Contents

ABS

ABS-lite appetite

Insured trade receivables notes in vogue

Meaningful flows into trade finance ABS are emerging from institutional investors. Such demand is, in turn, spurring structural innovation across the sector.

“In the hunt for yield, traditional institutional investors are shopping around for new asset classes with interesting characteristics that tick the right boxes in terms of risk profile. Providing they can get comfortable with the underlying risk, one area they are flooding into is trade receivables, given that the market is less liquid and structurally more complex,” confirms Suresh Hegde, head of structured private debt at NN Investment Partners.

His firm, for one, recently launched an insured trade receivables note (ITRN) strategy, among the other trade finance investment products it offers. Hegde describes the ITRN programme as “ABS-lite”, in that it involves SPVs purchasing trade finance receivables, insuring them and then issuing short-dated notes that are bought by investors. There is no tranching, however, to avoid capital requirements being triggered for insurers under Solvency 2.

“Our key role as asset manager is to structure the investments properly: to ensure appropriate diversification, that there is recourse against certain parties to prevent fraud, that the receivables have been legally sold on a true sale basis and are being held properly, and that the SPV incorporates performance triggers. We also add value by sourcing the assets: there is no bank involvement – we speak directly with corporates or use debt advisors and factoring companies,” he explains.

The assets are typically commercial invoices, where the debtor – usually an SME, but sometimes governments - has 45 to 60 days to pay, and a single pool usually comprises hundreds of debtors. Diversification across portfolios is enforced according to size of invoice, exposure to single debtors, exposure to single sellers and rating caps.

Hegde notes that contractual commercial relationships between buyers and sellers perform better than traditional credit, as the buyers need the assets in order to run their businesses. “These assets are an essential requirement, in contrast to traditional credit – which is senior debt on a company’s balance sheet but isn’t crucial to the business.”

As such, credit risk arises in connection with the aging of the portfolios. The proportion of late receivables and by how long within the ITRN pools is monitored.

“If a receivable is 90 days late, it implies a high probability of default. So, we have a performance trigger if 5% of the portfolio is 40 days late as an early warning. In serious cases of default, we can restructure or unwind the transaction,” Hegde comments.

He continues: “We want to understand a debtor’s payment history, what the invoice is for, does the price make sense and is the asset stable? Both qualitative and quantitative judgment is involved in this process.”

The other risk taken into account is commercial risk. Any fraudulent behaviour or commercial disputes are contractually avoided.

ITRNs are bespoke arrangements, usually executed via an investment mandate, but sometimes as a club deal. The total financing size is €25m-€50m per SPV note.

The strategy involves a number of SPVs across multiple jurisdictions with different programme managers. Servicers are involved on the operational side, subject to due diligence and KYC checks.

Hegde confirms that NN Investment Partners executed €300m of ITRNs for one client last year and the firm currently has €1bn of new mandates for the strategy.

Corinne Smith

Capital Relief Trades

Positive results

Stress tests raise SRT prospects

The results of the latest EU bank stress tests demonstrate that European banks are able to withstand severe shocks. Indeed, the tests were the most severe to date and - following the ECB’s lifting of dividend restrictions in late July - banks are now able to boost dividend payments. The latest developments raise the issuance prospects for significant risk transfer transactions, which will likely be utilised to free up capital for share buybacks.

Under a very severe scenario, the EU banking sector would stay above a CET1 ratio of 10%, with a capital depletion of €265bn against a starting CET1 ratio of 15%. Credit losses, like in previous such exercises, would explain most of the capital depletion. The ‘lower-for-longer’ scenario narrative would also result in a significant decrease in the contribution of profits from continuing operations, especially from net interest income.

The stress tests involved 50 banks from 15 EU and EEA countries covering 70% of EU banking sector assets. This exercise allows to consistently assess the resilience of EU banks over a three-year horizon under both a baseline and an adverse scenario, which is characterised by severe shocks, including the impact of the pandemic.

The individual bank results are an input into the supervisory decision-making process. The EBA published the results of the tests on 30 July.

According to Fernando de la Mora, md at Alvarez and Marsal: ‘’The scenario was the most severe ever in terms of unemployment and GDP declines, but there were no surprises. Capital depletion was the largest ever at 485bp, but the banking system showed strong resilience due to higher initial capital levels. The banks with the highest remaining buffers will now be able to restart dividends.’’

Marco Troiano, co-head of financial institutions at Scope Ratings, notes: ‘’The stress test period begins at end-2020 and so adds additional headwinds to a sector that has just come out of one of the deepest recessions in recent history. The key variable for the stress test outcome is the consumption of CET1 capital under the adverse scenarios – which will feed into the supervisory process and contribute to the definition of pillar two guidance.’’

He continues: ‘’The greater the resilience under the adverse scenario, the lower the need for banks to hold additional capital for Pillar 2 guidance. Pillar 2 guidance was in the past a more obscure component of capital requirements and it wasn’t disclosed to the market, so this increased transparency should be welcome news to investors.’’

The existence of moratoria did not make any difference to the tests, given that they are only 4.2% of total loans at the beginning of the exercise, so regulators considered them immaterial. ‘’Moratoria have expired in most countries and the performance of loans under moratoria have done well. We expect the asset quality cycle to be milder this time, compared to the 2008 financial crisis,’’ says Troiano.   

One caveat to the tests is that they assume that banks would not react to an adverse macro development by, for instance, scaling down their balance sheets or cost base. Yet banks will likely move quickly to address challenges.

According to Scope, excess capital could now in theory be used to finance organic growth. But in the current low rate environment, profitable lending opportunities remain scarce.

The rating agency states: ‘’We believe opportunities to profitably grow loans books organically are scarce and limited to banks that have a significant emerging markets footprint or scope for in-market consolidation. Balance-sheet growth in 2020 was the result of TLTRO 3 that tied funding subsidies to lending targets and public guarantee schemes, which will not be available for ever.’’

The negative rate environment particularly complicates organic growth. Banks could try to pass these rates to consumers or reduce costs, although that is always problematic. This is where significant risk transfer transactions enter the picture because they are more cost-effective (SCI 19 March).

Crucially, SRTs free up capital for share buybacks - which will become more important over the next two years, given the dearth of investment opportunities in a low rate world. However, up until now, using SRTs in this fashion did not make sense due to the post-Covid dividend limitations. Hence, the removal of these limitations has now raised issuance prospects.   

The ECB announced on 23 July that it will not extent dividend restrictions beyond September 2021, allowing banks to boost dividend payments, but the central bank will continue to supervise on a lender-by-lender basis. Last year, the central bank asked all banks to consider not distributing any dividends or execute share buy-backs or to limit such distributions until 30 September 2021, given uncertainties over the economic impact of the Covid-19 pandemic.

Stelios Papadopoulos

Capital Relief Trades

Positive prospects

Risk sharing remains promising, despite due diligence burden

Risk-sharing deals involving the EIF and private investors are yet to gain ground. This CRT Premium Content article surveys the likelihood of such collaborations going forward.

Significant risk transfer transactions between banks on the one hand and insurers and hedge funds on the other have grown substantially over the last two years in deal count terms. However, risk-sharing deals involving the EIF and private investors are yet to gain ground, seemingly due to the EIF’s due diligence requirements on potential counterparties. Nevertheless, these requirements only apply to certain types of risk-sharing deals, raising the prospects for EIF and private investor collaborations going forward.

The entrance of insurers into the capital relief trades market took off approximately three years ago, thanks to the advent of the new Securitisation Regulation. According to Giuliano Giovannetti, md at Granular investments: ‘’The thicker tranche requirements of the new Securitisation Regulation have been a big driver behind the arrival of insurers into the market. Thicker tranches mean that either the coupon on the tranche must collapse - which is difficult for hedge funds - or risk needs to be shared in some other form and attach higher up. This is where insurers have played a clearly positive role.’’

The Securitisation Regulation’s higher senior risk weights has forced issuing banks to mitigate the capital increase by structuring transactions with thicker junior tranches. This is because the more credit risk a bank transfers lower down the capital structure, the better the rating for the senior tranche and hence the lower the associated risk weight.

However, if an issuer is forced to sell thicker tranches to achieve significant risk transfer, such a sale will not be economic for the bank if investors do not agree to accept the correspondingly lower return that comes with these thicker tranches. This is where the value of splitting, or re-tranching, the junior risk into first- and second-loss pieces enters the picture (SCI 26 January 2018). The resulting mezzanine tranches matches the risk/return requirements of insurers and offer banks competitive pricing and strong counterparty credit ratings.

There are potential alternative investors for the mezzanine notes, such as life insurers and pension funds. However, SRTs are usually classified as alternative investments, where such investors can only allocate a small fraction of their assets.

“It’s more likely that these investors participate in SRT through hedge funds, rather than directly,’’ says Giovannetti.

Another alternative is the EIF. ‘’The EIF has certain known advantages, since its zero-risk weight status means that it is as good as cash. Additionally, the credit risk limits that the banks have towards the EIF are likely large, while with insurers, they may have to allocate limits to other products such as single name protection. Yet the EIF is limited to what it can guarantee, given its mandate around SMEs and - despite its supranational status - its eligibility criteria are conservative, and not all banks are comfortable with the additional restrictions imposed by an EIF transaction,’’ Giovannetti adds. 

One credit portfolio manager at a large European bank concurs. ‘’The EIF is different because it is stricter with its eligibility criteria and portfolio construction, putting it effectively in the driving seat in selecting the reference portfolio. Naturally, it is limited to SMEs, but it is also wary of keeping the portfolio balanced without overweighting certain industries,” he explains.

He continues: “Furthermore, the EIF isn’t as flexible on the replenishment period, preferring instead amortising pools or shorter revolving periods. Nevertheless, this is expected, given the different mandate of the institution.’’

Meanwhile, pricing from insurers is typically competitive. “What we further need are investors with a good understanding of the collateral. Insurers understand retail pools well, since, unlike asset managers, they are looking for less risk and more granularity,’’ the portfolio manager observes.

Consequently, depending on the circumstances, banks are willing to surrender control for the pricing benefits or to facilitate new business. The latter is particularly pertinent for smaller portfolios and regional lenders, where the EIF has been overall more active compared to private investors.  

However, precisely because of these differences in flexibility, transactions involving both hedge funds and the EIF would be cumbersome. Originators note for instance that the EIF would insist that the participating bank comply with the SME definition of the European Union, when that might contradict the needs and requirements of hedge fund investors as well as banks.

The main criteria determining the definition of an SME, according to EU law, is staff headcount and either turnover or balance sheet total. Staff headcount for small and medium-sized businesses is over 50 and 250 respectively. Turnover is €10m and over for small firms and €50m and over for medium-sized firms.

However, when it comes to risk-sharing transactions, the most salient concerns are the EIF’s due diligence requirements - which range from background checks on the managing partners, ownership and how the funds consolidate due to their presence in different parts of the world - including vehicles in offshore jurisdictions - to information on their investor clients. The due diligence is not just an issue given the confidential nature of the requested information, but it will also further prolong the execution process and render it more costly and cumbersome for private investors.

Robert Bradbury, head of structuring and advisory at StormHarbour, comments: ‘’The EIB has a well-trodden list of requirements, so you know exactly what they need to ask from an originator. They also have a great deal of standardisation in documentation, given the number of transactions they have executed, so are able to rapidly adapt every transaction feature to a specific situation. Real money accounts and funds tend to deploy money quickly, so time is not as much a constraint for the EIF as it is for private investors.’’

The only risk-sharing transaction known to have been executed so far is one issued by BCC Grupo Cajamar (SCI 9 January 2019).The €972.1m Spanish true sale SRT transaction was completed between the EIF, Spanish state owned bank ICO and hedge fund investors.

The class A notes were split into €319.3m and €283.4m that were guaranteed and purchased respectively by the EIF and Spanish state-owned bank ICO. The EIF also guaranteed the class B and C notes with back-to-back guarantees from the EFSI. Hedge funds bought the class D and E notes.

‘’Transactions where the risk is shared between supranationals and other market participants are rare. One exception is the Cajamar transaction, where the participation of ICO was particularly important,” Bradbury says.

He adds: “Ultimately, if you only have supranationals, you will typically be limited in size terms, due to single counterparty restrictions and risk concentrations. In the Cajamar deal, the senior risk was a good fit for that kind of investor, and it worked broadly within the existing structure. It is less likely that a ‘traditional’ SRT investor would be interested in a similar proposition.’’

Apart from the additional expense of having a traditional SRT investor participate, their inclusion alongside a supranational is likely to add time and complexity for the sponsor, given the need for their own in-depth credit analysis. “It is certainly a proposition that can work, but the asset perimeter, pricing, timing and other factors need to line up very well,’’ Bradbury notes.

Indeed, the Cajamar transaction indicates the types of risk-sharing deals that can and can’t work. Pablo Sanchez Gonzalez, head of Southern European securitisation at the EIF, explains: ‘’We are here to cover market gaps, so from time to time we have mandates from EU states to boost these markets. Consequently, our participation isn’t a competition with private investors but to facilitate transactions, working as an equaliser to bring structured finance expertise where it is currently insufficient, and thus allowing midsize and smaller banks to access this market.’’

He continues: ‘’So if a jurisdiction is commercially attractive to private investors, we are willing to step aside, such as the pre-pandemic economy which was performing well and when our resources were limited. Bringing onboard private investors allows us to use our resources more efficiently to do more transactions. However, the pandemic opened a large market gap - particularly for smaller tier two banks - so we had to intervene, and we were able to do so following the launch of the European Guarantee Fund.’’

Announced in May 2020, the €25bn European Guarantee Fund (EGF) aims to help European SMEs finance their way out of the coronavirus crisis (SCI 27 May 2020). All 27 EU Member States have been invited to contribute to the €25bn fund with a portion equal to their share of EIB capital.

The EGF will enable banks to buy low mezzanine and first loss protection for SME synthetic securitisations for a ‘’limited period’’. Hence, Gonzalez confirms that when the market returns to a more stable path, there will be opportunities to combine public and private resources.

However, risk can only be shared under two formats. The first is a mezzanine guarantee, where the EIF and private investors face the bank either on a pari passu basis or via an upper and lower mezzanine tranche respectively.

The second option involves a bilateral guarantee between the EIF and a bank, which is then counter-guaranteed by a private investor. Overall, although private investors may consider the first option, the second one will raise eyebrows since this is where the costly due diligence requirements enter the picture.

The EIF will have to carry out these checks under the second option because the hedge funds will be, by definition, one of the two counterparties in the transaction. However, Sanchez qualifies that the KYC challenges apply more to American funds than European investors, such as several large asset managers who are physically located in Europe.

“It’s the American funds who tend to be more complex and sometimes a concern on the due diligence process because they are more global and often linked to offshore jurisdictions. In any case, the EIF is well equipped to carry on its KYC and compliance due diligence for all types of counterparties,’’ he explains.

Asset managers contacted by SCI have confirmed these concerns, but they also unequivocally outlined the benefits that EIF participations can bring. The EIF has knowledge and familiarity of certain markets that private investors are not necessarily privy to.

Time will tell whether funds will get more on board with the idea of sharing risk with supranationals, but these investors aren’t the only alternative. In fact, another possibility are trades involving the EIF and insurers, owing to the growth in insurer participations and increasing standardisation in the market. Bradbury believes that supranationals can support most of the capital structure, while insurers can take the risk that fits their risk/return profile.

Andy Garston, md at Credit Risk Transfer Solutions (CRTS), notes: ‘’The EIF had historically a large balance sheet, so they are quite happy doing deals by themselves. Yet we’ve seen trading where the EIF takes the senior mezzanine and insurers take the junior mezzanine along with the first loss investor. It just reflected a moment in time when there was a need to bring in more capital into this space and insurance had at that point become a visible option.’’

The prospects look brighter, thanks to the existence of new structures that allow insurers to face banks on both a funded and unfunded basis (SCI 11 June). CRTS is the firm behind them and they are typically mezzanine deals that involve an investment platform managed by a broker that acquires and holds the related CLN. Insurers then cover the risk on the CLN, without having to deposit cash.

CRTS is an FCA authorised and regulated insurance broker, with a focus on structuring and arranging credit risk transfer - both primary and secondary participations - from banks to insurers, particularly in the context of SRT transactions. Thomas Oehl, director at the firm, concludes: ‘’From a pure cost perspective, insurers are incredibly competitive. However, you have to go one step further and consider the benefit of a multilateral like the EIF as a zero-risk weighted entity, as well as collateralised protection which also carries a zero-risk weight. This becomes even more pertinent with the EU’s new synthetic STS framework.’’

Stelios Papadopoulos

ABS

Summer reflections

Euro ABS/MBS new issuance pricing trends

From now on, SCI will publish regular case studies and reports on the European ABS/MBS market in addition to our usual news stories on the sector and the first can be found here for free.

This time, we examine the demand and consequent pricing dynamics seen across European and UK ABS, CMBS and RMBS new issuance in Q2 and July 2021. Read this report to discover coverage levels for every widely marketed deal and the impact on price movements broken down sector by sector.

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.

Structured Finance

SCI Start the Week - 2 August

A review of SCI's latest content

Last week's news and analysis
Are direct lending strategies fit for purpose?
Contributed thought leadership by Ocorian
Consistent opportunities
European CLOs still offering value
Ginnie in a hurry
Only 10 more days for market input on new capital rules
Growing foothold
CRC expands Latin American presence
Landmark CRT debuts
BMPS inks first stage two SRT
Out of favour?
WBS issuers turning to high yield bonds
Risk on
Lower quality credit outperforms
Risk transfer return
Intesa executes SRT
Social vision
Prodigy Finance explains how its innovative securitisation was structured
Summer hiatus
European ABS/MBS market update
Up, up and away
Recovery of GSE CRT/MILN deals from dark days of spring 2020 continues

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.

Capital Relief Trades

SME SRT return

STS synthetic securitisation debuts

Santander has finalised a €183m direct CLN that references a €3.05bn portfolio of Portuguese corporate and SME loans. Dubbed Castelo, the significant risk transfer transaction is the first post-Covid Portuguese capital relief trade sold to private investors and Santander’s debut STS synthetic securitisation.

The tranches amortise on a pro-rata basis, with triggers to sequential, while the portfolio features over 20,000 borrowers and revolves over a one-year replenishment period. Further features include a 4.24-year portfolio WAL and the standard clean-up calls, tax calls, regulatory calls and time calls.

Castelo is one of a handful of European direct CLNs, although the structure has been used extensively in the US after Santander first utilised it in a US synthetic auto SRT back in 2019 (SCI 5 July 2019).  

The Spanish lender completed its first Portuguese SME SRT in June 2019 (see SCI’s capital relief trades database). Dubbed Syntotta, the trade’s portfolio is ‘’very similar’’ to Castelo, according to sources close to both transactions. However, the same sources qualify that Castelo differs slightly, given the addition of ‘’some longer-dated project finance loans’’. 

Santander initially considered the EIF for this ticket, but the deal eventually ended up with private investors. The latter have slowly returned to Southern European SMEs over this year - as evidenced by transactions in Greece and Italy - thanks to strong performance records, government support for Covid-affected sectors and lack of supply.

The EIF dominated post-Covid SME issuance as the Coronavirus crisis triggered a flight to safety for private investors, who opted for large corporate exposures. Large corporates have large, globally diversified balance sheets, access to capital markets and offer enough disclosure that enables investors to assess default risk more accurately.     

Stelios Papadopoulos

Capital Relief Trades

Issuance boost

STS synthetic securitisations taking off

The pipeline of STS synthetic securitisations continues to grow (SCI 5 March), with at least a dozen such transactions expected to price by year-end. Banks that are new to the significant risk transfer market, as well as regular capital relief trade issuers are readying deals, with Santander believed to be first off the blocks (SCI 4 August).

“We’re receiving an STS synthetic securitisation mandate every other week at the moment,” confirms Harry Noutsos, md - market outreach at PCS. “We’ve received seven mandates already and more are likely to emerge, given that we’re talking with lots of lawyers that are preparing transaction documents for them. We could see a further three to five deals close by year-end, having locked in investors and finalised the documents.”

The STS synthetics that PCS is currently looking at are new transactions, but the organisation is also talking to some originators about amending existing deals, for which the issuers are seeking an STS label. Noutsos suggests that making an existing significant risk transfer deal STS-compliant is a straightforward process compared to the grandfathering rules for true sale STS, given that the majority of the criteria are already met.

Furthermore, usually a single investor is involved and they appear to be happy to approve the changes – albeit sometimes for a minor fee – in order to strengthen their relationship with the issuing bank. “STS compliance doesn’t change the economics for investors, so it’s a win-win for all parties,” Noutsos observes.

Both banks that are new to the SRT market and regular capital relief trade issuers are readying STS synthetic securitisations. Indeed, some of the large, programmatic CRT issuers are said to be modifying their platforms to be STS-compliant.

In terms of the new entrants, the STS synthetics framework is proving especially economic for standardised banks.

Overall, STS synthetic securitisations are expected from banks domiciled in Eastern, Northern and Southern Europe – including the Baltic states and Germany. Noutsos, for one, is confident that the STS synthetics market will continue to grow in terms of volume and participants.

“The STS synthetics framework has followed general market practise and feedback. The result will be a strengthening of the banking system by generating additional capital and encouraging banks to become more systematic about managing and sharing risk,” he notes.

He adds: “On one hand, the significant increase in appetite for SRT among investors provides checks and balances on the business banks originate. On the other hand, bank equity investors are pushing management to improve ROE and – given persistent negative rates - it makes sense for banks to act now.”

While STS synthetics may ultimately dominate SRT volume, non-STS transactions will still be executed in the UK - where no rules exist for synthetic STS - or with pools where the assets don’t fit the STS criteria.

Corinne Smith

Capital Relief Trades

Risk transfer round-up - 5 August

CRT sector developments and deal news

Credit Agricole is believed to be readying a capital relief trade backed by capital call facilities that is expected to close in 2H21. The bank has issued such deals over the last two years and follows a slew of banks issuing these trades, including BNP Paribas, Societe Generale, Standard Chartered and Citi.    

Capital Relief Trades

Record Freddie

Freddie Mac churns out STACR and ACIS at highest yet seen volumes

Freddie Mac today (August 5) announced that its CRT programme, including both STACR and ACIS, achieved record H1 issuance of $9.9bn, protecting $418.9bn of unpaid principal balance of mortgage loans.

This was comprised of $6.4bn of issuance in Q1 - a new quarterly record - and $3.5bn in Q2. There were five STACR deals and seven ACIS transactions in H1. So far in Q3, Freddie has issued another STACR trade, designated STACR 2021 DNA-5 at record narrow prints.

The H1 issuance easily exceeded the previous record of $5.5bn set in H1 2020. Two trades - STACR 2021-HQA1 and STACR 2021-SAP1 - also achieved the highest ever amounts sold of $1.4bn and $1bn respectively.

“Our first half CRT issuance increased notably year-over-year due to the swell of purchase and refinance activity, as well as our ability to shorten the time from loan acquisition to ACIS issuance, in the first quarter,” says  Mike Reynolds, vice president of single-family CRT at Freddie Mac.

“In our strongest half to date, we completed the largest transactions in the history of the STACR and ACIS programs, drew 111 investors and continued to attract new capital to the CRT markets,” he adds.

This record-breaking pace has been set during a period of Fannie Mae’s continued absence from the CRT market.

Since it issued the first CRT deal in 2013, the single family CRT programme has transferred around $83bn of credit risk in $2.3trn of mortgages, the GSE notes.

Simon Boughey

CMBS

Robust performance

Freddie Mac K-Series defaults, losses tracked

Freddie Mac K-Series CMBS are exhibiting a cumulative default rate of 0.35%, according to a new KBRA loan default and loss study on the sector. Such robust performance is expected to continue, as the US multifamily sector has benefited from strong investor demand, demographic shifts, household formations and an improving economy.

“We expect this to continue for the foreseeable future, considering recent changes in the Federal Housing Finance Agency (FHFA) administration are not expected to alter Freddie Mac’s mission and role in the market for now,” KBRA states.

The study indicates that 59 loans have defaulted, based on a total population of 17,037 loans from 300 transactions securitised from June 2009 to December 2020. In comparison, the conduit multifamily CMBS sector has experienced a cumulative default rate of 15.8% over the last 20 years.

The study examined default rates by property, loan and financial characteristics. Among the K-Series property sub-types, loans secured by student housing properties exhibited the highest default rate of 3.53%, while manufactured housing recorded the lowest at 0.14%. Of the 59 defaults, 52 (0.31%) were term defaults and seven (0.04%) were maturity defaults.

Meanwhile, 27 loans were resolved with an average resolution time of 21.2 months. Of these loans, eight experienced loss severities ranging from 9.6% to 51%.

The study also shows that acquisition (0.25%) loans were 1.7 times less likely to default than loans used to refinance (0.41%) or for other purposes. Among larger loans with loan balances greater than US$50m, the default rate was 0.10%, compared to 0.36% for those with loan balances of US$50m or less.

Of the 59 loans that defaulted, six had supplemental debt associated with the loan. To date, four of the six loans are outstanding, while the remaining two loans liquidated without any losses.

The KBRA report concludes that changes to the structure of the GSEs and the breadth and role they play in the multifamily market - which includes those resulting from a potential exit from conservatorship - may negatively influence defaults in the future, particularly as more cohorts season or if underwriting standards change.

Angela Sharda

NPLs

Scalabis strikes

Algebra brings Portuguese NPL ABS

Algebra Capital is in the market with an unusual Portuguese non-performing loan ABS. Dubbed Scalabis STC (compartment Panda), the securitisation is backed by a €1.47bn portfolio that was acquired through two investment vehicles – LX Investment Partners II and III – from Banco BPI, Banco Comercial Português, Caixa Geral de Depósitos, Caixa Leasing e Factoring and Novo Banco between 2019 and 2021.

The pool comprises five corresponding sub-portfolios - BCP-04, NB-01, CGD-01, BPI-01 and BCP-06 – with a gross book value of approximately €1.9bn. The assets are predominantly unsecured loans, representing approximately 90.5% of the GBV, with secured loans - including loans with associated cash in court - representing the remaining 9.5%.

The loans were granted to corporates and SMEs (representing 65.9% of the pool), as well as to individuals (34.1%). The secured loans are backed by residential and non-residential properties that are concentrated in the Lisbon district.

Rated by DBRS and Scope, the capital structure comprises €80m BBB/BBB rated class A notes (which will pay three-month Euribor plus 2%), €25m unrated class Bs (6% fixed) and €20m unrated class Js. The class B interest rate payments rank senior to class A principal, they will be subordinated if the cumulative amounts collected are 10% below the business plan or if the present value cumulative profitability ratio falls below 90%.

There is also an equity leakage feature, which allows for a pre-amortisation of class B using up to 10% of the issuer remaining funds after the payments of class A and B interests, as well as class A principal, in case the transaction is performing above 110% of the business plan.

The servicer (Algebra) has already reached a number of agreements or payment plans with 2,219 borrowers. Although these loans represent only a small share of the portfolio’s outstanding balance (3.3%), they consist of more regular flows of recovery amounts totalling 14.5% of class A gross collections, according to Scope.

The transaction benefits from a cash reserve, sized at 3% of the principal outstanding of the class A notes, and a recovery expenses cash reserve of €50,000 – both of which are fully funded with part of the proceeds from the initial collections. The final maturity date of the transaction is October 2075.

Angela Sharda

ABS

Risk assessment platform bolstered

Sector developments and company hires

Risk assessment platform bolstered
Moody's is set to acquire climate and natural disaster risk modeling and analytics firm RMS from Daily Mail and General Trust for approximately US$2bn. The acquisition will immediately increase Moody’s insurance data and analytics business to nearly US$500m in revenue and accelerate the development of the company’s global integrated risk capabilities to address the next generation of risk assessment.

With over 400 risk models covering 120 countries, RMS serves the global property and casualty (P&C) insurance and reinsurance industries. The acquisition builds upon Moody’s and RMS’s complementary customer bases and capabilities.

Through further innovation and a combination of both companies’ core strengths and offerings, RMS is expected to meaningfully accelerate Moody’s integrated risk assessment strategy for customers in the insurance industry and beyond, with significant capabilities across climate, cyber, commercial real estate and supply chain risk. As part of the Moody’s Analytics platform, RMS is expected to generate up to US$150m of incremental run-rate revenue by 2025.

The acquisition is expected to close in late 3Q21, subject to the satisfaction of customary closing conditions.

In other news…

North America
Digital auto insurer Metromile has appointed John Butler, an md of Cohen & Company, to its board. Butler is head of Cohen & Company’s US insurance asset management platform and has 25 years of insurance experience. Prior to joining Cohen & Company, he oversaw the investment of US$4bn principally in fixed income and ILS at Twelve Capital.

Butler will assume the non-executive chairman role on 31 August, succeeding David Friedberg, ceo of The Production Board and Metromile founder, who has served in the position for more than 10 years. Friedberg will remain a member of the Metromile board. Meanwhile, Betsy Cohen has stepped down from the board, Cohen & Company having been instrumental in Metromile’s transition to a public company.

Structured Finance

Debt servicing spin-off inked

Sector developments and company hires

Debt servicing spin-off inked
Credito Fondiario Banking Group has demerged its debt purchasing and servicing activities in favour of the newly established Gardant Group. As part of this reorganisation, it has redefined the bank's mission as a challenger bank, specialising in financing solutions for SMEs and corporates. The two companies will operate independently going forward.

Panfilo Tarantelli has been appointed chair of Credito Fondiario, Davide Croff as deputy chair and independent director, and Iacopo De Francisco as ceo.

Gardant is dedicated to the management of and investment in Italian impaired and illiquid loans. Armando La Morgia, previously head of capital markets and securitisation at Credito Fondiario, has been named group chief business officer for Gardant.

EMEA
Capital markets fintech Nivaura has appointed Scott Eaton as its new ceo. Eaton brings three decades of experience in leadership roles in capital markets and financial technology. Most recently, he served as ceo of Algomi from 2018 until its sale to BGC in 2020 and prior to that, as coo of MarketAxess Europe.

Nivaura’s founder Avtar Sehra moves to the role of president, focusing on intensifying the firm’s innovation and product development in capital markets automation technology.

Mortgage industry merger
Blockchain platform Figure Technologies is set to merge with Homebridge Financial Services, with the aim of reshaping the technology landscape of the mortgage industry in the US. Under the agreement, Figure will provide a platform on Provenance Blockchain that should double Homebridge’s capacity for fulfilling home loans and the two firms will introduce new payment and lending products to the lender’s customers.

Structured Finance

SOFR term rates recommended

Sector developments and company hires

SOFR term rates recommended
The Alternative Reference Rates Committee (ARRC) is now formally recommending CME Group’s forward-looking SOFR term rates, following the completion of a key change in interdealer trading conventions on 26 July under the SOFR First initiative. SOFR term rates marks a major milestone in the transition away from US dollar Libor and the completion of the paced transition plan that the ARRC outlined in 2017. In a statement on the move, Tom Wipf, ARRC chair and vice-chair of institutional securities at Morgan Stanley, urged market participants with Libor exposures to immediately take action and base their new contracts on forms of SOFR.

In other news…

EMEA
Ocorian has appointed Hugo Smyth as head of business development - UK and Europe - capital markets. Based in Ocorian’s London office, he reports to chief commercial officer Simon Behan. Smyth previously worked in corporate trust roles at Deutsche Bank and BNY Mellon. 

SRT ratings upgraded
KBRA has upgraded by a notch all rated classes of Lloyds’ synthetic RMBS Syon Securities 2019, reflecting better-than-expected collateral performance, as evidenced by increased credit support for each rated class since issuance and current loss levels that have remained low. The rating agency notes that the reference mortgage pool has experienced relatively benign levels of arrears at 0.56%, with 0.2% of them above three months in arrears. As per the 19 July IPD, the cumulative losses for the portfolio since closing are 0.05%.

Structured Finance

Pretium strengthens resi credit capabilities

Sector developments and company hires

Pretium strengthens resi credit capabilities
Sarah Kong, Andrew Miller and Peter Morreale have joined Pretium as mds, based in New York. Kong will be responsible for mortgage whole loan trading at Pretium and joins from Goldman Sachs, where she spent 15 years in the firm's mortgage business. Miller was previously at Fortress Investment Group and will be responsible for the buildout of Pretium's MSR investment strategy, as well as the expansion of its Ginnie Mae early buyout investing capabilities.

Morreale was previously at Cadwalader, Wickersham & Taft, representing issuers, underwriters and servicers in connection with public and private finance transactions within the residential mortgage, single-family rental, consumer loan and CLO asset classes. In his new role, Morreale will assist with the structuring, negotiation and execution of capital markets transactions across the Pretium business.

In other news…

EMEA
Mount Street has appointed Jaymon Jones head of CRE primary servicing. He has 20 years’ experience in CRE servicing and portfolio management, having previously worked at Hatfield Philips, Morgan Stanley, CREFC Europe and most recently Trimont, where he was an md.

North America
KopenTech has recruited Jill Scalisi as chief engagement officer, responsible for business development, launching new products and overseeing the firm's platform growth and sales efforts. Scalisi brings over 20 years of experience leading the development and implementation of new financial product lines at several global investment banks, including Nomura Securities, where she built and managed credit sales businesses in New York and Boston, following the firm’s acquisition of Lehman Brothers. Before that, Scalisi was co-head of credit derivatives and CDO product management at Lehman Brothers, having begun her career at Chase.

Lakemore Partners has hired Dan Norman as md and head of its US business operations. In this role, he will focus on growing Lakemore's investment platform globally from its recently established US office in Scottsdale, Arizona.

Norman joins Lakemore following his retirement last year from Voya Investment Management, where he most recently served as group head and senior md. Previously, he founded Voya's senior loan group in 1995 and co-managed the firm’s global loan platform, including its global CLO business.