Contents

CMBS

Going hybrid

New working models 'render offices as a service'

The Covid-19 pandemic has ushered in hybrid working models that are redefining real estate valuations of offices as a service, rather than passive assets. At the same time, a shift in the balance of power from landlords to tenants appears to be underway.

“The shift appears to be irreversible,” says Euan Gatfield, md of EMEA CMBS at Fitch. “It is clear we are not coming back to the pre-pandemic status quo, where we would see vast numbers of people travelling in and out of the city centre every day.”

This combination of factors is causing a shift in the balance of power from landlords to tenants, which could in turn spur market value declines. “It would be strange if something as widespread and systemic as this did not have an impact on values. It is, however, hard to make an exact assessment in terms of magnitude or timing, based on the degree of liquidity in the market or the volume of property transactions taking place,” notes Gatfield.

He continues: “It is too early to judge these factors. But the pandemic will mark a monumental shift in the property market.”

European CMBS issuance is gathering pace, buoyed by appetite for a variety of assets – including offices – and jurisdictional exposures (SCI 30 June). Earlier this week, for example, Morgan Stanley priced Viridis (ELoC 38) – a CMBS secured by London’s 16-storey Aldgate Tower (see SCI’s Euro ABS/MBS Deal Tracker). Another transaction suggesting growing confidence in the office market was Bruegel 2021 – a €220.15m securitisation originated by Goldman Sachs and secured in part by seven office buildings.

“It is unquestionable that we are seeing a good level of supply being placed on the market,” notes Gatfield. “After shortages of allocation during the pandemic, it is somewhat of a turning point for CMBS issuance.”

The pandemic has had a tangible effect on the office, hospitality and retail sectors, but current volumes are a cause for optimism. "If global financial market risk premiums increase, then very often the CMBS market follows suit,” observes Gatfield. “As things stand, however, there is a window of opportunity for issuers - particularly because of current spread conditions.”

If the hybrid approach to work – partly office-based and partly working from home – has already brought about concrete alterations to the lives of many, its potential to influence the structure of future CMBS transactions remains unclear. Certainly, in terms of the prospects for innovation across the sector, Gatfield does not anticipate causal changes to the financing mix.

“The pandemic, more generally, is resetting many aspects of the property market. Hybrid work is the primary mediator of the pandemic for London property, a legacy that will have its own dynamic within the property market,” he concludes.

Vincent Nadeau

ABS

International SLABS debuts

Global legal, regulatory complexity addressed

Prodigy Finance is in the market with the first rated securitisation backed by international private student loans. One differentiating factor of the US$303.5m Prodigy Finance CM2021-1 transaction is the originator’s business model, which allows it to lend to borrowers around the world (currently 186 countries and territories).

Headquartered in London, Prodigy is a student loan lender that began lending in 2007 to postgraduate students attending INSEAD, a private university in France. In 2011, Prodigy extended its offering to students attending other European universities and in 2014 commenced lending to international students attending postgraduate programmes in the US. The product offering was developed to address the difficulties that international students can encounter in accessing credit to finance their postgraduate education.

The loans are governed by English law and are regulated by the UK FCA. Prodigy has partnered with several law firms that have broadly confirmed that its origination model should not require it to be licensed in borrower jurisdictions and the efficacy of its enforcement model, which involves arbitration proceedings in the UK that can be enforced in a borrower’s country of residence, based upon that country's adoption of the New York Convention on recognition and enforcement of foreign arbitral awards.

The lender uses a proprietary dataset that links student application data with post-study salary data to develop a statistical model that predicts a future earnings potential (FEP) for each new applicant. The FEP model and a debt service ratio threshold is then used to determine the borrower’s affordable loan size, given their specific budget and debt circumstances.

As of the 7 June cut-off date, the Prodigy 2021-1 collateral pool comprises 8,048 US dollar-denominated loans to 6,037 borrowers, with an average loan size of US$37,705m, an average per borrower exposure of US$50,265m, a weighted average margin of 6.6% over the floating base rate and a weighted average remaining term of 12.9 years. Obligors with Indian citizenship comprise 44.4% of the pool and the next largest concentrations are Brazil at 9.7% and China at 5.3%. Further, borrowers taking a business postgraduate degree account for 69.1% of the portfolio.

Prodigy estimates that 62.2% of the borrowers who are in the repayment stage currently reside in the US. Indeed, 84.8% of the pool relates to loans taken out to fund postgraduate courses in the US.

The collateral backing the transaction has been in repayment for an average of 10.5 months after the expiration of the grace period, compared to a weighted average original repayment term of 164 months, according to KBRA.

Angela Sharda

ABS

Stable outlook

NPL ABS potential underlined

Greece is now leading the way in Europe’s bad loan clean-up, participants in a recent DBRS non-performing loan webinar agreed. The outlook for the European NPL market overall is stable, despite decreased collections and extended timeframes for most securitisations.

Greece’s leading banks have embraced securitisation as a way to improve asset quality, replicating what Italy has done with help of the GACS programme. “Non-performing exposures on bank balance sheets are declining,” stated Gordon Kerr, head of structured finance research for Europe at DBRS. “Securitisation has been a key tool for Greek banks to securitise those exposures, making full use of state guarantees on the least risky tranche of notes for sale, and we expect this trend to continue.”

Unsurprisingly, the Covid-19 crisis has had a heavy impact on NPL business plans and collections. The economic challenges generated by the pandemic have produced downward projections, despite a generally stable recovery outlook.

Referring to the J-curve collection model, Mark Wilder, svp and head of European operational risk at DBRS, noted: “Collection quarters get stretched out before money starts flowing through. In that sense, the Covid-19 pandemic has had a very hard impact: the amount of collections is slower and this reflects the dip in the J-curve.”

Consequently, updated plans show decreased collection expectations and extended timeframes for most transactions. “Collection activity continues and while the majority of transaction collection ratios are 75% or higher, these are based on updated business plans.”

Although data shows that the market is experiencing a slight up-tick in non-performing exposures, the outlook remains stable – at least until the beginning of 2022. Looking ahead, securitisation vehicles appear to be the most reliable and central tool for banks to address their non-performing exposures and balance sheets.

“The market continues to introduce new transactions across various jurisdictions, highlighting a clear pan-European dimension. Non-performing loans have the potential to develop into a regular securitisation issuance market,” Kerr concluded.

Vincent Nadeau

Structured Finance

SCI Start the Week - 5 July

A review of SCI's latest content

Last week's news and analysis
Advantageous returns
Australian RMBS market update
Crazy collateral
ABS yields sink as collateral surges, driving investors to look elsewhere
Finish line
ESMA designates securitisation repositories
Innovative NPL ABS inked
CF opts for ReoCo rather than GACS
Litmus test
European CMBS momentum set to last
Pick a card, any card
Covid credit card usage soared, but ABS issuance is strangled
Strong technical
WFH lifestyle boosts RMBS market
Tight summer
European ABS/MBS market update

For all of last week’s stories including ‘Market moves’ and ‘Risk transfer round-up’ click here.

Recent research to download
Synthetic Excess Spread - May 2021
The requirement to fully capitalise synthetic excess spread is expected to result in SRT issuers dropping the feature from their transactions. This CRT Premium Content article weighs the relative benefits of synthetic securitisations versus those of full-stack cash deals, in which originators can use excess spread.

TCBI Deal Profile - May 2021
It took Texas Capital Bank nine months to finalise its landmark capital relief trade, becoming the first US regional bank to tap the risk transfer market. This CRT Premium Content article tracks the deal’s progress from inception to launch.

CLO Case Study - Spring 2021
In this latest in the series of SCI CLO Case Studies, we examine the double-B pricing patterns in CLO primary and secondary markets amid November to January’s textbook new issue boom and rally. Read this free report to discover the shifting relationship between new issue and BWIC DMs supported by an intuitive visualisation of market activity and tone.

Upcoming events
SCI's 3rd Annual NPL Securitisation Seminar
September 2021, Virtual Event
The volume of non-performing loans on European bank balance sheets is expected to increase due to Covid-19 stress and securitisation is recognised by policymakers as key to enabling these assets to be disposed of. SCI’s NPL Securitisation Seminar explores the impact of the coronavirus fallout on performance and issuance, as well as on pricing assumptions, servicing and workout trends across the European market. Together with recent regulatory developments, the event examines the establishment of an asset protection scheme in Greece and the emergence of synthetic NPL ABS.

SCI's 7th Capital Relief Trades Seminar
13 October 2021, In Person Event
Last year saw significant regulatory developments in connection with capital relief trades, including the publication of the EBA’s final SRT report and the introduction of an STS synthetics regime. SCI’s Capital Relief Trades Seminar will explore the impact of these developments, as well as the latest trends and activity across the sector.

Capital Relief Trades

Risk transfer round-up - 8 July

CRT sector developments and deal news

Intesa Sanpaolo is believed to be readying a significant risk transfer transaction backed by corporate loans that is expected to close in 2H21. The Italian lender’s last corporate SRT closed in December 2020.  

Capital Relief Trades

Fourth gear

JP Morgan takes to the road again for fourth auto CLN in 11 months

JP Morgan Chase is to issue its second auto loan credit linked note (CLN) of the year and its fourth in less than a year as it continues to expand its use of CRT technology.

The eight-tranche offering, designated Chase Auto Credit Linked Notes Series 2021-2, references 189,931 loans for a notional amount of $4.25bn. This is 28,000 more loans than were referenced in the previous Chase Auto Credit Linked Notes Series 2021-1, priced in March.

JP Morgan Chase has been unavailable for comment.

US investors say that the deal is likely to have been largely placed with buyers that participated in the previous transaction. “I think they tend to go back to the investors that got involved in the first one or two,” says one.

The weighted average (WA) LTV is 94.4% and the reference pool has a combination of loans for new cars (54.9%) and used cars (45.1%). More loans were originated in California (16.6%) than any other state, with 13.8% from Texas and 6.1% from Florida, but the geographic diversity of the trade is considered high. The concentration of loans in the top five states is 44.9%.

Of the eight tranches, the largest, worth $3.718bn, is unrated and retained by the borrower, as is usual. The AA-rated B class notes constitute the next largest tranche, worth $332.57m, with a 4.76% credit enhancement.

There is also a $46.75m A-rated tranche, a $46.75m BBB-rated tranche, a $23.38m BB-rated tranche, a B-rated $16.36m tranche, and two unrated tranches of $39.95m and $25.5m. The expected legal maturity is 26 December 2028.

Coupons have yet to be determined.

As usual, the credit risk inherent in the notes sold is transferred to the investors through a hypothetical tranched CDS position.

The composition of this most recent deal is very similar to the previous three since JP Morgan has issued since it re-opened its auto loan-backed CLN issuance programme almost 12 months ago. The high seasoning of 15 months in this deal compares to 14 months in the last trade, for example.

The WA FICO score is 779, only a point less than March’s deal. Indeed, the credit quality of these most recent auto CLNs compares very favourably to when JP Morgan Chase was in the auto sector in 2006, before it retreated from this market. Its CAOT 2006-B had a WA FICO score of 766 and in the 2006-A note the WA FICO score was 746.

“These deals are prime Chase auto, so these are guys who go to buy cars in cash and the dealer says, ‘Look I’ll give you a discount if you take a loan.’ So the default risk is low,” says a market source.

SUVs/CUVs account for 42.7% of the vehicles in the pool, while cars comprise 23.8% and the remainder is light trucks and minivans. The pool is also considered well-diversified in terms of manufacturer: Ford has the highest concentration with 15% of all loans.

JPM Morgan has been a principal user of the CRT market since a mortgage-backed bond was afforded regulatory approval in February 2020.

Simon Boughey

Capital Relief Trades

Issuance boost

BNP Paribas leads the pack

BNP Paribas has completed a full-stack significant risk transfer transaction backed by French unsecured consumer loans. Dubbed Noria 2021, the securitisation is the first capital relief trade from the programme to be backed by personal, debt consolidation and sales finance loans. The transaction renders the bank the most active SRT originator this year to date.  

According to Alexandre Adwokat, associate director at Fitch: ‘’It’s the first SRT transaction from the Noria programme to reference personal, debt consolidation and sales finance loans and features a robust hybrid pro-rata amortisation structure. This provides more protection than full pro-rata, since you maintain credit enhancement for non-covered defaults for all notes.’’

Damien Zarowsky, director at Fitch, adds: ‘’Principal payments are made for each class of notes according to each subordination ratio that the notes have to meet and once that credit enhancement has been reached, you move down the rest of the principal waterfall.’’

The subordination ratio for each class is equal to its initial credit enhancement, which means all the notes amortise pro rata if no sequential amortisation event occurs and there is no principal deficiency ledger (PDL) in debit. The notes are paid based on their target subordination ratios - as percentages of the performing and delinquent portfolio balance - during the amortisation period. The transaction benefits from the presence of excess spread.

The underlying loans revolve over an eleven-month replenishment period and bear a fixed interest rate. Early amortisation triggers are relatively loose, but the short length of the revolving period - along with eligibility criteria and available credit enhancement - mitigate the risk introduced by the revolving period. Fitch has also analysed potential pool mix shifts during this period and stressed the average interest rate of the portfolio.

BNP Paribas Personal Finance is the transaction servicer, with no back-up servicer appointed at closing. However, servicing continuity risks are mitigated by a monthly transfer of borrowers’ notification details, a specially dedicated account bank, a reserve fund to cover liquidity and the management company being responsible for appointing a substitute servicer within 30 calendar days upon the occurrence of a servicer termination event.

Rated by DBRS and Fitch, the trade – which was upsized from €750m to €900m – consists of €648m AAA/AAA rated class A notes (which priced at one-month Euribor plus 70bp), €40.5m AA (high)/AA rated class B notes (70bp), €76.5m A/A rated class C notes (110bp), €45m BBB/BBB rated class D notes (150bp), €27m BB (low)/BB rated class E notes (255bp), €22.5m B/B+ rated class F notes (370bp) and €40.5m unrated class G notes (fixed 5.95%).

Noria 2021 follows another full-stack SRT and a capital call deal that the lender closed in June. Overall, the latest ticket and a pending synthetic CMBS bring BNP Paribas’ SRT deal count to five, the most for any originator so far this year (see SCI’s capital relief trades database).

Stelios Papadopoulos

Real Estate

Forbearances south of 2m

Forbearances below 2m for 1st time in 15 months - big weekly drop

The number of active mortgage forbearance plans in the US dropped by 189,000 in the last week to below two million for the first time since April 2020, mortgage data provider Black Knight reported this morning (July 9).

This represents the highest weekly exit week in over six months.

Forbearances in mortgages held by banks and in private label deals led the way with a 78,000 reduction, while FHA/VA and GSE numbers dropped by 67,000 and 44,000 respectively.

Overall, US forbearance plans have dropped by 254,000, or 12%, over the last month, to a total of 1,862,000.

This significant decline seen in the previous seven days was underpinned by the large number of debt-holders which entered Covid forbearance early last year reaching the 15-month quarterly review.

By July 6, 1.86m, or 3.5%, of all mortgage-holders remain in Covid-related forbearance plans, including 2.2% of GSE loans, 6.8% of FHA/VA loans and 4.6% of private label loans. The total unpaid principal balance (UPB) of all loans in forbearance is now $365bn.

Some 582,000 GSE loans are in forbearance, with an UPB of $121bn. There are 760,000, or 6.3%, FHA/VA loans still in forbearance plans, with an UPB of $130bn. It is estimated that Fannie Mae and Freddie Mac spend $1.15bn monthly on principal and interest payments for loans in forbearance.

Another 400,000 forbearance plans will be reviewed for extension or removal in the next 30 days.

Black Knight was unavailable for comment.

Simon Boughey

RMBS

Taper talk

Fed tapering could lead to 50bp MBS repricing

If - as many expect - the Federal Reserve commences a taper operation in 2H21 then agency mortgage bonds could reprice wider by 40bp-50bp, suggest MBS analysts.

The Fannie Mae interpolated five year/10 year curve currently yields around 69bp to Treasuries, but if the Fed does execute a taper then the market could see yields back up to plus 110bp-120bp.

Mortgage-backed security purchases commenced in March 2020 as the Covid 19 pandemic bore down heavily upon markets. Currently, the Fed buys $40bn of MBS per month, in addition to Treasury purchases of $80bn.

By the end of May 2021, it owned $2.2trn in MBS, having added $900n since last March. This represents about 32% of the total MBS market.

Prices of MBS will back up not only because the Fed’s aggressive bid is taken out of the market but because at the moment the Fed is also absorbing all the prepayment risk. But if the Fed steps back then the market will have to bear prepayment risk, which, given the current lowness of rates, is considerable.

“If the Fed buys everything - which it is - the market doesn’t have to price prepayment risk. But when the Fed steps back then the pricing will be very different,” says Satish Mansukhani, md and MBS strategist at Bank of America.

Market sources agree that the market is looking down the barrel of a significant repricing. “If the Fed does taper it will certainly put pressure on the MBS supply and demand technicals and the spreads to Treasuries. The magnitude of the move is dependent on other factors too, but yes, we’d expect a wider bias with tapering,” says one experienced mortgage-watcher.

There has also been talk of a taper being focused initially on the MBS market with the Fed bid in the Treasury market left untouched. Last week new Fed governor Christopher Waller said it was time to start looking at ending the taper, beginning with the $40bn MBS bill.

He said he was “all in favour” of discontinuing the MBS programme first, adding “The housing market is on fire. We should think carefully about doing MBS purchases, and if we were to taper those first that wouldn’t necessarily be a big deal.”

However, Waller is the only voice from the Fed to make this preference clear; from other governors there has been a deafening silence. “Clarida, Powell, Brainard and Williams have not uttered a word on this topic,” comments Mansukhani.

Moreover, he points out, the housing market is already starting to show signs of cooling off. The MBS Purchase Index, which leads the much-followed new home sales data by between four to six weeks, has begun to roll lower. “So we feel that housing market strength is not a reason in itself to scale back MBS purchases,” he explains.

Finally, with a taper announcement expected in H221, the Fed is running out of time to tell the market that it will discontinue solely MBS purchases before moving onto a Treasury taper.

The Bloomberg Barclays US MBS index performance versus Treasuries was down 4bps last week, underperforming US corporates, which climbed by 11bp. On an YTD basis, MBS remains an underperformer both versus the aggregate and the US corporate indices.

Simon Boughey

Structured Finance

NPL facility inked

Sector developments and company hires

NPL facility inked
Together Financial Services has launched a new £96.2m securitisation vehicle called Brooks Asset Backed Securitisation 1 (BABS), which matures in 2026. The facility consists of a varied pool of residential and commercial purpose non-performing loans, previously funded within the senior borrower group. Consistent with its wider securitisation programme, Together will continue to service and manage the loans within the new facility and will retain the customer relationships.

In other news…

Credit managers merge
American Securities’ opportunistic credit business, Ascribe Capital, has merged with Birch Grove Capital. The combined entity, which will be named AS Birch Grove, manages approximately US$5bn in assets across an opportunistic hedge fund, private credit vehicles and par credit and CLO vehicles. In the near term, the firm has over US$1bn in capital to invest in opportunistic credit situations across leveraged loans, stressed and distressed investments and corporate structured credit.

North America
KKR has appointed Giacomo Picco and Stephanie Yeh as mds in its global private credit team based in New York. The pair are tasked with deepening KKR’s capabilities and reach within its private asset-based finance (ABF) investment strategy, with Picco leading a new effort focused on receivables and inventory financing and Yeh responsible for co-leading the sourcing of ABF investment opportunities in the US.

Picco was previously portfolio manager and head of alternative lending and capital solutions at Sound Point Capital and has also worked at KS Management, The Carlyle Group and Lazard Freres. Prior to her new role, Yeh was md and head of early stage financing at Credit Suisse and has also worked at Goldman Sachs in structured finance.

TwentyFour acquisition completed
After acquiring a 60% stake in TwentyFour Asset Management in 2015, Vontobel had intended to acquire the remaining 40% in two tranches in 2021 and 2023 (SCI 26 March 2015). However, TwentyFour’s partners and Vontobel agreed to Vontobel acquiring the remaining 40% in one tranche on 30 June. By bringing the transaction forward, the two firms aim to provide clients and investors with clarity and ensure that focus remains on client service for the long term.

TwentyFour will remain operationally independent and will continue to service its clients from offices in London and New York, as well as via Vontobel’s international network. Since Vontobel acquired a stake in the business, TwentyFour’s advised client assets have increased from Sfr6.4bn to Sfr24.2bn, as of 31 December.

Structured Finance

Sustainable finance strategy unveiled

Sector developments and company hires

Sustainable finance strategy unveiled
The European Commission has adopted a number of measures in connection with sustainable finance. First, a new Sustainable Finance Strategy sets out several initiatives to tackle climate change, as well as increase investment in the EU's transition towards a sustainable economy.

The strategy includes six sets of actions: extend the sustainable finance toolbox to facilitate access to transition finance; improve the inclusiveness of SMEs, and consumers, by giving them the right tools and incentives to access transition finance; enhance the resilience of the economic and financial system to sustainability risks; increase the contribution of the financial sector to sustainability; ensure the integrity of the EU financial system and monitor its orderly transition to sustainability; and develop international sustainable finance initiatives and standards, and support EU partner countries. The Commission will report on the strategy's implementation by end-2023 and actively support Member States in their efforts on sustainable finance.

The second sustainable finance measure adopted by the Commission is proposed regulation on a voluntary European Green Bond Standard (EUGBS), which aims to set a ‘gold standard' for how companies and public authorities can use green bonds to raise funds on capital markets to finance ambitious investments, while meeting tough sustainability requirements. There are four key requirements under the proposed framework: the funds raised by the bond should be allocated fully to projects aligned with the EU Taxonomy; there must be full transparency on how bond proceeds are allocated through detailed reporting requirements; all EU green bonds must be checked by an external reviewer to ensure compliance with the regulation and that funded projects are aligned with the Taxonomy; and external reviewers providing services to issuers of EU green bonds must be registered with and supervised by ESMA.

Finally, the Commission has adopted a Delegated Act on the information to be disclosed by financial and non-financial companies about how sustainable their activities are, based on Article 8 of the EU Taxonomy. The Act will be transmitted for scrutiny by the European Parliament and the Council for a period of four months, extendable once by two months.

In other news…

North America
Hiscox ILS has appointed Vincent Prabis managing principal, responsible for spearheading the company’s ILS evolution. He will also become a member of the Hiscox Re & ILS executive team, reporting to Kathleen Reardon, ceo of Hiscox Re & ILS. Prior to joining Hiscox, Prabis served as head of ILS strategies at SCOR Investment Partners, where he oversaw the strategic direction of a well-diversified ILS business.

Structured Finance

EU monetary policy to reflect carbon transition

Sector developments and company hires

EU monetary policy to reflect carbon transition
The ECB has published its new monetary policy strategy, which includes what it describes as “an ambitious climate-related action plan”. The central bank states that climate change has profound implications for price stability through its impact on the structure and cyclical dynamics of the economy and the financial system.

As such, it is committed to ensuring that the Eurosystem takes into account, in line with the EU’s climate goals and objectives, the implications of climate change and the carbon transition for monetary policy and central banking. In addition to incorporating climate factors in its monetary policy assessments, the ECB is therefore set to adapt the design of its monetary policy operational framework in relation to disclosures, risk assessment, corporate sector asset purchases and the collateral framework accordingly.

In other news…

EMEA
Rachit Prasad has joined Orchard Global as a portfolio manager focused on advancing the firm's strategies in the CLO space. Prasad previously served as a director on the highly regarded European ABS research desk at Deutsche Bank. He joins Orchard Global's structured credit team in London, overseen by Shawn Cooper, who was formerly a portfolio manager at Brevan Howard and head of structured credit trading for Deutsche Bank.