Contents

ABS

Alternative support

Infrastructure ABS boosts Italian direct lending

Further details have emerged regarding the debut syndication of an Italian infrastructure loan via a securitisation vehicle (SCI 4 May). The transaction was undertaken with aim of enabling alternative lenders to access the Italian credit market.

“The objective of the deal was to syndicate both drawn and undrawn loan commitments to non-banking institutions that were not licensed to make direct lending in Italy. To this end, the securitisation tool effectively allows alternative lenders to access the Italian credit market,” explains Pietro Bellone, counsel at Allen & Overy Italy.

Société Générale is the original lender and arranger of the transaction, which securitises a portion of a loan granted to a telecommunication company by a pool of banks comprising Société Générale and other financial institutions. Allen & Overy advised Société Générale on the deal, but the other parties involved could not be disclosed, due to confidentially issues.

The transaction involves both the acquisition of receivables arising from drawdowns already made and the direct lending by the securitisation vehicle of further funds, pursuant to article 1, paragraph 1-ter of Law 130/99. “This is the first time that non-banking institutions which are not licensed to make direct lending in Italy provide financing through a securitisation vehicle for infrastructure. This is particularly important, considering the need for alternative sources of funding to support infrastructure,” says Bellone.

He adds that the transaction has been structured in such a way as to get investors comfortable that they have the same economic and administrative rights and protections as if they were direct lenders. In particular, the deal – which comprises a single tranche of notes - required a lot of engineering to ensure that the bonds work effectively as a loan for the investors.

Bellone suggests that the originator is likely to bring further deals such as this to the market in the future. “There is a lot of pressure from banks in Italy to deleverage loan exposures, thus releasing resources for new financing. At the same time, we see an increasing appetite from alternative lenders to partner with banks in strategic sectors.”

He concludes: “Infrastructure is a key priority in Italy and, with no doubt, this unprecedented deal will pave the way for others.”

Angela Sharda

Capital Relief Trades

Tight pricing

Standard Chartered prints CRT

Standard Chartered has finalised a US$180m CLN that references a US$2bn portfolio of around 130 US and European corporate exposures. Dubbed Chakra Five, the capital relief trade is the most tightly priced Chakra deal to date.

The trade printed in the high single-digits and features tranches that amortise sequentially over a an approximately three-year weighted average life and three-year replenishment period. The portfolio consists of both drawn and undrawn commitments, although it comprises primarily the latter.

The last Chakra deal was carried out in 2019 and even though the market rebounded in 2H20, Standard Chartered waited a bit longer before tapping the market for a new ticket. According to sources close to the transaction, the bank simply waited for market pricing to tighten and stabilise at pre-Covid levels.

 Chakra Five is the fifth transaction from the Chakra programme. Standard Chartered initiated the programme in 2018, as it built up its corporate and institutional banking business in the US and Europe, while managing concentration risks through the credit cycle.

Stelios Papadopoulos

ABS

Niche exposure

CFE Finance business development manager Duccio Duranti and CFE Finance UK md Giuseppe Leppi answer SCI's questions

Q: How and when did CFE Finance become involved in the securitisation market?
DD: CFE Finance was founded by Mario Cordoni in 2001 to support the trade of commercial transactions both to and from emerging markets, including pre-export finance and export credit agency (ECA) financing. As a metals trader, Mario often faced credit risk exposure when dealing with emerging market buyers, which meant he turned to credit insurance from export agencies. With the backing of Banca Lombarda (now part of UBI Banca), Mario created CFE with trade finance expert Massimiliano Piunti, with the aim of developing relationships with export credit insurers in Italy, France, the Netherlands, Switzerland, Austria and Japan.

Since then, the firm has built up a reputation as a leading non-bank player in the origination of trade finance opportunities, with over €2bn of AUM deployed across private credit and special solutions strategies. In 2014, we began offering trading and execution services through our London and Monaco offices, in addition to investment advisory.

The firm began using securitisation in 2015 in connection with our Italian factoring business, as the technology is an efficient way of raising money for such assets. Securitisation is an ideal instrument for transforming illiquid assets: invoices and letters of credit are difficult to trade in and out of; securitising them enables the resulting notes to be traded.

Over time, the firm has established 15 securitisation vehicles domiciled in Italy and Luxembourg, four of which are dedicated to trade credits and the remainder to Italian public administration credits.

Q: What are the firm’s key areas of focus today?
GL: Securitisation is one of the reasons why CFE was able to grow: it is a transparent and institutionally viable instrument. We require a mandate to put together a securitisation and they are bespoke vehicles, each with different risk characteristics.

Typically, the minimum size of commitment from one or more investors is €20m. Some vehicles are structured as single tranches; others have multiple tranches. We usually retain the junior tranches.

The investment parameters – geographical and sector exposure, types of merchandise, duration and so on - are set out in the offering memorandum. The underlying pools are granular, since we try to minimise portfolio limitations to avoid reducing the investable universe too much.

Together with the SPVs, we have two funds. One is the GMS Sovereign Plus Fund, a segregated portfolio company offering different tailor-made compartments investing in strategies with differing characteristics. It was created in 2004 and focuses on investments in liquid and illiquid credit that offer low volatility and diversification.

The other fund is the Debt Opportunities Plus Fund Ltd, which was established in 2005 and invests in global trade finance assets from flows of imports/exports between OECD and developing countries. Our main client base is composed of high net-worth individuals, family offices and asset managers mainly based in Italy, Switzerland, the UK and the Middle East.

Q: How does the firm differentiate itself from its competitors?
DD: Our cost of funding is 4%-5% and we invest at rates of 8%-plus. Not many banks can achieve this in the trade finance space: it is a niche asset class, from which banks are stepping back, leaving more opportunities for firms like CFE. Although competition is growing from other funds and supply chain finance houses, it is such a big market that there is plenty of business for everyone.

Q: Which challenges/opportunities do you anticipate in the future?
DD: Looking ahead, we’re seeking a partnership with a group that’s complementary to us in the private debt space to help us with distribution. We have a strong origination function, but we need to improve our distribution in order to keep raising capital. We’re hoping to finalise such a partnership by end-2021 or the beginning of next year.

Corinne Smith

Structured Finance

Hong Kong ILS pilot unveiled

Sector developments and company hires

Hong Kong ILS pilot unveiled
The Hong Kong Insurance Authority has released details of the two-year Pilot Insurance-linked Securities Grant Scheme promulgated in the jurisdiction’s 2021-2022 Budget. The scheme provides an incentive for onshore and offshore issuers and sponsors to issue ILS in Hong Kong, while efforts are being made in parallel to map out a new regulatory regime for special purpose insurer vehicles.

Eligible issuances must be sized at least HK$250m-equivalent, with at least 20% of upfront issuance costs earned by local service providers. Priority will be given to first-time issuers and sponsors, as well as issuances lodged with and cleared by the Central Moneymarkets Unit operated by the Hong Kong Monetary Authority.

The sum of grant for each eligible issuance is the lesser of HK$12m or 100% of total upfront costs incurred for maturities of three or more years, or the lesser of HK$6m or 50% of total upfront costs incurred for maturities of up to three years.

In other news…

EMEA
Investec has appointed Megan Sachs as assistant portfolio manager for its Private Debt Fund I, with responsibility for co-ordination and management of the fund, alongside her existing role in the firm’s growth and leveraged finance team. Investec’s inaugural private debt fund was closed in December 2020 and is currently actively investing in European private debt solutions.

Additionally, the firm has added a further four staff to its growth and leveraged finance team: Finyin Inuayo, Rebecca Moss, Jack Moore and Lucian Purvis. They will focus on providing direct lending solutions to Investec's private equity clients and their portfolio companies.

The appointments follow the hire of Matthew Skingle, who joined Investec from HSBC’s leveraged finance team in December 2020.

Ruhi Patil has been promoted to managing associate in Linklaters’ London derivatives and structured products department. Specialising in credit derivatives and synthetic securitisations, Patil joined the firm in 2017. Before that, she worked at S&R Associates in Mumbai, India.

Landmark infrastructure ABS closed
Allen & Overy has assisted Société Générale, as original lender and arranger, in the securitisation of a portion of a loan granted to a leading Italian telecommunication company by a pool of banks comprising Société Générale and other financial institutions. The transaction is believed to be the first syndication of an infrastructure loan carried out through a securitisation vehicle. The deal involves both the acquisition of receivables arising from drawdowns already made and the direct lending by the securitisation vehicle of further funds pursuant to Law 130/99.

New workout strategy for ELIZA 2018-1
Mount Street has replaced CBRE as special servicer in relation to the Maroon loan, securitised in the Elizabeth Finance 2018 CMBS, pursuant to a special servicer replacement deed instigated by the controlling class D noteholders. The new special servicer is expected to temporarily suspend the sale of the underlying assets and try to implement asset management initiatives to improve and stabilise the portfolio’s net operating income, as well as wait for a likely pick up of the retail investment market following the anticipated ramp down of the coronavirus pandemic.

In October 2020, CBRE - after the exit strategy provided by the Maroon borrower was considered unsatisfactory - accelerated the loan and subsequently fixed charge receivers were appointed with the aim of disposing of the assets in a timely manner. The loan is in special servicing following the failure of the borrower to cure for a second time the 75% LTV covenant breach. CBRE had agreed to a standstill until the initial loan maturity in January 2021, as long as three months before maturity, the borrower provided a plan for repaying the loan in full.

The final note maturity is scheduled in July 2028, which should provide the new special servicer with sufficient time to work out the loan. Nevertheless, DBRS Morningstar has downgraded by a notch its ratings on the class C and D notes of the transaction. The trends on all classes of notes remain negative because of the challenges facing the UK retail sector, due to the economic consequences of the Covid-19 pandemic, as well as increasing competition from online sales.

North America
Jefferies Credit Partners (JCP) has expanded its capital formation capabilities and its investor relations team with the addition of two senior hires. Charles Byrne has been named global head of sales and capital formation, responsible for building and overseeing JCP’s investor relations, fundraising and global capital formation initiatives. He was previously co-head of US alternatives at RBC Global Asset Management/BlueBay Asset Management and has also worked at Regiment Capital Advisors and Marathon Asset Management.

Meanwhile, Andrew Gordon has been appointed head of strategic accounts and will focus his efforts on delivering the firm’s private credit solutions to strategic relationships across the globe. Gordon was previously co-head of US alternatives at RBC Global Asset Management/BlueBay Asset Management and has also worked at Marathon Asset Management and Bear Stearns.

Redding Ridge Asset Management has recruited Patrick McCarthy as a principal, based in New York. He was previously a vp at JPMorgan, having worked in asset management and treasury at NewStar Financial before that.

RMBS operational questionnaires enhanced
Fitch will begin distributing ESG-enhanced operational questionnaires as part of its US RMBS reviews from this month. The aim is to provide deeper insight into industry developments in its transaction presale and special reports, as well as in its originator/aggregator and servicer summary reports. The new questionnaires consist of open-form ESG items, including: company ESG strategy; originator/aggregator and servicer ESG policies; ESG impact assessments, including risks and opportunities; ESG reporting; and environmental impact.

Structured Finance

US CLOs assessed

Sector developments and company hires

US CLOs assessed
As US CLO primary volumes continue to fall, JPMorgan CLO research has taken stock of the market’s current standing. It finds the US$1trn benchmark is edging within sight, despite a deceleration in the number of new managers, and strong risk/reward credentials keeping the CLO space attractive.

JPMorgan reports that global CLO market outstanding notional is currently US$970bn, of which US CLOs account for around 80%, or US$785bn. It adds that despite record refinancings this year, new issue supply remains strong and US CLO net supply of +US$26bn year-to-date is on pace for its full year forecast of +US$100bn net, which would result in an all-time high.

However, JPMorgan research analysts note that despite record volumes, only two new managers came to the US market in 2020 and none have so far in 2021, after 11 new ones in 2019. The new managers that first issued in 2019 have since grown to a total US$20bn CLO AUM in under two years, accounting for about 3% of the total CLO market size. Historically, 81 managers first entered the market in the 2.0 era, which account for 35% of current market size.

Meanwhile, the analysts find that based on JPMorgan’s CLOIE index’s annualised total return and volatility on a monthly basis over the last five years to 30 April, CLO debt return and risk/reward is broadly comparable to US credit; though recently, after a strong rally in high yield and leveraged loans, the CLOIE return lags. However, as they conclude: “In the search for yield as the reopening/recovery trade gains steam, CLO mezz (BB-B) yields around 8-9%, whereas only around 6% of the leveraged loan index trades above 8% yields.”

In other news…

Analytics offering expanded
Confluence and JPMorgan have partnered together to deliver a multi-asset portfolio analytics solution to fund managers and service providers. At the start of 3Q21, Delta - Confluence’s risk and performance solution - will expand coverage powered by JPMorgan’s proprietary analytics to include US securitised products, which will also be available through JPMorgan’s platform. The enhancement completes the global coverage of Delta across all asset classes, enabling front-to-middle office decisionmakers to manage risk and performance.

Delta became available to JPMorgan clients in June 2019 during the first phase of the collaboration between JPMorgan and StatPro, prior to Confluence’s acquisition of StatPro in October 2019. 

Emissions limits pose ‘nominal’ CMBS risk
Approximately 13% of US CMBS assets are located in New York City and about 80% of these properties are - in the absence of owner remediation - on track to incur Local Law 97 (LL97) fines that would impair property cashflows, according to Moody’s. However, for the majority of properties, such fines would amount to less than 2% of net operating income (NOI). Furthermore, only 10 large properties - most of which have highly energy-intensive operations - would account for a significant share of the potential fines: 59% in 2024 and 23% in 2030.

Indeed, potential fines pose nominal loan risk in 2024 and moderate risk from 2030, with the onset of stricter emissions limits. In the majority of cases, potential erosion of NOI for LL97 non-compliant properties will be nominal relative to the DSCR of the CMBS loans they secure. But because multifamily assets tend to have lower DSCRs and less flexibility to make improvements to comply with LL97, Moody’s suggests that additional costs will push some marginal borrowers into distress without mitigating actions.

The agency notes that owners can avoid fines by increasing energy efficiency, using renewable energy and retrofitting their buildings. “Although such investments will yield additional benefits, such as lower energy costs, higher cost retrofits will create financial strain for borrowers without access to capital for such building improvements,” it adds.

LL97 will see groundbreaking greenhouse gas emissions limits phase in over the coming decade across New York.

RFC on NPL data templates
The EBA has published a discussion paper to facilitate a review of the standardised non-performing loan data templates. The NPL data templates are expected to play an important role in providing a common basis for data exchange in secondary markets, which forms part of the overall strategy to tackle NPLs in the EU.

The current revision of the template is based on user feedback and responds to the European Commission’s Communication on tackling NPLs in the aftermath of Covid-19 that requests the EBA to review the templates during the course of 2021. With this consultation, the EBA is seeking comment on a number of aspects of the templates, such as the design, data fields to be included, as well as their criticality and availability.

The objective of this revision is to make these voluntary data templates simpler, more proportionate and more effective, as well as making them available to all market participants by end-2021. The aim is to enable price discovery in a consistent way across the single market.

However, the EBA notes that the adoption of the proposed Directive on credit servicers, purchasers and recovery of collateral may mandate the EBA to turn these data templates into implementing technical standards (ITS), for which the EBA would have to publish a consultation paper.

The consultation runs until 31 August 2021.

Structured Finance

Landmark Romanian CRT upgraded

Sector developments and company hires

Landmark Romanian CRT upgraded
Scope Ratings has upgraded to single-A from single-A minus the two tranches issued under the SME Initiative Uncapped Guarantee Instruments (SIUGI) for Romania deal (SCI 5 May 2020), an EIF risk transfer transaction referencing 60% of a €1.369bn portfolio – which is still ramping up – of SME credit rights originated by eight Romanian banks. The rating actions reflect the increase in the rated instruments’ credit enhancement from subordination to at least 48%, due to good credit performance and amortisation in line with expectations.

The ratings also consider amendments to the transaction that have been undertaken since Scope’s last review. First, the inclusion periods for all participants except ING have been prolonged to at least 30 December 2022 from 30 December 2020.

Second, ING decided not to assign further loans to the reference portfolio. The EIF will consequently reallocate the remaining unused guarantee capacity to other initiative participants.

In other news…

EMEA
Gateley Legal has named Christopher Lister partner in its banking and finance team, based in Manchester. Lister joined the firm in November 2018 from Arrow Global Group, where he was senior legal counsel supporting its structured finance activity, among other functions. Before that, he was a senior associate at DLA Piper.

North America
Akin Gump has appointed Deborah Festa as a partner in its corporate practice, resident in Los Angeles. Festa joins the firm from Milbank, where she led its West Coast securitisation and investment management practices. She has an international practice, with extensive experience representing institutional investment managers and global investment firms in CLO issuances and other complex finance transactions.

Ommeed Sathe has joined Lafayette Square as head of strategy, responsible for leading various thematic impact-driven investment strategies. Sathe was previously the head of Prudential’s impact investment unit, where he managed over US$1bn across a range of alternative asset classes and investment strategies. Before that, he was head of real estate development for the New Orleans Redevelopment Authority (NORA) in the immediate aftermath of Hurricane Katrina, having begun his career as a real estate and land use attorney with Fried, Frank, Harris, Shriver & Jacobson.

Structured Finance

Green railcar ABS debuts

Sector developments and company hires

Green railcar ABS debuts
Trinity Industries has priced its inaugural green railcar ABS, following the publication of its green financing framework in January. The US$355m TRP Series 2021-1 transaction is backed by a US$482.68m portfolio comprising 6,350 railcars.

The notes constitute green bonds based on the generally accepted market principles for such classification published by ICMA. Sustainalytics, acting as an external verifier, has provided a pre-issuance review of the deal. 

Crédit Agricole acted as structuring advisor in connection with Trinity Industries Leasing Company’s (TILC) green financing framework, which enables the firm to issue green financing instruments - including green non-recourse ABS bonds and green loans - supported by green eligible assets. TILC will manage and report on eligible projects and assets, in line with the Green Bond Principles 2018 and the Green Loan Principles 2020. 

Under the framework, currently eight of TILC’s outstanding debt financings - representing over US$4bn of railcar-related debt - meet the criteria and qualify for the green financing designation. Sustainalytics provided a second-party opinion on the framework. 

KBRA and S&P have assigned preliminary ratings to the US$334m A/A rated class A notes and US$21m BBB/BBB class Bs to be issued by TRP Series 2021-1. The proceeds will be used to redeem in full the series 2012-1 class A1 and A2 notes and the series 2013-1 class A1 notes issued under the Trinity Rail Leasing 2012 programme.

In other news…

CMBS delinquencies rise as debt relief expires
Fitch’s US CMBS delinquency rate rose 2bp to 4.12% in April from 4.10% in March 2021, marking the first increase after five consecutive months of decline. The rating agency notes, however, that this was partially offset by strong new issuance volume.

Fitch says it had anticipated that the overall delinquency rate would be volatile as stimulus burns off and coronavirus debt relief expires. New delinquencies rose to US$1.6bn last month from US$697m in March, with approximately 37% previously having been granted relief. Many of the larger newly delinquent loans have become 60 days delinquent for at least a second time, with borrowers requesting additional debt relief.

The roll rate of 30 to 60 days delinquent was 42% from March to April, up from 21% from February to March and 33% from January to February. Total 30-day delinquencies fell to US$2.6bn in April from US$3bn in March.

Meanwhile, resolutions totaled US$1.2bn in April, compared with US$1.6bn in March. Since the onset of the coronavirus pandemic, US$24.9bn (806 loans) have received debt relief, up from US$24.1bn (778 loans) in March.

Special servicing volume in April was US$28.6bn (1,188 loans), down slightly from US$28.9bn (1,210 loans) in March. Approximately 71% of the special servicing volume (US$20.3bn) was at least 60 days delinquent in April, similar to 69% (US$20bn) in March.

With the exception of hotel and industrial, all major property types reported higher delinquency rates from the prior month. The largest new delinquency last month - the US$171m Empire Hotel & Retail loan (securitised in CGCMT 2013-GCJ11 and GSMS 2013-GC10) - became 60-days delinquent for a second time, after being brought current in August 2020 when the borrower was granted a consent agreement to allow for the reallocation of reserve funds to pay debt service. The special servicer is reviewing the borrower’s request for additional relief.

RFC issued on long-term asset funds
The UK FCA has launched a consultation on proposals for a new category of fund designed to invest efficiently in long-term, illiquid assets. These funds would be open-ended and able to invest in assets such as venture capital, private equity, private debt, real estate and infrastructure.

The aim of this new long-term asset fund (LTAF) would be to provide a fund structure through which investors can invest with appropriate confidence in less liquid assets because the fund structure is specifically designed to accommodate relatively illiquid assets. These illiquid assets can offer attractive expected returns to investors. If successful, the existence of funds investing in these assets can also help businesses and infrastructure projects have greater access to long-term capital to support investment and wider economic growth.

The FCA is proposing that LTAF rules embed longer redemption periods, high levels of disclosure and specific liquidity management and governance features. These would take account of the types of risk to which LTAFs might be exposed and help provide investors with confidence that they are being managed appropriately and in their interests.

As well as offering an alternative investment opportunity to experienced retail investors, the LTAF would be aimed at defined contribution (DC) pension schemes that may be interested in investing part of their assets into an LTAF, in line with their investment horizons and risk appetite. The consultation also therefore proposes amending the permitted link rules to enable pension schemes to consider the proportion of illiquid assets across their investment portfolios, rather than to restrict the proportion of illiquid assets in each underlying fund in which they invest.

Establishing a new fund regime and overcoming operational hurdles are only two steps in creating an environment in which investment in longer-term, less liquid assets can flourish. To address these wider questions, together with Her Majesty’s Treasury and the Bank of England, the FCA has convened a Productive Finance Working Group. The group is considering how to ensure that the wider ecosystem can operationally support the LTAF as a non-daily dealing fund.

The working group is expected to draw its conclusions in July. Views from stakeholders on the LTAF proposals should be submitted by 25 June.