Contents

ABS

Recovery trade

Pub credit quality to diverge amid changing consumer behaviour

The UK pub sector has been one of the most severely affected areas of hospitality during the last 15 months. However, despite the turmoil during the pandemic, panelists participating in a recent S&P webinar expect a recovery to return to this sector within the next two years.

“It will take even longer to return to 2019 leverage levels and we expect these levels to return by 2023,” one webinar panelist confirmed.

Pandemic-induced lockdowns and trading restrictions have put pressure on the pub industry (SCI 9 February). However, unlike many smaller operators, larger pub groups have been able to withstand the stress posed by the pandemic, due to government support measures.

“Government support is still relevant for the sector, but we expect it to taper downwards. In terms of looking forwards, we see premiumisation trends as a support for top-line growth and support on margin, as well as food offerings as a bigger part of menus for pub operators to capture a wider range of audience,” another panelist added. 

As such, the estates of larger players have remained relatively unchanged - and they appear better positioned to capitalise on the reopening going forward.

S&P expects UK GDP to grow by 7% this year and by 5.2% in 2022. While unemployment has been controlled, it is expected to edge upwards to 5.1% as government support measures are phased out.

The reopening trade looks set to be strong, given pent-up demand and major sporting events. But a full recovery in credit quality is unlikely in the short term as earnings are set to recover to pre-pandemic levels in 2022 and free cashflow generation will remain more muted due to catch-up investment. Further, credit metrics are not expected to recover to 2019 levels before 2023, thereby putting smaller and less diversified operators’ credit quality under pressure.

Panelists also pointed out that the alcohol industry had been under pressure due to competition from supermarkets prior to the onset of Covid-19. “Volumes have been under pressure due to decline in on-trade beer consumption in the UK and competition from supermarkets,” a panelist observed.

Overall, changing consumer behaviour is expected to continue shaping the sector. Nevertheless, managed pub models are likely to fare better in the recovery phase, due to the tighter control of strategy and operations.

Angela Sharda

Structured Finance

Disposals pending

Irish NPL activity set for rebound

The Irish non-performing loan market is set for a rebound in the second half of the year, following a hiatus due to the coronavirus crisis. Indeed, owner-occupied residential mortgages are expected to be a major area of focus for banks as they develop their future strategies against the backdrop of a post-Covid economy.

Ireland has been one of the most active NPL markets in Europe since the peak of the post-financial crisis recession in 2013. Irish banks have implemented a sustained strategy of NPL portfolio disposals to bring NPL ratios in line with wider European averages.

This trend continued in 2019, with approximately €10.5bn of loans sold across a variety of different asset classes, according to the latest KPMG data. Although all of the transactions that were being actively marketed in early March 2020 were put on hold, following the global outbreak of Covid-19, sellers are expected to look to recommence these deleveraging initiatives in the near term.

‘’Sellers remain cognisant of the anticipated increase in NPL flows arising as a result of the pandemic’s impact across many different sectors and are endeavouring to develop robust strategies to prevent a build-up of NPL stocks that was prevalent across all Irish banks following the global financial crisis in 2008,’’ says KPMG.

Indeed, the accounting firm states that there is approximately €2.1bn of GBV that is expected to return to the market shortly, following periods of extended deferrals and delays due to Covid-19. The first half of 2019 was extremely active, with mega portfolio transactions successfully completed from both AIB and Rabobank.

Although deal activity slowed in the latter half of 2019 and then completely stalled towards the end of 1Q20 due to the coronavirus crisis, the €1.4bn performing buy-to-let portfolio transaction announced by PTSB in 4Q20 has provided some cause for optimism for the months ahead.

The large Rabobank and AIB transactions in 1H19 were secured against a broad mix of asset classes, including CRE, SME, land, agricultural and residential BTL property. KPMG concludes: ‘’However, since then we have observed banks seeking to address the major remaining overhang from the global financial crisis – non-performing owner-occupied residential mortgages. It is anticipated that such residential mortgages will continue to be a focus for banks as they develop their future strategies against the backdrop of a post-Covid recession.’’

Stelios Papadopoulos

Structured Finance

Asset quality boon

EU bank credit conditions normalise

Credit conditions for European banks are normalising and prospects for the second half of the year look positive. A return to pre-coronavirus crisis operating income with higher loss absorption buffers accumulated during the pandemic should facilitate the management of non-performing loans.

According to Scope Ratings, credit risk has frozen in time, due to the extraordinary support measures available to borrowers and lenders during the pandemic. The rating agency expects a moderate net increase in NPLs this year. The large EU banks reported a stable NPL ratio of 2.5% at the end of March, helped by active NPL workouts and well controlled NPL formation from a low base.

Several reasons drive the agency’s assessment. First, credit exposure to the most fragile economic sectors is relatively small and unlikely to jeopardise banks’ creditworthiness.

The mining and quarrying sector, which includes exposure to the oil and gas sub-sector, has been a source of credit risk for some northern European banks. Companies were heavily affected by commodity price volatility in 2020, but prices now stand above pre-crisis levels. The offshore sector remains under pressure, however.

Additionally, the transport sector has been exposed to energy price volatility (shipping), but the impact of the crisis on the airline industry has so far been mitigated by support measures or dynamic activity in the cargo sector.

Scope notes: ‘’The credit exposures to the hotel and restaurant sector is more material than exposure to the leisure sector, especially for some southern European countries, but the credit performance of the two sectors will likely be highly correlated. Easing of public health measures and the rebound of activities should facilitate the phasing-out of support measures. But there is still a lot of uncertainty and some countries have even reinforced certain measures.’’

Helping banks in high NPL countries move legacy soured exposures off their balance sheets was a pre-pandemic priority for national and European authorities alike. Indeed, addressing NPLs is becoming as important as putting in place the original three pillars of the Banking Union - single supervision, resolution and deposit protection.

Nevertheless, there are caveats. Among them, according to Scope, is keeping the momentum with NPL management. For instance, banks in Italy and Greece have been relying on selling legacy loans to reduce their net NPL formation during the crisis.

Finally, the rating agency’s base case largely hinges on an orderly withdrawal of support measures. Abrupt cuts would be counter-productive and ruin lengthy efforts to keep economies afloat. Preserving credit supply remains a public policy priority, although general elections are approaching in some countries.

Stelios Papadopoulos

Capital Relief Trades

Collateral Chase

JPMC visits CRT space again with trade referencing prime mortgages

JP Morgan Chase is back in the regulatory capital relief market with a trade referencing 4,862 fixed rate prime mortgages almost a year to the day since its last, and first, similar such deal.

The trade, designated Chase Mortgage Reference Notes 2021-CL1, comprises five tranches which transfer mortgage risk through tranched credit default swaps. The pool of mortgages has a total balance of $3.24bn with maturities to 30 years.

The borrower’s first CLN to reference prime mortgages hit the tape on July 31 2020, but since then it has also priced a CRT referencing a pool of very high credit quality mortgages from its wealth management platform and no less than four trades referencing auto loans - the most recent of which was two weeks ago.

In addition to a deal last year referencing corporate loans, JP Morgan Chase has now been in the CRT market at least seven times since its ground-breaking note in October 2019.  That deal, after some to-ing and fro-ing, won regulatory approval from the OCC in early 2020 and essentially gave the entire US CRT market a new leash of life.

The extent to which JP Morgan has used the CRT market in the 16 months underscores the value the bank places on it as a tool to reduce regulatory capital burden. It also validates the belief, expressed frequently in different areas of the market in recent times, that risk-sharing is here to stay in the US and will expand.

JP Morgan Chase declined to comment on the trade or its increased use of CRT techniques.

Goldman Sachs also issued two risk-sharing CLNs in September 2020, while Citi continues to quietly churn out private trades behind the scenes.

The five classes of notes in the market at the moment, designated M-1, M-2, M-3, M-4 and M-5, are rated by Moody’s Aa3 to B2.

All apart from two of the mortgages in the reference pool are non-qualified mortgages (QMs) but they are so because the QM status was not tested, says Moody’s.

Simon Boughey

Capital Relief Trades

Credit events

US moratoria challenges highlighted

The capital relief trades market has adapted to the existence of payment holidays by either excluding them from portfolios or limiting their presence in them. Nevertheless, payment holidays have raised challenges for US synthetic securitisations - although their removal isn’t expected to have a negative impact on US deals, given that the bulk of take-up rates occurred last year during the peak of the coronavirus crisis.   

According to Andreas Wilgen, md and group credit officer, structured finance at Fitch: ‘’The main question with synthetic structures is what you classify as a defaulted credit, which isn’t always straightforward. Credit events could be defined as 180 days past due or could be in line with the lender’s policies.’’

Indeed, a notable example in this respect is a group of Fitch-rated US CRT transactions. These consider forbearances exceeding 180 days as credit events until the missed payments are fully repaid or borrowers resume their payments, with the missed payments deferred as part of a resolution agreement.

Given that the protection payments in these US deals are defined as a fixed percentage of the loans, the transactions experienced large and sudden protection payments when Covid-19 forbearance schemes where introduced in 2020. The latter happened even though the underlying loans in the transactions performed well.

One common option for defining credit events is by synchronising payments with actual losses. Yet this will most likely lead to a highly protracted process until realised losses are calculated with sufficient confidence. Alternatively, banks and investors can agree to make a payment that is equal to a predefined percentage of the loan amount.

‘’The advantage of this is that it’s simple and results in fast protection payments. However, under certain circumstances, such as the 2020 US transactions, the protection seller might have to make payments - even though losses aren’t there,’’ says Wilgen.

One lesson learned from the pandemic is that the exclusion of payment holidays from credit events is a simple way of avoiding this issue. Nevertheless, the challenges that payment holidays pose for credit events definitions are more prominent in the US than in Europe, given that European regulators made it clear last year that the existence of payment holidays wouldn’t amount to arrears or defaults (SCI 17 August 2020). 

Wilgen concludes: ‘’Synthetics performed well and similar to cash deals in recent years. We don’t expect the removal of payment holidays to have an effect in the market following their removal. In the US, the take-up rates in the predominant segment, namely RMBS, peaked in 2020 and have gone down since. The same applies to Europe, except for UK non-conforming, where late arrears remain elevated.’’

Stelios Papadopoulos

Capital Relief Trades

Risk transfer round-up - 23 July

CRT sector developments and deal news

Nordea is rumoured to be readying a significant risk transfer transaction that is expected to close in 2H21. The lender’s last capital relief trade closed in December 2019 (see SCI’s capital relief trade database).

Capital Relief Trades

Six STACRs - UPDATE

Freddie's sixth STACR of 2021 prints inside previous two

Freddie Mac late yesterday (July 19) priced its sixth STACR deal of the year, designated STACR 2021-DNA5, at levels inside recent DNA and HQA trades.

“Freddie Mac’s single family CRT programme continued to attract strong investor demand, with 66 unique investors participating in the STACR 2021-DNA5 transaction, the most since 2017.  The B1 tranche drew 39 investors, the most in programme history.  The B1 and B2 were the largest-ever for those STACR tranches with $339 million of offered notes for each.  And, the M1 and M2 spreads were at their tightest in more than 2 years,” says Mike Reynolds, vice president, Freddie Mac , single-family CRT.

For example, the $169m M-1 tranche, rated high BBB/BBB+ and with credit enhancement of 1.75%, printed at SOFR plus 75bp, compared to SOFR plus 80bp for M-1 tranche of STACR 2021-HQA2, which closed on June 25, or SOFR plus 85bp for the M-1 tranche of STACR 2021-DNA3 which closed on April 23.

The tightening is even more striking further down the capital stack. The $339m low BBB/BBB- M-2, with a CE of 1.25%, printed at SOFR plus 165bp compared to SOFR plus 205bp for the corresponding tranche of June’s HQA deal or SOFR plus 210bp for the corresponding tranche of April’s DNA trade.

The $339m BB/BB- B-1 tranche came in at SOFR plus 305bp (compared to 315bp in June and 350bp for April, while the unrated $339m B-2 printed at SOFR plus 550bp. The B-2 was in fact 5bp wider than the June deal but 75 inside the last DNA trade seen in April.

Bookrunners were Nomura and Amherst Pierpoint (recently acquired by Santander). Co-managers were Barclays, Bank of America, JP Morgan and StoneX.

The trade is set to close on July 23.

There was no 2021-DNA4, as, according to Freddie Mac, "DNA5 overtook it in the internal approval process."

Freddie Mac is due to print another STACR deal - under the HQA banner - in Q3.

Simon Boughey

RMBS

Minor deterioration

Spanish payment holidays buck the trend

The end of payment holidays for Spanish mortgages could lead to a minor deterioration in the collateral performance of Spanish RMBS. However, an impact on credit ratings is not expected.

“The collateral performance has experienced a very minor deterioration and the impact on credit ratings is unlikely. Once payment holidays schemes have ended, no ratings impact should happen on those transactions,” observes Isabel Plaza Escribano, director, structured finance at S&P.

After several extensions, on 31 March, Spanish authorities declared that the application period for the moratorium schemes had ended, allowing borrowers to be on payment holidays until the end of 2021. Over this time, S&P has tracked usage rates of payment holidays, any possible impact on the performance of the mortgages and the ensuing effect, if any, on its RMBS ratings.

Escribano notes: “On average, only 6% of these loans that were under payment holidays have become delinquent. That means only a 1% increment on delinquencies is expected on Spanish RMBS transactions rated by S&P Global – so that is very minor.”

Contrary to other European markets, in the Spanish RMBS market, payment holidays have remained low and stable, consistently under 10% - that is 4.5% for the legal scheme and below 5.5% for the sectorial scheme. Borrowers under the legal moratorium were also eligible for the sectorial one. Consequently, the usage rates on the sectorial moratorium started to rise in the latter part of 2020.

Escribano claims: “The sectorial scheme picks up later within the year 2020, as opposed to the legal one.”

In May, based on macroeconomic updates and projections of how the pandemic might affect certain European economies and their residential mortgage markets, S&P updated its outlook on some mortgage markets. Across the main European jurisdictions, payment holiday uptake was highest in Ireland, the UK, Portugal and Italy. Of these, the maximum potential rating achievable on RMBS transactions in Italy and Portugal is capped by the rating on the sovereign under S&P’s criteria.

Escribano concludes that the payment holiday usage rates in the Spanish market of the transactions that S&P rates have been in line with those in the market and the agency does not expect a rating impact.

Angela Sharda

Structured Finance

Social factors

Tina De Baere, head of ESG and macro strategy at Cairn Capital, argues that securitisation can facilitate the transition to a sustainable economy

Q: How consistent can ESG issues be? Ultimately, how subjective is ESG and ESG analysis?
A: Yes, this is a question that comes up all the time. ESG topics will always be subjective; it is the nature of the beast in many ways.

Given that there are so many values and opinions on those topics, it would be unreasonable to expect a clear consistency or a common framework across investors and asset classes. But similarly, to our standard credit analyses, different analysts can take different views on issuers and bonds.

We all get the same financial data, but we may all have a different cashflow forecast or a different view on relative value in the end. The same applies to ESG analysis as well.

On the topic of ESG scores, it is unreasonable to expect ESG scores to be entirely consistent. However, investors should understand the methodology behind those scores, compare scores against a peer set and track how scores change over time, as there is value in doing this and using scores in this way.

Q: Given the current sanitary and economic crises, how resilient are ESG discussions/transactions during more troubled times? Can they still be a priority?
A: It is too early to say and we will have to wait for studies to come out. Anecdotally however, what the current crisis has shown is the prominence of social factors.

We have seen companies throughout the pandemic either come out as heroes or have their reputation damaged by bad publicity – largely as a result of how they treated their employees. This, I feel, underlines the continued importance of ESG.

Q: In terms of the market and the current context, would you say that the supply of positive ESG assets is still limited? Or, on the contrary, are you seeing a clear flow of such assets?
A: With regards to structured credit, it is definitely a major challenge, with a limited source of supply. As a result, we are not seeing many transactions.

Perhaps policymakers or regulators could help stimulate the trade of those assets. They have a clear part to play here.

Q: In terms of sustainable finance regulations and the concept of 100% ESG assets, would a strict approach be positive towards financial stability?
A: There needs to be a good balance. Unfortunately, regulation is needed within the space of responsible investment - mostly to highlight the current climate urgency, raise awareness around climate change and the need to take collective actions. However, at the same time, I do not think that regulations should be so prescriptive as to restrict innovation - after all, it is an industry that is constantly evolving.

I would not want to be in the regulator’s shoes, as they need to find a nuanced, balanced approach within a very complex environment.

Q: Finally, in your opinion, can securitisation facilitate a transition to a sustainable economy?
A: Absolutely, I could not agree more with that! Securitisation enables real economy lending.

RMBS, for example, facilitate real-life mortgages and help people buying their own homes, which can be used by policymakers to stimulate a more energy-efficient housing stock. Securitisation can therefore play a crucial role in the re-orientation of capital towards more sustainable economic activities. It is a very important channel, which should not be ignored by policymakers.

Vincent Nadeau

Structured Finance

Angel eyes

Angel Oak Capital Advisors' Sam Dunlap talks value in non-agency MBS

Atlanta-based Angel Oak Capital Advisors’ flagship multi-strategy income fund (ANGLX),  this year celebrates its 10-year anniversary.  The ANGLX is a dedicated structured credit mutual fund, focussing chiefly on US non-agency residential MBS, and was launched after the Financial Crisis of 2007/2008. In the last decade, ANGLX has achieved average annualised returns of 5.66%, as of 6/30/21, and now has approximately $7bn under management. Sam Dunlap, chief investment officer of public strategies, talked to US editor Simon Boughey, who is also based in Atlanta, about the state of the structured credit market, where he sees value and where he doesn’t.

Hi Sam, how are you? So, looking back ten years ago, in the wake of the sub-prime crisis it can’t have seemed the most obvious move in the world to start a fund dedicated to US structured credit. Why did you do it?

It was definitely unique. As you know, 2011 was a challenging time in the credit markets but also an excellent opportunity. A lot of our initial core investors were looking for an open-ended opportunity within structured credit and that was the genesis of ANGLX.  We have a US structured credit focus, predominantly mortgage credit. In our view, there was a need for this, and there continues to be so, as we see structured credit as generally continuing to be under-allocated. In our opinion, this bodes well for the next decade of growth and potential performance.

The fund focus is everything non-agency, so RMBS and CMBS, as well as CLOs, but it is predominantly a mortgage credit fund. Historically we have allocated the bulk of the capital to non-agency RMBS and, in our opinion, this has represented an overwhelming opportunity over the last decade. We continue to hold that conviction about RMBS.

What is the governing investment philosophy underpinning ANGLX?

Our philosophy to identify the best relative value within US structured credit that in our view will deliver superior risk-adjusted returns over the full credit cycle. We feel non-agency RMBS is still often misunderstood from allocators who continue to look back at the Financial Crisis of 2007/2008, and understandably so, but in truth the non-agency structured credit market is very large with lots of different components. It’s a $3trn asset class. It is a nice complement for investors looking for high current income and shorter duration.

Spreads are really compressed at the moment. Where do you see value?

We still favour non-agency MBS particularly senior legacy assets. That is an area that still provides yields at swaps plus 120-150bp, depending on your scenarios. The bulk of the asset class is still at a healthy discount. Prepayments are at historic highs and housing value tailwinds are pushing yields into much more bullish scenarios, with often optional upside as well.

Specifically, we favour assets in the RMBS 2.0 space, namely prime jumbo subs and some areas of mortgage insurance. Prime jumbo subs were hard hit after the Covid crisis especially as mortgage REITs were selling. We saw this and still see this as a huge opportunity to get access to America’s best borrowers in the form of prime jumbo subs and mezzanine tranches. We like that area not only from a perspective of current income but also total return potential in the form of spread compression.

What about the CRT market? Do you like that?

We do like the CRT market. This is compelling from a spread perspective, and also because CRT assets are floating rate. You’re getting high spreads on a relative basis and we also like the fact that the fundamental mortgage credit tailwind is bolstering total return potential as well.

What we favour are seasoned tranches of agency CRT, the CAS and STACR programmes, and mortgage insurance CRT, the ACIS and CIRT programmes. Despite the thinness of yields on a relative basis, when you factor in home price appreciation and the prepayment story, and also where we see delinquencies right now, it is in our view an attractive opportunity. But we favour and continue to favour more seasoned tranches of both agency CRT and mortgage insurance CRT.

Do you look outside the US for CRT exposure?

No. From the beginning the focus of ANGLX has been US structured credit and predominately mortgage credit. That’s what we do and we’ll stick to our knitting going forward.

What about US bank CRT deals?

We have looked at them and while so far we haven’t been a huge participant we do see it as an area that will expand and it will be in our view be an attractive opportunity in the coming years. US banks can benefit from the success of CAS and STACR. I think the performance of the mechanism over the years shows there is clearly demand in the marketplace and acceptance of the structure. And we think it could be a win-win for not only the issuers, but also bond market participants like ourselves.

Will US banks issue more CRT do you think?

I wouldn't say it's necessarily something we've been hearing, but there is definitely a growing acceptance of the structure. Among money managers like ourselves there will be a continued need for this type of deal. I think really the $64,000 question is what do US banks want to do? Do banks actually want to get rid of that credit exposure or is that something that they would rather keep on balance sheet

We’ve touched on this but how is increasing prepayment risk enhancing MBS value?

How we're positioned within the non-agency portfolio is definitely benefiting from the prepayment speeds. This notably is the case in the legacy portion and is still at a discount. Higher than expected prepayment has been very beneficial, not only to current income, but for potential spread tightening.

We think mortgage credit tailwinds have been blowing quite hard but we expect them to continue particularly for the second half of the year. We think the Fed will stay firm. The portfolio continues to benefit from the high prepayment risk.

What don’t you like at the moment?

We’re not in favour of owning agency RMBS at the moment because of very high dollar prices and low all-in low yields, but also from an OAS basis they don’t make much sense from negative convexity standpoint. We just don't see very much upside from here and definitely favour non-agency assets.

In general, we are wary of taking a lot of interest rate risk at all-time low yields. We’re broadly cautious of long duration in favour of higher current income and shorter duration characteristics that you get in other areas of structured credit.

We’ve always tended to favour solid credit fundamentals and areas of the structured credit markets that would pay us over the long credit cycle.

Thanks Sam. That’s been very interesting. Let’s grab a coffee in town soon!

Simon Boughey

ABS

Credit engagement

Raj Shourie, from Lockton's political and credit risks division, discusses how he will lead the firm's engagement with financial institutions internationally for both credit mitigation and country risk protection

Q: Your role means that you will be responsible for leading the engagement with financial institutions internationally out of London, for both credit mitigation and country risk protection.  Tell us more about what that will entail.
A: I’ll be responsible for originating business dialogue with banks and funds, targeting new users of credit and political risk insurance and existing users in respect of new risks.

Q: Which factors are behind Lockton’s move into this space and what challenges are you hoping to help your clients address?
A: The financial institutions sector has always been a key client segment for Lockton. The ongoing bank capital regulatory changes, alongside the increasing activity of funds in developing markets are simultaneously generating additional opportunities to grow market share.

Moreover, the wallet from financial institutions is increasing as part of the overall credit and political risk insurance (non-trade credit) wallet. Lockton is keen to ensure that it is well positioned to capture a share of this increase in the market.

Q: Can you provide more detail about the types of credit mitigation tools Lockton will offer for banks seeking to use insurance as a credit risk distribution and capital efficiency tool?
A: The types of credit mitigation tools we’ll offer range from bilateral and syndicated insurance contracts on unsecured, asset or project-backed loans to bespoke securitisation structures.

Q: Synthetic securitisation will presumably play a role, but is this likely to include capital relief trades?
A: It will certainly play a role, and the dialogue with respect to synthetic securitisation structures will revolve around capital and significant risk transfer.

Q: How will the transactions combine insurance and capital market investors? Are the deals likely to be innovative or structurally complex?
A: Certain bank balance sheet securitisation opportunities may provide the opportunity and require the need for risk protection from both funded capital markets investors and insurers. Given the bespoke nature of these transactions, structures will continue to evolve.

Q: Will Lockton be acting as arranger, placement agent or broker in these deals?
A: Lockton will act as insurance broker.

Q: How are you anticipating expanding the firm’s footprint in the credit insurance and credit risk areas?
A: In terms of our future credit insurance and risk offering, we will continue to engage with banks and funds who are potential new clients for Lockton.

Q: What is in the pipeline for the rest of 2021?
A: We’ve begun discussions on a target list of banks and funds, consisting of existing and new users of credit and political risk insurance.  As these discussions develop and progress is made, we expect to turn these into potential opportunities which will then hopefully lead to executed transactions.

Angela Sharda

Structured Finance

Jamaica in cat bond first

Sector developments and company hires

Jamaica in cat bond first
The World Bank/IBRD has priced a catastrophe bond that will provide the government of Jamaica with financial protection of up to US$185m against losses from named storms for three Atlantic tropical cyclone seasons ending in December 2023. The government of Jamaica is the first government in the Caribbean region, and the first of any small island state, to independently sponsor a cat bond.

Jamaica was one of the 16 countries in the Caribbean Catastrophe Risk Insurance Facility that benefitted from IBRD’s first-ever cat bond in 2014 (SCI 3 July 2014). This latest bond – dubbed CAR 130 - was issued under IBRD’s capital at risk (CAR) notes programme. The margin on the notes is 4.40%.

Payouts to Jamaica will be triggered when a named storm event meets the parametric criteria for location and severity under the bond terms. The transaction includes an innovative reporting feature resulting in a quick payout calculation, within weeks of a qualifying named storm. It is also the first cat bond to use an innovative cat-in-a grid parametric trigger design for tropical cyclone risk.

The cat bond received financial support from the US through the United States Agency for International Development, the World Bank’s Disaster Protection Program funded by the UK and the Global Risk Financing Facility (GRiF). The GRiF, implemented by the Global Facility for Disaster Reduction and Recovery (GFDRR) and the World Bank’s Disaster Risk Financing and Insurance Program, is supported by Germany and the UK to provide grants to strengthen the financial resilience of vulnerable countries through establishing or scaling-up pre-arranged risk financing instruments.

ILS funds accounted for the majority (66%) of investors in the CAR 130 cat bond, with re/insurers (17%), asset managers (14%) and pension funds (3%) making up the remainder. By geography, the majority of investors (60%) were based in Europe, with the remainder based in North America (24%), Bermuda (15%) and Asia (1%).

Aon Securities and Swiss Re Capital Markets were joint structuring agents and bookrunners for the transaction.

In other news…

‘Cambiali’ plans boost Marathon performance
Moody's has upgraded the ratings of the class A and B notes issued by the Marathon SPV non-performing loan ABS from Baa2 to Baa1 and from B1 to Ba2 respectively. The rating action reflects better-than-expected collateral performance, which has boosted credit enhancement for the notes.

Moody’s notes that the Marathon SPV securitisation has overperformed its original business plan, with the cumulative collection ratio standing at 102.42% as of the most recent IPD and consistently above 102% since the transaction closed. The servicer has updated its original projections twice around December 2020 and March 2021, with total gross expected recoveries at respectively around +1.6% and +2.1% when compared to their original expectations. The pace of collections has shown resilience even during the height of the coronavirus pandemic, with gross collections consistently above €20m per quarter.

The main recovery strategy put in place by the servicer to collect recoveries from the securitised pool of assets has been to swap defaulted positions for ‘cambiali’ plans (akin to promissory notes). As at the March 2021 interest payment date, over 65% of gross collections recorded since deal closing came from cambiali plans, contributing to the resilience and stability observed in the pace of cash collections.

The advance rate on the class A notes decreased to 3.39%, as of the April 2021 interest payment date, from 5.70% at closing. A lower advance rate translated into higher protection against credit losses for the notes.

Euro CMBS issuance ‘oligopolistic’
Three US bank underwriters account for 67% of issued European CMBS volume year-to-date, while Blackstone dominates the sponsor side with a 49% market share, according to Scope figures. The rating agency notes that the domination of US arrangers and sponsors has spurred the emergence of US underwriting standards in Europe.

“For example, cov-lite securitised CRE loans characterised by the absence of financial default covenants prior to a permitted change of control represent 50% of issuance and have become the norm for CMBS sponsored by Blackstone. The share of securitised interest-only loans has also grown, increasing refinancing risk,” it observes.

Meanwhile, originate-to-distribute lending models dominate European issuance, with agency-style CMBS characterised by single asset/single borrower deals accounting for up to 90% of 2021 volume. In 1H21, 10 public European CMBS transactions were issued for €3bn (SCI 30 June), compared to 46 transactions worth €15.3bn issued since 2018.

Before Covid, originators offloaded pro-cyclical assets by issuing retail and hospitality CMBS. “Arrangers reopened the market in 2H20 with assets perceived to be winners of the outbreak, such as logistics and residential,” comments Florent Albert, a director in Scope’s structured finance team. “They have continued to issue logistics CMBS in 2021, as well as deleveraging out of non-prime assets and sectors with an unclear future, such as office or UK retail. We expect affordable housing and UK buy-to-let CMBS to be issued soon.”

Structured Finance

Pension scheme taps credit managers

Sector developments and company hires

Pension scheme taps credit managers
Local government pension scheme Brunel Pension Partnership has launched a multi-asset credit fund, to which its clients have committed approximately £2.1bn of funds that will be spread across three separate mandates. The fund is split between three separate sub-funds: 60% is allocated to Neuberger Berman Brunel Multi Asset Credit Fund (an Irish QIAIF), 20% to Oaktree Brunel Global Credit Fund (Luxembourg SICAV) and 20% to CQS Brunel Multi Asset Credit Fund (Irish QIAIF).

The portfolio will invest in various bond sectors, including ABS, aiming to gain exposure to diversified and enhanced credit opportunities with modest-to-low exposure to interest rate risk. The performance objective is to outperform SONIA by 4%-5% over a rolling 3-to 5-year period.

In other news…

Bridge loan JV formed
Gryphon Real Estate Capital Partners and CarVal Investors have formed a joint venture to originate multifamily senior bridge loans in primary and secondary markets throughout the US. The Gryphon-CarVal Multifamily Loan Program is designed to advance up to 85% of the capital stack in a single execution facilitated by the programme's ability to close on balance sheet.

Gryphon and CarVal will target sponsors focused on either value-add or lease-up strategies. Targeted loans range from US$20m to US$75m, with what the JV describes as competitive market pricing. Loan servicing and asset management will be retained by the partnership.

Leading up to the announcement of the joint venture, over US$150m of multifamily loans have closed or are under a signed term sheet. The programme is primed to deploy US$1bn or more over the next two years.

EMEA
Scope Group is adding to its supervisory board with the appointment of Inès de Dinechin and Chantal Schumacher as new members, in an effort to expand on its pan-European activities. While De Dinechin joins as chairwoman, Schumacher will preside over the newly established audit committee.

With over 25 years of experience in the industry, De Dinechin joins Scope after having served as ceo of Aviva Investors France, ceo of Lyxor Asset Management and various senior positions at SG CIB. Schumacher joins from Allianz Group, where during a tenure of over 20 years she held the prominent roles of global programme director, group cfo and member of the board of Euler Hermes Group, and cfo of Allianz Reinsurance.

Structured Finance

CRC in French portfolio sale

Sector developments and company hires

CRC in French portfolio sale
French financial guarantee provider Crédit Logement has expanded its non-performing loan servicing capabilities to begin partnering with third parties for the assignment of real estate NPL receivables. The firm’s external servicing business launched with an NPL portfolio sale to Christofferson Robb & Company, with Société Générale acting as adviser.

Crédit Logement has more than 40 years of experience in recovery on non-performing residential loans in France for its own account. Covering one-third of the residential loan market, it services nearly 20,000 receivables for its own account and around 2,500 other receivables for several French banks.

‘ESG-optimised’ CLO platform launched
CarVal Investors has launched the CarVal Clean CLO platform, a managed CLO programme utilising a new ESG risk assessment technology to pursue a high-performing, ESG-optimised portfolio. The platform is driven by proprietary technology developed by CarVal Investors and Insig AI, a data science and machine learning solutions company. The two firms state that the technology is the first of its kind in fixed income and will cover both private and public issuers, with the aim of creating a transparent and auditable risk assessment that allows for comparison to relevant benchmarks. 

CarVal's ESG risk assessment model measures each asset on six themes: climate Change, including carbon emissions and carbon footprint; natural capital, including raw material sourcing and water stress; pollution, including toxic emissions and waste; human capital, including health and safety and labour management; product liability, including product safety and consumer financial protection; and corporate governance, including ownership and board. These measurements are then utilised to create a composite ESG risk assessment that is comparable at an individual credit and portfolio level.

Global
Credit Suisse has promoted Arun Cronin to co-head, global CLOs and corporate asset finance. Based in London, Cronin was previously head of EMEA credit financing solutions and CLOs at the bank, which he joined in 2009. Before that, he worked at Merrill Lynch and Simmons & Simmons.

North America
Ocorian has appointed Marc van Rijckevorsel as head of business development – corporate and fund services for the US. Based in New York, he reports to Ocorian’s chief commercial officer Simon Behan. Rijckevorsel was previously at Intertrust, where he held a variety of roles, most recently as commercial director responsible for business development and global client relationship management in the US. 

RMBS

Euro CLO BWICs down, but staying strong

Sector developments and company hires

Euro CLO BWICs down, but staying strong
European CLO 2.0 BWIC activity contracted sharply in the first half of 2021 versus 1H20. However, secondary liquidity remains more sustained compared to pre-pandemic levels, reflecting the market's maturity and expansion in recent years, according to Bank of America European CLO research analysts.

BofA estimates overall BWIC volumes of €5.3bn for 1H21, almost 50% down on the €7.5bn for the same period last year, but nearly 1.5 times higher than that of 1H19 and even higher than that of the preceding years. “We think such decline in secondary activity can be explained mainly by the record surge in primary supply in 1H21,” the analysts suggest.

BWIC rating composition in 2021 has been broadly stable with that of 2020, with triple-A bonds continuing to account for most volume (around 33%) - slightly higher than their relative weight in 2019, but not so compared with their share in 2018-2019. However, there were some differences lower down the stack.

The BofA analysts observe: “The share of the belly of the curve (double-A to double-B) slightly declined in 2021 in proportion of all BWIC volume compared with 2020, reflecting - in our view - the stabilised prices on these tranches. Equity and single-B share of the BWIC volume increased year-on-year (more than doubled for equity). Better liquidity at the bottom of the stack is in line with continued recovery in asset prices and a reduction in CLO portfolio's tail-risk.”

In other news…

Adverse market fee revoked
In order to help families reduce their housing costs, Fannie Mae and Freddie Mac will eliminate the adverse market refinance fee (SCI 13 August 2020) for loan deliveries effective from 1 August. As such, lenders will no longer be required to pay the GSEs a 50bp fee when they deliver refinanced mortgages.

The fee was designed to cover losses projected as a result of the Covid-19 pandemic, but the success of the FHFA and enterprises' Covid-19 policies reduced the impact of the pandemic and were effective enough to warrant an early conclusion of the adverse market refinance fee. The FHFA's expectation is that lenders that were charging borrowers the fee will pass cost savings back to borrowers.

The vast majority of GSE borrowers have successfully exited Covid-19 forbearance. In April, approximately 2% of single-family mortgages guaranteed by the enterprises remained in forbearance, down from a high of approximately 5% in May 2020.