itself from the market for over a year, due, it is said, to concerns about the new capital rules released in May 2020.

This deal is the 26^th in the STACR series of CRT bond offerings. The first of 2021 was printed in late January and the second in late February. Another STACR is planned for later in 2Q 2021, as is the second HQA deal - which incorporate mortgages with higher LTVs.

Freddie Mac was unavailable for comment.

Simon Boughey

ABS

Climate concerns

KBRA md Peter Giacone and Nephila Climate structured finance director Ariane West discuss the nexus between insurance risk transfer and ESG

PG: How does the insurance industry fit into the ESG discussion and where do you see touch points within the Nephila Climate universe?
AW: The evaluation of climate risk, a key aspect of the ‘Environmental’ factor, is a core capacity and it is what we do every day. In terms of the ‘Social’ element, the obvious thing is that insurance exists to help mitigate or manage risk.

It is there to provide crucial resources to respond to, or recover from, the effects of an event that an individual or a community might not otherwise be able to bear. But if we look deeper, insurance can also play a further role in enhancing sustainability and stability.

The safety net that insurance often provides can enable innovation and promote cooperation. From this very good starting point, a question that we, as an industry, can be asking ourselves is: what activities are you helping to sustain?

On the governance side, insurance is known for being a well-regulated industry. Governance, at a fundamental level, is about being clear on what we require from one another and as a society. Governance rules are the guard rails essentially, to ensure that we are keeping our commitments to each other – they are there to guide us and keep us on the right path. I think that as an industry, we generally benefit from our strong regulatory foundations, and therefore bring a lot to the table in terms of modelling the importance and benefits of good governance.

PG: Have you seen the momentum of the industry change the discussion in the insurance sector?
AW: The Bermuda market is known for providing reinsurance coverage, particularly relating to peak natural catastrophe events. We have seen many wanting to talk about weather and environmental risks, as well as social and governance factors.

Engaging in these dialogues in the context of the broader market, I was reminded of the story that David Foster Wallace relayed in his address ‘This is Water’. The story is about two young fish swimming along, when an older fish swims by and asks: “How’s the water boys?” And the little fish swim on, until one turns to the other and says: “What the heck is water?”

For us, in the natural catastrophe and climate risk transfer market, being asked about the assessment of climate-driven risk is a little like being the young fish swimming in the water. It’s what we are swimming in day-to-day, and so we don’t think of it as a separate or novel issue, as some organisations might.

So we are now in a position where we need to think about how we communicate with ‘non-fish’ regarding our views on ‘the water’. How can we be most helpful in moving this forward?

We need to be thoughtful and to make sure the lessons or expertise we convey makes sense in this context. I think we have a great opportunity to contribute to the discussion and advancement of the assessment and disclosure of climate-related risks.

PG: Can you talk through some of the processes for developing speciality products to address specific environmental risks?
AW: We try to listen and understand the problems that are out there and understand how these play out in a business or organisation. To design a product that effectively addresses a risk, it requires us to understand a lot of things that might not be visible to us from the outside looking in.

Once we have that understanding, we can make proposals in terms of how to analyse the risk, how to come up with the right way to measure it and how we can guide our counterparty to the different type of risks that can be covered in a particular product, and how they can be best mitigated or managed.

At the end of the day, we are looking to structure a risk-transfer product or transaction that is a good fit for the risk holder, both in terms of coverage and cost. As part of that process, we will look for indices or data sources that allow us to measure and track the risk being underwritten that are transparent.

PG: Are you seeing an increased focus in the industry to address constituent ESG perspectives or broader products?
AW: We will always stay close to our core expertise, which is the assessment of weather-driven risks, but what we are seeing is that social risks and sustainability risks are increasingly linked to climate events. We are seeing an increase in volatility.

So we are, in effect, capable of developing products that are addressing real societal concerns. We are seeing demand from the market and a need for products that take a more holistic approach.

PG: We have had a change of administration in the US. What are the implications for your business and ESG investing if regulatory mandates were to come into play in the US?
AW: I think the expectation is that we will see some significant developments in the regulatory space to do with climate risk – there have been announcements from the US Federal Reserve, the SEC, the CFTC, to name a few notable ones. Movement in this space will bring the US into better alignment with the UK, the EU and other jurisdictions, which to date have been further ahead on that path.

What this likely means is that companies and public sector entities will be taking a hard look at their exposures. For risk transfer and risk mitigation, it is helpful if we are able to start the discussion and the product development process at an earlier stage. At the end of the day, the more information we have, the better able we are to take it in and this will open up opportunities for the insurance industry.

Angela Sharda

Structured Finance

Blockchain mortgage 'ecosystem' prepped

Sector developments and company hires

Blockchain mortgage ‘ecosystem’ prepped
Liquid Mortgage has raised capital from and entered into a strategic partnership with Redwood Trust, marking the culmination of a months-long engagement, in which Redwood Trust tested Liquid Mortgage's technology and developed an actionable strategy to build a future-ready mortgage ecosystem. The partners share a common mission of utilising blockchain technology within the current market infrastructure, rather than reinventing the mortgage ecosystem overnight.

Liquid Mortgage is built on a public blockchain and intends to make loan data reporting and delivery more efficient. Liquid Mortgage and Redwood Trust have placed nearly US$300m of loans on the Liquid Mortgage test platform.

Funds from the capital raise will allow Liquid Mortgage to further develop its technology and expand its team, in order to proliferate its solution to the broader mortgage ecosystem. The partners intend to engage with other market participants over the next several months.

Declining defeasance activity examined
Overall defeasance activity volume for US conduit and Freddie Mac CMBS decreased by 21% in 2020, according to Moody’s. The agency notes that this reflects slower activity for retail, hotel and office loans amid property value and cashflow uncertainty during the pandemic.

Defeasance activity fell to US$15.4bn across 1,200 loans last year from US$19.5bn in 2019. Meanwhile, the number of defeased loans only nudged down, reflecting low interest rates and the strength of the multifamily loan sector during the pandemic.

The multifamily sector accounted for 78% of the aggregate defeased loans by balance and 74% by loan count. Loans from Freddie Mac transactions made up most of the multifamily defeasance, reflecting strong asset performance and liquidity.

Loans with shorter terms to maturity accounted for over half of defeasance, while loans with less than three years to maturity accounted for 62%. Further, 2013 vintage loans represented the largest share of defeasance, at 29%.

Finally, defeased loan size contracted to its lowest average since 2012. The decline in defeasance volume and size among retail and office assets, which typically have larger loan balances, caused the average balance of defeased loans to decline to US$12.8m in 2020 from US$15.2m in 2019.

With a US$900m balance, the Grace Building was the only single-asset/single-borrower loan to defease last year.

EIF backs Alantra funds
The EIF and Alantra have joined forces under the European Guarantee Fund (EGF) to support European SMEs hit by the Covid-19 economic crisis. The EIF will assume up to 70% of the risk on a €110m portfolio of loans granted to SMEs by two Alantra funds - Alteralia Real Estate Debt FIL (real estate financing) and Alteralia SCA SICAR (direct lending).

The EIF uncapped guarantee under the EGF will allow the two Alantra funds to increase their lending capacity to European SMEs, mainly targeting Spanish companies, to support their sustainability and growth. A significant portion of the €110m financing is expected to be granted under the recently launched Alantra Real Estate Debt fund, which provides financing mainly for repositioning, development or acquisitions to real estate companies for all type of asset classes in Iberia and Continental Europe. The remainder of the guarantee will be dedicated to Alantra's direct lending business, which provides long-term, flexible financing mainly for capex investments, acquisitions and debt refinancings.

EMEA
BlueBay Asset Management has hired Tom Mowl as a portfolio manager within its structured credit and CLO management team. Based in London, Mowl reports to Sid Chhabra, head of structured credit and CLO management, and will focus on investing in US and European structured credit securities across the capital structure. Prior to joining BlueBay, Mowl was most recently a senior portfolio manager at CIP Asset Management, where he focused on US and European ABS, RMBS and CLOs.

Lower remediation costs for UK SLABS
Moody's has upgraded the ratings of two tranches issued by UK student loan ABS Honours Series 2. The rating action reflects lower costs of the remediation plan associated with the non-compliance with applicable consumer credit legislation (SCI 8 November 2016) and an increase in credit enhancement for the affected tranches.

From November 2006 to January 2016, Ventura and Capita were the servicers of Honours Series 2, during which time notices of arrears sent to a portion of borrowers were not in compliance with applicable consumer credit legislation. As a result of this non-compliance, the issuer had initially estimated in 2016 that the remediation plan would cost up to £22.5m of interest and charges to be refunded either via account book adjustments or by way of cash refunds. The remediation process was anticipated to cost an addition £5m-£10m for the services of third parties to complete the remediation plan.

In its previous rating action in February 2017, Moody's assumed that the costs of the remediation plan would be fully borne by the transaction, without any recoveries from a counterclaim against any third party, therefore reducing significantly future cashflow available to repay the notes. In December 2017, the issuer announced that it entered into a settlement agreement with Capita pursuant to which Capita would make a payment of £8m in relation to the non-compliance with consumer credit legislation.

Implementation of the remediation plan was completed in December 2019, using a total amount of only £5.9m to refund the borrowers. The remaining cash was set aside, including £640,000 for the UK government and £1.5m to be held for three years to be used for any potential future liability, costs, claims, expenses or losses in relation to the non-compliance with consumer credit legislation. Moody’s understands that the latter reserve has not been used to date and the agency now expects there to be no further erosion of cashflow arising from the remediation plan.

Finally, sequential amortisation from June 2018 onwards has resulted in an increase in the credit enhancement available in this transaction. For instance, credit enhancement calculated as subordinated notes minus unpaid PDL over the sum of all notes increased to 21.6% from 17.2% for class B and to 10.2% from 8.6% for class C, according to Moody’s.

The agency has upgraded the class B and C notes from B2 and Caa2 respectively to Baa2 and B2. The remaining classes of notes have been affirmed.

Structured Finance

Forbearance SPV availability ends

Sector developments and company hires

Forbearance SPV availability ends
The Australian Office of Financial Management has released an update on its Structured Finance Support Fund (SFSF) activities. As of 31 March 2021, total funds committed by the SFSF were A$3.8bn, including A$1.36bn public market investments and circa A$2.3bn across 45 individual warehouses sponsored by 34 eligible lenders.

The AOFM notes that public securitisation market conditions continued to improve through the first quarter and no requests for support were received in connection with public transactions or private warehouse facilities during the period. Nevertheless, there has been an increase in the number of issuers expressing an interest in replacing the AOFM’s positions with private sector commitments. As of 31 March, the AOFM had been replaced by other investors in two instances.

Meanwhile, the Forbearance SPV (fSPV) availability period ceased at end-Q1. Total draws on the fSPV stand at A$47m, inside the approved limits of A$101.6m. “Drawdowns under the fSPV have been substantially lower than expected, due to the rapid improvement in Covid-19 hardship portfolios through the March quarter. Repayments of support drawn under the fSPV are scheduled to begin [this month], though…some originators in the fSPV programme have already commenced the repayment of principal and interest ahead of their original schedule,” the AOFM observes.

In other news…

Electronic closing solution launched
ICE Mortgage Technology has launched a solution that aims to transform the way mortgage loans are electronically closed in the US. Dubbed Encompass eClose, the solution enables lenders to electronically facilitate every aspect of the mortgage closing workflow, from ordering documents to delivering to loan investors, by leveraging a standardised platform. Later this year, ICE Mortgage Technology will expand eClose support in Encompass by providing eNotes and eVault, MERS eRegistry, witnessed documents, as well as eNotary support.

ESG credit indicators planned
S&P intends to introduce alpha-numerical ESG Credit Indicators to help explain the influence of ESG factors on its credit rating analysis. Over time and not before September, it will begin publishing ESG Credit Indicators for rated entities and, where relevant, at the transaction level. The agency notes that these indicators will not affect its credit ratings because they do not form part of its credit rating methodologies.

North America
Aeolus Capital Management has recruited alternative investments research and portfolio advisory specialist Amit Patel. Patel has been providing investor clients with research and advisory on alternative investments for more than a decade at Aksia. He will be based in Bermuda for the role.

Structured Finance

Taxonomy Delegated Act adopted

Sector developments and company hires

Taxonomy Delegated Act adopted
The European Commission has adopted what it describes as an “ambitious and comprehensive” package of measures to help improve the flow of money towards sustainable activities across the EU. The measures – which include the EU Taxonomy Climate Delegated Act - are expected to be instrumental in making Europe climate-neutral by 2050.

The EU Taxonomy creates a common language that investors can use when investing in projects and economic activities that have a substantial positive impact on the climate and the environment. It will also introduce disclosure obligations on companies and financial market participants.

The Delegated Act introduces the first set of technical screening criteria to define which activities contribute substantially to two of the environmental objectives under the Taxonomy Regulation - climate change adaptation and climate change mitigation. These criteria are based on scientific advice from the Technical Expert Group on sustainable finance. It covers the economic activities of roughly 40% of listed companies, in sectors which are responsible for almost 80% of direct greenhouse gas emissions in Europe.

The EU Taxonomy Delegated Act is a living document and will continue to evolve over time, in light of developments and technological progress. The criteria will be subject to regular review, ensuring that new sectors and activities - including transitional and other enabling activities - can be added to the scope over time.

The Act will be formally adopted at the end of May, once translations are available in all EU languages.

The package of measures also includes a proposed Corporate Sustainability Reporting Directive (CSRD), which aims to improve the flow of sustainability information in the corporate sector. It will make sustainability reporting by companies more consistent, so that financial firms, investors and the broader public can use comparable and reliable sustainability information.

Finally, six amending Delegated Acts on fiduciary duties, investment and insurance advice should ensure that financial firms include sustainability in their procedures and their investment advice to clients.

In other news…

Argentine economic fallout eyed
The fallout from severe economic constraints - including rising inflation and the government-backed freeze of the Unidad de Valor Adquisitivo (UVA) value for UVA-denominated mortgage loans - is driving asset-liability mismatches that could reverse years of progress in Argentina's mortgage market, according to S&P. The agency rated the first Argentine securitisation backed by UVA-denominated residential mortgage loans three years ago.

Such loans were created in 2016 to provide mortgage credit amid an inflationary environment and are linked to a coefficient that varies with the Argentine Consumer Price Index (CPI). They gained popularity because the initial installment the borrower pays is lower than it would be for fixed- or adjustable-rate loans.

S&P notes that subordination levels for the rated transaction, Fideicomiso Financiero Cedulas Hipotecarias Argentinas UVA Serie I, remain high at around 70%. However, the asset-liability mismatch means that cashflow may eventually fail to meet the requirements of bondholders.

The extended UVA freeze - which began in August 2019 as a temporary measure - or a change of the UVA reference variable could potentially discourage banks from making UVA loans and investors from entering into UVA-related transactions, including RMBS. “This would further contract the already limited supply of consumer credit that is available in the system, resulting in a reversion to the economic conditions prevalent in the 2001-2002 housing market crisis. For now, we believe the Argentine mortgage market will continue to shrink as political and economic challenges and risks persist,” S&P concludes.

EMEA
WhiteStar Asset Management has opened a London office to drive its European expansion and demonstrate the firm's commitment to its European investors. The office will be led by Gordon Neilly, who has joined the firm as executive chairman of WhiteStar Asset Management, Europe.

Neilly was previously chief of staff at Standard Life Aberdeen, where he acted as advisor to the ceo and was also responsible for developing the group's strategy and overseeing its implementation. Neilly joined Standard Life Aberdeen in 2016 from Cantor Fitzgerald Europe, where he was co-ceo. His prior positions include serving as md, corporate finance at Canaccord Genuity, as well as founder and ceo of Intelli Partners.

Stable outlook for ETD ABS
The continued steady repayment of electricity tariff deficit (ETD) debt through 2021 by the Spanish and Portuguese electricity systems should, in turn, facilitate steady payments to related securitisations. Moody’s expects the cumulative ETD debt-to-regulated revenues ratio for both Spain and Portugal to remain at historically low levels - at roughly 70%-80% - through the end of 2021.

Similarly, cumulative outstanding ETD debt as a percentage of GDP is anticipated to drop to 1.1% in 2021 from 1.4% at year-end 2020 for Spain and to 1.4% from 1.5% for Portugal. This is the result of deleveraging and the current stable regulatory framework, which was designed in the two countries to ensure system sustainability.

The Spanish electricity system has reduced its outstanding debt by more than 50% since 2013 and the Spanish energy sector regulator, Comision Nacional de los Mercados y la Competencia, expects the cumulative stock of debt in Spain to continue declining - despite a 5.6% reduction in electricity demand in 2020 from the 2019 level amid the Covid-19 pandemic.

The Portuguese electricity system's outstanding debt has declined by roughly 45% since 2015. However, according to the Portuguese energy sector regulator Entidade Reguladora dos Serviços Energeticos, the Portuguese debt level will likely remain flat in 2021, despite a decline in electricity consumption in 2020 by 3.7%. Moody’s notes that the lower-than-expected revenue led to an increase in access tariffs for 2021, which limits further deleveraging capacity this year.

Structured Finance

CLO investment firm formed

Sector developments and company hires

CLO investment firm formed
York Capital Management and Kennedy Lewis Investment Management have formed a strategic partnership and established a new entity called Generate Advisors. Under the agreement, York’s approximately US$4bn CLO business and team - led by Rizwan Akhter - will transition to Generate Advisors and continue to manage York’s current CLO portfolio, as well as any future CLOs issued by Generate Advisors. Kennedy Lewis, supported by its strategic investor Azimut Alternative Capital Partners, has committed at least US$200m of capital to be invested in the equity of Generate Advisors’ future CLOs.

Akhter will manage Generate Advisors. He and York cio Bill Vrattos will be joined by representatives from Kennedy Lewis to form the CLO investment committee. The pair will serve on Generate Advisors’ board, alongside Kennedy Lewis co-founders David Chene and Darren Richman, as well as Kennedy Lewis president Doug Logigian.

Credit opportunities build-out underway
Oak Hill Advisors (OHA) alumni Lei Lei and Christophe Rust are leading the build-out of Ninety One’s European credit opportunities business. Formerly known as Investec Asset Management, Ninety One manages approximately £120bn of assets globally and is significantly expanding its alternative credit platform. The European credit opportunities strategy represents an important initiative within this context and will focus on asset-backed capital solutions for European sponsorless borrowers.

Lei and Rust co-head European credit opportunities at the firm. The former joined from OHA – where he was md and portfolio manager - in December, having previously worked at Merrill Lynch.

The latter joined Ninety One in October from Sterndale Capital Partners, which he founded in October 2017, having previously been an md at OHA. Before that, Rust worked at Värde Partners, BC Partners, JH Whitney Capital Partners and Bankers Trust.

EMEA
NoviCap has appointed Lois Duhourcau cfo, reporting to founder and ceo Federico Travella. Duhourcau will focus on building out the company’s capital markets activities and strengthening the broader finance function. He has 12 years of experience in investing roles in London, with a focus on originating, underwriting and managing debt and equity investments.  Prior to joining NoviCap, he was a director in The Carlyle Group’s global credit division, where he helped build out the credit opportunities team.

NoviCap plans to continue hiring in the finance team across capital markets, control, risk and other functions.

Following his appointment at NoviCap, Duhourcau will remain an advisor to The Carlyle Group in connection with its credit platform.

Forward-looking SOFR eyed
The ARRC has published three key principles that will guide it as it considers the conditions necessary to recommend a forward-looking SOFR term rate. Such a rate should: meet the ARRC’s criteria for alternative reference rates, similar to SOFR itself; be rooted in a robust and sustainable base of derivatives transactions over time, to ensure that its use as a reference rate is consistent with best practices and the ARRC’s own standards; and have a limited scope of use. The latter point aims to avoid use that is not in proportion to the depth and transactions in the underlying derivatives market, as well as use that materially detracts from volumes in the underlying SOFR-linked derivatives transactions that are relied upon to construct a term rate, making the term rate itself unstable over time.

The ARRC says it has long recognised that the use of a forward-looking SOFR term rate may be a useful supporting tool, but for a limited set of use cases - such as fallbacks for certain legacy cash products referencing Libor - and only once sufficient liquidity exists in SOFR derivatives. This is because forward-looking SOFR term rates would be based on derivatives transactions, not the financing transactions that back overnight SOFR rates.

Ocwen case closed
The US District Court for the Southern District of Florida has entered final judgment in Ocwen’s favour and ordered the case to be closed, following the CFPB’s decision to drop any remaining claims under its Counts 1-9 and the entirety of its Count 10 in connection with its lawsuit (SCI 12 January). The court granted summary judgment in Ocwen’s favour last month. The CFPB is reportedly appealing the decision.