Contents

Capital Relief Trades

Counting Calabria

The Supreme Court decision on the FHFA is eagerly awaited, but immediate impact may be limited

Market-watchers are still waiting with bated breath for the Supreme Court judgement on whether the executive can dismiss Mark Calabria from the Federal Housing Finance Authority (FHFA), but some say that even if the president is given the authority to appoint a new director things might not change all that much.

Firstly, there is a slew of agency appointments yet to be made which probably take precedence. The confirmation of Rohit Chopra as head of the Consumer Financial Protection Bureau (CFPB) - a key agency in the Biden plan for greater financial “equity” - is still held up with no Senate vote scheduled, while the Office of the Comptroller of the Currency (OCC) and the Commodity Futures Trading Commission (CFTC) are aLSO still operating with temporary heads.

Secondly, even if Calabria is replaced, he is likely to be succeeded by an acting director who might not change the trajectory of the FHFA dramatically, suggest sources. The current deputy director is Chris Bosland, who succeeded Adolfo Marzol in December 2020.

The appointment of FHFA director has been much scrutinized as Calabria is committed to taking the GSEs out of conservatorship and eliminating the moral hazard posed to US taxpayers. Moreover, the role of CRT mechanisms was diminished by the capital rules introduced in May of last year. Fannie Mae has been absent from the CRT market in the last year largely due, it is said, to these new roles.

However, a new director with a new vision could roll back the process and see the capital rules kicked into the long grass - putting the GSEs back to the status quo ante.

The Biden campaign pledged $640bn every decade to “affordable” housing and to this end said that the GSEs would be subject higher assessments. At the moment, the GSEs commit 4.2bp of each new mortgage commitments to affordable housing schemes run by the Department of Housing and Urban Development (HUD) and the Treasury, but the administration plans to increase this by three or four times, say those in the market.

“This looks to me that they don’t care about capital very much,” says a well-placed source.

If administration cares far less about the GSEs building up capital, it also indicates it is less worried about Fannie and Freddie being in a fit state to join the private sector. Moreover, if the GSEs build up less capital, then CRT mechanisms once again assume the prime importance they have had for the last eight or nine years. The CAS program could be back in business.

Simon Boughey

ABS

NPL ABS return

Government guarantees dominate 2020 NPE activity

Government guaranteed non-performing loan securitisations in Italy and Greece dominated NPL transaction issuance last year. However, overall volumes were well below their 2018 and 2019 peaks.

Most NPL transaction activity came to a halt during 2H20 as the first wave of the coronavirus pandemic spread throughout Europe. According to the latest data from Deloitte, €53.8bn gross book value traded in the second half of the year as processes that were initially put on hold returned to the market, bringing total transaction activity to €77.8bn for 2020, across 103 transactions. This marked a major slowdown in activity from previous years, with volumes traded down 35% below the total for 2019 of €119.2bn and 62% down from the high-water mark in 2018, when €203.6bn was traded.

Securitisations supported by government guarantees dominated the deals that were closed last year. The Italian market led the way with 51 completed deals (accounting for circa €44bn), more than half of European portfolio trades, primarily through AMCO - Italy’s state-owned asset management company - as well through GACS. Greece was the second most active market, although some way behind Italy, and again benefiting from the government guaranteed securitisation scheme (HAPS).

Indeed, this has helped Greek banks close transactions totalling €12.4bn in the year, including Eurobank Ergasias’ €7.5bn Project Cairo. Additionally, Deloitte states that Greece has a strong pipeline, with €21.6bn closed in 1Q21 or expected to close imminently, and several banks already announcing or indicating their intention to launch transactions in 2021 totalling €24.3bn.

From a buyer perspective, with the bid-ask spread seen as too wide for many of the traditional private equity buyers, AMCO was the top purchaser of portfolios in Europe, completing €11.3bn of deals. This included the largest that closed in the year, namely an €8bn mixed NPE portfolio from Banca Monte dei Paschi di Siena, as well as €2bn of unlikely-to-pay exposures from Banca Popolare di Bari. Spain, on the other hand, saw a significant drop in activity, with sales at their lowest since the clean-up after the 2008-2009 financial crisis.

Over the period since the pandemic began, €900bn of European loans received support through EBA-eligible moratoria. Of these, 70% were granted by banks in France, Spain and Italy, making these jurisdictions potential hotspots as measures are unwound.

Loans under EBA-eligible moratoria almost halved, decreasing from €587bn at end-Q3 to €318bn, with exposures to non-financial companies (NFC) declining the most. Meanwhile, the proportion of Stage Two loans under non-expired moratoria continued on an upward trend, standing at 26.4% in 4Q20, up by 6.2 percentage points from Q3.

Deloitte concludes: ‘’Although it is still early to draw conclusions about asset quality, it is noteworthy that the proportion of Stage Two loans under moratoria is almost three times higher than the 9.1% ratio for total loans across Europe, emphasising the potential downside risks once the moratoria expire.’’

Stelios Papadopoulos

ABS

Pricing flurry

European ABS/MBS market update

Yesterday saw five new European ABS/MBS price in one of the busiest days the primary market has seen this year. However, volumes are still short of pre-Covid levels.

Despite the flurry of deals yesterday, paper throughout the stack saw strong demand. Indeed every offered tranche priced inside initial price talk.  

“Across European ABS/MBS, sentiment has been pretty positive for a while,” says one trader. “That’s been driven by strong support from central banks, which implies a lot of liquidity, and the reverse of that – the main issuers have no particular pressure to come to market for funding.”

Consequently, he says: “There has been negative net supply generally, which has contributed to very tight spreads. The Finance Ireland deal pricing in the 40s yesterday is a strong example of this.”

Overall, the trader says: “The market is nothing like it was prior to the pandemic in terms activity, though spreads are not particularly different. However, we are working with negative rates, which we haven’t seen before, and that is probably having the biggest impact currently.”

Largest of the deals to price yesterday was Banco Cetelem’s capital relief trade AutoNoria Spain 2021 (see here for more). Tightest was another auto deal, Bavarian Sky Compartment German Auto Leases 6, which at 10bp DM for its triple-As matched last month’s VCL 33 record for a post-GFC German deal in the sector.

Meanwhile, Dutch CMBS Bruegel 2021’s seniors gapped in from IPTs of 100 area to price at 80bp DM. A similarly impressive move came from UK RMBS Economic Master Issuer Series 2021-1, which was first talked in the mid-high 30s, but printed with a coupon of SONIA plus 30bp.

The day’s record for most oversubscribed seniors went to the four times covered Finance Ireland RMBS No. 3. The deal’s €235.9m class As priced at a 43bp DM, having begun in the low-50s.

There are five more deals currently in the visible Euro ABS/MBS pipeline: CMBS Agora Securities UK 2021; UK buy-to-let RMBS Canada Square Funding 2021-2; Austrian auto ABS FACT Compartment 2021-1; Spanish prime IM AndBank RMBS 1; and Italian salary/pension loan ABS Pelmo.

Vincent Nadeau and Mark Pelham

Structured Finance

SCI Start the Week - 14 June

A review of securitisation activity over the past seven days

Last week's stories
Arch markets MILN
Second Bellemeade deal of 2021 in the market, pricing soon
Execution queries
Questions linger over funded insurer SRTs
Positive prospects
Rating upgrades boost default outlook
Rebound continues
Second trade finance SRT inked
Low flying aircraft
Aircraft ABS remain slowest to recover from Covid
Aircraft lease ABS remains the black spot of the US ABS market, and has been the slowest to recover from the pandemic sell-off, note analysts.

While spreads in every other sector have now recovered from the pandemic sell-off, and, in fact are now trending at 24-month lows, the aircraft ABS market is still mired in the doldrums.

At the end of May 2021, there was $29bn outstanding in the aircraft ABS market

"We like to look at where spreads have traded over the past 24 months and right now most spreads are near the 24-month minimums, with the noticeable exception of aircraft," says Theresa O'Neill, senior ABS strategist at Bank of America in New York.

Average aircraft ABS spreads are currently around 100bp wider than pre-Covid levels and over 200bp wider than the pre-Covid 24-month average.

The continued restrictions on travel, especially international travel, are clearly responsible for this disconnection.  While the number of flights has increased from the depths of April 2020, they are still much below pre-pandemic levels. European flights, for example, are 60% lower than they were before the global lockdown took effect.

Prices for aircraft ABS have also become much more widely dispersed than they were before the pandemic, according to FINRA, and this is expected to continue as tranches with exposure to different types of aircraft and airlines recover more slowly than others.

As a whole, the aircraft ABS sector is most heavily exposed to the narrow body B737 and A320 families of aircraft. These aeroplanes are generally used for short haul flights so ABS predominantly composed of this type collateral should recover more quickly that ABS composed of wide body collateral.

Overall, 35% of aircraft ABS deals are composed of B737 family collateral and 33% are composed of family A320 collateral. Only 12% are composed of the wide body A330 family and 5% of the wide body B777 family.

This should bode well for the market going forward. For example, the number of flights on a A320neo have increased 26.4% in the most recent seven day average compared to a 2020 low of down 82.9% with January 2020 indexed at zero. The number of flights on a B737 Original has decreased 21.4% compared to a 2020 low of down 63.4%.

However, the number of flights on wide body B777s is still down 40% compared to January 2020, some 30% higher than the lows, while the number of flights on wide body A330s is down almost 50% compared to the January 2020 low of down 86.4%.

So while the overall numbers are still from encouraging, narrow body flights are picking up better than wide body flights, and the spreads for relevant ABS trades will reflect this disparity. But there are other factors to consider. A wide body aircraft could be on lease from a very strong airline and the terms of the lease could be favourable, and this will affect ABS pricing as well.

"It's not just the piece of metal, it's other things that go into it as well. The quality of the airline needs to be considered. If it's on lease to one of the larger, more financial secure airlines for five or more years, then you shouldn't have to worry too much," says O'Neill.

Despite the problems that continue to affect the sector, Bank of America expects that spreads in the aircraft ABS market will not take as long to recover as the aviation industry itself as passengers to begin to take to the air once more. The IATA predicts that air passenger numbers will not return to pre-pandemic numbers until 2023, but the ABS sector should return to pre-pandemic prices before then, suggests BoA.

Bank of America also recently updated its expected issuance in the aircraft sector in 2021 from $3bn to $6bn, in line with increased market share for aircraft lessors. Airlines are thought more likely to lease aircraft than buy as they shore up finances shattered by the effect of the pandemic and the global lockdown.

"The reason that the lessors will gain market share is related to the financial condition of the airlines. As the airlines look to recover from all that they have been through, they will prefer to lease rather than buy the aircraft outright," says O'Neill.

Another structure said to be in vogue are sale leasebacks, where the airlines sell the aeroplanes to the lessor and then lease them back.

It has been a busy week in the US ABS sector so far, with 10 deals worth $8.5bn priced across sectors by the close on Thursday and another couple expected to come before the close on Friday.

Overall ABS spreads remain range-bound, but levels in the student loan market could improve more than most due to strong fundamentals and positive market tone, suggests O'Neill.

Simon Boughey

Other deal-related news

• European CLO new issue triple-A spreads are now out to 87bp-88bp from their post-Covid tights of 79bp-80bp, but could still soften (SCI 7 June).
• Just under US$2bn in US CMBS loans were resolved with a loss last year, compared to US$5.3bn in 2019, according to Fitch's latest annual US CMBS Loss Study (SCI 7 June).
• The Australian Prudential Regulation Authority has released a letter to authorised deposit-taking institutions (ADIs) on the implementation of the capital framework reforms, which will come into effect from 1 January 2023 (SCI 7 June).
• Kensington is in the market with the UK's first green RMBS issuance (SCI 7 June).
• The European Parliament and European Council have agreed on common EU standards regulating the transfer of non-performing loans from banks to secondary buyers while protecting borrowers' rights (SCI 10 June).
• Finance Ireland Credit Solutions is in the market with its third Irish RMBS, Finance Ireland RMBS No. 3 (SCI 10 June).
• Bayfront Infrastructure Management has priced an infrastructure ABS via Bayfront Infrastructure Capital II (BIC II), a wholly owned and newly incorporated distribution vehicle (SCI 11 June).
• ICE Mortgage Technology is set to deploy an eVault solution for secure storage of digital mortgages and notes, based upon technology acquired from DocMagic (SCI 11 June).

Company and people moves

• Charles Wakiwaka has joined McGuireWoods as partner in the firm's securities and capital markets practice in London (SCI 7 June).
• Ocorian has appointed Mike Hughes as global head of service lines, with full responsibility for the group's client segments (SCI 7 June).
• Schroders has united its specialist private assets investment capabilities under the newly launched Schroders Capital brand, with the aim of delivering an enhanced service for its clients (SCI 7 June).
• Eagle Point Credit Management has appointed Nate Morse as head corporate trader, reporting to managing partner Thomas Majewski and principal and portfolio manager Dan Spinner (SCI 7 June).
• Nishil Mehta has joined First Eagle Alternative Credit as md (SCI 7 June).
• Varagon Capital Partnershas named Suraj Panjwani md, business development and investor relations (SCI 7 June).
• Sound Point Capital Management has acquired the US direct lending platform of CVC Credit (SCI 10 June).
• Andrew Rippert has joined Aspen in the newly created role of evp - head of mortgage, reporting to Christian Dunleavy, chief underwriting officer of Aspen Reinsurance (SCI 10 June).
• David Ryan has joined Barclays as director, CLO syndication, based in New York (SCI 10 June).
• Kawai Chung has joined Intriva Capital as md, based in London (SCI 11 June).
• Seelaus Asset Management has received an allocation of US$50m from Boise-based Micron Technology (SCI 11 June).
• Academy Securities has hired Paul Staples as director of CMBS sales and trading (SCI 11 June).
• Chimera Investment Corporation has appointed Kevin Chavers to its board (SCI 11 June).
• Miller has hired Erik Manning as head of ILS, reporting to Charlie Simpson, head of Bermuda for the firm (SCI 11 June).
• Pagaya has named Theodore Douglas as svp, head of innovation US (SCI 11 June).

Data

Recent research to download
Synthetic Excess Spread - May 2021
TCBI Deal Profile - May 2021
CLO Case Study - Spring 2021

Upcoming events
SCI's 1st Annual CLO Special Opportunities Seminar
29 June 2021, Virtual Event
SCI's 3rd Annual NPL Securitisation Seminar
September 2021, Virtual Event
SCI's 7th Capital Relief Trades Seminar
13 October 2021, In Person Event

Capital Relief Trades

Super narrow Arch prices

New Bellemeade comes at spreads well inside previous CRT trade

Arch Capital has priced its latest Bellemeade CRT transaction at levels significantly tighter than the last such deal in March, and to a more broadly syndicated pool of investors than ever before, confirms evp, alternative markets Jim Bennison.

The deal, designated Bellemeade 2021-2, consisted of five tranches for a total value of $522.8m. In addition, $93m was placed in the reinsurance market, for an overall risk transfer of $616m.

The $194.5m M-1A tranche was priced at 120bp over SOFR, the $93.3m M1-B came in at 150bp over SOFR, the $97.3m M1-C was priced to yield 185bp over SOFR, the $105.7m M-2 tranche was priced to yield 290bp over SOFR and the $31.9m  unrated B-1 tranche came in at 425bp over SOFR.

These levels were, respectively, 55bp, 70bp, 110bp, 195bp and 260bp tighter than the previous Bellemeade 2021-1 deal, priced in March. Indeed, all the investment grade tranches printed at a level inside SOFR plus 200bp.

"This deal shows that investors have largely accepted that the risks associated with Covid are largely over," says Bennison.

The notes were sold to 25 bond investors, including four new buyers, while the reisurance piece was sold to seven reinsurers, including two new names, he adds. This roster includes overseas names as well as US buyers. Normally, Bellemeade deals attract between 15 and 20 investors, so the attractiveness of these trades has clearly spread. Meanwhle, reinsurance risk usually gains about four buyers per trade, so that piece of the CRT mechanism is reaching a new audience too.

A very strong US housing market and a paucity of subordinate risk in the market also explain the deal’s very strong execution, suggest US RMBS analysts.

The deal is Arch's 13th MILN since it inaugurated the Bellemeade programme in July 2015. Other mortgage insurers who also issue such trades include Radiant, Genworth, MGIC and National Mortgage Insurance Corporation.

Simon Boughey

Capital Relief Trades

Triple-starred first for BMO

BMO brings innovative C$ CRT trade referencing Canadian CRE

A groundbreaking Canadian dollar denominated regulatory capital relief trade from Bank of Montreal (BMO) closed earlier today (June 15), say well-placed market sources.

Not only does the deal constitute the first Canadian dollar CRT trade, it will also be the first to reference a pool of Canadian commercial real estate (CRE) loans.

In another debut feature, the deal possesses a hybrid structure, incorporating a funded tranche bought by one investor and an unfunded tranche with a guarantee provided by an insurance firm.

BMO declined to comment.

The trade, designated Boreal 2021-1, references a C$1.2bn pool of Canadian CRE loans. The pool was upsized from an original C$750m-C$1bn to C$1.2bn to reflect investor appetite.

The pool consists not only of loans to landlords but also construction loans to builders and developers - another creative feature of this highly original transaction.

The first tranche covers a first loss position, attaching at 0% and detaching at 5.5%, for a net amount of C$66m. The sole investor is said to be a traditional regulatory capital relief trade buyer.

The unfunded guarantee tranche attaches at 5.5% and detaches at 8.5%, with the guarantee provided by an unspecified insurer.

Granular Investments, a UK-based firm providing specialist advice to insurance firms seeking exposure to the CRT market, sought and provided the insurer for the unfunded tranche.

“From the insurer’s perspective, they were very pleased to be able to participate in the first funded/unfunded Canadian dollar deal. BMO is a well-run bank with a positive credit story,” says Richard Sullivan, md of Granular.

There is a maximum concentration limit of 50bp in the reference pool, meaning each borrower can supply no more than 50bp of the overall debt covered.

The deal carries a five year maturity, with a 2.5 year call. Until the first call date, there is a replenishment feature based upon criteria agreed with investors.

Rating will be supplied by DBRS Morningstar.  

Simon Boughey

Capital Relief Trades

Risk transfer round-up - 17 June

CRT sector developments and deal news

BNP Paribas is believed to be readying a synthetic CMBS that is expected to close in 3Q21. The transaction would be among the first pure post-Covid synthetic CMBS deals, along with the latest Boreal trade from Bank of Montreal (see SCI’s capital relief trades database).

Separately, Bank of Montreal is rumoured to have closed a capital relief trade backed by mid-market corporate loans. Finally, Greek lender Eurobank is said to have chosen the EIF as counterparty for its upcoming synthetic securitisation, rather than private investors.   

Capital Relief Trades

AutoNoria returns

BNP Paribas draws crowd

BNP Paribas has arranged a €1bn full-stack significant risk transfer transaction for Banco Cetelem. Dubbed AutoNoria Spain 2021, the Spanish auto SRT is the first post-Covid capital relief trade from the AutoNoria programme and attracted one of the largest order books for Spanish auto ABS following the 2008 financial crisis at over €2bn.

Rated by Fitch and Moody’s, the deal consists of €790m AAA/Aa1 rated class A notes (which priced at one-month Euribor plus 28bp), €55m AA+/Aa2 rated class B notes (80bp), €50m A/A2 rated class C notes (105bp), €40m BBB+/Baa2 rated class D notes (155bp), €30m BB+/Ba2 rated class E notes (265bp), €20m B+/B1 rated class F notes (390bp) and €15m unrated G notes (fixed 5.25%). The tranches that were eventually offered are €553m class A notes, €52.2m class B notes, €47.5m class C notes, €38m class D notes, €28.5m class E notes €19m class F notes and €14.2m class G notes.  

The transaction features a one-year revolving period and a highly granular portfolio, with the largest individual and 20 largest borrowers representing 0.01% and 0.12% of the pool respectively. The size of the excess spread in the transaction could not be confirmed, although Moody’s notes that it is high, given that the initial portfolio yields a weighted average interest rate of around 7.15%. Additionally, the eligibility criteria provide a weighted average minimum portfolio yield of 6% after the addition of receivables during the revolving period.

More saliently, the deal incorporates strong default definitions compared to other Spanish consumer and auto loans. Indeed, the transaction structure benefits from an artificial write-off, which traps the available excess spread to cover any losses. The full amount of the loan will be artificially written off if it has more than five unpaid instalments.

Loans with Covid-19 payment holidays granted before the assignment are excluded, as per the eligibility criteria. However, the seller will neither replace nor repurchase exposures subject to moratoria after the sale of the assets to the SPV.

Most of the loans were originated in recent years, with 5.3% of the pool balance originated in 2021, 53.7% in 2020, 24.4% in 2019 and 10.6% in 2018. In terms of geographical concentration, most of the borrowers are concentrated in Madrid (13.2%), Barcelona (11.6%) and Valencia (5.9%). Finally, the portfolio is collateralised 64.59% by new cars, 26.57% semi-new cars, 4.86% used cars, 2.84% motorcycle loans and 6% recreational vehicles.   

Stelios Papadopolous

Asset-Backed Finance

Financing football

James Paul, head of sport at Blackstar Capital, discusses how structured finance is playing a pivotal role in sport's recovery post-coronavirus

Q: Which sports are you seeing structured financing in?
A: In Europe, football is the most mature sport commercially and hence attracts most of the opportunities for structured debt financing. That isn’t to say that there aren’t things done in other sports, particularly on the equity side, but it’s certainly much more opportunistic.

The impact of the pandemic has essentially created three tiers in sport financing. The first tier is football, where most top-tier clubs and leagues make enough money to sort themselves out one way or another.

The second tier is comprised of sports which require assistance from the government to cover losses but which have sufficient financial resources to be able to repay that assistance over time, such as Rugby Union. Finally, the third tier consists of sports that don’t have the financial ability to recover the revenue they have lost and hence require outright government grant funding in order to continue. 

Q: Why is structured financing predominantly private in sports deals?
A: The majority of sport deals are private, as for the most part sporting clubs - especially football - don’t like to be a headline, particularly on the subject of something financial. Football and sport are topics which provoke emotional reactions from fans and outside observers and the general tendency is to believe that basic concepts, such as debt, are either bad or to be feared.

Q: How are the deals typically structured and executed?
A: The most common method of financing in European sport is to purchase future contracted cashflows due to a club or league - for example, broadcast receivables - via an SPV, which then collects the receipts over time in its own bank account and distributes the proceeds to repay the lender.

Q: Do you expect issuance in this sector to pick up?
A: I think historically sports deals are kept as quiet as possible for the reasons discussed previously, so I don’t see that intention changing any time soon. That said, I think especially now - when the deals are becoming higher profile, for example - there’s a lot more noise about league-wide financings than I can ever remember in the past, due to a natural curiosity about how clubs and leagues are going to cover the cost of the pandemic. There’s more digging being done from the outside, which may result in more public announcements.

Q: What is driving activity in the sector?
A: In football, in particular, there are two types of financing: transfer financing and general financing. I think there is a focus on general financing right now, as a result of the pandemic, as obviously clubs and leagues want to shore up their balance sheets following the hits they’ve taken over the past 18 months or so.

As we return to normality, I’d expect to see a shift back toward transfer financing, as the vast majority of clubs require a healthy transfer market in order to execute their preferred financial strategies. For example, training young players through academies and selling at higher valuations later, or buying more established players for larger sums and using those places to win titles.

Angela Sharda

Structured Finance

Auto turnover dampens DFP issuance

Sector developments and company hires

Auto turnover dampens DFP issuance
Accelerated dealer auto inventory turnover has resulted in insufficient collateral available for US dealer floorplan (DFP) ABS master trusts in 2021, Fitch reports. The agency notes that this is indirectly accounted for by deal structures, for the most part, through the use of excess funding accounts (EFAs). EFAs are meant to protect trusts against inventory volatility and help mitigate lower cashflows, but can introduce negative carry risk if cash in EFAs increases to high levels and is relied on to make note payments.

EFA caps vary by trust, but most are limited to 30%. If exceeded, there is usually a three-month cure period before an early amortisation event is triggered and the trust pays down the notes.

Securitisation sponsors routinely add to or remove cash from EFAs to manage changes in inventory volume by providing liquidity if there is not enough trust collateral for sufficient hard credit enhancement. Recently, trust asset balances started to decline to historically low levels and sponsors are addressing this by adding more cash to EFAs to ensure adequate credit enhancement levels. Most of the time, EFA account levels are close to 0% across the eight DFP ABS trusts rated by Fitch, but ranged up to approximately 24%, as of the May 2021 reporting date.

While the agency expects that issuers will have no difficulties paying down outstanding transactions when they mature, it believes there will be lower new issuance volume until inventory levels return to pre-pandemic levels. Auto dealership inventories have plummeted, due to very strong customer demand and limited new production supplies as a result of semiconductor chip shortages.

Inventory shortages are likely to persist at least into 4Q21. Due to the relatively long lead-times needed to ramp up chip production, it could be a year or more before vehicle production and supply normalise.

CO2e declining across German auto ABS
The average estimated CO2 emissions at closing for German auto ABS portfolios have decreased by about 6% for issuances in 2021, compared with deals from the 2019 vintage, according to Fitch. The decline was less pronounced than observed in new car registrations, where emissions decreased by 20% in the same period.

The agency ranks German auto ABS portfolios by their emission levels, which are estimated using publicly available data from the German Federal Motor Transport Authority and pool data from the European DataWarehouse. The study finds that the main driver for the different speed of decreases in emission levels is the composition of auto ABS pools, which mostly include a meaningful share of used cars. Even cars tagged as ‘new’ can be a couple of months old at transaction closing, as these vehicles were new only at loan or lease origination.

New car registrations reflect the most recent cars, which are typically becoming increasingly more emission-efficient. In addition, the shift to battery-electric cars in registrations is not yet fully reflected in most auto ABS pools.

Domi rating error amended
Moody's has affirmed the ratings of 14 notes issued by the Domi 2020-1 and 2020-2 Dutch buy-to-let RMBS, following the correction of an error. In prior rating actions for these transactions, the rating agency mistakenly assumed that the reserve fund amortises after the first optional redemption date, in line with the outstanding balance of the class A notes. However, the transaction documents provide that after the first optional redemption date (five years after transaction closing), the reserve fund target level is set to zero and the reserve fund is released into the principal waterfall.

In both transactions, the reserve fund release amounts after the first optional redemption date are fully available to turbo amortise the most senior outstanding notes, which is overall positive for all notes, according to Moody’s. However, as a result, the reserve fund cannot provide liquidity to the structure after the first optional redemption date in order to mitigate servicer financial disruption risk.

Nevertheless, Moody's cites a number of mitigating factors, including that Stater Nederland and HypoCasso - as delegate servicer and delegate special servicer respectively - are obliged to continue servicing the portfolio after a master servicer termination event. Given these factors, servicer financial disruption risks are deemed sufficiently low to maintain the existing ratings without further mitigants.

EMEA
Luca Giancola has joined Cairn Capital to lead the repositioning of its private structured credit business, which will continue to play an important role in the firm’s growth within a broader credit opportunity offering. Giancola joins from NatWest, where he spent 11 years in various roles, most recently as head of corporate portfolio structuring - a team focused on structuring regulatory capital (significant risk transfer) and CLO transactions. Cairn Capital is expected to close its merger with Bybrook Capital within the next quarter (SCI 3 February).

RBS International has appointed Neal King as senior director, to oversee new business from NatWest’s Trustee and Depositary Services traditional fund management clients. Based in London, King has over 30 years’ experience in the industry, having held several prominent roles at HSBC. He was most recently global head of corporate trust and loan agency product, implementing the firm’s strategy across 15 existing and eight new markets.

Hertz restructuring plan approved
The bankruptcy court has confirmed Hertz Global Holdings' plan of reorganization, clearing the way for Hertz to emerge from Chapter 11 by end-June. The plan unimpairs all classes of creditors and was approved by more than 97% of voting shareholders.

As a result of the restructuring, Hertz will emerge from Chapter 11 with a substantially stronger balance sheet and greater financial flexibility than it had prior to the onset of the Covid-19 pandemic. The plan will eliminate over US$5bn of debt, including all of Hertz Europe's corporate debt, and will provide more than US$2.2bn of global liquidity to the reorganised company.

Hertz also will emerge with: a new US$2.8bn exit credit facility, consisting of at least US$1.3bn of term loans and a revolving loan facility; and an approximately US$7bn asset-backed vehicle financing facility. The plan provides for the payment in cash in full to all creditors and for existing shareholders to receive more than US$1bn of value.

Multi-borrower CMBS stress-tested
Most high investment-grade rated US CMBS bonds are able to withstand downgrades under a hypothetical stress test conducted by Fitch. The stress test considers severe declines in cashflows for certain properties across the four major property types, should they not recover and/or decline further post-coronavirus.

Fitch reduced property-level net operating income (NOI) for a representative sample of 2013-2018 vintage multi-borrower transactions to assess ratings sensitivity to a stress that layers an office stress on top of coronavirus stresses on lodging, retail and multifamily currently applied in its surveillance analysis. The stress scenario implies a valuation decline from current estimated market levels of between 15% to 30%, based on property type-specific stressed NOI declines, and a further 15%-40% value decline from applying higher capitalisation rates than prevailing rates.

The stress scenario results in hypothetical losses to tranches rated in the triple-B category and below. Approximately one-third of triple-B bonds would experience losses or be downgraded to below single-B minus.

Most super-senior triple-A ratings (86%) would remain unchanged, with the balance migrating at worst to the single-A category. Only 7.8% of bonds currently rated investment grade would be downgraded to below investment grade, with 3.9% of such bonds incurring losses.

The 2013-2015 vintages are less affected by the stress scenarios than the 2016-2018 vintages, due to their build-up in credit enhancement from paydown and/or defeasance since issuance, according to Fitch. Of the more seasoned vintage triple-A ratings, 86% would remain unchanged, versus 72% of less seasoned triple-A ratings.

Structured Finance

Innovative SME securitisation fund inked

Sector developments and company hires

Innovative SME securitisation fund inked
SGR-CESGAR, the Spanish guarantee society (SGR) association, has launched a pioneering securitisation fund that aims to provide Spanish SMEs with access to the capital markets. Dubbed Aquisgrán, the programme is structured by Intermoney and backed by the Ministry of Industry through CERSA, with initial financing from the EIF, Instituto de Crédito Oficial (ICO) and Banco Caminos.

Aquisgrán represents a new approach to SME financing in Europe that could be scaled-up and allow investors to achieve direct exposure to SMEs. Under the initiative, financing will be commercialised by SGRs and funded via loans of around €100,000, guaranteed by SGRs and benefiting from a counter-guarantee from CERSA. The loans will be funded initially by Banco Caminos, up to €20m, and subsequently by the issuance of €150m in securitisation bonds, progressively subscribed to by ICO with a bilateral guarantee from EIF.

The platform will also specifically provide support to SMEs contributing to sustainability and green transformation. The bonds will be listed on the Spanish alternative fixed-income market (MARF).

In the near future, Aquisgrán aims to also issue bonds subscribed to by private institutional investors.

In other news…

Aviation finance platform formed
KKR has launched AV AirFinance, a global commercial aviation loan servicer. The new platform combines stable, long-term capital and decades of experience structuring commercial aircraft loan transactions to offer creative and innovative financing solutions to commercial aviation customers around the world.

AV AirFinance is led by ceo Siggi Kristinsson, who most recently co-founded and served as ceo of Volito Aviation Services, a company providing debt origination and advisory services to a number of financial institutions. Ryan Jasinski joins the AV AirFinance team from CIT as part of a related portfolio purchase and will continue to focus on loan origination in the Americas. Per Waldelof, former president of PK AirFinance, serves as a consultant advising on loan origination and other aspects of AV AirFinance’s operations.

To support the launch, KKR and AV AirFinance have agreed to purchase a circa US$800m portfolio of aviation loans from CIT Group, comprising over 50 loans secured by approximately 60 commercial aircraft. The loans in the portfolio have an average yield in the mid-single digits and an average remaining term of approximately four years.

The portfolio acquisition from CIT is being funded by separate accounts managed by KKR.

Climate disclosure recommendations released
The SFA has responded to the US SEC’s RFC on climate change disclosures with recommendations that it believes would facilitate a clear, consistent and standardised framework in connection with public securitisations over the next 18-24 months. The first recommendation is to establish a principles-based approach to the goals of climate disclosure, including establishing the objectives of such disclosure, in order to allow market participants to determine which specific data or other disclosures should be provided.

Second, existing standards should be leveraged, while tailoring them to the securitisation markets given the unique structures and underlying assets of such issuances. In particular, climate risk should be evaluated at both the transaction level and the collateral level, while the applicability of certain climate data between asset classes should be taken into consideration.

Finally, the approach should be phased in over time, given that the market for such issuances is at a nascent stage. “Overly prescriptive rules that come into existence before the securitisation industry coalesces around them risks hampering the development of the green securitisation market to the point where there is no issuance at all,” the SFA warns.

Cyprus NPE ratio declining
The non-performing exposure (NPE) ratio in Cyprus stood at 17.7% in December 2020, declining by almost 10 percentage points from 28% in December 2019, according to DBRS Morningstar figures. Overall, from its peak in May 2016 at 49%, the NPE ratio has dropped by roughly 31 percentage points - mainly due to the transfer of the Cyprus Cooperative Bank's (CCB) non-performing assets to the state-owned asset management company KEDIPES in 2018, and more recently due to non-organic solutions and write-offs.

The significant reduction in 2020 is largely attributed to: transactions totalling €2bn by Bank of Cyprus (known as Helix 2 - Portfolio A and Velocity 2 (SCI 5 August 2020)) and Alpha Bank; write-offs of around €1.1bn mainly by Hellenic Bank; and the remainder through organic solutions. Another transaction of €500m, mainly made up of retail and SMEs loans, was completed in January 2021 by the Bank of Cyprus.

EMEA
HIG Capital has expanded its European WhiteHorse team with the addition of Sebastian Lorenz as principal and head of the DACH region. Lorenz has 11 years of experience in direct lending and corporate finance. He was previously a director in Barings’ private finance division and has also worked for Ares Management.

Structured Finance

Piraeus preps third NPL ABS

Sector developments and company hires

Piraeus preps third NPL ABS
Piraeus Financial Holdings has reached definitive agreements with Intrum and Serengeti Asset Management in connection with the sale of 49% and 2% respectively of the mezzanine and junior notes of the Sunrise I non-performing exposures portfolio. The portfolio consists of circa 205,000 retail and corporate loans, with a gross book value of €7.2bn, as at 30 September 2020. The implied valuation for the transaction, based on the nominal value of the senior notes and the sale price of the mezzanine and junior notes, corresponds to 34.5% of GBV.

Piraeus Bank has already filed an application for the inclusion of the Sunrise I senior notes in the Hellenic Asset Protection Scheme, relating to the provision of a government guarantee on the senior notes of around €2.45bn. The transaction will be classified as held for sale in 2Q21.

Piraeus Bank will retain 5% of the mezzanine and junior notes, as well as 100% of the senior notes of the Sunrise I securitisation. Conditional upon requisite supervisory and corporate approvals, Piraeus Financial Holdings is contemplating distributing part or the whole of the remainder of the instruments to its shareholders.

Together with the Phoenix and Vega NPE transactions that are also pending completion this quarter (SCI passim), the Piraeus NPE ratio will drop to about 23% from the reported 46% in March. Subject to the required approvals, the loans within the Sunrise I securitisation are expected to be derecognised from Piraeus Financial Holdings’ consolidated financial statements within 2H21.

The expected capital impact of the transaction stands at circa 2.7 percentage points over the December 2020 total capital ratio, taking the P&L effect and RWA relief into account. The transaction is part of Piraeus’ wider Sunrise transformation programme and underlines the progress the bank is making with its €19bn NPE clean-up plan, leading to a single-digit NPE ratio within less than 12 months.

UBS Europe and Alantra acted as arrangers and financial advisors to Piraeus on the transaction.

In other news…

CMBS loan-level data integrated
Moody’s Analytics has integrated CMBS loan-level data across its commercial real estate solutions. A dataset of approximately 170,000 properties and 130,000 loans is now available across the Moody’s Analytics REIS platform, CMM, and CMBS Data Feed. The Moody’s Analytics CMBS dataset aims to provide investors with visibility into long-term trends by covering more than 12 years of performance history of active CMBS deals covering US$828bn of outstanding debt, as well as 20 years of historical data on the US CMBS universe.

E-commerce ABL agreement signed
Apollo Global Management has committed to invest up to US$500m in senior secured credit facilities originated by Victory Park Capital (VPC). The new lending relationship will focus on asset-backed lending (ABL) to companies that aggregate third-party sellers on Amazon and other e-commerce sites.

VPC will pursue income generation and capital preservation through downside protected investments in businesses with strong management teams building modern, scaled consumer goods companies. The financing commitment marks Apollo’s entrance into growth lending and complements the firm’s broad coverage of credit origination, including credit strategies that span capital markets, real estate, fund and G&P finance solutions.

Structured credit fund spins out
Panagram Structured Asset Management, an Eldridge-backed RIA specialising in structured credit, has launched with approximately US$13.5bn in assets under management. Panagram is led by John Kim, former principal and head of structured products at Eldridge.

Kim and his team of investment professionals, who have worked together since 2014, invest across the capital structure in CLOs, ABS and commercial real estate. The firm is one of the largest CLO investors in the market, with approximately US$12bn in CLOs and more than 45 control positions currently managed.

Panagram manages assets in separately managed accounts, private funds and other investment structures.

Structured Finance

SRT upgraded on CE build-up

Sector developments and company hires

SRT upgraded on CE build-up
Scope Ratings has affirmed its single-A rating on the class C credit-linked notes issued by SSPAIN 2019-A and upgraded the class D to F notes to triple-B plus, triple-B minus and double-B plus respectively from triple-B minus, double-B and double-B minus. The transaction is a significant risk transfer deal, which closed on 28 June 2019 (see SCI’s capital relief trades database). The CLNs constitute direct obligations of Banco Santander and reference the credit performance of a static pool of auto loans granted to private and commercial customers in the US.

As of the March 2021 calculation date, the notes outstanding nominal balance was US$531.58m, versus US$1.38bn at closing. Since the 25 March 2021 payment date, the class G notes have been amortising together with classes A to F on a pro-rata basis, due to the size of class G being equal to or greater than 7.5% of the total notes’ principal balance outstanding. The class G notes had previously been excluded from amortisation.

Scope notes that the rated classes benefit from credit enhancement build-up, due to the fast repayment of the reference obligation portfolio. As of 25 March 2021, credit enhancement on classes C, D, E and F has respectively increased to 21.2%, 17.1%, 14.7% and 13.1% from the closing levels of 16.5%, 12.1%, 9.6% and 7.9%.

As of 25 March 2021, the cumulative event loss ratio was at 1.07%, well below the 2.70% threshold level to trigger a subordination event.

In other news…

Alternatives consolidation
HSBC Asset Management is consolidating its alternative assets operations into a single unit, HSBC Alternatives, managing and advising US$53bn. The new 150-strong team and combined unit will encompass HSBC Alternatives Investments, which includes the multi-manager hedge fundand private market teams, in addition to the firm’s private debt, venture capital and direct real estate teams.

Joanna Munro, global cio, will lead the new unit. She will continue to be based in London, reporting directly to ceo Nicolas Moreau, as a member of his management committee. Succeeding Munro as global cio is Xavier Baraton, former ciofor fixed income, private debt and alternatives since June 2010.

EMEA
BlueBay has appointed Michael Wolfram as head of institutional sales for Germany and Austria, based in Munich. He was previously a director, institutional investment consulting at bfinance, which he joined in December 2011. Before that, Wolfram worked at HCI Capital, Sparkasse Harburg-Buxtehude and Dresdner Bank.

Global
White & Case has appointed structured finance partner Ingrid York as co-head of its financial institutions industry group. The other co-heads of the group are London-based dispute resolutions partner John Reynolds and New York-based fintech partner Douglas Landy.