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Capital Relief Trades

Ready to launch

Norway readies SRT take off

The Norwegian banking market is getting ready for a pick-up in significant risk transfer (SRT) issuance next year following the pending incorporation into law of the new Securitisation Regulation, say market experts.

Nevertheless, the first deals are expected to be relatively simple vanilla structures, given the scepticism of local supervisors.   

The Norwegian market has been slow to adopt the SRT mechanism for a number of reasons, but this is set to change from the start of 2022, add market watchers.

According to Markus Nilssen, partner at BAHR, ‘’Norway implements EU financial regulations through the EEA agreement, but in the aftermath of the 2008 financial crisis, the new EU rules gave too much power to European supervisors. So, this had to be resolved by setting up a two-tiered system, which caused significant delays to the implementation of important EU regulations in Norway.’’

He continues: ‘’One important reform has been the full implementation of the CRR and CRD IV last year since previous domestic regulations did not mirror EU rules on SRT and basically barred the product from Norway. With the Securitisation Regulation expected to finally come into force in Norway later this year, SRT issuance is expected to pick up.’’

Another historic impediment has been the Basel one floor and the higher risk weights it implied for the retained senior tranches. The floor was removed last year for Norwegian banks as part of the implementation of the CRR and CRD IV.

Idar Fagereng, head of active portfolio management at DNB notes: ‘’In theory we could have done SRT transactions with supranationals despite the Basel one floor, but securitisation as a concept was foreign to Norwegian regulators and was effectively banned given the requirement for SPVs to have a banking license. This means that the SPV would have to comply with capital requirements.’’

He adds: ‘’Additionally, although we have been interested in this market for many years, the internal processes including the reporting systems had to be in place and that is a challenging task, but the main issue was always the regulatory uncertainty. If we execute a transaction going forward it will be mainly to hedge risk limits, adjust capital consumption and grow certain lines of business.’’

Norway’s financial supervisor (Finanstilsynet) has been traditionally sceptical towards securitisations. This is a salient point given that EU law grants national regulators, or ‘’national competent authorities’’ (NCAs) in EU parlance, plenty of discretion. Consequently, the first transactions are likely to be structured in funded vanilla form, although pro-rata amortization deals with triggers have promise.

Moreover, the SRT assessment process could take longer than the three month period stipulated by EU rules. The main issuers in the market are large systemic lenders such as DNB and Nordea and the smaller savings banks in the so called SpareBank one Alliance. The individual savings banks are usually too small to form their own financial groupings to engage in insurance activities, investment management and the other similar forms of business. Financial groups such as SpareBank one can offer these services.

Another question concerns the asset classes that originators will target. Nilssen confirms that corporate loans including real estate, shipping and energy exposures are good candidates, which would not be surprising given the broader European experience.

DNB  is the dominant player in the domestuc corporate loan market with a 30% share, according central bank of Norway data, while the SpareBank one alliance has close to a fifth. Nearly half of corporate lending goes to the commercial real estate sector.

Residential mortgages constitute the largest single item on Norwegian bank balance sheets with 47% of total lending, but the low risk weights render synthetic RMBS uneconomical. Nevertheless, synthetic RMBS activity has picked up in Europe and the US in 2020-21 for a variety reasons including hedging risk limits and standardized bank risk weights (see SCI’s capital relief trades database).   

Looking forward, Nilssen concludes: ‘’It is unlikely that we will see transactions this year given the complexity of the trades and the pending incorporation of the new Securitisation Regulation into Norwegian law. Early next year is a more promising prospect.’’

Stelios Papadopoulos

ABS

Scope concerns

SFA underlines concerns in UK government call for regulation opinion

The SFA has highlighted problems in regulatory jurisdictional scope in its response to Her Majesty’s Treasury’s Call for Evidence on UK securitisation regulations.

Earlier this year, the UK government had issued a call for evidence in connection with securitisation regulation. Under the terms of the consultation, it is seeking views to ensure that it “best delivers” for the UK’s financial sector and real economy.

At the top of the list, it sought opinion on diligence obligations imposed on UK institutional investors when investing in third country securitisations.

These could be tackled in two ways. Firstly, there could be obligation to ensure the investor had obtained sufficient information to have a good understanding of both the transaction and the underlying assets.

Another possible solution would be a substituted compliance approach, whereby the UK regime either grants equivalence to other jurisdictions or simply requires that investors check that the sell-side entities have complied with their local disclosure rules.

But the SFA believes both remedies are lacking.

It states: “We do not believe either of these is as sensible an approach for achieving interoperability, however. The equivalence approach would require constant monitoring, be at risk of change by the other jurisdiction and therefore be unstable requiring a cumbersome and ongoing equivalence assessment process from UK authorities.”

The second approach is deficient as it would require individual investors to develop expertise in local rules for disclosure which are otherwise irrelevant as they no bearing on their particular credit analysis.

The SFA says that while UK market is at ease with compliance with the EU Securitisation Regulation, substantial uncertainty plagues virtually every other jurisdiction.  This creates an uneven playing field.

The letter states: “Even if it were sufficiently clear, the ‘substantially the same’ standard is overly restrictive. To our knowledge, the disclosure requirements in the UK are unmatched anywhere in the world (bar the EU) both as to the content of the disclosure requirements (templated loan-level data disclosure across all asset classes) and the modalities of disclosure (the existence of repositories).”

Angela Sharda

Capital Relief Trades

High LTV Italian SRT inked

Intesa executes capital relief trade

Intesa Sanpaolo has finalized a significant risk transfer (SRT) transaction from the GARC programme that references a €1.3bn portfolio of high loan-to-value (LTV) residential mortgages.

The deal is the first high LTV mortgage SRT in the Italian market. The mortgages in the pool have a LTV ratio that is 80% or higher.

The trade features a €33.3m upper junior tranche (1.5%-4%), a €70.6m (4%-9.3%) mezzanine tranche and a €20m retained lower junior piece. Further features include policy covers that protect the underlying exposures from the physical risks of climate change events.

AmTrust, Munich Re and Arch jointly underwrote an unfunded insurance policy to cover the credit risks associated with the upper junior and mezzanine tranches. The transaction was organized and structured by the Active Credit Portfolio Steering team along with the IMI CIB and BdT divisions.

Synthetic securitisations of mortgages are unusual as the risk weights for these exposures are already low. However, following the example of Lloyds in 2019 and its Syon programme (SCI 25 July 2019) more banks have printed such transactions.  The aim is to hedge risk limits, standardized bank risk weights or even IRB weights - provided there are sufficiently large enough volumes (see SCI’s capital relief trades database).

The Intesa Sanpaolo Group, through the Active Credit Portfolio Steering team, has completed approximately €33bn of synthetic securitisations during the current business plan, with the aim of optimizing the risk-return profile of the loan portfolio and providing financial support to SMEs and households.

Stelios Papadopoulos

Capital Relief Trades

Risk transfer round up - 31 August

CRT sector developments and deal news

Alpha bank confirmed in last week’s 1H21 statements further details of a significant risk transfer trade that the Greek lender intends to execute in 4Q21 (SCI 5 March).

Dubbed Aurora, the transaction references a €2bn corporate and SME portfolio, and is expected to release €1bn of RWAs. Piraeus Bank opened the Greek SRT market in March (SCI 18 March) and the bank will finalize another deal in 2H21 along with an alleged ticket from Eurobank.

Greek banks are utilising synthetic technology to generate enough capital to offload NPLs via outright sales and NPL securitisations (SCI 14 January).   

CMBS

CMBS vigour

CMBS issuance for rest of 2021 to keep everyone busy

Issuance in the European CMBS market for the remainder of this year is to exceed 2018 figures  despite the uncertainty emanating from the pandemic, say market experts.

“Covid-19 has hit the CMBS market very hard. Thanks to the vaccine and re-openings we have seen this market is back on the road to recovery. The CMBS market in terms of assets – we will continue to see pools with high granularity and leverage will be around 65% in the next 12 months,” said a panelist at S&P’s European Structured Finance Conference yesterday. 

Other speakers agreed that the rest of the year looks as if it will be just as busy as the first half of 2021.

One added: “The market does look very active to us. Banks are back to pre-pandemic levels. We are seeing new transactions in the pipeline. It has been a busy year with various asset classes with a focus on Germany and the UK. There is pent-up demand from last year.”

Property types involved remain mostly industrial, office and logistics, with one new multi-family deal. The UK has been the biggest single market, with 24% of deals referencing UK assets.

Members of the panels say that there are a number of factors driving regional difference in property performance types. For example, there is an increase in vacancy rates in Paris and London which is due to specific dynamics in these markets.

A panellist commented, “Cities like Brussels have seen a significant decline in vacant office spots. Other than that, apart from hotels and retail, the performance of most property types throughout the pandemic have been stable, even in terms of yield.”  

Speakers believe that lessons learnt from the pandemic have been have been profound.

One concludes: “It has been a new environment for property types. It’s a new situation that we haven’t seen before not even in the financial crisis.”

Angela Sharda

NPLs

Low delinquencies - for now

Delinquencies give few alarms but asset quality slump pending

While aggregate delinquency data currently looks benign, asset quality is expected to deteriorate as support programmes come to an end.

Up to date aggregate delinquency data, while masking some divergence, holds no terrors, notes Scope Ratings. The NPL ratio for EU-headquartered banks fell to just 2.5% at the end of 1Q21, according to ECB numbers, while gross euro area NPLs more than halved between 4Q14 and 4Q20 from €998bn to €443bn thanks to effective offloading mechanisms and solid demand.

‘’Banks have come through the pandemic crisis broadly unscathed. Markets have responded to fiscal and monetary stimulus, and public and bank support programmes have led to reduced corporate insolvencies relative to initial forecasts. Banks continued to lend, buoyed by TLTRO and other measures, and robust capital buffers,’’ says the rating agency.

However, as ECB vice president Luis de Guindos said in a recent speech, while bank results have beaten expectations, the key drivers of this resilience have been lower provisions and solid trading earnings and neither of these is sustainable over time.

Net interest income remains under pressure and, as Scope has previously noted, the profitability outlook is cloudy and banks will struggle to clear their cost of equity.

The pace and nature of economic recovery are the critical factors. These are already unequally distributed across countries and sectors. If growth stumbles and inflation turns out to be more stubborn than central banks would currently have the markets believe, banks will need to review their provisioning.

Indeed, if the current benign scenario is made possible only by public support, these stimulus measures might in fact have simply prolonged the lag between the recession and the rise in NPLs rather than prevent NPLs outright, says de Guindos.

Scope states: ‘’Given the sharp reduction in the use of legislative moratoriums, we see no need for these programmes to continue. Any remaining hardships, for example in hospitality or transportation, should be dealt with directly through grants. Governments should also withdraw public guarantees for new lending. Few countries have made extensive use of public guarantee schemes.’’

The agency concludes: ‘’Depending on the Covid exit paths of the respective economies, we expect these programmes to be phased out gradually. Restoring proper accounting of NPLs will greatly enhance transparency for bank investors and strengthen the confidence in stronger banks. Where necessary, regulators could temporarily lengthen calendar provisioning for new NPLs incurred because of the crisis, for example for government-guaranteed loans.’’

Asset-quality deterioration and NPL recognition was the first of the ECB’s four-part FAQ about the raft of forbearance measures to help banks weather the crisis. Banks were guided to mitigate volatility in regulatory capital and financial statements from IFRS 9 accounting by implementing transitional arrangements.

Under transitional IFRS 9  arrangements - extended under last year’s quick fix CRR amendments - banks are allowed to replenish CET1 capital with any increase in expected provisions recognised in 2020 and 2021 for assets that are not credit-impaired relative to end-2019. Supervisors, meanwhile, have adopted a more flexible approach to processes, timelines, and deadlines.

Stelios Papadopoulos

RMBS

Cliff edge looms

400,000 loans face forbearance expiry

The number of mortgages in active forbearance continued to tick down last week, but this month the market is set to be buffeted by the termination of plans that commenced at the beginning of the pandemic.

Some 400,000 mortgages hit the expiration date on September, based on the current allowable term lengths which were extended in June.

It is not clear what proportion of these loans will return to active payment and which will slip into actual delinquency.

"All eyes are now on the post-forbearance performance of those 400,000 borrowers who are nearing the end of their allowable plan terms in September. It stands to reason homeowners who stayed in plans for the full allowable length may be facing more financial distress than those who've been in forbearance but have since left," Andy Walden, vice president of market research firm Black Knight told SCI.

In the worst case scenario, the RMBS market could be hit by the biggest wave of delinquencies since the pandemic began.

Overall, 671,000 home loans are set to be reviewed for extension or removal this month.

Some 1.71m mortgages remain in active Covid-19 forbearance plans, including 1.8% of GSE, 5.6% of FHA/VA and 4.0% of portfolio held and privately securitized mortgages. This represents $331bn of unpaid principal balance.

The good news is the number of plans in active forbearance continues to decline. There was another 53,000 drop in the last week of August, driven by a 23,000 reduction in plans among FHA/VA loans. There was also a 20,000 drop in GSE loans in forbearance and a 10,000 drop in private label loans.

Simon Boughey

RMBS

Libor worries

UK RMBS transition to leave ratings unshaken

The transition from sterling LIBOR to risk-free rates is unlikely to have negative rating consequences for UK RMBS transactions, a Standard & Poor's (S&P) report notes.

Even though the 31 December phase-out deadline is less than four months away and with mounting general uncertainty around transition plans, S&P estimates that current ratings will prove resilient. 

Its analysis, centred around transition patterns and amended terms which could potentially trigger negative rating actions, posits four potential scenarios. These are: note coupon remains fixed for life at three-month LIBOR as of end-2021 while asset rate switches to BBR on day one; note coupon switches to SONIA and asset rate to BBR simultaneously on day one; note coupon stays fixed for a number of months and then follows SONIA while asset rate switches to BBR on day one, and, finally, note coupon switches to SONIA on day one while asset rate remains fixed for a number of months and then follows BBR.

The research demonstrates that the robustness of the initial ratings in the each of the modelled LIBOR replacement terms. Consequently, it appears unlikely there will be a negative rating transition, even for non-investment grade classes of notes.

The report further notes that for the revised transaction terms to cause a negative rating transition they would need to materially exceed the current market expectations on the year-end sterling LIBOR rate, the LIBOR to SONIA credit adjustment spread, or the time given to obtain the noteholders' consent to replace LIBOR.

Vincent Nadeau