Contents

Capital Relief Trades

Bridging the gap

Sustainable SRTs to spur ESG securitisation growth?

A steady stream of renewables significant risk transfer deals is expected to come on to the market in the coming months. This CRT Premium Content article investigates whether synthetics can spur growth across the broader ESG securitisation sector.

Synthetic transactions referencing sustainable portfolios are being touted as a straightforward way to overcome the current paucity of suitable ESG assets to securitise (SCI 9 April). However, data remains a constraining factor on the sector’s growth.

“Many banks have sustainable loans on their balance sheets and these have more immediate scope in terms of asset supply, given the dynamic of banks seeking to optimise capital. At the same time, institutional investors are keen to get exposure to these loans, but lending to the renewables sector can be challenging for them,” says Tim Conduit, partner at Allen & Overy.

He continues: “In that sense, it is a perfect storm and I expect to see a steady stream of significant risk transfer deals coming on to the market. Renewables makes the most sense as an asset class because banks have a lot of sustainability-linked loans on their books.”

Another lawyer involved in the capital relief trades market confirms that many banks are focused on ESG, but remain in the early stages of working out what this means for them and how to incorporate such assets into deals. He suggests that there are three ways of approaching ESG synthetic securitisations at present, the most obvious being to reference portfolios of ESG assets.

The second approach focuses on how the freed-up capital is used; for example, it can be redeployed into specific ESG-related lending. The third approach is to link deals to the overall ESG targets of banks, rather than specific ESG portfolios.

The lawyer notes, however, that it is currently challenging to aggregate assets at a meaningful size and with enough diversification to execute a pure ESG SRT deal. “The ability to capture the requisite data is an issue. The assets historically referenced by capital relief trades weren’t originated with ESG considerations in mind,” he explains.

Alien Pauw, investment manager at PGGM, agrees that it’s challenging to source 100% ESG SRTs of a sufficient size at present. “The supply of positive impact assets remains limited, so we consider 50% of the underlying having a positive impact and the remainder having a neutral impact as acceptable for the moment.”

Nevertheless, banks are increasingly implementing ESG frameworks to target lending in these areas. The more these frameworks are reflected in bank origination policies, the more data will be captured that can be used to facilitate CRTs.

In the meantime, as one structurer notes, it is important to provide for a transition process – whereby lenders are incentivised to promote sustainable finance. In its Sustainable Finance Strategy, adopted earlier this month (SCI 7 July), the European Commission notes that the current framework could be developed to “better recognise investments for intermediary steps on the pathway towards sustainability”. As a first step, it says it will consider proposing legislation to support the financing of certain economic activities – primarily in the energy sector – that contribute to reducing greenhouse gas emissions in a way that “supports the transition towards climate neutrality” throughout the current decade.

“If the industry adopts a strict approach to what constitutes an ESG securitisation, only a small portion of the market will be covered. Unless transitional assets are included in the criteria, the industry’s efforts will lose impetus,” Conduit suggests.

He points out that there has been some criticism of the green supporting factor and brown penalising factor concepts currently being considered by European policymakers. In theory, the former would discount the risk weights that apply to green lending, while the latter would increase risk weights for polluting assets held on a bank’s books.

“The EU must tread carefully in this area, since it is important to avoid creating stranded assets,” Conduit explains. “We should be moving away from our reliance on fossil fuels, for example, but there is still a lot of generation capacity and you can’t simply make everything run on renewables from day one.”

A recent BofA Global Research report calls for a sliding sustainability scale to be introduced, whereby the use of proceeds or the application of released capital generated by a securitisation is directed to the origination of sustainable assets, or where a portion of sustainable assets in a pool can be combined with sustainable proceeds use. Subsequent securitisations from a given originator or programme could be required – over a defined period of time – to increase the share of sustainable assets in the underlying pools until 100% of ESG assets is reached.

Alternatively, sustainable securitisation assets could reflect, say, 10%-15% of the best-in-class assets in a given country. This echoes the European Commission’s adoption in April of a sustainable finance taxonomy (SCI 22 April), the scope of which includes financing secured by pre-2021 buildings that fall within the top 15% of energy efficient buildings in a country or region, and buildings constructed after January 2021 with energy efficiency levels that are 10% better than the nearly zero-energy building (NZEB) standard. The aim of these criteria is to support energy transition by capturing a country’s improvements in energy efficiency standards over time.

“In this way, securitisation can facilitate the transition to a sustainable economy and sustainable bank balance sheets in a compressed period of time, and can reflect the state of sustainable asset creation and availability at present and over time,” the BofA report states.

It goes on to note that analysing sustainable securitisations involves not only asset-level aspects, but also deal-related parties. Asset-level assessment can encompass the assets included in the securitisation or can integrate the supply chain that leads to the assets forming part of the securitisation pool – albeit the latter can create both qualitative and quantitative difficulties in sustainability assessment.

As for deal-related parties, while the ESG assessment may be simpler, it presents a challenge it terms of the ranking of their contribution to the sustainability label of the securitisation. Consequently, one approach may be to limit the ESG assessment to the originator, retainer or servicer of a securitisation.

Rabobank credit strategists suggest that green proceeds securitisations make sense as a first step and as a way to generate more green collateral, which can then be used for green collateral securitisations. They note that this is particularly important for smaller non-bank players, which may simply have insufficient collateral at present, with Kensington Mortgages being a prime example.

The lender’s Finsbury Square 2021-1 Green RMBS is an example of a green proceeds securitisation (see ‘Green securitisation categories’ box), according to the Rabobank strategists, which they view as a viable alternative to 100% green collateral securitisations as long as a lack of collateral remains a constraining factor for more green securitisations overall. Only the senior tranche of the transaction is labelled green and proceeds will be used to purchase a specific pool of loans originated by Kensington designated as eligible green projects under the lender’s Green Bond Framework (SCI 7 June).

Conduit notes that the most effective incentive for banks to transition towards sustainable finance is likely to be significant regulatory intervention. “If the EU legislates in the area of green capital requirements, it will be a game-changer for ESG securitisation. Once there is an active incentive to tap the market, it will become inescapable.”

The EBA is set to publish a report by 1 November 2021 - as part of the changes to securitisation legislation to create synthetic STS - on the development of a specific sustainable securitisation framework. The report will assess the introduction of sustainability factors, the implementation of proportionate disclosure/due diligence requirements and the methodologies and presentation of such information.

More importantly, the report will also assess the possible effects of a sustainable securitisation framework on financial stability, the scaling up of the EU securitisation market and of bank lending capacity. Following the EBA’s report, the European Commission will submit a report to the European Parliament and Council on the creation of a sustainable securitisation framework, including a possible legislative proposal.

A couple of European studies published in 2Q21 demonstrate that green mortgages tend to exhibit lower borrower probability of default than their traditional counterparts. For example, Nationwide estimated that the default probability was 1.1% for a vanilla mortgage borrower versus 0.9% for a green mortgage borrower, based on a sample of 657,000 of its loans. Another study conducted by the University of Venice on the Dutch mortgage market established a negative correlation between credit risk and the energy efficiency of a building.

S&P notes that while borrowers who acquire green properties tend to have higher disposable incomes, these studies also determined that for lower income households, the higher the energy efficiency of the property, the lower their default rates. “In our view, banks may use these results showing that green mortgages carry lower credit risk than traditional mortgage loans to lobby for lower capital charges,” the rating agency suggests.

Meanwhile, investors are also trying to encourage banks to adopt ESG practices. For instance, while ESG has been a focus for PGGM for many years, Pauw notes that the next step for her firm is to begin measuring and increasing its share of investments with positive impact.

Last year, the firm established the Sustainable Development Investment Asset Owner Platform (SDI-AOP) with APG, AustralianSuper and British Columbia Investment Management to promulgate standardisation across the industry. This involved creating an SDI taxonomy, based on the UN Sustainable Development Goals, as a way to measure positive impact.

PGGM is currently in discussions with banks on how the taxonomy could help them in their lending business. The aim is to stimulate banks to start measuring positive impact for their corporate lending portfolios and discriminate between banks based on the KPIs.

Measuring ESG in the securitisation context remains confusing, according to Allen & Overy senior associate Isabel Tinsley. She says that the definition of what constitutes ESG needs greater standardisation and fewer market participants providing ratings on it.

“Reducing the number of third-party opinion providers to two or three players and creating a universal ESG benchmark would be helpful,” she adds.

Looking ahead, Tinsley suggests that an array of interesting ESG products are likely to emerge going forward. She cites as examples blue bonds linked to marine conservation or bonds linked to gender balance.

One area, in particular, that appears primed to benefit from CRT technology is microfinance lending - especially given that many microfinance lenders use digital technology to originate loans, so the requisite data is available. Microfinance CRTs have the potential to both facilitate a direct positive impact on communities and leverage the limited capital provided by development aid.

Green securitisation categories
There remains no clear definition or agreement on what constitutes a green securitisation (SCI 12 March 2020). Nevertheless, Rabobank credit strategists state that, in their view, ICMA’s Green Bond Principles (GBP) are the market standard for a green bond and are also relevant for the securitisation market.

Importantly, alignment with the GBP doesn’t require green collateral, providing the proceeds are allocated towards green projects. The European Green Bond Standard (EUGBS) – proposed by the European Commission in early July - also takes a broad ‘use of proceeds’ approach, meaning that providing the proceeds are put towards green projects (according to the EU taxonomy), a securitisation can be aligned with the EUGBS.

The Rabobank strategists broadly divide green securitisations into three categories. The first category is Green Collateral Securitisation, which is backed by a pool of green assets, whereby investors are exposed to the green collateral and its performance.

Second is Green Proceeds Securitisation, where the proceeds of the transaction are used to (re)finance (new) green assets. The assets backing the securitisation can be green or brown assets, as long as the proceeds are put towards green projects.

Third is Green Capital Securitisation, where a capital relief trade or synthetic transaction is executed and the freed-up capital is used to fund (new) green lending. “Hence, it is similar to the proceeds type but differs in terms of purpose/treatment of the transaction, in that the former is merely for funding purposes and the latter sees the assets and/or the risk taken off the balance sheet of the originator/seller,” the strategists explain.

They point out these three types of securitisation are not mutually exclusive. For example, a transaction can feature green collateral, with the proceeds also allocated to green projects.

The EU Taxonomy
The EU Taxonomy is a classification system for sustainable economic activities which contribute to the EU’s climate objectives. A total of six environmental objectives have been defined in the Taxonomy, but only two have so far been transposed in delegated acts - namely those on climate change mitigation and adaptation.

Climate change mitigation is concerned with mitigating the impact on the environment of economic activities, while adaptation is concerned with solutions aimed at reducing physical climate risks. “In our view, climate change mitigation is the most relevant one for the securitisation market, as it will encompass the vast majority of building/mortgage stock and car financing, for instance - i.e. the largest segments of the securitisation market,” Rabobank credit analysts observe.

In order for an activity to be considered environmentally sustainable under the EU Taxonomy, a number of conditions must be met, including that it: makes a substantial contribution to at least one of the six environmental objectives; does no significant harm (DNSH) to any of the other environmental objectives; complies with the technical screening criteria; and meets minimum social safeguards. The Taxonomy regulation also imposes reporting requirements regarding Taxonomy alignment on a number of financial market participants. As such, a gradual but material increase in focus by investors on reporting in terms of Taxonomy alignment for ABS transactions is anticipated.

Corinne Smith

CLOs

Loss mitigation mechanics

Euro CLO primary practice around LML documentation discussed

SCI publishes regular case studies and reports on the CLO market in addition to our usual news stories on the sector and the latest can be found here.

This time, we examine the uptake of loss mitigation loan language in European deals since the concept emerged a year ago. Read this free report to find out the background, challenges and deal numbers involved in the necessary significant documentation rewrite required.

While this report is available for free, future additional reports will only be accessible to premium subscribers. To enquire about SCI’s premium content please contact Tauseef Asri.

ABS

MPL rewards

Generous MPL returns stand out in parsimonious ABS market

ABS investors in the US searching for value in an environment otherwise starved of this should look at the marketplace loans (MPL) sector, suggest analysts.

One year AAA-rated unsecured consumer MPL ABS currently trade at around 40bp against the EDSF curve while three year A-rated MPLs are about 90bp to swaps.

“Nothing else is close to that. If you’re looking for value, unsecured consumer loans look good” says an ABS analyst.

In contrast, AAA-rated three year fixed rate credit card-backed ABS - which are also categorised as unsecured consumer loans - deal at just 4bp to the mid-swaps curve while floating rate paper is only a few bps more generous.

Triple B MPL ABS is also urrently 80bp wider than BBB subprime auto paper, compared to 50bp wider before the pandemic hit. Spreads thus not only offer a hefty pick-up to subprime auto paper but the differential is expected to narrow, so investors can anticipate price performance too.

“The MPL sector is the new subprime auto sector. The subprime auto market has gone mainstream: it is liquid, with lots of investors, but spreads are very tight. The MPL market offers opportunities. It is one of the few areas of the consumer space that still has some pickup,” says another analyst.

At the height of the pandemic scare in March 2020, BBB-rated MPL ABS ballooned to spreads of 1600bp/1700bp while BBB-rated subprime auto paper peaked at around 500bp.

The MPL sector developed in the wake of the financial crisis as businesses found it more difficult to access bank credit. Middle market lending platforms appeared as a bridge between cash hungry corporates and investors. It has since split into two segments: those businesses with physical premises and the burgeoning fintech scene, with names like LendingTree and OnDeck.

Total MPL ABS issuance was $15bn in 2019, which slumped to $9bn in 2020, of which $4bn was from the fintech sector. A total of $15bn is expected in 2021 with the preponderance emanating from the non-physical fintech lenders, according to JP Morgan research.

Despite the pandemic, delinquency rates in MPL loans are extremely low. Research by JP Morgan indicates that it is currently running at around 2%-4%, about twice that of bank cards and prime auto loans but only a quarter of the delinquency rate in student loans.

These low delinquency rates are attributed to the government stimulus and relief programmes, but even as these come to an end delinquency is not expected to rise substantially as the economy rebounds, says JP Morgan ABS research.

Overall ABS issuance volume this year in the US is $129bn, almost exactly where it was in the pre-pandemic year of 2019. JP Morgan forecasts full year issuance of $220bn.

Simon Boughey

RMBS

Foreclosure fears

CFPB's new rule curtailing foreclosures complicates mortgage market

The final rule on foreclosures introduced this week by the Consumer Financial Protection Burea (CFPB) is unlikely to interrupt MBS issuance in the short term but problems likely lie round the corner, say experts.

At the moment, record refinancing are contributing to healthy MBS issuance but if rates rise - as looks likely - then refinancing will become less popular and the potentially injurious effect of the CFPB rule upon mortgage provision more relevant.

While the final rule issued by the CFPB does not implement a blanket prohibition on all foreclosures - as the proposed rule did - it makes foreclosure significantly more difficult for lenders and mortgage servicers. Under the terms of the new rule, servicers may only proceed with foreclosure if the terms of prescribed “procedural safeguards” are met.

For example, when the rule comes into effect on August 31, foreclosure may only proceed if the borrower has submitted a loss mitigation application and remained delinquent at all times subsequent to the submission of the application, if the property is considered to have been abandoned, or the delinquent borrower has been unresponsive to servicer outreach for at least 90 days.

Under the terms of Regulation X, servicers must also retain extensive and detailed records detailing compliance with the procedural safeguards. For example, if the procedural safeguards are claimed to have been met with regard to borrower unresponsiveness, then the servicer must provide exhaustive records showing that the borrower had failed to respond to regular communication.

“While the Final Rule is not as far-reaching as the blanket foreclosure prohibition initially suggested in the Proposed Rule, it is nonetheless apparent that the CFPB’s clear focus is still on preventing foreclosures,” writes Hunton Andrews Kurth in its summary of the new rule.

The ruling of the CFPB in this matter is also very much in keeping with the new stance of the CFPB under the Biden administration as a much more interventionist body than under the previous president. Sources also suggest that the agency is using Covid 19 as a “hook” to introduce changes to the marketplace which might have been difficult to implement before the pandemic.

The extent to which the final rule affects the provision of mortgages remains to be seen. “My feeling is that certain banks are more reluctant to lend in some states, like California, especially on investment property loans, because they are concerned about foreclosure restrictions or tenant eviction restrictions,” says Abigail Lyle, a partner at Hunton Andrews Kurth at Dallas, Texas.

The need to collate and retain extensive documentation also adds considerably to servicers’ costs. Moreover, the restrictions now imposed on foreclosure open the door to class action suits in the future, in which the plaintiffs will claim that a foreclosure was initiated without due process.

All in all, considerable new barriers to foreclosure have been erected while mortgage lending and servicing appear more irksome.

At the moment, there has been no impact on the MBS market nor is there expected to be while refinancing is so high. However, should that change then the impact of the new rule upon the securitization market will become more apparent.

As of the end of June this year, $321bn of MBS has been issued, flat to last year, according to data from SIFMA. Overall outstanding MBS debt is $11.4trn, an 11% year on year increase.

The new rule may also in fact prove detrimental to delinquent borrowers, worry onlookers.  If such a borrower were to enter a workout at the moment, they are likely to receive a sizeable slice of equity from a foreclosed home. If, however, the hour of decision is postponed to next year or the year after, property prices are likely to have come off the current highs and the borrower will be in a worse position.

“Kicking the can down the road isn’t always in the borrower’s best interest, but this isn’t the view of the CFPB,” says Lyle.

Simon Boughey

ABS

Endless cash

European ABS/MBS market update

As the pre-summer flow comes to a close, optimism still prevails across the European ABS/MBS primary market. Despite strong execution from the four widely marketed deals last week and three still in the pipeline (see SCI’s Euro ABS/MBS Deal Tracker for more), further tight pricing levels are expected.

“The ABS-RMBS space has been exceptionally strong during these first six months,” notes one trader. “The market has been very technically driven and both volumes and supply have generally been overwhelmed by the amount of cash available.”

With spreads only getting tighter and showing compression across the stack, June and the first two weeks of July have brought a bustling pre-summer flow to the market. 

"In terms of spreads and tightening, I think we all should expect things to plateau out at some point,” states the trader. “However the view is still that investors are still keen to deploy cash and there is no indication or reason for that to change. Across most sectors we are seeing historical tights, and everything in both the secondary and primary markets points to a surplus of cash.” 

This solid demand was reflected in Creditis Servizi Finanziara’s latest Brignole transaction, where the class A notes ended up well oversubscribed at 2.1x and the class Bs at a mammoth 5.3x. “The Brignole CO 2021 deal - a full-stack consumer ABS - resulted in probably one of the strongest executions I’ve seen in many years,” observes the trader.

“It feels as though there is still a lot of cash out there – things will now start slowing down, but the Bavarian Sky and Polaris deals are a clear indication that people are working through the final pieces in their pipelines before the summer,” the trader concludes.

Vincent Nadeau

Structured Finance

SCI Start the Week - 12 July

A review of SCI's latest content

Last week's news and analysis
Forbearances south of 2m
Forbearances below 2m for 1st time in 15 months - big weekly drop
Fourth gear
JP Morgan takes to the road again for fourth auto CLN in 11 months
Going hybrid
New working models 'render offices as a service'
International SLABS debuts
Global legal, regulatory complexity addressed
Issuance boost
BNP Paribas leads the pack
Softly softly
US banks reluctant to swallow issuance costs of corporate CRTs
Stable outlook
NPL ABS potential underlined
Taper talk
Fed tapering could lead to 50bp MBS repricing

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 - 12 July

CRT sector developments and deal news

Santander is believed to be readying a Spanish synthetic securitisation from the Magdalena programme that is expected to close in 3Q21. The last Magdalena deal closed in September 2020 with the EIF (see SCI’s capital relief trades database). Meanwhile, the Spanish lender is also said to have priced a Portuguese corporate and SME capital relief trade today.    

Capital Relief Trades

Lift off

BMO programme details revealed

Further details have emerged of a synthetic securitisation programme launched by BMO in late December 2020. Dubbed Sauble, the programme will exclusively focus on leveraged loan issuance and is one of only two programmes dedicated to this segment. BMO has already printed two transactions from the Sauble programme - executed in December 2020 and June this year (SCI 17 June) - further bolstering the bank’s record as the most prolific leveraged loan capital relief trade originator. 

According to sources familiar with the programme, unlike regular capital relief trades, Sauble will target new originations. As new loans are originated, they will then be added into the portfolio, subject to certain eligibility criteria. Consequently, the bank will not be using loans that are already on its books but will keep adding new exposures over a one-year revolving period, thereby increasing the size of the deals over time.

Another innovative feature of the programme is the ability to extend the revolving period and maturity date on an annual basis. Following the end of the programme’s revolving period, the portfolio will amortise on a pro-rata basis, but with triggers to sequential amortisation.

The Sauble programme shares risk via a thick first loss tranche that in both deals is understood to have priced in the mid-teens. SPF Investment Management acted as the investor in the programme’s June transaction.

The Canadian lender’s main origination vehicle for leveraged loan CRTs until now has been the Muskoka programme, although this typically includes a mix of traditional corporate and leveraged loans. Sauble is therefore the first programme dedicated to leveraged loan issuance (see SCI’s capital relief trades database).

Bank of Ireland is another lender with an established programme named Mespil and Deutsche Bank has issued such deals in the past. Nevertheless, SCI data confirms BMO as the leader of the pack both in deal count and tranche notional terms.

Sauble will further expand the bank’s CRT origination capacity and is BMO’s second new programme this year along with Boreal. The first synthetic securitisation from the latter was inked in June and references Canadian commercial real estate loans (SCI 15 June).

Stelios Papadopoulos

RMBS

Back in vogue?

Reverse equity to test market appetite

Another UK RMBS backed predominantly by legacy Northern Rock assets has hit the market. The Towd Point Mortgage Funding 2021-Hastings 1 transaction marks the first public securitisation of UK equity release mortgages since the financial crisis.

Acquired by Cerberus in 2018, the £215.68m portfolio comprises 86.5% Northern Rock loans and 12.9% Legal & General loans, with the remainder originated by unknown lenders. There are 1,154 obligors in the pool, 73 of whom are deceased (representing £13.82m of the current balance), with the borrower age averaging 89.

The weighted average current LTV of the pool is approximately 70.7% and the WA current indexed LTV is about 43.1%. Most of the loans were originated between 2000 and 2010, with a geographic concentration in the South East (39.1%) and Greater London (16.1%).

One trader suggests that equity release mortgages remain a niche market. “Looking back at Aviva’s Equity Release Funding programme, for example, the general experience was that these bonds became really long-dated and there was uncertainty around how to model these types of transactions. Given that the market is generally looking for more yield, I don’t expect ERMs to make a significant comeback."

Nevertheless, the trader believes there is some appetite for this latest Towd Point transaction. “Cerberus has a long history of buying these types of assets and securitising them, so this deal is consistent with its strategy and it has been pretty successful so far with those transactions.”

The deal is provisionally rated by KBRA and Moody’s. Lisa Macedo, vp - senior analyst at Moody’s, notes: “One of the main features analysed was the scheduled principal amortisation of the senior notes. This is a more challenging analysis, given the underlying portfolio has uncertain repayment timing, mostly dependent on mortality rates. So, the structure has protection mechanisms in the event of the portfolio amortising either faster or slower than expected.”

The transaction is arranged by Citi.

Vincent Nadeau

Structured Finance

Aviation finance practice inaugurated

Sector developments and company hires

Aviation finance practice inaugurated
Global aviation services provider ACC Aviation has added an in-house aviation finance specialist. Viktor Berta joins the group as vp of its newly created aviation finance practice. The appointment broadens the scope of ACC Aviation’s suite of consultancy services, led by Rob Watts, who also takes on an enhanced role as director of aviation services.

Berta - who will work between the UK and Dubai offices - previously spent eight years in aviation finance and investment management at DVB Bank and Erste Bank, working from their Amsterdam and London offices. He has structured and restructured a variety of aircraft deals, including ABS.

EMEA
Scott Spurling has joined BlueBay Asset Management’s structured credit and CLO management team as an analyst. Based in London, he will report to Sid Chhabra, head of structured credit and CLO management.

Before joining BlueBay, Spurling was most recently an analyst at CIP Asset Management, where he was responsible for the due diligence across global ABS and RMBS bonds. Prior to this, he worked as an ABS and mortgage analyst for WyeTree Asset Management.

Giovanni Inglisa has joined the EIB as loan officer - banks and structured finance. He was previously structured finance manager at the EIF, which he joined in 2014. Before that, Inglisa worked at S&P as an associate in the Milan-based securitisation ratings team, as well as undertaking consultancy work at EY and Protiviti.

Salah Maklada has joined STS Verification International as associate director, bringing 10 years of securitisation experience gained through his work as a senior manager in the credit and securitisation team of Deloitte. His responsibilities at Deloitte covered trustee and verification services for a wide range of clients in Germany across various synthetic and true sale transactions.

North America
Antares Capital has recruited Jeffrey Stammen as md, head of investor coverage in asset management. He will report to Vivek Mathew, head of asset management and funding, and lead the company’s efforts in developing new relationships and raising capital from institutional investors. Stammen brings nearly three decades of experience in private credit and most recently served as md and regional sales head of North American institutional distribution at Barings. He previously led a sales team responsible for structured credit product distribution at Wachovia and began his career leading the credit derivative and structured credit products businesses for Citi Private Bank.

Ashurst has appointed Julia Lu as partner in its global markets practice, based in New York. She joins from Crowell & Moring, where she was a partner focusing on derivatives, distressed debt and structured credit markets. Lu previously worked at Sullivan & Cromwell and also undertook a secondment as the coo of the bank loan syndication and trading desk at Goldman Sachs.

Structured Finance

ILS efforts beefed up

Sector developments and company hires

ILS efforts beefed up
AXIS Capital Holdings has appointed Chris Caponigro as global head of AXIS ILS, as its third-party capital unit has been rebranded. Caponigro will oversee the company’s activities related to third-party capital under management, supporting ILS efforts across its reinsurance and insurance segments. He will report to AXIS Re ceo Steve Arora and be based out of the company’s New York and New Jersey offices.

Caponigro has extensive ILS and investor experience, combined with a technical background in underwriting. Prior to joining AXIS, he served as head of business development at Mt Logan Re/Everest Re, where he led investor relations and global capital fundraising responsibility for the private capital arm of Everest. Previously, he served at Platinum Underwriters Bermuda and St Paul Re.

In other news…

EMEA
Eric Wragge, md and head of Northern Europe ABS at JPMorgan, is set to leave the bank. In the near term at least, he will focus on developing Rochester Square - a derelict garden nursery site in central London – into a community arts space that he founded with his wife. Wragge joined JPMorgan in 2000 as an associate, moving into CLO structuring in 2001, followed by a number of other structured credit-related roles.

North America
Nate Weber has joined Mizuho as md, based in New York. He was previously a director in BMO Capital Markets’ CLO trading and origination team. Before that, he worked at Nomura, Barclays and Lehman Brothers in structured credit roles.

Structured Finance

New CLO committee to tackle 'greenwashing'

Sector developments and company hires

New CLO committee to tackle ‘greenwashing’
The European Leveraged Finance Association (ELFA) has created a new committee to establish industry best practice and serve investors in the CLO market. The CLO Investor Committee will provide a forum for members to identify CLO investors’ requirements, facilitate discussion on general market progress and key issues, and contribute to the regulatory dialogue on the asset class.

One prevalent issue that the committee will prioritise is the development of ESG credentials for managers and deals. Indeed, it says it will work on defining the concept of an ‘ESG CLO’, in order to avoid greenwashing.

By engaging directly with market participants, the CLO Investor Committee hopes to better support and identify further issues and improvements in the marketplace. It will also work closely with other committees within the ELFA, in particular the Loan Investor Committee and ESG Committee.

The CLO Investor Committee will be chaired by Emeric Chenebaux, structured credit analyst at Federated Hermes. A second committee chair will be chosen from nominations taken at the first committee meeting, scheduled to take place on 7 September.

In other news…

Climate risk division formed
International insurance group Howden has launched a new climate risk and resilience division. Led by Charlie Langdale, the team will focus on risk transfer products that help to accelerate and de-risk the move towards a low carbon economy, as well as mitigate the results of climate change.

The team aims to bring together ideas and insight from across the group to create solutions that will have impact in helping its clients in the transition to a more sustainable world. Langdale explains: “We’re helping to remove barriers to financing the projects that will help us move towards a low-carbon economy, while also creating scalable, sustainable markets for funding disaster response by unlocking private capital for social good. We’re driving capital to where it otherwise wouldn’t go and, in doing so, tackling climate risk from both a reduction and recovery angle.”

So far this year, Howden has collaborated with the Danish Red Cross on the first-ever volcano catastrophe bond (SCI 23 March), developed a carbon offset invalidation insurance for the California Cap and Trade scheme and is helping to launch the world’s first fully sustainable insurer, Parhelion.

North America
Capital Four has expanded its US CLO and high yield operations, following the appointment of Ami Dogra, Aasir Khan and Joe Sorensen to its New York office. Dogra joins from Citadel, where she served as senior sector analyst in the credit investment team. Khan recently held the position of investment analyst at Blue Torch Capital, while Sorensen has over 20 years’ experience in the industry and joins Capital Four from MacKay Shield, where he acted as director.

RFC issued on contingent liquidity
APRA has launched a consultation on contingent liquidity for locally-incorporated authorised deposit-taking institutions (ADIs) subject to APS 210 liquidity coverage ratio (LCR) requirements. Based on its analysis and experience of the liquidity impacts through the early stages of Covid-19, APRA considers that it would be prudent for an ADI to maintain surplus self-securitised assets amounting to at least 30% of its LCR net cash outflows. The authority expects the self-securitised assets to be unencumbered and not held as collateral for any other purpose. 

“Given the 2020 experience of volatility in financial markets, it is important that ADIs maintain prudent levels of contingent liquidity reserves for times of stress. Self-securitised assets are a key source of contingent liquidity in stress. By maintaining surplus self-securitised assets at this level, an ADI would be better placed to access material extraordinary liquidity support in a future stress, if required, at short notice,” the authority states.

Feedback on the proposal should be submitted by 20 August. APRA expects to release an updated version of APG 210 with the above amendment, subject to feedback received in the consultation, in late 2021. 

SRT ratings upgraded
KBRA has upgraded its ratings on three tranches and one class of CLNs and affirmed the ratings on one tranche and one class of CLNs issued by Santander’s Motor Securities 2018-1. Since closing, the reference obligations have paid down to a 41.4% pool factor and credit enhancement levels have increased for all rated tranches and CLNs. Additionally, all classes of rated CLNs have continued to receive their timely protection fee payments.

Structured Finance

Structured products dealer acquired

Sector developments and company hires

Structured products dealer acquired
Santander Holdings USA is set to acquire independent broker-dealer Amherst Pierpont Securities - through the acquisition of its parent holding company Pierpont Capital Holdings - for a total consideration of approximately US$600m. Well known for its fixed-income and structured product franchise, Amherst Pierpont will become part of the Santander Corporate & Investment Banking global business line.

Amherst Pierpont was designated a primary dealer of US Treasuries by the New York Fed in 2019 and is currently one of only three non-banks to hold that designation. The firm has approximately 230 employees serving more than 1,300 active institutional clients from its headquarters in New York and offices in Chicago, San Francisco, Austin, other US locations and Hong Kong.

Completion of the acquisition significantly enhances Santander CIB’s infrastructure and capabilities in market making of US fixed income capital markets, provides a platform for self-clearing of fixed income securities for the group globally, grows its institutional client footprint, and expands its structuring and advisory capabilities for asset originators in the real estate and specialty finance markets. The acquisition of Amherst Pierpont is expected to be around 1% accretive to group earnings per share and generate a return on invested capital of around 11% by year three (post-synergies), with a -9bp impact on group capital at closing.

The transaction is expected to close by end-1Q22, subject to regulatory approvals and customary closing conditions.

In other news…

BTL lender spun off
Fortress Investment Group is set to sell UK specialist mortgage lender and servicer Foundation Home Loans to Athene Holding, a financial services company focused on retirement savings solutions. Foundation Home Loans - the trading brand of Paratus AMC - is well known in the European mortgage lending, servicing and securitisation markets. As GMAC-RFC, the company grew to be the tenth largest UK originator of residential mortgages, a leading issuer of UK RMBS and a central contributor to the formation of the specialist loan market.

Funds managed by affiliates of Fortress acquired GMAC-RFC from GMAC in October 2010, as the company and its loan portfolio faced substantial challenges in the aftermath of the financial crisis. Management appointed by Fortress rebranded the company and set about transforming it into a focused and highly effective mortgage servicer.

With this strong focus on customer outcomes and providing solutions to borrowers in distress, the company saw dramatic improvements in loan performance and a substantial decline in arrears levels in a £4bn book of legacy mortgage loans. Under Fortress stewardship, the company returned to profitability in 2011 and in 2015 relaunched mortgage lending under the Foundation Home Loans brand, which has established itself as a top-three specialist buy-to-let mortgage lender and a growing provider of specialist mortgages to residential borrowers.

Since relaunching lending, Foundation Home Loans has originated over £2.5bn of mortgage loans, including over £500m in the first half of this year. The company has also developed a strong presence in the capital markets under Fortress, with cumulative RMBS issuance in excess of £3bn through 10 transactions since 2017, including the successful securitisation of legacy mortgage portfolios acquired from third parties.

During nearly 11 years under FIG ownership, the company’s headcount more than doubled to nearly 300 staff. The company has maintained its headquarters in Bracknell in Berkshire, where it was founded.

CIB strategic alliance agreed
Jefferies Financial Group and SMBC Group have entered into a strategic alliance to collaborate on future corporate and investment banking business opportunities. In particular, the two firms will coordinate efforts in the US leveraged finance business to expand and scale existing offerings.

SMBC will also provide financing to Jefferies Finance (JFIN), the leveraged finance underwriting affiliate of Jefferies, to expand its leveraged finance origination and underwriting efforts, as well as financing to Jefferies Group. SMBC’s financing to JFIN is in the form of a US$1.65bn revolving credit facility and a US$250m subordinated loan to support JFIN’s lending capabilities, while the financing to Jefferies is in the form of a US$350m revolving credit facility.

Further, SMBC Group intends to solidify its relationship with Jefferies by acquiring in the open market up to 4.9% of the firm’s publicly traded shares of common stock of Jefferies Financial, reflecting an approximately US$386m equity investment (based on the closing stock price as of 13 July 2021), subject to receipt of Hart Scott Rodino clearance.

French NPL partnership inked
Debitos and French data management company Transformation Factory have begun partnering on non-performing loan portfolio transactions. The aim is to construct a comprehensive solution for French banks and credit institutions by producing a holistic service, from data gathering to execution to pricing and portfolio selection. 

This partnership will provide Debitos’ 1,300 registered investors with access to French institutions and open the French NPL market to overseas investors, thereby connecting suppliers and purchasers. The NPL stock in France is projected to be over €130bn, the highest in Europe.

As part of the partnership, Transformation Factory has launched a new deal advisory and quantitative analysis practice, which will recruit sellers, negotiate deals and execute transactions. The firm expects to add additional strategic personnel, particularly a senior banker now based in London, who will join the firm in the coming months.