Contents

ABS

Out of favour?

WBS issuers turning to high yield bonds

Punch Pubs Group last month refinanced its pub securitisation in the European high yield bond market, becoming the second pubco to do so after Stonegate refinanced its legacy Enterprise and Unique transactions in July 2020. The move underlines a growing trend in Europe to refinance whole business securitisations with high yield bonds.

“We are slowly seeing the death of WBS in Europe, other than the form used by utilities companies. WBS is too expensive and the documentation is too restrictive for many borrowers. In contrast, high yield bonds typically have permissive documentation, enabling borrowers to incur secured debt up to a certain amount and sell assets across certain buckets,” confirms Conor Downey, real estate finance partner in the London offices of GunnerCooke.

He adds: “With securitisation, every deal is different and when they’re restructured, hidden nasties within the documentation often come to light. The high yield bond market is more standardised and has sophisticated information services, with databases that allow users to compare covenants, for example.”

There have also been a few high-profile blow-ups during the WBS market’s 25-year history that have cast doubt on the robustness of the asset class. For instance, in the Marne et Champagne Finance deal from 2000, the French security interest (a stock of champagne) was shown to be ineffective after the borrower was unable to refinance the transaction.

Another example is Tees and Hartlepool Port Authority’s 2001 THPA Finance, the notes of which were repurchased in 2004 after Chorus Steel - the biggest customer of the port - became insolvent. Meanwhile, the performance of the RoadChef Issuer and Welcome Break Finance motorway service area deals was clobbered by the foot-and-mouth disease outbreak in 2001.

“The core element of WBS is that the underlying business must have some unique feature that guarantees its position in the market. It is this that enables the owners to raise 20- to 30-year financing against it. For these transactions to work, the business needs to be capable of surviving for that length of time - but plenty of ‘unknown unknowns’ can crop up during that period,” notes Downey.

He points out that the barriers to entry for competitors must be high. “No-one can set up another Madam Tussauds business, for instance. Given these requirements, the pool of appropriate WBS assets is limited. Furthermore, the transactions aren’t replicable: each has its own bespoke suite of documents.”

WBS initially emerged from the private equity world in the 1990s, as a way of leveraging businesses. At the time, what is now known as high yield was known as “junk bonds” in the US, which were tainted by a series of corporate and banking scandals. High yield is a variant of the old junk bonds with improved terms, disclosure and investor protections.

With regards to pub securitisations, like all WBS, on issue these comprised a mix of fixed and floating rate bonds. As interest rates fell over the years, the issuers refinanced most of the floating rate notes with other forms of debt, resulting in the majority of what is left being fixed rate.

These fixed rate bonds require a premium to be paid on early redemption based on the yield on UK Gilts over their remaining life, meaning it is too expensive to refinance them if they have a long remaining life. “If they have two or three years to go, the redemption penalty might be considered OK, but at a certain point it becomes uneconomical,” Downey observes.

Punch has a portfolio of 1,235 predominantly freehold pubs across England, Scotland and Wales. The proceeds of the pubco’s debut offering of £600m 6.125% senior secured notes due 2026 were used to refinance all of its existing debt, including the Punch Finance securitisation. Concurrently with the issuance of the notes, Punch entered into a super senior revolving facilities agreement with Barclays Bank and NatWest, which will provide for borrowings of up to £70m.

Breaches of suspension-of-business covenants occurred across pub securitisations, due to Covid restrictions, with pubcos securing waivers from noteholders to keep the structures afloat (SCI 15 May 2020). More recently, pubs have raised new equity or sold portions of their estates to property developers, in order to refinance their bonds.

“Pub revenues have declined and no-one knows what they’ll look like post-Covid. People have got used to drinking at home and the population in city centres has decreased. Barring a massive recovery in hospitality, the only option for pubcos to refinance is to sell off properties,” Downey indicates.

Overall, he suggests that nursing homes and utility companies remain reasonable candidates for WBS - albeit the latter typically prefer to issue debt via MTN programmes, as they benefit from flexibility and stable market conditions.

Corinne Smith

RMBS

Ginnie in a hurry

Only 10 more days for market input on new capital rules

Ginnie Mae has blindsided the market with its new proposed capital rules for non-bank lenders, which it also appears to want to implement before the end of the year, say sources.

The government agency announced a request for input (RFI)from interested parties by August 9 in a six-page document released on July 7. Not only is this a relatively short period, it coincides with summer months when offices are habitually less fully staffed.   

“The process of developing this has been pretty opaque, but Ginnie Mae seems to be on a fast track as it wants comments in 30 days. My thinking is that it wants to implement a revision this year, although it may drop or revise the risk-based capital ratio based on pushback,” says Larry Platt, a partner who specialises in housing finance at law firm Mayer Brown.

The rules entail new net worth and liquidity requirements for all lenders, but what has put the cat among the pigeons is the proposed risk-based capital ratio floor of 10% for non-bank lenders.  Moreover, in the calculation of the capital ratio, mortgage servicing requirements (MSRs) will be assessed according to a risk weighting of 250% - the same as for federally-chartered and FDIC-insured state-chartered banks.

While the larger mortgage servicers are likely to be able to meet the new requirements, it will have economic consequences. Meanwhile, the smaller servicers will have greater difficulty in implementing the new elevated capital buffer and may not be able to participate in the Ginnie Mae programme.

However, the most direct impact of the new rules will be upon the cost of mortgages, say market experts. “I don’t think the non-bank lender will lend less, but the risk-based capital requirement could affect prices and who holds the servicing or how much they hold,” says Platt.

For example, those lenders that have originated mortgages in-house for subsequent Ginnie Mae securitization may be inclined to sell the loans in the marketplace, along with the related servicing rights, rather than issuing its own Ginnie Mae securities and holding the related servicing rights, given the attendant higher capital requirements.

Moreover, those lenders executing flow purchases are likely to have to pass on the higher capital costs. So, the flow of product into the MBS market is unlikely to be affected, but the price the buyers are willing to pay for the servicing rights could well go down.

From one perspective, this is alien to the Biden administration’s aim to improve access to credit for disadvantaged communities, many of whom use non-bank lenders. Ginnie Mae is also part of the Department of Housing and Urban Development (HUD) and thus an arm of government. However, concern over the financial stability of participants in the Ginnie Mae programme has been evident for years.

Since the financial crisis, an increasing proportion of mortgage servicers providing loans guaranteed by Ginnie Mae have been non-bank lenders such as Lakeview, Mr Cooper and PennyMac. As of April 30, PennyMac, Lakeview and Freedom Home had a more than 30% share of loans in Ginnie Mae pools. Overall, some 70% of the top 30 servicers of loans in Ginnie Mae pools are non-banks, according to a June report by Ginnie Mae.

“There is nothing new about the concern. Non-banks aren’t subject to federal supervision as banks are and there is the worry among policy makers that non-bank servicers don’t have the financial strength to handle a downturn in the economy given their obligations to advance interest and principal payments to Ginnie Mae security holders,” says Platt..

In the six-page document released on July 7 Ginnie Mae explained the need for the new rules:  “Ginnie Mae’s general view during this period has been that changing risk characteristics – such as the increased size of the guaranteed portfolio(s), the changing profile of the issuer base, and a greater systemic vulnerability to economic stress and liquidity shocks – have necessitated a more rigorous set of financial requirements than was in place during the GFC.”

But the proposals have aroused a firestorm of criticism and not only from non-bank lenders. Writing in Housing Wire yesterday (July 29), former ceo of the Mortgage Bankers’ Association David Stevens wrote, It is rare to see a regulator so afraid of its own programs as we are witnessing at Ginnie Mae. In an alarming move, Ginnie Mae has unleashed a plan that, if implemented, will significantly alter the mortgage markets and raise costs on loans that the majority of first-time homebuyers and minority homebuyers depend on.”

Peter Mills, the current senior vice president of residential policy at the MBA, also commented, “The risk-based provisions are entirely new and could adversely affect otherwise strong issuers.”

A spokesman for the MBA told SCI that “the MBA is collecting feedback from our members and will be responding to the RFI.”

Ginnie Mae has been unavailable for comment.

Another so far unexplored but potentially seismic consideration is whether these new rules augur a similar move by Freddie Mac and Fannie Mae. Perhaps ominously, Ginnie Mae in its July 7 paper notes it wishes “to align our requirements to the greatest degree possible with the other governmental bodies who regulate this area.”

Enhanced capital requirements for non-bank Ginnie Mae lenders have, however, found favour in some quarters. Writing this week, Clifford Rossi, professor at the Robert H Smith School of Business at the University of Maryland said, “Ginnie Mae’s proposal to strengthen liquidity and capital requirements of its single-family issuers is a prudent step in establishing a level playing field between depositories and nonbank financial institutions.”

Simon Boughey

ABS

Summer hiatus

European ABS/MBS market update

Tight spreads, significant supply and general optimism have epitomised the first half of the year in European ABS/MBS. Now, as the primary market finally comes to a halt for the summer with only one deal widely marketing – Taurus 2021-4 UK, see SCI’s Euro ABS/MBS Deal Tracker for more – the secondary market appears to be entering hiatus too.

“If you look at German Auto ABS and Dutch RMBS offers this week, it is actually worse than I envisioned,” notes one core Europe ABS trader. “Trading is really tight across the curve at the moment, with low single digits for German Auto ABS deals for example. Current pricing levels leave us with a -52bp yield, which is not attractive.”

He continues: “No big BWICs are being announced and it wouldn’t be sensible to schedule one when half of your investors are on the beach.”

However this lack of enthusiasm does not apply to all investors, the trader notes. “There is always going to be a bid at this level – particularly from money market firms or investors with no central bank deposits – in that case there is no alternative and you need to invest.”

Looking ahead to September and more sustained activity, should we expect spreads to go even tighter? “I am not sure how the primary ABS market will pan out,” the trader notes. “However I don’t think there is room for tighter spreads, because then it will have to compete with covered bonds.”

Vincent Nadeau

ABS

Growing foothold

CRC expands Latin American presence

Christofferson, Robb & Co (CRC) has fully acquired Colombian consumer lender Finsocial. The acquisition will help grow CRC’s foothold in the Latin American consumer market, although the firm will remain opportunistic towards that segment.

CRC has been investing in Latin American consumer finance since 2005, where middle and low-income consumers are underserved by banks. This contrasts with the fund’s core European strategy, where those needs are met via significant risk transfer transactions. Latin American consumer finance accounts for around 5% of CRC’s private credit AUM, but the Finsocial transaction could grow this over the long term to as high as 10%.

Finsocial is based in Barranquilla, Colombia, and focuses on payroll deduction, micro and digital consumer loans. The company was founded in 2012 by Santiago Botero and has grown to 634 employees.

Last year, Finsocial developed Colombia’s first entirely digital payroll deduction loan product and in December 2020, it became the first non-regulated financial entity in Colombia to issue a securitisation of payroll deduction loans. It obtained a single-A rating from Fitch, which was upgraded to double-A in May 2021.  

CRC intends to bring efficiencies to the business via the acquisition, since Finsocial will no longer rely exclusively on negotiations with banks, senior investors and rating agencies for small, expensive financings. Consequently, going forward, a portion of financing will come directly from funds managed by CRC.

According to sources close to the transaction, from CRC’s perspective, common ownership reduces transaction costs - particularly with respect to so-called ‘hold-up’ issues. When two parties have made a prior commitment to a relationship, either side can hold up the other for the value of that commitment. Hold-ups can lead to underinvestment in relationship-specific investments and hence to inefficiencies.

If, for example, an auto supplier contracts with an auto manufacturer to supply car parts and the supplier is the only one who can deliver those parts according to required specifications, then - depending on future circumstances, such as a higher-than-expected increase in demand - the supplier may ‘hold up’ the manufacturer by increasing the price of additional parts produced.

Hence, common ownership should enable the creation of loans with competitive rates, the expansion of Finsocial’s lending operations and further investment in technology, since all parties will follow through on their commitments and do so without the threat of competition. Finsocial was initially put up for sale by a private equity firm that owned half the company. By buying the entire organisation, CRC controls the process from start to finish.

Stelios Papadopoulos

Structured Finance

SCI Start the Week - 26 July

A review of SCI's latest content

Last week's news and analysis

Angel eyes
Angel Oak Capital Advisors talks value in non-agency MBS
Asset quality boon
EU bank credit conditions normalise
Collateral Chase
JPMC visits CRT space again with trade referencing prime mortgages
Credit engagement
Lockton's engagement with institutions internationally for credit mitigation and country risk protection
Credit events
US moratoria challenges highlighted
Disposals pending
Irish NPL activity set for rebound
Minor deterioration
Spanish payment holidays buck the trend
Recovery trade
Pub credit quality to diverge amid changing consumer behaviour
Six STACRs
Freddie's sixth STACR of 2021 prints inside previous two
Social factors
Cairn Capital argues that securitisation can facilitate the transition to a sustainable economy

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

Recent research to download
Sustainable SRT - July 2021
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 articles investigates whether synthetics can spur growth across the broader ESG securitisation sector.

CLO Case Study - Summer 2021
In this latest in the series of SCI CLO Case Studies, 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.

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.

Upcoming events
SCI's 3rd Annual NPL Securitisation Seminar
14 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.

Structured Finance

Risk on

Lower quality credit outperforms

The first half of 2021 has been universally positive for below-investment grade credit markets and for alternative credit funds. Indeed, stressed and distressed corporate credit generated the highest returns.

“If you fell asleep at the end of 2019 and woke up mid-way through 2021, you would look back and say these performance numbers don’t look too bad. Credit funds were up – and you would say it was an OK 18 months,” says Chris Acito, ceo, Gapstow Capital Partners.

While all credit peer groups generated positive returns for the quarter, those with larger exposures to stressed and distressed corporate credit generated the highest returns. This result reflects the broader credit markets, in which lower-quality credit outperformed again.

Acito observes that, in the second quarter, the sector remained ‘risk-on’ - albeit performance wasn’t as strong as in the first quarter. “In the credit markets spreads tightened and they particularly tightened for lower quality credit. On the debt side, the stress positions outperformed more performing credit.”

The Gapstow Alternative Credit Index (GACI), the composite of alternative credit hedge fund performance, gained 3.2% in Q2 and is up 8.7% year to date - significantly outpacing the high yield bond (+2.8% in Q2 and +3.7% YTD) and leverage loan (+1.5% and 3.3%) indices.

Acito notes that credit interval funds continued their strong pace of growth, with net capital flows estimated to be 12% for Q2 alone. Credit interval funds, on average, gained 2.9% for the quarter, bringing year-to-date performance to 6.7%.

He adds: “This retail product structure is becoming a vehicle of choice into the investor world.”

Acito says this year has been characterised by bounce-backs and rebounds in economies. He concludes: “The numbers we are seeing for half-year performance are substantial.”

Angela Sharda

Capital Relief Trades

Landmark CRT debuts

BMPS inks first stage two SRT

Banca Monte dei Paschi di Siena (BMPS) and Christofferson, Robb & Co (CRC) have finalised two financial guarantees of corporate and SME loans and project finance exposures respectively. The corporate and SME transaction is the first significant risk transfer trade to reference stage two assets.

The two synthetic securitisations transfer mezzanine risk via a guarantee structure, but only the project finance deal shares both junior and mezzanine risk. The combined portfolio for both types of loans is €1.4bn. In particular, the corporate and SME deal consists of €800m of loans, while the project finance trade references €600m.

The Italian government took over BMPS four years ago, but it aims to divest its stake from the lender by the end of the year. As part of this effort, BMPS must bolster its capital reserves and balance sheet for potential future buyers.

Structurers have in the past discussed the notion of using synthetic securitisations as an IFRS 9 hedge by synchronising credit event definitions with IFRS 9 loan loss provisions. The idea being that credit event pay-outs are triggered following a shift of assets from stage one to stage two and a corresponding rise in provisions.

IFRS 9 introduces a forward-looking view of credit quality, under which banks are required to recognise impairment provisions and corresponding impairment losses before the occurrence of a loss event. This is reflected in the standard's three credit stages, with stage two requiring banks to provide for lifetime expected credit losses when there is a significant decline in creditworthiness, but a loss event has not yet occurred.

However, the complications that this potential solution entailed - including the task of defining credit events - rendered it effectively unenforceable (15 June 2018). The elegance of referencing stage two assets lies in its simplicity, since standard credit event definitions - such as bankruptcy and failure to pay - continue to apply, given the performing nature of stage two assets. Nevertheless, it remains unclear what criteria BMPS uses to classify stage one and two assets and how investors monitor the performance of these assets over time.

Intesa Sanpaolo acted as arranger on the transaction.  

Stelios Papadopoulos

Capital Relief Trades

Risk transfer return

Intesa executes SRT

Intesa Sanpaolo has completed a €60m mezzanine guarantee with the EIB Group that references a €1.4bn Italian SME portfolio. The significant risk transfer trade is Intesa’s first for the year and will release capital that will be allocated to €300m of SME financing.

Intesa Sanpaolo began its issuance in 2014 with the GARC programme, initially targeting SME loans, but in 2018 the bank broadened its scope to corporate loans. Intesa went one step further in 2019 by adding residential mortgages and in 2020 it further expanded with leasing, wind, solar and biomass project finance contracts.

This latest transaction was executed jointly with the EIF and the EIB and organised by Intesa’s active credit portfolio steering team and its domestic commercial banking division, which is responsible for SME and retail clients.

Overall, the Intesa Sanpaolo Group - through its credit portfolio steering activities - has completed approximately €30bn notional of synthetic securitisation tranches during the current business plan to optimise the risk-return profile of the loan portfolio and strengthen financial support for Italian SMEs. The Italian lender is expected to close another capital relief trade referencing corporate loans in 2H21.

Stelios Papadopoulos

Capital Relief Trades

Risk transfer round-up - 26 July

CRT sector developments and deal news

NatWest is expected to close a synthetic securitisation backed by leveraged loans next month. Dubbed Chowa, the transaction would be the British lender’s first significant risk transfer trade to be backed by such assets.

CLOs

Consistent opportunities

European CLOs still offering value

Notwithstanding a slight and short-lived wobble last week as a result of macro volatility, the European CLO market has remained the model of consistency over the past few months with technicals dominating fundamentals. That consistency has provided opportunities throughout the capital structure – not least at the top of the stack, with heavy primary volume keeping CLO triple-A spreads softer than other asset classes, which looks set to continue over the summer.

JPMorgan CLO research reports that for the year to the end of last week, 155 European CLOs have priced totalling €57.3bn (46/€18.7bn new issue and 109/€38.7bn refi/reset/re-issue). This compares to 38 European CLOs totalling €12.9bn (36/€12.0bn new issue and 2/€0.9bn refi/reset/re-issue) for the same time period last year. While a summer lull is definitely on the cards, primary bankers will still have work to do over the coming month or so.

“There are still about 15 deals marketing in primary at the moment, of which maybe six are new issue,” says Tom Mowl, portfolio manager at BlueBay Asset Management. “While we don’t expect many more than that to issue pre-September, those deals have created enough pressure to keep triple-A spreads out to the low 100s on a coupon basis – to which you have to add the floor, which has increased in value over the last couple of weeks.”

He continues: “So that looks set to remain an opportunity, especially with corporate credit tightening at the same time. You’re really getting bifurcation of the basis between the two – absolute spreads of around 130bp over cash are offering an increasingly attractive pick-up versus corporate risk – for a higher rating, in our view.”

CLO mezz spreads, meanwhile, have remained firmer on the back of stronger demand. As for equity, Mowl is also positive at present. “While the arb has suffered because triple-As have widened, once you’ve accounted for the optionality of refi-ing that triple-A in the future, combined with the fact that mezz has held firm and that loan portfolios can be created with spreads in the 380s, equity still looks relatively interesting,” he says.

From September, it’s expected that primary issuance volumes will kick on once again, given the number of 2020 deals that still need to refinance. Consequently, primary technicals will continue to drive European CLO spreads as a whole and thereby replicate the activity and opportunities seen over the past few months into year-end.

As Mowl concludes: “There’s always the caveat that if new investors come to market or existing ones turn the tap back on, particularly one of the larger anchor investors, that can always have an effect on the market. But where we are with the number of deals expected, the likelihood is its going to be more of the same.”

Mark Pelham

Structured Finance

Are direct lending strategies fit for purpose?

Contributed thought leadership by Ocorian

Ocorian's Global Head of Capital Markets Alan Booth draws on the firm’s global survey of capital markets decision-makers to shed light on why a staggering 87% of firms surveyed have a direct lending strategy in place. He also explains how these firms can overcome operational challenges by optimising their approach to administration.

Our research found that the majority (57%) of capital market investors have an existing direct lending strategy, which they are looking to expand, while 30% have a strategy that they are in the process of executing (SCI 1 June). These findings add substance to the narrative of banks being supplanted by alternative lenders as funders for midsized businesses. For example, going into 2021, non-bank lenders had a 74% market share of the European mid-market direct lending space.

As government subsidies and support schemes are withdrawn, banks - constrained by regulation, commercial appetite and their focus on sustaining profitability in a low interest rate environment - are unlikely to extend credit facilities to midsized businesses. This is going to leave a real need for capital and is likely to be felt most acutely in the hardest-hit sectors. The potential opportunities created by this void are an attractive proposition for private capital funds.

The right capabilities are needed to capitalise on opportunities
Private capital funds wishing to offer direct lending strategies in the distressed debt space may face several challenges. As much as they might anticipate increasing opportunities, they will require the right capabilities to capitalise on them.

For some of them, it will involve major strategic shifts that may create hurdles. For example, funds pivoting from a private equity or real estate focus towards direct lending may have challenges in adapting their infrastructure to meet their information and decision-making needs.

These constraints potentially limit the scalability of business models, resulting in sub-optimal data management and workflow processing. In turn, this would raise administration and compliance risks that might damage investor confidence.

Fund managers might be able to manage loan books that are performing well, but how will they fare if underperformance sets in? As pandemic-driven government support schemes are withdrawn, it is widely accepted that there will be a significantly higher risk of defaults. The question is then whether these fund managers have the experience of previous credit cycles to weather the potential storm?

Strategic success will rely on effective operational execution
In order to capitalise on opportunities effectively, private capital funds - particularly mid-market players with fewer resources – will need personnel with experience in direct lending through the whole credit lifecycle, so they can identify, understand and address the risks in their operational systems and processes. From managing covenants to collecting payments, the right expertise is vital in reducing risk, ensuring compliance and increasing operational efficiency.

At Ocorian, we partner with our clients to ease the administrative burden of loan agency and administration. Our team combines extensive market experience and first-class IT infrastructure to provide independent third-party facility agent services for new transactions, as well as successor facility agent services for existing transactions. To discuss how we could support your direct lending strategy, get in touch below.

Get more insight

Download Ocorian's global capital markets report, ‘Navigating CovExit: searching for value in the debt markets’, here.

ABS

Social vision

Edward Baker, capital markets director at Prodigy Finance, explains how the lender's innovative securitisation was structured and the challenges that the pandemic presented

Q: Prodigy Finance earlier this month issued a first-of-its-kind ABS backed by international private student loans (SCI 7 July). Tell us more about Prodigy Finance CM2021-1?
A: The US$288m issuance is Prodigy’s inaugural ABS and comes under Prodigy’s new social bond framework, marking a double debut in the fixed income market for the lender. 

The senior tranche of US$227m notes have been assigned ratings of Aa3 by Moody’s and single-A plus by KBRA. The class A notes were oversubscribed several fold within a day of launch and priced at Libor plus 125bp. A further three rated debt tranches were all preplaced with a major global asset manager.

The ABS is backed by a portfolio of US$304m of loans originated by Prodigy Finance, mainly since 2017, to postgraduate students attending the world’s top-ranked universities and business schools.

Q: Can you provide more details about how the deal is structured?
A: To meet investment grade rating agency criteria, this static pool structure has 25% subordination for the class A and provides 1.7% of cash reserves; OC targets build credit enhancement and allow for modified pro rata payment. The pool is expected to have a base case CPR of 29% and amortises over four to five years, giving a fast-paying cashflow to investors. The notes and residual have been placed with a broad range of US-based asset managers, institutions and credit funds.

Q: What is Prodigy’s vision for this transaction?
A: The transaction and the ratings have helped recognise and provide credibility to our global enforcement model for unsecured consumer lending, international payments and servicing platform - which is a first. The social bond framework and alignment to ICMA principles has made us the first international student lender to issue a social bond, which shows our commitment to social impact. Not only are we giving investors the opportunity to contribute to achieving the UN SDGs, but we are also diversifying our funding and ensuring we can continue to help even more global students to have access to financing and ultimately access education at the highest ranked schools in the world.

Q: How has the higher education sector been affected during the pandemic and which challenges did you encounter when working on this transaction?
A: International students have been facing many additional barriers in the pandemic (travel restrictions, access to visas and exceptionally limited finance options) and last year the higher ed sector saw a 43% decrease in new international students in the US alone. Schools and universities have accommodated international students as a priority and allowed many to start courses online.

This year we have seen a 50% year-on-year increase in loan applications from prospective students pursuing graduate studies, including MBAs and engineering masters. The first transaction is always challenging and involves a lot of work, but investors were very interested in learning about our model, credit performance and platform. 

Q: The transaction introduces major public market investors and asset managers to Prodigy Finance for the first time, as the start-up looks to accelerate its expansion coming out of the pandemic. What is your advice to anyone looking at anything similar?
A: Prodigy has been able to access public market investors and cheaper funding, which are vital for the business’s future growth. This kind of transaction requires a lot of planning and pre-market sounding - but this helped deliver a successful result.

Q: What is in the pipeline for the rest of 2021?
A: We are working on several transactions to finalise funding requirements and planning expansion for 2022.

Angela Sharda

Structured Finance

Call for more risk-sensitivity in Sec Reg

Sector developments and company hires

Call for more risk-sensitivity in Sec Reg
The European Commission has launched a consultation on the Article 46 review of the Securitisation Regulation, seeking stakeholder feedback on a broad range of issues. The questionnaire covers: the effects of the regulation; private securitisations; the need for an equivalence regime in the area of STS securitisations; disclosure of information on environmental performance and sustainability; and the need for establishing a system of limited licensed banks performing the functions of securitisation special purpose entities (SSPEs).

In addition, the questionnaire seeks feedback on a number of other issues that have been identified and raised by stakeholders and by the Joint Committee of the ESAs as having an impact on the functioning of the securitisation framework. Responses to the consultation should be submitted by 17 September.

In response to the consultation, AFME states that the review needs to focus on introducing more proportionality and risk-sensitivity in the Securitisation Regulation, as well as in the treatment of securitisation in sectoral regulations governing bank capital and liquidity (CRR), insurance company capital (Solvency 2) and other areas.

In other news…

Collateral performance ‘surpassing expectations’
The collateral performance in European ABS and RMBS surpasses previous expectations as economies recover from the coronavirus crisis. Consequently, Moody’s has changed most of its collateral forecasts for the sectors from negative to stable for the next 12-18 months.

Economies are bolstering thanks to pandemic-driven relief measures from governments, lenders and sponsors, and accelerating vaccine roll-out in Europe. However, overall transaction performance in Northern European markets has recovered faster than in Southern Europe.

Moody’s forecasts a modest increase in unemployment in 2021, but it is not expected to weaken the performance of most ABS and RMBS securitisations materially. Nevertheless, non-performing loan and SME ABS deals - except for German SME ABS - have not yet recovered and are likely to remain under the greatest performance pressures.

Euro CMBS ratios ‘relaxing’
A European CMBS rating decomposition analysis undertaken by Scope reveals a relaxation of financial ratios across the capital structure year-on-year, albeit they remain within their historic ranges. The agency notes that LTV levels are now comparable to their 2019-issuance levels at 62%, while NOI ICR has decreased to 2.2x and debt yield has compressed to 8%.

By asset type, the analysis reveals: opposing trends for retail and logistics assets; tighter cashflow metrics across all asset types; and increasing risks for non-stabilised and secondary office and mixed-use CMBS. “Leveraged industrial is amplified by securitised logistics portfolios, which are now often valued with a roughly 5% premium compared to the sum of individual properties, resulting in a covenanted CMBS LTV 2% to 3% lower,” says Florent Albert, a director in Scope’s structured finance team. “Term and refinancing risk may rise if rental income were to dry up and rates were to increase for low-yielding CMBS.”

In particular, risks will be amplified for CMBS exposed to non-stable tenancy (such as Taurus 2021-3 DEU and ELoC No.38 (Viridis)) or assets in secondary locations (Taurus 2021-2 SP).

US rating agencies have downgraded a third of European CMBS classes since the start of the pandemic, including 75% of retail and all hospitality CMBS. Yet only one securitised loan has entered special servicing since 2Q20.

Structured Finance

BTL issuer acquired

Sector developments and company hires

BTL issuer acquired
Starling Bank has acquired specialist buy-to-let mortgage lender Fleet Mortgages in a £50m cash and share deal. To date, Fleet Mortgages has originated £2.3bn of mortgages and experienced zero credit losses. It currently has circa £1.75bn of mortgages under management and has executed nine RMBS.

Starling will become the sole funder of future originations, with Fleet Mortgages able to build on its successful lending operation by accessing Starling’s growing deposit base. Day-to-day operations at Fleet will continue unchanged with the company’s existing management team.

The acquisition - Starling’s first - is part of the bank’s wider plan to expand lending through a mix of strategic forward-flow arrangements, organic lending and targeted M&A activity.

Calculations API launched
Thetica Systems has launched a new module for its proprietary infrastructure: Thetica ElastiCloud API is designed to automate resource management and reduce the costs of cloud operations. Calculations for structured finance portfolios can be very resource-intensive, especially where clients use complex scenarios, run many bonds in parallel or require multiple universe runs. But because resources in Thetica’s new API are activated based on demand, the number of bonds and scenarios being processed simultaneously can be scaled up or down dramatically. Plus, increased server power provides faster job completion without inflating costs.

North America
Z Capital Credit Partners has promoted two in its New York-based CLO team. Director Shahid Khoja has been appointed md and portfolio manager, while senior associate Brian Morrison has been named director. The former previously worked at Garrison Investment Group and Bank of America; the latter previously worked at Oaktree Capital Management and Semler Brossy Consulting Group.