Contents

ABS

Vertical structure

Rare Spanish NPL ABS closed

Morgan Stanley last month closed a rare Spanish non-performing loan securitisation, dubbed Retiro Mortgage Securities. The €470m transaction features a vertical structure for the management of four sub-portfolios, with a mortgage lender, an SPV with credit rights over the loan collateral and a respective propco with security rights over the REO assets.

The NPL collateral has a total current balance of €678.4m and the REO assets are valued at €396.2m. The four sub-portfolios - Wind, Tag, Normandia and Tambo - were acquired between 2015-2017 by OCM Luxembourg OPPS X, which operates as sponsor and retention holder in the transaction.

The assets were originated by Banco Sabadell, Bankia, Caja De Ahorros De Valencia, Castellon Y Alicante (Bancaja), Caja De Ahorros Layetana, Caja De Ahorros La Rioja, Caixa D´Estalvis Laietana and Deutsche Bank. The portfolio is composed of senior secured loans (accounting for 94.5% of current balance), junior secured loans and REO assets. The portfolio is highly seasoned, with the weighted average time since default close to 11 years.

The underlying properties are mainly residential (77.8% of indexed property value) and concentrated in Valencia (27.1%), Catalonia (26.3%) and Andalucía (14.2%). The majority (66.9%) of borrowers are corporates or SMEs.

To ensure the flow of transaction-related funds between the various SPVs, a number of loan agreements were entered into by the issuer and the mortgage lenders, as well as the mortgage lenders and their respective propcos. Under these agreements, at the closing date, the issuer made advances to the mortgage lenders (using note proceeds) and the mortgage lenders will use these funds to make advances to the respective propcos. Portfolio collections, as well as principal and interest payments under each mortgage lender/propco loan agreement are then used to repay the principal and interest due on the issuer/mortgage lender loans.

Chirag Shekhar, an analyst with Scope’s structured finance team, notes: “Additional note payments are not considered as interest on the notes. However, due to the priority they take, they do have an impact on the duration risk of mezzanine and junior notes.”

Nevertheless, liquidity support is stronger than for other Spanish NPL transactions. He adds: “The issuer has entered an interest rate cap agreement for the first five years, followed by a structural cap on the base rate. This caps the payable base rate through the life of the transaction. Another positive feature is that most of the assets are located in areas with average or above average liquidity.”

Rated by DBRS Morningstar and Scope, the deal comprises €260m A/BBB+ rated class A1 notes, €77m BBB/BBB- class A2s, €34m BB/B- class Bs and €15m BB (low)/CCC class Cs. The €10m class D1s, €10m class D2s, €10m class D3s and €54m class Es are unrated. The class A1 and A2 tranches were preplaced.

Scope notes that legal developments in some autonomous Spanish communities have favoured borrowers, especially those at risk of residential exclusion in Valencia and Catalonia. Shekhar says: “While the Spanish constitutional court has partially annulled the law in Catalonia, we believe the risk from similar regional legislation remains material.”

Retiro Mortgage Securities is the first public Spanish NPL securitisation since Prosil Acquisition, also rated by Scope (SCI 10 July 2019). The portfolio is serviced by Redwood MS (as master servicer), VicAsset Holdings (as master servicer and REO servicer), Redwood Real Estate Spain (as REO servicer) and RTA Management Gestion Integral de Activos (as loan servicer).

Angela Sharda

CLOs

Convexity clues

CLOs hold firm but opportunities arise

Booming CLO primary activity either side of the Atlantic continues to be met with sufficient demand to keep supporting spreads. However, there are still opportunities for investors in some areas.  

“Mezz in particular has continued to come in over the past couple of weeks,” says one investor. “The only area where we are seeing a hint of stabilisation and moving a tiny bit wider is on triple-As, but obviously we are coming from very tight levels, so are still seeing European new issue in the low-to-mid-80s and US in the 110s to 120s.”

Such levels show the strength of appetite from a growing and diverse range of investors in the face of record-breaking supply. JPMorgan CLO research reported that to the end of last week, 23 April, year-to-date 297 US CLOs had priced totalling US$132.4bn and 91 European CLOs totalling €33.3bn. This compares to 96 US CLOs totalling US$45.3bn and 16 European CLOs totalling €6.7bn for the same time period last year.

US activity has continued unabated this week, with 15 deals printing over the first three sessions. Europe, however, has slowed this week - perhaps in advance of month-end - with only two deals pricing to last night’s close.

The primary market remains dominated by refis and resets, as it has been throughout this year. This month has seen another period of intense activity with 16 refis, resets and re-issues printed in Europe and 52 in the US in April up to yesterday’s close. The continuing significant volumes in such deals through most of this year is having a notable side effect, according to Stephane Michel, senior portfolio manager at the international business of Federated Hermes.

“Refis and resets are creating a lot of interesting data points and technical flows because existing investors may or may not want to roll, so there’s potentially a huge technical imbalance there,” he says. “At the same time, equity holders and CLO managers are getting quite subtle in the way that they are looking at the cost of their stack and are no longer automatically calling or resetting a deal on schedule. Instead, they may look at the market and see what the feedback is and decide to refi one or two tranches, or they might refi the stack or they might reset or they might clean up the portfolio and reset.”

As a result, Michel continues: “Not just having pure refis or resets is creating a better visible credit curve with pricing points for different durations beyond the typical new primary at eight years for mezz tranches. So, you can start to really inspect the subtleties of different convexity profiles in different CLO tranches.”

Indeed, the investor reports: “There are a few specific themes we are currently finding interesting and focusing on. For example, double-Bs where we are looking for convexity, so buying profiles with 93, 94, 95 dollar price with some upside.”

In addition, the investor sees some opportunities at both the top and bottom of the stack. “We like shorter duration, higher quality triple-A paper, as we’ve seen that there’s not a lot of basis between new issuance and shorter duration paper in terms of weighted average lives; we think that basis is about as steep as it can be and we think those profiles will be relatively more stable,” he says. “Equally, CLO equity continues to be interesting for us in secondary and to a certain degree in primary markets.”

Overall, the investor concludes: “While there is always the potential for some external factor to catch us by surprise and trigger a risk-off environment, the CLO market currently looks in good shape with strong engagement from investors across the capital structure and healthy secondary as well as primary volumes. Sure, spreads and valuations are at the tighter end of what we’ve seen in the last year to 18 months, but I don’t see massive reasons from the market itself why that would change in the next three to six months.”

Mark Pelham

Structured Finance

SCI Start the Week - 26 April

A review of securitisation activity over the past seven days

Last week's stories
Bottoming out
EU NPL ratios improve
Climate concerns
The nexus between insurance risk transfer and ESG
Investor interest
European CLOs attracting new investors to mezz and equity
Regional resilience
Structural enhancements for debut aircraft ABS
RWA boost
ECB reveals TRIM findings
Third 2021 STACR prints
With Fannie Mae still on the sidelines, Freddie corners CRT space
Uncertainty highlighted
UK banks unclear on project finance slotting
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 scrutinising, 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 securitisation 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

Other deal-related news

• Overall defeasance activity volume for US conduit and Freddie Mac CMBS decreased by 21% in 2020, according to Moody's (SCI 20 April).
• Moody's has upgraded the ratings of two tranches issued by UK student loan ABS Honours Series 2 (SCI 20 April).
• The Australian Office of Financial Management has released an update on its Structured Finance Support Fund activities (SCI 21 April).
• S&P intends to introduce alpha-numerical ESG Credit Indicators to help explain the influence of ESG factors on its credit rating analysis (SCI 21 April).
• 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 (SCI 22 April).
• 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 (SCI 22 April).
• 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 (SCI 22 April).
• 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 (SCI 23 April).
• 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 23 April).

Company and people moves

• 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 (SCI 20 April).
• The EIF and Alantra have joined forces under the European Guarantee Fund (EGF) to support European SMEs hit by the Covid-19 economic crisis (SCI 20 April).
• BlueBay Asset Management has hired Tom Mowl as a portfolio manager within its structured credit and CLO management team (SCI 20 April).
• ICE Mortgage Technology has launched a solution that aims to transform the way mortgage loans are electronically closed in the US (SCI 21 April).
• Aeolus Capital Management has recruited alternative investments research and portfolio advisory specialist Amit Patel (SCI 21 April).
• WhiteStar Asset Management has opened a London office to drive its European expansion and demonstrate the firm's commitment to its European investors (SCI 22 April).
• York Capital Management and Kennedy Lewis Investment Management have formed a strategic partnership and established a new entity called Generate Advisors (SCI 23 April).
• Oak Hill Advisors (OHA) alumni Lei Lei and Christophe Rust are leading the build-out of Ninety One's European credit opportunities business (SCI 23 April).
• NoviCap has appointed Lois Duhourcau cfo, reporting to founder and ceo Federico Travella (SCI 23 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 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

Structured Finance

Funded reinsurance roll-out

Pass-through longevity swap completed

Prudential Insurance Company of America’s (PICA) international reinsurance business last month closed an innovative longevity swap with a UK pension scheme using a UK-regulated insurer, Zurich Assurance, as intermediary. The transaction - which transfers longevity risk associated with £6bn of pensioner liabilities - features a limited recourse structure, whereby the longevity and default risks can be passed through the insurer.

“Last year, we expanded our offerings and launched funded reinsurance, where we reinsure both longevity and asset risk for our clients. At PFI, we see the use of a third-party onshore UK-regulated insurer as limited recourse intermediary as the logical next step in the de-risking solutions we can offer clients in our evolving business model,” says Rohit Mathur, head of transactions for Prudential Financial’s international reinsurance business.

Using a regulated UK insurance company for longevity risk transfer provides a number of benefits for UK trustees, including cost certainty for the life of the transaction. “For many sophisticated trustees of UK defined benefit pension schemes, the immediate removal of longevity risk - while using scheme assets in the most efficient and risk-aware manner - will continue to represent the optimal route to eventually secure all their liabilities,” suggests Greg Wenzerul, head of longevity risk transfer at Zurich Assurance.

Willis Towers Watson (WTW) served as lead adviser to the trustee and joint working group for the transaction, the third Prudential Financial longevity reinsurance deal it has been involved with in recent years. Each transaction used a different intermediary insurer – a Guernsey captive, a Bermudan captive and now a UK insurer - demonstrating that structuring options exist for schemes with a wide range of governance, flexibility and cost requirements.

“We helped the joint working group to understand the full breadth of available options for managing longevity risk, which was a material outstanding risk in the scheme. We concluded that a longevity swap would provide good value for money relative to the risk transferred, as well as enabling the scheme to continue to run an optimised investment strategy,” observes Ian Aley, head of transactions at WTW.

The trustee and joint working group were also advised by CMS and Eversheds Sutherland. PFI was advised by Willkie Farr & Gallagher and Clifford Chance, while Zurich was advised by Pinsent Masons and Kramer Levin Naftalis & Frankel. The scheme's sponsor was advised by LCP. 

Corinne Smith

Capital Relief Trades

Marco Polo returns

Credit Agricole finalises landmark SRT

Credit Agricole and the IFC have finalised a five-year US$182m mezzanine guarantee that references a US$4bn portfolio of over 1,300 emerging market trade finance exposures. Dubbed Marco Polo Three, the transaction is the largest significant risk transfer trade that the French lender has ever executed in portfolio terms. More saliently, it matches the IFC’s sustainability criteria with that of Credit Agricole’s.

The synthetic securitisation is twice as large as the last Marco Polo deal, which was completed over three years ago (see SCI’s capital relief trades database). The project comes at a time when emerging market trade finance flows have been hit hard by the global pandemic.

Credit Agricole embarked on the latest iteration of the programme as the second Marco Polo trade was approaching full amortisation. The deal features a retained first loss tranche, pro-rata amortisation, a time call and a replenishment period that is equal to two years. 

According to Jean-Marc Pinaud, head of structuring at Credit Agricole Corporate and Investment Bank: “It’s a transaction that expands our seven-year partnership with the IFC - beginning with the first Marco Polo trade in 2014 - and was built jointly with the trade finance division of the bank, with a commitment to develop that line of business to serve emerging markets.’’

He says that the sustainable finance aspect of the deal is particularly interesting. “Unlike previous Marco Polo transactions, the latest one matches our portfolio eligibility criteria with that of the IFC’s sustainable finance criteria. Matching this meant that we managed to make the IFC feel sufficiently comfortable, so that it could rely on our internal policies, which is very novel and a recognition of the work that we have done over the years.’’  

Stelios Papadopoulos

Capital Relief Trades

Risk transfer round-up - 27 April

CRT sector developments and deal news

Credit Suisse has redeemed and delisted two Magnolia Finance Five transactions. Magnolia Finance Five Series 2017-1 is a US$400m CLN that matures in 2024. The other transaction, dubbed Magnolia Finance Five series 2017-2, is a US$75m CLN that matures in 2025. 

ABS

Balancing act

Alexander Batchvarov, md, head of international structured finance research at BofA Securities, discusses the burgeoning European esoteric securitisation sector with SCI

Q: How would you describe European investor appetite for esoteric securitisations currently?
A: We have a situation on the market, where corporate spreads are moving very tight and at present high yield spreads are in the 300bp area in Europe. Investors seek beta, but also keep an eye over their shoulders – ECB reaction function is of concern. 

With rates beginning to back up elsewhere, the demand for floating rate exposure is strong and can only rise. Investors will want more leveraged loans exposure and the corporate conditions are ripe for more leveraged loan supply, given that M&A and LBOs are picking up.

With esoterics, it is a bit tricky. These bonds are sometimes a little more difficult to assess and may not offer economies of scale for investors; i.e. supply of a given sector may be rather sporadic.

So, demand is definitely there, but it is dependent on asset class, issuer and sector.

Q: In which ways are market conditions ripe for esoteric and first-time issuers?
A: Market conditions are good for first-time issuers. On the one hand, the banks have more liquidity than they can handle, so they issue little ABS paper, if at all. On the other hand, the investor demand is there and, in the absence of the low hanging fruit (e.g. repeat bank issuers), investors will assess and eventually take the investments that are on offer (e.g. debut issuers, debut asset classes).

Whether the supply will materialise remains to be seen. Let’s not forget the regulatory hurdle: for US versus EU investors, there are different standards of due diligence (broadly defined versus very prescriptive, respectively); the same can be said about the issuers (e.g. just compare the disclosure template requirements) and the same can be said about the products (the standards for due diligence and disclosure for RMBS and mortgage covered bonds are significantly different).

A first-time issuer and a first-time asset class issuance would take more time to reach EU investors than US investors.

Q: What, if anything, has changed to create these conditions?
A: There are contradictory conditions at the moment.

On the one hand, we have strong investor demand for beta, along with demand for floaters. On the other hand, there are barriers to issuers and investors reaching out to the ABS market. 

It is, quite frankly, a balancing act between the two for esoteric ABS.

Q: How much of a yield pick-up do rare deals generically provide versus more traditional issuance?
A: There is no rule of thumb or an indicative average spread pick-up for esoteric deal pricing. It will depend on the reference point (for example, is the esoteric deal comparable to consumer or corporate ABS) and on the dominant investor base (for example, a preference for shorter duration investment by banks versus long duration investments by insurers).

It will also depend on whether the asset class is new for just some (geographically constrained) or all investors. Rental car ABS have been present in the US for a while and offer a pick-up of about 65bp over prime auto loan ABS; if such a deal were to be done in Europe, it may end up with a higher pick-up than that because of newness or a lower pick-up because of scarcity. Timeshare ABS offer similar pick-up over credit card ABS in the US; the former product will be fairly new, if offered in the EU now, and the latter is of limited supply in the EU, so the spread differential in the EU may be potentially bigger than in the US.

Q: How do you see the esoteric/first-time issuer segment evolving, in terms of potential new assets, jurisdictions and beta trades?
A: We should see more products coming into the market. There is certainly more demand for esoterics, especially in the ESG space: solar panels, water treatment plans, wind turbines and EV loan ABS. In that space, there is a real money pull from investors and a verbal push from regulators, as far as sustainable ABS is concerned.

Q: What is driving the supply/demand imbalance in the European securitisation market at the moment?
A: There are certainly constraints on both sides of the market, both demand and supply, and the reasons for that are multiple. The EU has the most restrictive and costly regulatory framework for securitisation anywhere in the world and among all fixed income instruments, despite the stellar historical performance of the EU securitisation market since its inception about 30 years ago. 

The cheap and easy liquidity that ECB has offered the banks has certainly reduced their funding needs. The most favourable treatment offered to covered bonds makes them a preferred funding instrument for banks over RMBS; the shift from RMBS to covered bonds is evident in, for example, the Netherlands, a historically strong MBS jurisdiction. The restrictions on EU insurers and pension funds have largely taken them out of the securitisation market. 

Q. Is this situation likely to change in the coming months?
A: Let’s call these small changes. A new asset class here or there (rare issuance of insurance premium ABS or a rare mortgage type), a debut issuer (we have every year a few in CLOs and there was recently a debut issuer of salary loan ABS in Italy) or ESG-defined collateral.

Even if this happens all together, it will not lead to a material change in the EU securitisation market.  For that to happen, we need to see a change at the top that the market has been asking for many years now and which found the most visible and detailed expression in the list of recommendations for fixing the EU securitisation market drawn up by the High Level Forum on CMU (SCI 21 July 2020).  But that is not in the cards for 2021, if at all. 

The recently adopted ‘quick fixes’ for synthetic and non-performing loan securitisation are anything but fixes. Depending on how they are implemented, they may turn out to be two steps backwards in the future for the one step forward made by the market in recent years.

Angela Sharda

CLOs

Democratising data

Stephane Michel, senior portfolio manager at the international business of Federated Hermes, answers SCI's questions on ESG in the CLO space

Q: How does Federated Hermes integrate ESG in its CLO business?
A: CLOs are still very much a universe where we are trying to build an analytical framework that is comparable to what our equity colleagues have been able to do for much longer, due to the provision of data that we haven’t got. That’s the challenge for ESG across the whole spectrum of structured credit.

As my colleague Andrew Lennox noted when he spoke to SCI last November, we arrived three or so years ago with a mandate to build out the firm’s structured credit business, but to do so within the DNA of Federated Hermes, meaning that we needed to integrate ESG. We started our credit approval process with a blank sheet of paper and said how can we best do this our way?

Because we’d seen quite a lot of chat from investors when discussing ESG and it sometimes comes across perhaps as a bolt-on when everything else is finished. But for us, it truly is integrated because every part of the credit analysis and the due diligence and the investment approval has all got the ESG aligned.

Q: What are the specific challenges of integrating ESG in the CLO market?
A: What we’d like to have is some form of output that in some way at some point can be consumed by our investors. If we get our way, in time hopefully the PE sponsors in the world of loans will feel comfortable with public disclosure of their ESG data in their deals.

At that point in time, CLO managers will be able to not only do their analysis, but also report ESG factors in their deals. Or, if they don’t, we’re at least able to see a trustee report and look at the collateral and have some way ourselves of guesstimating the ESG factors contained in those deals. That kind of democratisation of data is the end goal that we’d like to see the industry arrive at.

That’s one of the issues in syndicated leveraged loans in general: forget ESG; just financial information is not readily available for people who are not involved in that particular field. This is something that will hopefully continue to improve over time.

Data disclosure is an issue, but so is performance history. It’s still obviously early days. We have as a house in the past shown the benefits of ESG within credit specifically, but we’re not yet able to do that for structured credit because the history is not there in terms measuring performance.

There have been studies by the Bank of England in regards to mortgages, for example, so there’s a bit of data coming through. But I couldn’t tell you for sure that good ESG gives you better credit performance in structured credit – we don’t have that empirical evidence.

Q: Can you work with that lack of evidence in the short-term?
A: For us, to a certain extent, it doesn’t really matter. If we go one step beyond that and say ESG is credit neutral and has had no particular upside to credit performance, have I still achieved something better by engaging with those issuers and pushing for a better social agenda or environmental records or stronger governance in the structure or internally within the managers?

If the answer to that is yes, then even if my pool hasn’t performed better necessarily, I’ve still made a positive contribution by investing this way. So, we’re not going to wait for the empirical evidence to prove itself because we don’t need to.

Q: Is the ESG data situation improving?
A: If you look at what’s happening, we are seeing progress. We’ve got the ELFA templates and everyone is focused on moving things in the right direction. From what I gather, the PE sponsors too now have an investor base that’s very demanding on their ESG credentials, so I think they’re on board.

The risk with all these things is that it becomes a marketing sticker and by having that sticker, investors feel like they have ticked the boxes if they select that particular deal without knowing whether it is truly beneficial or not. In the CLO space, we’ve had quite a few ESG deals, but the range of ESG integration and genuine ESG analysis is quite broad. So for the time being, what you’ll find is most of the deals are exclusions-based, where you could argue that their exclusions aren’t much different to what they were prior to the introduction of ESG criteria.

Q: So, there is still some way to go?
A: Yes. For us as an investor in CLO liabilities, what we’d like to see is a deeper application of the ESG principles in the process from beginning to end, including reporting. I have no way of knowing whether these deals are ESG, other than knowing they have ticked the boxes by not buying the assets that are excluded.

I don’t really know how the manager used the deals from an ESG perspective and this is where we really have to face up to the challenge of lack of transparency and data. Everyone doing the work right now is having to use a more qualitative framework than quantitative, because the data is not yet there to crunch.

And ‘qualitative’ isn’t necessarily apples and apples from one party to the next. So, we apply our own qualitative and where possible quantitative framework in terms of how we review all our CLO managers and CLO deals. But if I take at face value what one of my CLO managers says is good ESG and I just accept the same from the next CLO manager, without being able to dig into the data underneath, I have no way of knowing whether I’m really signing up to apples and apples or apples and oranges.

We have to rely on a bit of an agency model in the sense that for the current generation of ESG, you’re passing on your burden to the manager. But, in a way, it’s like the life cycle of how credit ratings evolved: in the beginning, there were just a handful of rated companies, so people did their own work based on the information they could find.

Then as agencies became more prolific, everyone started relying on the ratings. But ratings are still only a way of benchmarking for good credit investors – they’ll do their own work as well.

Ultimately, as good investors, we really want to do the look-through ourselves, so we need to keep pushing for transparency.

Mark Pelham

Structured Finance

Downgrades for 'lower quality' mall CMBS

Sector developments and company hires

Downgrades for ‘lower quality’ mall CMBS
Moody's has downgraded 119 principal and interest, 26 interest-only and 11 exchangeable classes from 36 US CMBS and placed eleven P&I, one exchangeable and three IO classes under review for possible downgrade from a further two CMBS. The rating actions affect approximately US$6.2bn of securities and were prompted primarily by increased loss expectations and higher interest shortfall risk to the transactions, due to the continued cashflow and value deterioration for specially serviced, delinquent or otherwise poorly performing loans secured by lower quality regional malls.

For regional mall loans contributing to this action that have reported at least six months of annualised 2020 NOI, the NOI was on average 16% lower than full-year 2019 NOI. Moody’s reports that borrowers of certain poorly performing CMBS loans have indicated that they intend to cooperate with foreclosure proceedings and/or are unwilling to inject additional cash to support these assets. For regional mall assets that are undergoing foreclosure or are already classified as REO, the agency anticipates that the acceleration of dispositions in the next 12 months and the ultimate liquidations of these assets may result in significant losses.

As of the March 2021 remittance reports, the share of specially serviced loans secured by all property types for the impacted transactions averaged 20% and ranged up to 42% of their respective pooled transaction balances. The downgrades also reflect heightened refinancing risk among these poorly performing loans; in particular, seven 2011 transactions where nearly all of the remaining loans have maturity dates in the next six to eight months.

Meanwhile, the ratings on the 26 IO classes were downgraded due to a decline in credit quality of their referenced classes. The ratings on the 11 exchangeable classes were downgraded due to a decline in credit quality of their referenced exchangeable classes.

The downgraded tranches included in this action represent approximately 2% by balance and 5% by count of the outstanding conduit CMBS tranches Moody's rates. Of the impacted deals, 35 were issued between 2011 and 2016, while one was issued in 2006 - in which a regional mall represents 94% of the remaining collateral.

EMEA
Martijn van der Molen has joined Christofferson Robb & Company as md in its portfolio management group, based in London. He was previously senior director, credit and insurance-linked investments at PGGM. Before that, he worked at Citi, UBS and JPMorgan.

Spanish RMBS stress tested
High credit enhancement and robust structural protections mitigate the rating impact of slower and smaller recoveries and higher defaults in Spanish RMBS under a range of stress scenarios, Fitch notes. In the most severe stress scenario, 67% of tranches would be downgraded on average by three notches, but no investment-grade bonds would drop into sub-investment-grade territory.

The rating agency’s stress tests – which were run on a sample of eight out of 28 prime transactions from seven originators issued between 2008 and 2020 - measure the rating impact of shocks beyond those in its criteria. The first scenario extends standard recovery times by two years, while the second reduces recoveries by 30% from Fitch’s criteria expectation. The third combines a one-year recovery time extension, a 15% rise in defaults and a 15% reduction in recoveries.

UK mid-market lender launched
A new alternative lender has launched to provide credit and critical working capital funding to mid-market UK businesses. Blazehill Capital is backed by a number of high-profile investors, including global credit investment firm WAFRA Capital Partners.

Blazehill Capital provides asset-based finance ranging from £5m to £30m per transaction and aims to build a lending book of over £1bn in five years.

The core Blazehill Capital team has over 40 years’ direct lending experience and is led by md Tom Weedall. He previously held various leadership roles at US asset-based lenders, including Wells Fargo and GE Capital, where he sourced and closed a number of transactions in excess of £800m.

Structured Finance

APAC ESG expansion eyed

Sector developments and company hires

APAC ESG expansion eyed
Moody’s is set to expand its Singapore office with the aim of spearheading ESG, climate and sustainable finance efforts in the Asia Pacific region, as well as fostering the ESG ecosystem in Singapore. Included in the firm’s plans are several initiatives, such as the establishment of an ESG Centre of Excellence for investor outreach, engagement and training, and an innovation lab and technology accelerator that will partner with local fintech companies in developing ESG analytical solutions and assessment tools. These initiatives will, over time, complement the new Moody’s ESG solutions group office established in Singapore in February to support the growth of sustainable finance across APAC.

Separately, Moody's will include climate risk scores - as developed by Four Twenty Seven - as an appendix to presale and new issue reports for US and European RMBS. Climate risk levels will be disclosed for the transaction as a whole, as well as for the US counties and European regions showing the highest concentrations of mortgage loans in each pool.

APAC promotion
Crédit Agricole has named Edouard O’Neill as ceo for the Hong Kong branch and head of structured finance for Asia. O’Neill will lead the overall business development and strategy of the bank’s commercial franchise in Hong Kong and further develop the organisation’s structured finance activities in Asia.

Located in Hong Kong, O’Neill reports to Michel Roy, senior regional officer for Asia-Pacific. For structured finance Asia-related matters, he reports dually to Jacques de Villaines, global head of structured finance and Roy. He was previously md, global head of acquisition finance and advisory at the bank.

CLO data tie-up
Reorg and Moody’s Analytics have entered into a data-sharing agreement. Reorg will supply subscribers of Moody's Analytics structured finance solutions with real-time notifications of credit events from its intelligence platform in exchange for Moody's Analytics data on CLO portfolio holdings and collateral. The latter’s CLO data covers US$872bn in total CLO assets.

Spike in CMBS default rate
The US CMBS cumulative default rate hit a new high of 18.2% last year, exceeding the prior peak of 16.8% in 2013, according to Fitch’s latest loan default study for the sector. The total annual default rate for 2020 was 3.3%, up from 0.3% in 2019, due to a spike in term defaults - which accounted for approximately 95.9% of total defaults. The increase in the cumulative default rate was also influenced by the sharp decline in new issuance.

Retail and hotel defaults each represented 43.5% of total defaults. A total of 374 retail loans (US$12.9bn) defaulted in 2020, compared with 64 loans in 2019. Regional malls constituted 54.4% of retail defaults and 11 of the 15-largest overall defaults.

The hotel sector saw defaults increase substantially to 613 loans (US$12.9bn) from 31 (US$388.3m) in 2019. Moderate recoveries are expected in the coming year as travel increases with greater immunisation rates.

The overall default rate would have been higher if not for servicers’ willingness to work with borrowers to grant relief. The vast of majority of the 555 loans granted consent agreements received payment forbearance.

SR final assessments underway
ESMA has reached the last stage in the assessment process of applications received from securitisation repositories (SRs) under the Securitisation Regulation (SECR). The obligation to report securitisation transactions to an SR under the SECR will apply as soon as one SR is formally registered and ESMA will inform market participants when the registration of the first SR is completed. The authority has 40 working days in which to finalise its assessment of a registration and, if favourable, the entity will be registered as an SR five working days after the registration decision is adopted.

Structured Finance

Irish RPL refi prepped

Sector developments and company hires

Irish RPL refi prepped
A refinancing of two Irish reperforming RMBS - European Residential Loan Securitisation 2019-PL1 and Grand Canal Securities 1 - has hit the market. Dubbed Primrose Residential 2021-1, the transaction is backed by a €869.8m portfolio of seasoned first lien performing and reperforming mortgages secured by majority owner occupied (accounting for 57.6% of the pool) and buy-to-let properties located in Ireland.

The portfolio comprises 5,820 mortgage loans originated by three Irish originators: Permanent TSB (72.5%), Irish Nationwide Building Society (15%) and Springboard Mortgages (12.5%). The mortgages that collateralised ERLS 2019-PL1 aggregate to €630.8m (72.5%), with GCS1 assets making up the remainder of the portfolio.

The average balance of the loans is €149,451 and the pool has a weighted average seasoning of 165.3 months and a weighted average current LTV of 61%, according to KBRA. There is geographical concentration in Dublin, which accounts for 34.1% of the pool’s regional exposure, but the top 10 regional exposures account for 76%.

Restructured loans make up 54.7% of the portfolio (14.3% are split loans), with the majority of the restructurings undertaken between 2014 and 2019. Over the past 18 months, 44.5% of the restructured loans showed a clean payments history.

The portfolio includes 923 loans (18.6%) that have been subject to Covid-19 payment deferrals, although only six loans continue to be under an active payment holiday. The remainder have resumed scheduled monthly payments.

The loans will continue to be serviced by Start Mortgage (72.5%) and Mars Capital Finance Ireland (27.5%). The ERLS 2019-PL1 portfolio serviced by the former showed a cumulative loss of 0.27%, as of March 2021, while the GCS1 portfolio serviced by the latter has reported less than 0.1% of cumulative losses as of February. KBRA notes that the weighted average pay rate for the combined portfolios is approximately 97%.

In other news…

EMEA
Duff & Phelps has appointed Andy Marsden as md and leader of its EMEA business modelling and analytics team. Based in London, Marsden has more than 16 years of modelling experience and will assist the firm’s clients across all sectors with a variety of requirements, including developing transaction models to support buy- and sell-side deals, as well as applying data analytics as part of transaction diligence and business strategy design. Prior to joining the firm, he spent 20 years with Ernst & Young, where he was an associate partner in the strategy and transactions practice, leading the financial services business modelling team in London.

Fiona Nelson has joined Funding Circle UK as director, capital markets - structuring and execution. She was previously a director in Barclays’ securitised products solutions team and has also worked at Morgan Stanley, Giltspur Capital, Nationwide and Merrill Lynch.

Global
KBRA has made a number of changes to its senior management, reflecting the expansion of its global footprint. Patrick Welch has been named chief ESG and ratings policy officer, leading all aspects of KBRA’s commitment as an ESG-focused firm. He previously served as chief credit officer for the last five years.

Lenny Giltman, senior md, has been named chief credit officer, reporting to Welch. Giltman previously led KBRA’s ratings legal team, where he served for eight years. John Hogan, md located in KBRA’s London office, will assume Giltman’s role as head of ratings legal.

Kate Kennedy’s role as KBRA’s co-head of business development and overseeing its marketing and communication areas has been expanded to include oversight of KBRA Analytics. Steve Kuritz, senior md, has been named head of KBRA Analytics, reporting to Kennedy.

He will be responsible for driving the firm’s efforts in delivering data and analytics to the global financial community. Previously, he led the KBRA Credit Profile (KCP) team, which is responsible for the firm’s CMBS surveillance subscription service.

Finally, Caitlin Colvin becomes head of investor relations, reporting to Kennedy. She has served in an investor relations role for the past two years and previously was a member of the ratings legal team, with a focus on ABS.

Structured Finance

Greek investment partnership inked

Sector developments and company hires

Greek investment partnership inked
Mount Street Group has formed a strategic partnership in Greece and Cyprus with Technical Olympic, a Greek real estate, construction and investment group. As part of the partnership and through its subsidiary PFC Premier Finance Corporation (Cyprus), Technical Olympic has entered into a Memorandum of Understanding to acquire a stake in Mount Street’s businesses in Greece and Cyprus, including its real estate, credit advisory and loan servicing regulated business in Greece. The agreement is subject to final documentation and regulatory approvals in Greece, including from the Bank of Greece.

Mount Street Hellas will be supporting the acceleration of the capital deployment programme of Technical Olympic through debt and equity investments across a range of asset classes, primarily focusing on commercial real estate, hospitality, shipping and SMEs. Technical Olympic and entities related to its anchor shareholders, the Stengos family, will be committing capital to co-invest alongside Mount Street and its other capital partners across single credit and loan portfolio investments across a range of opportunities originating primarily in Greece and Cyprus.

Wells counterparty transfer eyed
Computershare Trust Company’s acquisition of the Wells Fargo Corporate Trust Services (CTS) platform is not expected to affect the credit ratings for the roughly 11,000 structured finance bonds that currently rely on CTS for certain trust administration functions, Fitch notes. The transaction is expected to close in 2H21.

The sale includes cash and non-cash handling functions across structured finance in the US and master servicing for US RMBS. The acquisition includes business critical items, such as fixed assets, technology, intellectual property and employees transferring from CTS to Computershare. The firm plans to use third parties that meet Fitch's counterparty criteria.

Structured Finance

RFC issued on LGD proposal

Sector developments and company hires

RFC issued on LGD proposal
The EBA has published a consultation paper on draft Regulatory Technical Standards specifying the types of factors to be considered when assessing the appropriateness of risk weights and minimum loss given default (LGD) values for exposures secured by immovable property. Relevant authorities, as designated by a Member State, may set higher risk weights or impose stricter criteria on risk weights, or increase the minimum LGD values when two conditions are met.

The first condition is when risk weights do not adequately reflect the actual risks related to the exposures secured by mortgages on residential property or commercial immovable property, or that the minimum LGD values are not adequate. The second is when the identified inadequacy of these risk weights or minimum LGD values could adversely affect current or future financial stability in the Member State.

The draft RTS focus on the first condition. For institutions applying the standardised approach (SA), these draft RTS specify the types of factors that authorities should consider during the risk weight assessment on the basis of the loss experience of exposures secured by immovable property and forward-looking immovable property market developments. For institutions applying the internal ratings-based (IRB) approach to retail exposures secured by residential or commercial immovable property, these draft RTS provide conditions to be considered when assessing the appropriateness of minimum LGD values.

Comments on the consultation should be submitted by 29 July. A public hearing is scheduled for 30 June.

In other news…

EMEA
Arrow Global has named Marco Grimaldi head of fund portfolio management, Italy. He will be responsible for the Italian portfolio management of the Arrow Credit Opportunities 1 Fund book and Arrow Global back books. Grimaldi was previously co-ceo of Whitestar Asset Solutions, prior to which he worked at Zenith Service, Commerzbank and ABN AMRO.

Alberto Marone has been appointed md for Intrum’s operations in Italy, having previously been group investment director at the firm. Since 2018, he has also been part of Intrum Italy’s senior management team, where he covered the role of head of M&A and strategy for the joint venture with Intesa Sanpaolo. Prior to joining Intrum, Marone worked as director at UBS Investment Bank in London, focusing on capital market activities with European financial institutions and sponsors.

Marone will report directly to president and ceo Anders Engdahl and be a member of Intrum’s group management team. He replaces Marc Knothe, who takes on the role as md for Intrum Germany and Austria.

General QM rule delayed
The CFPB has delayed the mandatory compliance date of the General Qualified Mortgage final rule from 1 July 2021 to 1 October 2022 (SCI 4 March). The move is designed to help ensure access to responsible, affordable mortgage credit and preserve flexibility for consumers affected by the Covid-19 pandemic and its economic effects. Delaying the mandatory compliance date of the General QM final rule allows lenders more time to offer QM loans based on a homeowner’s debt-to-income (DTI) ratio, rather than certain pricing thresholds.

North America
Eagle Point Credit Management has recruited Sam Yoon as a vp, reporting to principal and portfolio manager Dan Ko. Yoon will work alongside Patricia Antonios, director, assisting the senior investment team in CLO debt trading and portfolio management. Prior to joining Eagle Point, he was a vp at Good Hill Partners, where he was a member of the firm’s CLO investment team. Before that, he was an associate portfolio manager at MKP Capital Management, also focusing on CLO investing.