Contents

Capital Relief Trades

Back into the fold

CRT returns to centre stage with FHFA changing of the guard

The appointment of Sandra Thompson as the new acting director of the Federal Housing Finance Authority (FHFA) following the dismissal of Mark Calabria signals a radical change of direction for the agency and one that is likely to mean an enhanced role for credit risk transfer (CRT) mechanisms, agree market sources.

Firstly, the Biden administration has made clear that extending affordable housing to lower income borrowers is a principal policy aim. In accepting her role, Thompson underlined this aim, saying, “There is a widespread lack of affordable housing and access to credit, especially in communities of colour. It is FHFA’s duty through our regulated entities to ensure that all Americans have equal access to safe, decent, and affordable housing.” 

This would suggest that the GSEs will be encouraged to buy mortgages in which the credit quality is less secure and in which LTV values are higher than has been the case recently. If so, the role of CRT in mitigating risk comes into even sharper focus.

Secondly, official disdain for CRT, made manifest in the recently widely criticised paper on the tool published in May, will also become a thing of the past.

“That CRT paper won’t necessarily reflect the views of the FHFA going forward. That paper got a lot of flak and the FHFA will have a rethink about CRT,” says one well-placed market source.

The report, titled Performance of the Enterprises’ Single-Family CRT, noted that since the introduction of the CAS, STACR. CIRT and ACIS programmes, the GSEs have paid out $15bn in interest and premium to investors but have received just $0.05bn in write-downs and reimbursements covering 5% of historic loss on the reference pools.

As was observed at the time this, misses the whole point of CRT products. But the paper made it clear that the FHFA thought that the CRT tools were an expensive waste of money. That attitude is likely to change quite fundamentally now.

So, from the perspective of the collateral that Fannie Mae and Freddie Mac will now own and from the perspective of the philosophical trajectory of the FHFA, CRT is front, back and centre once more.

The capital plans, introduced a year ago to prepare the GSEs for re-entry to the private sector, are sure now to be forgotten and the way is therefore clear for Fannie Mae to come back to the market with new CAS and CIRT deals.

So, it’s difficult to overstate how important to the agency mortgage market that this change of guard at the FHFA represents.

The ultimate failure of the Calabria regime also comes as little surprise to many in the market.

“I always thought that Calabria would go, and that the plans to return the GSEs to the private market would fail. Firstly, it was being run by politicians, and secondly it’s a monumental effort. It’s not being managed in ten years so how do you do it in about a year?” asks one seasoned market participant.

It is also fair to say that Calabria was facing a great deal of opposition from those in the mortgage business. Just a few hours before the Supreme Court decision was announced, Housing Wire ran an op ed from Bill Cosgrove, chairman of the Mortgage Bankers Association (MBA) and David Stevens, ceo of the MBA, which claimed that Calabria had never really understood the GSEs or their role.

“This basic misunderstanding of the GSEs’ role has led Director Calabria down an ill-informed path of so-called reform, forcing the GSEs to capitalize at levels way beyond what makes sense and reducing their footprint just for the sake of reducing their footprint,” they concluded.

The celerity with which the White House moved to replace Calabria once the Supreme Court decision was announced and with which his successor was unveiled suggests that it came as no surprise to the administration. Thompson, it seems, was waiting expectantly in the wings for her cue, ready for her entrance, lines well-rehearsed.

Simon Boughey

ABS

Ever tighter?

European ABS/MBS market update

European ABS/MBS primary spreads continue to edge in on heavy investor demand. That looks unlikely to change, especially in core Europe, as supply begins to ease into the summer.

“The most notable development of the past four months for me has been that spreads keep going tighter and tighter,” says one core Europe ABS trader. “Current pricing levels no longer make sense for us – to the point that we did not even participate in the latest German ABS transaction, Bavarian Sky Compartment German Auto Leases 6.”

He continues: “With a DM of 10bp over one-month Euribor - which is at -55bp at the moment - we can’t even use it for collateral, so for us the cash premium is simply not high enough. Dutch ABS offers a little more, but is longer-dated, and even then is heading in the same direction.”

Nevertheless, the trader notes that buyers keep coming. “There is so much cash in the system, including an enormous amount on the banks’ balance sheets, and naturally they have to do something with that,” he says.

“I do not anticipate a lot of change,” adds the trader. “With the summer holidays coming, supply will be very limited. However, tightening has to stop at some point, otherwise people will have to shift to other sectors, including covered bonds.”

Away from core Europe, two peripheral new issues have priced so far this week. Yesterday saw Italian consumer ABS Pelmo’s class A notes come in at 55DM, having seen initial price talk in the low 60s. Today, Austrian auto deal FACT Compartment 2021-1’s seniors printed at 35DM, slightly up on initial talk of LM30s, but its class Bs came in from 110-120bp to 95 over one-month Euribor.

There are six more deals currently in the visible Euro ABS/MBS pipeline: CMBS Agora Securities UK 2021; Italian consumer ABS Brignole CO 2021; UK buy-to-let RMBS Canada Square Funding 2021-2; Spanish credit card ABS Columbus 2021-1; Spanish prime IM AndBank RMBS 1; and CMBS Last Mile Logistics Pan Euro Finance.

Vincent Nadeau

ABS

Leading the pack

UniCredit tops NPL sales

UniCredit has topped the list for European non-performing loan sales since 2019, according to new data released by KPMG. Indeed, Italian banks overall remain the most active sellers across the sector.

The European NPL market is highly concentrated, with only a few players conducting the majority of deals. The top 20 sellers account for 74% of GBV transacted over 2019, 2020 and 2021 year to date.

Most NPL sales happened in the last quarter of 2019, representing €32.3bn of transacted GBV. Compared to 4Q18, UniCredit saw fewer deals in 1H20 amid market uncertainty and organisational issues, such as teleworking.

The opposite was true for BMPS, which sold the most NPEs in 2H20. In general, 1Q20 was affected by Covid-19 related uncertainty that stalled most transactions amid concerns over pricing and collections.

Among the top 20 sellers in 2019 and 2020, nine Italian players pursued a reduction of non-performing exposures in their portfolios for 38.9% of the total GBV, given the maturity of the market and numerous active participants. Italy had the highest share of completed and ongoing deals between 2019-2020 - although with the advent of the Hercules Asset Protection Scheme (HAPS), Greece is now quickly becoming a growing and active market.

In fact, Greece has five seller firms on the top 20 list - including Piraeus and Eurobank - that already account for 33.3% of total GBV. Four of these five players are systemic banks that have already carried out transactions under the HAPS programme.

The European NPE market is following a growth trend, with 2021 and ongoing transactions so far worth €35.7bn of GBV.

Stelios Papadopoulos

Structured Finance

SCI Start the Week - 21 June

A review of securitisation activity over the past seven days

Last week's stories
AutoNoria returns
BNP Paribas draws crowd
Counting Calabria
The Supreme Court decision on the FHFA is eagerly awaited
NPL ABS return
Government guarantees dominate 2020 NPE activity
Pricing flurry
European ABS/MBS market update
Smoother transition?
US CLO secondary looks to be taking this quarter-end in its stride
Super narrow Arch prices
New Bellemeade comes at spreads well inside previous CRT trade
Triple-starred first for BMO
BMO brings innovative C$ CRT trade referencing Canadian CRE
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

Other deal-related news

• Accelerated dealer auto inventory turnover has resulted in insufficient collateral available for US dealer floorplan ABS master trusts in 2021, Fitch reports (SCI 14 June).
• 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 (SCI 14 June).
• 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 (SCI 14 June).
• Most high investment-grade rated US CMBS bonds are able to withstand downgrades under a hypothetical stress test conducted by Fitch (SCI 14 June).
• SGR-CESGAR, the Spanish guarantee society association, has launched a pioneering securitisation fund that aims to provide Spanish SMEs with access to the capital markets (SCI 15 June).
• 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 (SCI 15 June).
• 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 (SCI 15 June).
• 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 (SCI 16 June).
• Moody's Analytics has integrated CMBS loan-level data across its commercial real estate solutions (SCI 16 June).
• Apollo Global Management has committed to invest up to US$500m in senior secured credit facilities originated by Victory Park Capital (SCI 16 June).
• Panagram Structured Asset Management, an Eldridge-backed RIA specialising in structured credit, has launched with approximately US$13.5bn in assets under management (SCI 16 June).
• 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 (SCI 18 June).

Company and people moves

• 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 (SCI 14 June).
• RBS International has appointed Neal King as senior director, to oversee new business from NatWest's Trustee and Depositary Services traditional fund management clients (SCI 14 June).
• The bankruptcy court has confirmed Hertz Global Holdings' plan of reorganization, clearing the way for Hertz to emerge from Chapter 11 by end-June (SCI 14 June).
• KKR has launched AV AirFinance, a global commercial aviation loan servicer (SCI 15 June).
• HIG Capital has expanded its European WhiteHorse team with the addition of Sebastian Lorenz as principal and head of the DACH region (SCI 15 June).
• HSBC Asset Management is consolidating its alternative assets operations into a single unit, HSBC Alternatives, managing and advising US$53bn (SCI 18 June).
• BlueBay has appointed Michael Wolfram as head of institutional sales for Germany and Austria, based in Munich (SCI 18 June).
• White & Case has appointed structured finance partner Ingrid York as co-head of its financial institutions industry group (SCI 18 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

Risk transfer round-up - 22 June

CRT sector developments and deal news

Societe Generale is believed to be readying a capital relief trade backed by capital call facilities that is expected to close in 2H21. The transaction would be the French lender’s second such deal this year, following the execution of one in March (see SCI’s capital relief trades database).   

Separately, Bank of Ireland is rumoured to be prepping a capital relief trade that is also expected to close in 2H21. The transaction would be the lender’s first post-Covid significant risk transfer trade, following the finalisation of Vale Securities in December 2019.

Capital Relief Trades

SRT debut

LBBW prints first capital relief trade

The EIB Group and LBBW have executed a €95m mezzanine guarantee that references a €1.8bn portfolio of SME and midcap loans. The transaction is the German lender’s first capital relief trade and will enable it to provide up to €570m of SME and midcap financing.

According to Rainer Bohn, head of structured finance at LBBW: ‘’The transaction is our first synthetic securitisation, but we are not doing it for RWA relief only, given our healthy capital position. The reasons are more strategic, in the sense that it allows us to put in place the internal systems and capacity to hedge concentration limits and therefore provide more lending to our clients in South-West Germany.’’

Indeed, this explains the choice of the EIB Group as the counterparty. The latter has a long-standing track record of helping smaller first-time originators launch their first significant risk transfer trades, by building the capacity and systems that will allow them to issue more of these deals by themselves (SCI 16 December 2019).

The LBBW trade features sequential amortisation for the retained junior tranche and pro-rata amortisation for the mezzanine and senior notes, but with triggers to sequential. The portfolio has a weighted average life that is equal to 1.6 years and revolves over a two-year period.

Further features include a time call that can be exercised once the WAL has run its course and a back-to-back counter-guarantee from the EIB that will fully mirror the EIF’s obligation, so that the EIB takes on the mezzanine risk from LBBW. Excess spread is present in the transaction, but is limited to one-year portfolio expected losses, as stipulated by ECB guidance. 

More saliently, the deal is expected to support smaller businesses in their recovery from liquidity shortages caused by the Covid-19 crisis. The EIB anticipates the overall lending to expand to €800m via the engagement of additional lenders.

Looking forward, Thomas Lupbrand, structured finance analyst at the EIF, notes: ''Synthetic securitisation continues to be an important tool for the EIB Group, since it enables us to achieve our goal of providing funding to SMEs and the real economy. In the context of the European Guarantee Fund, which is yet to be approved, the EIB Group will be in a position to cover junior risk that hopefully can expand our foothold in the German market and other European countries.''  

Stelios Papadopoulos

Capital Relief Trades

US is coming

Stand by for more US regional bank deals, say panellists at IMN conference

Citigroup is currently having discussions with more US regional banks about issuing CRT transactions, following the lead established by the groundbreaking deal from Texas Capital Bank three months ago, it was revealed at the IMN risk transfer conference at the end of last week.

Seeing Texas Capital achieve regulatory appproval constituted a green light to other banks that have been hovering on the sidelines, it was noted.

“A lot of regional banks are happy to be a fast second but didn’t want to be the first one out there, so hopefully the market will now open up to a lot of additional issuance,” said one conference panellist.

Citi was adviser and underwriter for the Texas Bank deal, and is also a longstanding user of the capital relief trade mechanism for its own book.

The comments were made in a session entitled 'Risk transfer investing: what seasoned (and new investors) need to know about the changing landscape', and which featured speakers from Citi, Dutch pension fund investor PGGM, Semper Capital Management, Seer Capital and ArrowMark Partners.

All the investment firms represented on the panel have long experience of participation in the CRT market.

Another panellist agreed that thus far the possibility of regulatory disapproval has weighed heavily upon potential US issuers, but, in fact, the rules governing capital relief rules are not sizeably different in the US compared to Europe. Seeing the first deal occur should prove to other regional banks that the rules are broadly the same in the US and that capital relief is attainable as long as the proper processes are in place and real risk transfer takes place.

All eyes are now focused on the US and, despite the fact that Texas Capital is still the only regional bank to have essayed the CRT market to date, more transactions are thought likely to follow, they agreed.

“If you ask us where we see growth, it is in the US market doing transactions with US-focused banks preferably on commercial banking books, because that will provide true diversification. We’ll also look at mortgage books if the risk return is good enough,” said one investor.

Another investor commented that seeing US banks in general come into the market in the last years or so has been especially valuable, and that his firm would consider buying the same sort of core lending assets as they do in Europe.

However, there was broad agreement that mortgage book CRT trades and GSE deals don’t generallly provide the risk/reward returns that they are looking for. One noted that CRE trades would be more interesting as they would provide both diversification and higher returns.

One panellist recalled a synthetic risk transfer securitization of Chrysler US auto loan assets from Santander in 2019 which had been especially attractive to his firm. More deals like that from European or US banks would be sure to excite interest, he said.

Simon Boughey

Capital Relief Trades

Calabria exits

FHFA director removed, GSE stocks nosedive; Fannie comeback?

The Biden administration fired Federal Housing Finance Authority (FHFA) director Mark Calabria this afternoon (June 23) after the much-awaited Supreme Court ruling concerning the FHFA was delivered today.

Little time was wasted in getting rid of Calabria, a Trump appointee, after the Court decided that the FHFA was indeed structured unconstitutionally in that the director is insufficiently accountable to the executive, echoing an earlier decision concerning the Consumer Financial Protection Bueau (CFPB).

"In light of the Supreme Court's decision today, the President is moving forward today to replace the current Director with an appointee who reflects the administration's values," the White House said in a statement.

 It seems very likely that the new director of the FHFA will be in no hurry to return Fannie Mae and Freddie Mac to private hands – which had been a primary objective of the Calabria regime.

Fannie Mae and Freddie Mac stocks plummeted in the wake of the news. At the close in New York, Fannie Mae had lost 28% of value and Freddie Mac had sunk by 29%.

In another blow to GSE investors, the Supreme Court also rejected claims by a group of investors who have challenged the decision made in the wake of the crisis to channel GSE profits to the Treasury – the so-called Third Amendment.

“I respect the Supreme Court’s decision and the authority of the president to remove the Federal Housing Finance Agency director,” Calabria said in a statement as he left his job. “I wish my successor all the best in fixing the remaining flaws of the housing finance system.”

The status quo of the US housing market and the GSEs’ role within it is thus preserved. But the Supreme Court’s decision and Calabria’s exit have wide-ranging consequences.

It means that the revamped capital rules for the GSEs handed down over a year ago, which were meant to prepare the GSEs for an exit from conservatorship, are very likely to be kicked into the long grass.

If so, the GSEs will not be required to augment significantly the capital they hold.

Those rules, called the enterprise regulatory capital framework, also envisaged much less friendly capital treatment for CRT mechanisms than had been the case under the previous capital regime. Indeed, Fannie Mae has been absent from the CRT market largely as a result of these rules, it is said.

“We have not entered into any credit risk transfer transactions since early last year, initially due to the pandemic and subsequently because we paused issuance to evaluate their costs and benefits, including what reduction in capital relief they provide under FHFA’s enterprise regulatory capital framework. We may engage in credit risk transfer transactions in the future,” says a source at Fannie Mae.

With the departure of Calabria and the likely demise of these capital rules, the way for Fannie Mae to re-enter the CRT market is cleared.

Simon Boughey

Capital Relief Trades

Riding a wave

BNP Paribas executes capital call SRT

BNP Paribas has finalised a significant risk transfer transaction backed by capital call facilities. Dubbed Wagner 2021-1, the deal is the French lender’s first such transaction and is riding a wave of capital call SRTs.  

Banks that have successfully executed such deals over the last 18 months include Credit Agricole, Standard Chartered, Citi and Societe Generale (SCI passim). Societe Generale is believed to be working on another one that is expected to close in 2H21. Capital call facilities are a form of finance provided by banks to private equity funds and are typically secured against investors’ undrawn commitments.

The latest BNP Paribas transaction features a 0.2%-11% tranche thickness that combines funded and unfunded tranches, which have been sold to a credit manager and five insurers respectively. The tranches amortise on a pro-rata basis, with triggers to sequential, as stipulated by regulatory guidance.

The underlying portfolio totals €2.5bn of drawn and undrawn commitments and amortises over a 2.7-year weighted average life. Further features include a time call that can be exercised once the WAL has run its course.  

Originators of capital relief trades backed by such exposures do not usually execute them for capital relief but to hedge concentration limits and grow this line of business. Nevertheless, banks benefit from some RWA relief.

The rationale of using this technology for growing the balance sheet - as opposed to just receiving a CET1 boost - has been gaining ground in the market, as evidenced by LBBW’s recent debut CRT and Lloyd’s Syon programme (see SCI’s capital relief trades database).    

Stelios Papadopoulos 

CLOs

CLO opportunities seminar line-up finalised

Electronification, alternative structures on the agenda

SCI’s 1st Annual CLO Special Opportunities Seminar is taking place virtually on 29 June. The event examines the key areas in which investors and managers can enhance returns, from deal structures and pricing to unusual asset classes.

The seminar begins with a panel on ESG and CLOs, focusing on whether investors can achieve enhanced yield through ESG-compliant CLOs. Next, a panel on electronification looks at how technology is enabling market participants to save time and costs, while a middle market CLOs panel will explore whether the asset class still offers enough reward for the risk.

There is also a panel examining the prospects for alternative structures, such as CBOs, CFOs and PFI CLOs. Finally, the pricing and relative value panel covers the key issues in CLO analytics, pricing and valuation.

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

The seminar is sponsored by KopenTech. Speakers also include representatives from Angelo Gordon, Barclays, BNY Mellon, Cerberus, Climate Action Women, Converge RE, Corbin Capital Partners, GreensLedge Capital Markets, Jefferies, JPMorgan, Mark Fontanilla & Co, Morgan Stanley, Napier Park, Natixis, New York Life Investors, NIBC, Pacific Asset Management, Palmer Square Capital Management, PineBridge Investments, Sancus Capital Management, Seix Investment Advisors, Tetragon Credit Partners, TwentyFour Asset Management and US Bank.

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

Structured Finance

Volatility hedge

Bart Bakx, head of ABS and mortgages at NN Investment Partners, explains why securitisation and private credit currently represent sweet spots in the fixed income market

Q: Do you believe private credit will take on a more significant role in investor portfolios in 2021? If so, which factors are driving this forward?
A: We see that many investors are undertaking searches and these are increasing towards private credit. Looking for opportunities to allocate, investors seek alternatives in the private market space in view of continued volatility of the public markets and to mitigate the potential impact of rising inflation and interest rates. There are a number of compelling features that have been driving this trend forward; for example, diversification from established public credit products, pick-up in spreads and the ability to cater to specific needs for investors.

Furthermore, a changing and increasingly challenging regulatory environment puts pressure on banks’ balance sheets and creates opportunities for other institutional investors to step in and fill the gap. In addition, you may hold these loans at amortised cost instead of market value, which reduces valuation volatility, which is a great feature for insurance companies and pension funds and you get rewarded for accepting illiquidity or complexity in your investments.

Q: Why are the infrastructure, real estate and trade finance sectors likely to be of particular interest to investors currently?
A: For commercial real estate loans and trade finance, the floating rate nature - which is a benefit in times of inflation - spread pick-up and low volatility are factors that are compelling and hence the demand and interest in these sectors.

Q: How does the yield pick-up compare between these sectors and other asset classes?
A: In the ABS markets, the spread pick-up ranges from 10bp-100bp for triple-A rated ABS and for investment grade ABS, the pick-up versus investment grade credit bonds is approximately 85bp. Trade finance rated triple-B can offer around 350bp more, which is quite a bit better. For CRE loans, it is a bit lower and typically you see spreads on average of 200bp, depending on the loan and underlying asset quality.

Q: Why do current ABS spread levels provide an attractive entry point?
A: Securitisation did not recover from the Covid-19 widening as fast as investment grade credit, covered bonds or government bonds, as the purchases by the ECB in this market has been disappointing. The newly introduced Pandemic Emergency Purchase Programme did not spend a single euro for the purchase of securitisation.

So, while there has always been a basis between securitisation and investment grade credit in favour of securitisation, this basis has grown substantially. On average, single-A rated securitisations now trade wider than triple-B rated investment grade corporates. We already see added demand for this floating rate asset class, so we expect this basis to correct and believe now is the best time to start investing in securitisations.

Q: Can you provide more detail around the utility of securitisation in an uncertain inflationary and interest rate environment?
A: Most publicly traded bonds in the investment grade space are fixed rate products, while securitisations are floating products. With interest rates at an all-time low and expected to rise on the back of inflationary pressure, securitisations are at the sweet spot. Securitisations are the only liquid fixed income asset class with a floating rate character and can be added to a broader fixed income portfolio as a diversifier as a protection from inflation.

Q: What is your outlook more broadly for the European securitisation market?
A: The demand in this asset class is growing as investors are looking for yield, diversification away from the traditional fixed income products and protection from inflation. The ABS new issue market is performing very well.

Currently, all new issues are oversubscribed massively. We expect this to continue for the medium term and expect spreads to tighten.

Q: Do you foresee any challenges in the year to come in this space?
A: The negative effects of the pandemic have been muted, due to the monetary and government supports. But once the safety blanket is taken off, it is yet to be seen what will happen.

The biggest risk with investing in securitisations is a rise in unemployment rate, as the investors are mostly exposed to consumer risks. However, ABS structures are extremely robust.

In the aftermath of the global financial crisis, rating agencies were overly cautious, which led to more transparent and robust structures with more credit support. But even if you look at the spike in unemployment rate during the GFC, together with sharp decline in house prices, European ABS performance was solid.

We think that the GFC was a worse situation than what we currently face. Therefore, we do think that there will be challenges ahead, but we are not overly concerned.

Angela Sharda

Structured Finance

Generali debuts green cat bond

Sector developments and company hires

Generali debuts green cat bond
Assicurazioni Generali has priced an innovative catastrophe bond. Dubbed Lion III Re, the €200m ILS has a number of sustainable finance features.

First, Generali freed up €28.1m in capital as a result of the protection provided by Lion III Re, which will be allocated to eligible projects as defined by Generali’s Green ILS Framework. Second, proceeds from the sale of the notes will be used to purchase global MTNs issued by the EBRD under its Framework for Environmental Sustainability Bonds, which will be deposited in the collateral account. Finally, reporting on Generali's allocation to eligible projects and a link to EBRD reporting on its green project portfolio will be provided.

The Lion III Re notes pay 3.50% per annum and cover Italian earthquake and European windstorm risks on an indemnity trigger, per occurrence basis. The initial trigger and exhaustion amounts are respectively €400m and €600m for Italian earthquake and €600m and €800m for European windstorm perils.

The initial modelled annual expected loss is 2.99%, with an attachment probability of 3.87% and an exhaustion probability of 2.19%. AIR Worldwide is the modelling agent on the transaction.

GC Securities was structuring agent and joint bookrunner, Barclays was green structuring advisor and joint bookrunner, and Natixis was green coordinator and joint bookrunner.

In other news…

EMEA
USS Investment Management, the wholly-owned investment management arm of the Universities Superannuation Scheme, has appointed Janet Oram as its first head of ABS. Based in London, Oram was previously head of European ABS at BlackRock, which she joined in 2006. Before that, she worked at Fitch and Paragon Banking Group.

Hertz preps bankruptcy exit
Hertz is readying a new rental car ABS facility, which it will use to exit bankruptcy (SCI 14 June). The issuance proceeds from Hertz Vehicle Financing III Series 2021-1 and 2021-2 will be used to: fund the purchase of certain vehicles from Hertz's two existing rental car ABS platforms (Hertz Vehicle Financing and Hertz Vehicle Interim Financing); and pay off the outstanding principal balance of notes issued by Hertz Vehicle Financing II and HVIF. Any remaining proceeds will be used for the acquisition or refinancing of eligible vehicles.

The Series 2021-1 notes will have an expected maturity in 42 months and legal final maturity in 54 months, according to Moody’s. The Series 2021-2 notes will have an expected maturity in 66 months and legal final maturity in 78 months.

The collateral backing the notes is a fleet of vehicles and a single operating lease of the fleet to Hertz for use in its rental car business, as well as certain manufacturer and incentive rebate receivables owed to the SPE by the original equipment manufacturers (OEMs).

Structured Finance

Digital investment ABS prepped

Sector developments and company hires

Digital investment ABS prepped
DigitalBridge Group is in the market with its debut securitisation, the US$500m DigitalBridge Issuer Series 2021-1. The unusual transaction is secured by the firm’s digital investment management fees and carried interest, including from future investment vehicles.

The triple-B rated notes will be issued in two classes: a US$300m class A2 secured fund fee revenue tranche, to be drawn in full at closing; and a US$200m class A1 variable funding tranche that can be drawn, repaid and subsequently re-drawn over the deal’s five-year term.

DigitalBridge (formerly known as Colony Capital) focuses on identifying and capitalising on key secular trends in digital real estate. It is currently the only global REIT that owns, manages and advises across all major infrastructure components of the digital ecosystem, including data centres, cell towers and fiber networks, according to KBRA. As of 31 March, DigitalBridge had US$46bn of AUM, of which US$32bn is dedicated to digital real estate and infrastructure, and US$12.9bn to digital fee earning equity under management on behalf of third-party investors.

The collateral securing the notes is divided into two groups of management fees, consisting of current and future fees (with an NPV of US$899.63m), and select balance sheet assets (US$734m). The debt is sized to be serviced from the management fee portion of the collateral, with the balance sheet assets providing additional security for noteholders.

The value of the transaction collateral is determined by calculating the discounted value of management fees and the book value of the firm’s digital balance sheet investments. The deal is governed by a maximum permitted LTV of 35% or an asset coverage of 285.7%.

DigitalBridge is in the process of raising its second fund, DCP II, targeting a closing of over US$6bn. The firm has so far received US$4.5bn of signed commitments.

Barclays is structuring and placement agent on the transaction.

EMEA
Pepper Money has recruited Matt Blake as treasurer. He was previously director of treasury at Together, working there for almost 13.5 years. Prior to that, he had an almost four-year stint at Together as a management accountant, before working as a financial reporting accountant at Bupa.

North America
Greystone has appointed Eliav Dan as senior md, to oversee structured loan originations, CMBS, balance sheet lending and the firm’s agency and FHA programmes. Based in Los Angeles, Dan joins from Barclays, where he served as West Coast head, in charge of CMBS and balance sheet originations for the West Coast territory.

He has over 20 years’ experience in the industry, having held prominent positions both at Ladder Capital and Morgan Stanley. He will report directly to Scott Chisholm, Greystone’s evp and head of commercial.

Jake Kaercher has joined MUFG's MBS trading team as a director, securitised product trading. Working closely with the team, Kaercher will be responsible for growing the firm's agency CMBS businesses, including Freddie K Multifamily securities (FHMS), Freddie Small Balance Multifamily (FRESB), Freddie Tax Exempt (FRETE), Fannie Mae Delegated Underwriting and Servicing (DUS), Alternative Credit Enhancement Securities (ACES), Fannie Mae Guaranteed Multifamily Structures (GEMS) and Ginnie Mae Project Loans.

He will report to Michael McCarthy, head of MBS and securitised products trading, and will be based in New York. Kaercher joins MUFG with more than 25 years of industry experience, including time running the agency multifamily business at Piper Sandler, Stifel Nicolaus and Merrill Lynch.

Structured Finance

Apollo, illimity form NPE JV

Sector developments and company hires

Apollo, illimity form NPE JV
illimity Bank has entered into a binding heads of terms to form a 50:50 joint venture with certain funds managed by Apollo Global Management aimed at investing up to €500m in single-name distressed credit exposure secured by real estate assets in Italy. The JV - which will have an initial investment period of two years, with an option to extend - will pursue investments in non-performing and unlikely-to-pay loans with individual prices of up to €50m.

The agreement also provides for the contribution by illimity of approximately €231m gross book value of loans previously purchased by the bank, which forms part of its current special situation real estate investment portfolio. Indeed, the JV provides for the direct involvement of illimity's special situations real estate teams and Apollo's European principal finance teams.

Neprix, which illimity Group set up to manage distressed corporate credit, has been selected as sole special servicer for the JV. The transaction is expected to be completed during 3Q21.

North America
Sourna Daneshvar has joined Aon Securities as md, reporting to ceo Paul Schultz. Based in Chicago, Daneshvar will focus primarily on expanding the firm’s capabilities in raising capital and product innovation. Having spent 20 years in the financial services sector, he joins Aon from Citi, where he was a director, specialising in securitisation and managing alternative sales and asset origination across both public and private markets for alternative institutional investors and insurance clients. He was previously a director at Credit Suisse, with roles including responsibility for business development and financing in Europe within Credit Suisse Prime Services.

Ocorian has appointed Kareem Robinson as client director - capital markets in the Cayman Islands, where he will oversee the structured finance team. Robinson has over 20 years of experience in structured and asset finance, having worked at Waystone and as deputy head of the securities supervision division at the Cayman Islands Monetary Authority.

RFC issued on supervisory reporting
The EBA has launched a public consultation to amend its implementing technical standards (ITS) on supervisory reporting with regards to COREP and asset encumbrance, as well as for the purposes of identifying global systemically important institutions (G-SIIs). The paper aims to enhance proportionality in the area of asset encumbrance reporting, as recommended by the EBA’s study on the cost of compliance (CoC) with supervisory reporting requirements. The consultation runs until 23 September 2021.

The EBA notes that in response to the Capital Markets Recovery Package (CMRP), the reporting on securitisations needs to be amended to keep it aligned with prudential requirements. Furthermore, the EBA is proposing some minor amendments to COREP (reporting on own funds and own funds requirements), in order to obtain a deeper understanding of institutions’ use of the option to exempt certain software assets from the deduction from own funds.

Following the proposals for enhanced proportionality on asset encumbrance reporting, small and non-complex institutions will be exempted from the reporting of more granular data, as proposed in the CoC report. The paper also suggests changing the definition of the level of asset encumbrance.

Regarding the reporting of information for determining G-SIIs and assigning G-SII buffer rates, the EBA is proposing to slightly expand the scope of application of the reporting obligation, to include standalone entities - not only banking groups - that meet the relevant criteria.

A public hearing in connection with the consultation will be held on 9 July.

SFR acquisition agreed
Blackstone Real Estate Income Trust (BREIT) is set to acquire single-family rental operator Home Partners of America (HPA), valuing the company at US$6bn. The investment will be supported by BREIT’s perpetual capital, enabling a long-term approach to the management of HPA properties.

The firm has a portfolio of over 17,000 homes across the US. BREIT intends to support the HPA management team as it explores opportunities to expand access to high-quality housing for lower income households, including by formally launching its Choice Lease programme. Choice Lease aims to provide a direct and tangible opportunity to help address housing affordability challenges.

The transaction is expected to close in 3Q21, subject to customary closing conditions and approvals.

Survey highlights ESG information paucity
Availability of robust and standardised information is a stumbling block for asset managers as they seek to evaluate ESG factors for their investment decisions, Fitch notes. Given that leveraged loans are privately issued, asset managers face more challenges in terms of access to relevant information, fewer possibilities for active engagement with issuers and less focus on ESG from loan and CLO investors than public equity investors.

Fitch surveyed 117 asset managers on their ESG investment practices and the results highlight the differing degrees of ESG integration, including policy implementation, information sourcing and evaluation frequency. Most respondents noted that they rely on publicly available data, while fewer sourced relevant information by requiring the LSTA ESG questionnaire to be completed. Some managers indicated that their credit analysts were best positioned to assess ESG risks and opportunities for issuers or industries they cover based on their deal due diligence and experience.

A key finding that is not so surprising is that smaller firms, based on total assets under management and a less diversified product offering, lag behind larger firms in effectuating ESG policy. Nearly all (93%) of the top third of firms by total AUM had a formal ESG policy in place, versus 72% for the bottom third in total AUM. The gap in formal policies among firms of differing size is likely to narrow in the near term, as ESG becomes a regular part of investor due diligence.

CLO-only firms lag in having formal policies in place, compared with the more diversely mandated firms that oversee managed accounts/funds in addition to CLOs, according to Fitch. Fewer US CLOs have ESG guidelines when compared with those that have established European operations.

Structured Finance

RFC issued on NPL treatment

Sector developments and company hires

RFC issued on NPL treatment
The EBA has launched a public consultation on amendments to its regulatory technical standards on credit risk adjustments in the context of the calculation of the risk weight (RW) of defaulted exposures under the standardised approach (SA). The proposed amendments come in the wake of the European Commission’s Action Plan to tackle non-performing loans in the aftermath of Covid-19 (SCI passim), which indicated the need for a revision of the treatment of defaulted exposures under the SA.

The update is seen as necessary to ensure the prudential framework does not create disincentives to the sale of non-performing assets. The Commission’s Action Plan specifically asks the EBA to consider the appropriate regulatory treatment of defaulted assets, as laid out in the CRR, which have been sold at a discount (NPL sales).

Under the current regulatory framework, the capital charge for a defaulted exposure may – under certain circumstances - increase after its sale from a risk weight of 100% on the seller’s balance sheet to a risk weight of 150% on the balance sheet of the credit institution buying the assets. The proposed amendment to the existing RTS on credit risk adjustments introduces a change to the recognition of total credit risk adjustments, which ensures that the risk weight can remain the same in both cases. In particular, the price discount stemming from the sale will be recognised as a credit risk adjustment for the purposes of determining the risk weight.

By implementing this change through an RTS amendment, the EBA aims to clarify the regulatory treatment of sold NPL assets. However, the EBA also recommends that the treatment set out in this RTS be included in the Commission’s considerations as part of the revised CRR3 proposal, which is expected at a later stage.

The consultation runs until 24 September. A public hearing will take place on 13 July.

In other news…

EMEA
Ocorian has appointed Sandra Bur as head of capital markets - Luxembourg. Bur has over 10 years’ experience in the Luxembourg structured finance market. She joins Ocorian from Sanne, where she was an associate director, based in Luxembourg.

Korean cross-border ABS inked
Samsung Card has closed a rare cross-border credit card ABS. Dubbed Frontier Securitization XXXII, the securitisation comprises €164.22m class A1 and US$200m class A2 fixed and floating rate notes respectively, both rated Aaa by Moody’s.

The assets backing the notes consist of present and future receivables generated under designated credit card accounts originated by Samsung Card. The portfolio comprises credit card receivables owed by cardholders for their purchases on credit, as well as for drawing cash advances.

The transaction's revolving period is scheduled to continue until end-February 2025. A controlled amortisation period will then follow, during which the notes will be repaid in six equal monthly instalments.

Moody’s notes that there is a high degree of linkage between the ratings of the notes to the credit quality of Samsung Card, which acts as sponsor, seller and servicer on the transaction.

MPL analytics acquisition
Cross River Bank has acquired PeerIQ, with the intention of building on the bank’s suite of offerings, enabling clients, partners and investors to benefit from PeerIQ’s technology-enabled analytics. The acquisition will enable Cross River to provide end-to-end Software-as-a-Service (SaaS) technology solutions and advanced portfolio analytics, as well as additional data aggregation and risk management tools. The aim is to ultimately provide more transparency to the marketplace and the industry at large, according to the bank.

 North America
Jasmine DeSilva has joined Horseshoe as svp, ILS strategic initiatives and business development. DeSilva previously served as the business development manager for risk and insurance solutions at the Bermuda Business Development Agency. Before that, she was an avp at Sompo International, focusing on casualty underwriting in the transportation and energy risk segments.

One William Street Capital Management has recruited Christos Vlachos as vp, ILS. He was previously risk consultant, ILS at AIR Worldwide, which he joined in 2016.

Structured Finance

Aussie green RMBS bags Nochu support

Sector developments and company hires

Aussie green RMBS bags Nochu support
Firstmac has closed a groundbreaking A$750m green RMBS, backed by the Clean Energy Finance Corporation (CEFC) and Norinchukin. The underlying properties will be among the most energy efficient in Australia, meeting or exceeding a seven-star rating under the Nationwide House Energy Rating Scheme (NatHERS). The seven-star rating materially exceeds the minimum standards of the current National Construction Code and homes built to this rating require less energy for heating and cooling.

The issued notes either conform to the pre-issuance requirements of the Climate Bonds Standard for Green Bond issuances or will comply with the Firstmac Green Bond Framework that is aligned with ICMA’s Green Bond Principles 2018. Sustainalytics has provided a report covering the pre-issuance verification and Second Party Opinion covering Firstmac’s Green Bond Framework.

Under the transaction, qualifying green home loans will enable borrowers to benefit from a 0.4% finance discount for up to five years on loans of up to A$1.5m. Construction loans will receive an interest rate discount of up to 1.58%.

The securitisation attracted investment support of A$637.5m from Norinchukin and A$108.5m from the CEFC, investing on behalf of the Australian government. Firstmac will make available the full US$750m of finance to offer its first Green Home Loan product, tied to NatHERS. The initial seed pool will include existing Firstmac home loans valued at around A$520m, where these comply with the residential Low Carbon Buildings Criteria created by the Climate Bonds Initiative.

The property sector accounts for nearly a quarter of Australia’s greenhouse gas emissions, with about half of those emissions coming from residential buildings. CSIRO research has found that just 10% of new homes built in 2020 achieved a NatHERS rating of seven stars or more, with more than nine million existing homes not meeting this standard.

The transaction was arranged by JPMorgan.

Covid hit for CMBS appraisal valuations
US CMBS property appraisal valuations received for specially serviced loans across sectors since the start of the coronavirus pandemic have declined 34% from valuations at issuance, Fitch reports. Assets already in special servicing before March 2020 saw greater average declines than those that transferred since then, as the pandemic amplified existing performance concerns.

Fitch reviewed updated appraisal values reported between 1 March 2020 and 31 March 2021 for 732 specially serviced loans in its rated US CMBS 2.0 universe. The bulk of loans transferred to special servicing during the period were primarily hotel and retail assets.

Retail properties saw value declines averaging 38.9%, with the largest declines to Class B/C regional malls. The rating agency believes retail valuation declines incorporate a more permanent impairment to property-level cashflows.

Hotel valuations declined by 32.5% and are expected to have reached a trough for properties without pre-pandemic performance concerns. Fitch notes it may not rely on the current low appraisal valuations in determining long-term hotel value, as it expects cashflows to rebound as the sector recovers in 2H21.

In other sectors, lower valuations are mostly limited to student housing and assets that have already transitioned to REO.

Reps repeal true lender rule
The US House of Representatives yesterday voted 218-208 along a largely party line vote to approve Senate Joint Resolution 15, which invokes the Congressional Review Act (CRA) to repeal the OCC’s 2020 True Lender Rule. The SFA has responded by stating that while it believes the True Lender Rule should be revised to include explicit guardrails to prohibit high-cost lending partnerships, the association opposed Congress’ use of the CRA to address it.

The SFA remains concerned that the use of the CRA could lead to unintended consequences and costly uncertainty regarding foundational aspects that national banks and the capital markets rely on to provide consumers and small businesses access to affordable, responsible credit. It also removes the OCC’s full authority to address it, as the CRA prohibits a regulator from issuing a substantially similar rule. Instead, the SFA called on the OCC to expeditiously modify the rule and to have the Senate confirm a permanent Comptroller that makes this a priority.

The bill now heads to President Biden, who has indicated that he intends to sign it into law. Meanwhile, the OCC stated that moving forward it will consider policy options - consistent with the CRA - that protect consumers, while expanding financial inclusion.