Contents

Capital Relief Trades

Love me tender

STACR tender shows validity of CRT and salience of capital efficiency

The significance of Freddie Mac’s STACR tender offer, announced earlier this week, should not be underestimated, say market insiders.

The tender shows, on the one hand, that the GSE is acutely conscious of the demands of greater capital efficiency, they say.

But it also demonstrates that it places continued faith in the CRT mechanism.

“By this tender offer, Freddie shows that there is stress on capital efficiency and it seems that the CRT market does still provide that capital efficiency,” notes one.

Earlier this year, the Federal Home Finance Agency (FHFA), the regulator for Fannie Mae and Freddie Mac, released a report entitled Performance of the Enterprises’ Single-Family CRT which was highly fault-finding of the performance and results of CRT since it was introduced.

The report was subjected to widespread criticism from those who remain assured of the value of STACR and CAS

Since June, of course, there has been a change of leadership at the FHFA and is thought that the new management of the regulator will be much less inimical to the CRT market.

Freddie has targeted specific tranches - either the M2s or M3s - within eight offerings priced between 2014 and 2017.

Though seven of the eight tranches earmarked are drawn from HQA vintages, which have higher LTVs, the rapid rise in house prices over the last couple of years will have drastically improved the asset quality.

“Look at house price appreciation. They may have had high LTVs when originated but I bet they don’t now,” says another source.

In its fact sheet provided with the tender offer announcement, Freddie Mac notes “None of the STACR notes in the tender offer provide any capital relief to Freddie Mac.  Freddie Mac considered, among other things, the macroeconomic environment, overall CRT market condition and Freddie Mac risk management objectives.”

Market sources think it likely that this will not be the first such tender offer, as the exigencies which determined this offer continue to persist - depending of course on the response to this first time buyback.

Simon Boughey

ABS

Back in business

European ABS/MBS market update

The European ABS/MBS primary market is up and running again after the summer lull. This afternoon saw the first widely marketed deal to price since the August hiatus, with more set to follow this week and beyond.

UK non-conforming RMBS Together Asset Backed Securitisation 2021-1ST1 saw its three offered tranches price as follows – £283m class As at 70bp over SONIA; £7.95m class Bs at 95bp over; and £11.13m class Cs at 125bp. Prints were well inside conservative initial price talk of MH70s, L100s, M100s on the back of strong demand, particularly for mezz paper, as was the case for pre-summer deals. Notably, the class Bs are understood to be the tightest ever for a UK non-conforming transaction.

Next up is UK buy-to-let RMBS Lanebrook Mortgage Transaction 2021-1, which is slated to price tomorrow. Initial talk on the deal was again unsurprisingly conservative, given the deal’s post-summer early-mover status with, for example, the class As at LM70s. But demand for all six of the deal’s offered tranches tightened through guidance considerably.

Final guidance has been given on Lanebrook with the £301.8m class As 3.2x oversubscribed at initial guidance of 68a. The senior spread is now guided at 65bp over SONIA and the class Bs, Cs, Ds, Es and X1s at 95bp, 125bp, 165bp, 270bp, 290bp, respectively.

Also in the growing pipeline is another BTL deal – Dutch Property Finance 2021-2 – expected to price before the end of this week. Slightly further out are two auto deals – Autoflorence 2 and Santander Consumer Spain Auto 2021-1 – along with UK BTL RMBS Twin Bridges 2021-2 and UK CMBS Atom Mortgage Securities.

For more on all of the above deals, see SCI’s Euro ABS/MBS Deal Tracker.

Mark Pelham

ABS

NPL ABS seminar line-up finalised

Regulatory developments, servicing trends on the agenda

SCI’s 3^rd Annual NPL Securitisation Seminar is taking place virtually on 14 September. The event will explore the impact of the coronavirus fallout on performance and issuance, as well as on pricing assumptions, servicing and workout trends across the European non-performing loan ABS market. Together with recent regulatory developments in the space, it will also examine the GACS and HAPS schemes, and the emergence of synthetic NPL transactions.

The seminar begins with a market overview panel, before moving on to a discussion of the European Commission’s NPL strategy and capital markets recovery package, among other legislative developments. Next, a panel on servicing examines the importance of sourcing relationships and the rise of strategic servicing partnerships, while a securitisation panel focuses on the asset protection schemes in Greece and Italy.

The final panel on investment trends explores emerging NPL opportunities, including the unlikely-to-pay loan segment. There is also a fireside chat featuring the European DataWarehouse and the ECB.

The seminar concludes with a Q&A session, followed by a networking event.

SCI’s 3^rd Annual NPL Securitisation Seminar is sponsored by Societe Generale and Cerved. Speakers also include representatives from Alvarez & Marsal, Arrow Global, Ashurst, Banca Carige, Banca IFIS, Banca IMI, DBRS Morningstar, Distressed Technologies, DLA Piper, GreenbergTraurig, Hellenic Investment Recovery Advisors, Hoist Finance, HSBC, Intesa Sanpaolo, Intrum, KBRA, NPLMarkets, Orrick, Prelios, S&P and Whitestar Asset Solutions.

For more information on the event or to register, click here.

Structured Finance

Chinese reserves

Growth boosts domestic securitisation market

China’s continued economic growth has boosted both securitisation performance and issuance volumes. However, bank asset quality remains at risk because of high economic uncertainties from the lingering pandemic threat and ongoing structural adjustment in the economy. Yet bank asset metrics benefit from continued disposal of bad debts using their substantial loan loss reserves.

According to the latest Moody’s data, new issuance totalled RMB204.8bn across 50 deals in 2Q21, with delinquency rates declining for consumer ABS and remaining stable for auto ABS and RMBS. For CLOs, underlying loan defaults occurred in eight micro-business loan deals.

The number of new deals issued in 2Q21 was 18 more than in the same period in 2020, while the total issuance value was RMB95.73bn higher. China's real GDP for 1H21 rose 12.7% from the same period last year, while its GDP for 2Q21 increased 7.9% compared with 2Q20.

In May, Moody's raised its forecast for China's real GDP growth to 8.5% from its previous forecast of 7.5% on the back of stronger-than-expected first-quarter GDP numbers. The forecasts incorporate the expectation that domestic spending growth, especially on services, will accelerate in the coming quarters as social and economic activity continues to normalise.

The ratio of non-performing loans to total loans at Chinese commercial banks decreased to 1.76% at the end of June 2021, from 1.80% in March 2021 and 1.94% in June 2020.

Stelios Papadopoulos

Structured Finance

SCI Start the Week - 6 September

A review of SCI's latest content

Last week's news and analysis
Cliff edge looms
400,000 loans face forbearance expiry
CMBS vigour
CMBS issuance for rest of 2021 to keep everyone busy
Forward strides
Middle East Islamic finance market looks good into 2022
High LTV Italian SRT inked
Intesa executes capital relief trade
Libor worries
UK RMBS transition to leave ratings unshaken
Low delinquencies - for now
Delinquencies give few alarms but asset quality slump pending
Ready to launch
Norway readies SRT take off
Scope concerns
SFA underlines concerns in UK government call for regulation opinion

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

Recent research to download
The puzzling case of the disappearance of Fannie Mae
Fannie Mae has not issued a CRT deal since 1Q20. This SCI CRT Premium Content article investigates the circumstances behind the GSE’s disappearance from the market and what might make it come back

EIF risk-sharing deals - August 2021
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.

Euro ABS/MBS primary pricing - Summer 2021
In this first in a new series of Euro ABS/MBS premium content articles, 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 free report to discover coverage levels for every widely marketed deal and the impact on price movements broken down sector by 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.

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

Tender Freddie

GSE has commenced a debut buyback scheme to retire old STACR issuance

Freddie Mac yesterday (September 7) inaugurated its first-ever tender offer programme to buy back STACR notes to reduce indebtedness, the agency told SCI last night.

The tender offer period will run until midnight EDT on October 4 and will be managed by co-managers Barclays Capital and Bank of America. Freddie will buy back up to $650m in aggregate original principal amount, targeting eight deals priced in the last seven years.

Freddie has been issued CRT notes in the form of STACR issuance since 2013, but has never before put out a tender offer for outstanding issuance.  It has done so on this occasion not only to reduce overall debt levele but as these designated tranches have become substantially deleveraged due to improvement in the credit risk of the reference pools or an increase in credit enhancements to the extent they no longer offer a meaningful credit risk transfer, Freddie explains.

“None of the STACR notes in the tender offer provide any capital relief to Freddie Mac.  Freddie Mac considered, among other things, the macroeconomic environment, overall CRT market condition and Freddie Mac risk management objectives,” the GSE says

Eight different tranches of deals have been earmarked for repurchase, in a descending order of priority. Seven of the tranches belong to the HQA class offerings, which incorporate loans with higher LTVs of 81%-97%.

All the tranches sought are M2 or M3s, which are generally rated BBB or strong BB.   The higher priority tranche is the M2 of the HAQ1 2017 deal, which had an original principal amount of $472.5m. This is followed by the M2 tranche of the HQA3 2017 deal, the original principal amount of which was $405.5m.

Although it is making this debut foray into the world of buybacks, the GSE is at pains to add: “Freddie Mac remains committed to the CRT market. The execution of a tender offer should not be considered a signal to Freddie Mac’s future CRT issuance.”

Freddie has continued to issue STACR notes throughout the last year and a half, while Fannie Mae has absented itself from the market.

So far this year, Freddie has issued six STACR deals and achieved record issuance of $9.9bn in H1 in both STACR and ACIS programmes.

Another HQA deal is slated for Q3 with two more HQA and DNA transactions scheduled for Q4 2021.

Simon Boughey

Capital Relief Trades

Risk transfer round-up - 8 September

CRT sector developments and deal news

Bank of Ireland is believed to be readying a synthetic RMBS that is expected to close in 2H21. The bank’s last capital relief trade, dubbed Vale Securities Finance 2019-1, closed in 4Q19 (see SCI’s capital relief trades database).

Capital Relief Trades

WAL enters CRT space

CRT trade covers first losses on warehouse loans

Western Alliance Bancorporation (WAL), a $35bn western US lender headquartered in Phoenix, Arizona, completed a $242m 144a credit linked note (CLN) sale at the end of June to cover first losses on $1.9bn reference pool of mortgage warehouse loans.

This constitutes another capital relief trade brought to the market by a US regional following the lead of Texas Capital Bank six months ago, though the WAL deal was accompanied by less fanfare.

The notes were issued on June 28 and mature on December 30 2024. They pay a coupon of three month Libor plus 550bp.

JP Morgan was the placement agent, and Clifford Chance served as legal counsel while KPMG is believed to have acted as adviser. Citi, Clifford Chance and KPMG piloted Texas Capital Bank's debut CRT in March.

In February 2021, WAL bought Aris Mortgage, the parent company of AmeriHome Mortgage Company, for $1bn in cash and in doing so acquired new warehouse loans. AmeriHome is the third largest correspondent mortgage acquirer in the US.

Irrespective of the new loans, WAL’s own warehouse lending book grew by over 100% during 2020 $2bn at the end of 2019, or 9% of all loans, to $4.2bn at end of 2020, or 17% of all loans.

WAL has wasted little time in gaining capital relief on this expanded portfolio of warehouse loans. In this respect it also follows Texas Bank’s lead. Warehouse loans are subject to particularly harsh treatment by the standardized approach to capital adequacy calculation, to which US regionals subscribe.

Despite bearing many of the same asset characteristics as mortgage debt, they are treated as commercial loans and thus get a full 100% risk weighting. This makes them a particularly attractive reference asset for capital relief deals.

In its 10Q filing at the end of H1 2021, the bank noted in reference to this CRT trade, “In the event of a failure to pay by the relevant mortgage originator, insolvency of the relevant mortgage originator, or restructuring of such loans that results in a loss on a loan included in the reference pool, the principal balance of the notes will be reduced to the extent of such loss and recognized as a debt extinguishment gain within non-interest income in the Consolidated Income Statement.”

During 2020, AmeriHome bought approximately $65bn in GSE and non-GSE originations  from its network of independent mortgage originators. It also manages a mortgage servicing portfolio worth $99bn at the end of December 2020.

The bank was unavailable for comment.

Simon Boughey

Capital Relief Trades

JP Morgan into fifth gear

Third CLN in 2021 to cover auto loan losses soon to print

JP Morgan Chase is to price its second auto loan-linked CLN deal in two months, its third of the year and its fifth in just over 12 months as the auto loan book become the clear favourite for the bank’s use of the CRT mechanism.

Designated Chase Auto Credit Linked Notes, Series 2021-3 (CACLN 2021-3), the note transfers risk to noteholders via a hypothetical CDS on a reference pool of $4.5bn auto loans to prime quality borrowers. There are 180,301 separate loans in the portfolio.

The deal consists of eight tranches and the legal final maturity is 26 February 2029.

The A tranche, which is typically retained by the borrower, is unrated and is worth $3.94bn, or 87.5% of the asset pool. The B tranche, worth $409m, in rated Aa2 by Moody’s and constitutes 9.2% of the asset pool.

The $31.5m C tranche, 0.7% of the asset pool, is rated A2, the $40.5m D tranche, 0.9% of the asset pool, is rated Baa2, the $18m E tranche, 0.4% of the asset pool, is rated Ba2, the $17.1m F tranche, 0.38% of the asset pool, is rated B2, while the G and R tranches, worth a combined $46m, are unrated.

This is the first CACLN to receive a rating from Moody’s. The ratings agency calculates a cumulative loss expectation of the pool of 0.40%. It cites JP Morgan’s experience as a sponsor and servicer, and the high credit quality of the pool as key strengths of the pool.

The weighted average FICO score of the reference pool is 788, which is very high and higher than the deals in July or March. Some 73% of the creditors are 750 or higher, and none are below 650.

The weighted average LTV is 96%, which, though high, is customary for the auto loan market while the weighted average APR is 2.9%.

There are 68% new vehicles in the loan pool and 32% used. Over half the vehicles (52%) are SUVs.

JP Morgan Chase declined to comment.

Simon Boughey

CLOs

Structural innovation

Evolution of Euro CLOs set to continue

European CLOs issued during 2021 have started to resemble pre-pandemic deals, with par subordination returning to the 38%-40% range compared with 42%-44% for CLOs issued last year. At the same time, documentation and structural features continue to evolve in response to the challenging environment, adding further flexibility for effective management of CLO portfolios.

“Last year, CLO documentation changed, mainly as a response to the Covid environment. The structural features that we have begun to see are lower subordination and longer reinvestment periods,” says Emanuele Tamburrano, senior director at S&P.

In particular, single-B rated notes have reappeared, while innovation on the documentation side has focused on non-performing assets. The concept of loss mitigation obligations (LMOs) emerged to address the latter (SCI 14 July).

“This feature permits the CLO to buy an asset issued by a defaulted entity, but with the same or higher seniority than the current debt the CLO is holding. In pre-pandemic CLOs, when an asset defaulted, the CLO was restricted and generally would not be able put more money into such assets because of the restriction in CLO docs. Therefore, a more opportunistic fund could buy the asset cheaply creating greater losses for the CLO,” Tamburrano explains.

He adds: “We expect [LMOs] to be a credit positive, but only time will tell. It allows CLOs to invest in new debt with the potential for higher recoveries.”

Buoyed by positive news of rollouts of multiple Covid-19 vaccines across the world and strong macroeconomics, European CLO issuance volumes have been strong so far this year. The tally for 2021 stood at €21.5bn as of 24 August, from 53 deals. This compares with €13.21bn from 40 deals at the same time last year.

Meanwhile, as performance concerns that clouded most of 2020 subside, margins are strengthening as well - fueling CLO issuance momentum further. Indeed, the outlook for the rest of 2021 remains positive, with a strong pipeline.

This is despite real corporate bond yields being at record lows and late-cycle behaviour appearing in leveraged finance. But with limited signs of inflationary pressures altering the policy calculus, central bank support remains potent and pivotal, according to S&P.

Overall, Tamburrano concludes: “We expect continuous issuances and we are waiting to see if more investors will step into the space. There is overall a positive environment; I suspect we are going to see more of what we have seen this year.”

Angela Sharda

Structured Finance

Assured wraps Euro CLO pair

Sector developments and company hires

Assured wraps Euro CLO pair
Assured Guaranty has over the last month wrapped a portion of debt issued by two European CLOs for European investors. Assured Guaranty (Europe) guaranteed €125m of triple-A rated class A notes issued by NIBC Bank’s North Westerly V CLO, while Assured Guaranty Corp and Assured Guaranty UK co-guaranteed €100m – in aggregate – across the triple-A through single-A rated class A1, A2A and B notes issued by Blackstone’s Tymon Park CLO. In both transactions, investors in the guaranteed notes were able to reduce the level of regulatory capital consumed by the CLO exposure.

EMEA
Barbara Lambotte has joined Aegon as senior investment manager - private credit, based in The Hague. Lambotte was previously svp, risk, pricing and bank readiness at OnDeck. Before that, she was vp and co-head of capital markets at SoFi and associate md in Moody’s US asset finance group, having begun her career at JPMorgan.

Alvarez & Marsal has appointed Robert Bradbury as head of structured credit execution, based in London. Bradbury was previously md, global head of structuring and advisory at StormHarbour, which he joined in November 2015. Before that, he worked at Societe Generale and Barclays.

Thomas Akin has joined Whitecroft Capital Management as an investment director in its portfolio management team, focusing on originating, structuring and managing new and existing risk-sharing transactions. He was previously a director in StormHarbour’s structuring team and before that, was a member of Santander's securitisation team responsible for regulatory capital relief and funding transactions.

North America
Geoffrey Horton has joined BlackRock as a CLO research analyst, based in New York. He was previously a global CLO and loan strategist at Barclays, and before that was a CLO and commercial ABS research associate at Wells Fargo.

Everest Re Group has appointed John Modin as president of Mt. Logan Re, effective from 30 September 2021. Modin was previously an md in Citi’s financial services group and head of insurance solutions. He has over 30 years of experience in the financial services, ILS and insurance markets and succeeds David Whiting, current president of Mt. Logan, who is retiring.

Palomar Holdings has recruited Chris Cebula as svp, reinsurance, responsible for the management and execution of the company’s risk transfer strategy. Cebula was previously a portfolio manager at Elementum Advisors, where he developed portfolio strategy for the firm’s catastrophe bond-focused client accounts and led a team responsible for investment research and due diligence.

Structured Finance

SFDR to spur Article 8 CLOs

Sector developments and company hires

SFDR to spur Article 8 CLOs
CLOs may soon be structured as Article 8 funds under the EU Sustainable Finance Disclosure Regulation (SFDR), as part of the rotation of capital towards assets that promote ESG objectives, according to White & Case. The firm notes in a recent client memo that Article 8 funds that invest in CLOs are already emerging and suggests that it is “only a matter of time” before CLOs themselves are marketed as Article 8 funds - with the prospect of Article 9 CLOs to follow.

The SFDR is broader than the EU's Taxonomy Regulation and provides a regulatory framework to mobilise private capital for both the energy transition and the broader UN Sustainable Development Goals (SDGs) agenda. Within four months of the 10 March 2021 effective date of the SFDR, €3trn of funds had been labeled as Article 8 or Article 9. Analysts now forecast that over 50% of the assets under management in Europe will be managed through Article 8 and Article 9 funds as soon as next year.

At the same time, the convergence of ESG and CLOs has been gathering pace since the emergence of ESG negative screening in 2019 (SCI passim). “This convergence exploded in 2021 to the point of ubiquity, with ESG negative screening provisions in European CLO new issuances and resets. 2021 has seen further step changes for ESG provisions in CLOs, with forward-thinking managers introducing subjective ESG scoring across CLO portfolios, as well as the emergence of objective ESG reporting on CLO assets,” the White & Case memo states. 

The firm believes that the SDGs could provide the definitional framework for issuers across markets to access demand for ESG assets. Indeed, 1Q21 saw the first signs of the SDG model in the leveraged loan and CLO markets, with CLOs including reporting on SDG-covenanted assets.

“The missing piece of the jigsaw to facilitate pricing tiering for CLOs has now been filled by the SFDR, which provides the framework for funds to aggregate ESG assets, including those which promote the SDGs,” White & Case notes.

While corporate and sovereign issuers can make direct covenants by reference to the SDGs, the challenge for funds - including CLOs - has been ramping with a sufficient level of ESG assets for the pricing benefit to emerge. White & Case suggests that the SFDR solves this riddle definitively with the promulgation of Article 8 fund structure.

In other news…

Brookfield reopens Euro CMBS mart
Another Brookfield-sponsored transaction has reopened the European CMBS market post-summer (SCI 30 June). Atom Mortgage Securities securitises a £391.2m loan secured by the borrower’s freehold interests in four office (representing 92.2% of loan balance) and two industrial (7.8%) assets in the UK, totaling 1.57m square-feet.

The properties are located across the South East (42.2%), London (36.5%), South West (18.4%) and East of England (2.9%). The assets are leased to 68 tenants, of which the largest - a subsidiary of multinational pharmaceutical company Bristol Myers Squibb - represents 10% of gross rental income and the top 10 represent 54.3%. Occupancy stands at 86.2%, according to KBRA.

The sponsor’s business plan during the loan term is to invest approximately £37m to enhance certain properties (£16.7m) and to increase occupancy and gross rental income via investment in tenant incentives and leasing commissions (£20.3m). There is a £28m capex facility to partially fund the budget.

The mortgage financing - which comprises a £369m term facility and a £22.2m capex facility - was co-originated by Bank of America (accounting for 40%), Morgan Stanley (40%) and Standard Chartered (20%) in June 2021. Bank of America and Morgan Stanley are arrangers on the transaction.

EMEA
Guy Carpenter has appointed Quentin Perrot as md, GC Securities, responsible for the origination and structuring of ILS, collateralised structures and alternative capital, supporting a global client base. Based in London, he will report to Shiv Kumar, president, GC Securities.

Perrot was most recently svp and head of the European ILS team at Willis Re Securities, which he joined in 2014. Prior to that, he was a structurer of ILS products at BNP Paribas.

Structured Finance

Cyberattack scenarios weighed

Sector developments and company hires

Cyberattack scenarios weighed
S&P reports that it has seen more credit-relevant cyber events in the last six months than in the previous six years, including the first structured finance transaction reporting an operational disruption following a ransomware attack on the originator and servicer (SCI 28 May). The rating agency says it has explored several hypothetical scenarios to identify areas of potential risk and consider how structural features common in securitisations may help issuers respond to, and recover from, a material cyber event.

“In our view, securitisations have lower direct exposure to cyber events than non-special-purpose entities, such as corporates and financial institutions. However, the potential negative credit impact following a cyberattack could be more pronounced, given the limited resources available to securitisations,” S&P observes.

Many of the structural features already in place to ensure operational continuity in structured finance transactions have positive spill-over effects on cyber readiness. These include cash reserves to address liquidity risks, performance triggers that may change the priority of payments and replacement provisions for key transaction parties that may become materially affected by a cyber event.

Nevertheless, S&P notes that concerns over a key transaction party's level of preparedness for a cyberattack - or demonstrated poor management of an attack - could increase operational risk and potentially result in a ratings cap on the securitisation. “Overall, we believe transaction structures are relatively well prepared to respond to a cyber event and have not taken any rating actions directly attributed to a cyberattack to date. However, failure of the issuer to remedy exposure to a cyber event in a timely manner could lead to negative rating action,” the agency warns.

Environmental disclosure pilot launched
Private market investors with US$2.3trn of assets are, for the first time, requesting standardised environmental disclosures from over 1,000 privately held portfolio companies through non-profit global environmental disclosure platform CDP. The investors include Beach Point Capital, Coller Capital, M&G, Neuberger Berman and Nuveen. The platform will allow them to benchmark private companies and compare like-for-like on environmental performance.

A trend towards the privatisation of high-carbon assets risks diminishing transparency and performance on ESG issues, since private companies do not have to comply with the reporting requirements of a listed entity. To address this gap in transparency, CDP has collaborated with investors to create the first-ever standardised environmental disclosure questionnaire focused specifically on private companies. The Private Markets Pilot’s objective is to increase disclosure from private companies of all sizes, including the mid-markets and SMEs, and those with high-impact business activity that have historically avoided scrutiny on environmental issues and pressure to decarbonise. 

Structured Finance

CLO equity investment agreement inked

Sector developments and company hires

CLO equity investment agreement inked
CQS has entered into a strategic investment agreement with Jefferies and three investment management firms to support the new issuance of US CLOs on the CQS platform. Under the terms of the agreement, Jefferies and the investment management firms will provide CLO equity capital and warehouse funding to support the new issuance of four to five CQS CLOs over the next two to three years, subject to certain conditions.

As strategic investors, Jefferies and the investment management firms will share in the growth of the CQS CLO platform, but are otherwise not involved in the management of the CLOs. Each of the investors will make their own independent decisions regarding the potential purchase or sale of any such CLO equity.

Led by Jim Fitzpatrick, the CQS US CLO platform is supported by the CQS global research capability, including 19 corporate credit analysts with an average of 15 years' experience located across the US and Europe. The launch builds upon the existing CQS European CLO platform.

EMEA
Insurance Partners Europe has recruited Pierre Mouilhade as co-founder, reinsurance brokerage and ILS advisory, based in Paris. He was previously an ILS portfolio manager and analyst at SCOR Investment Partners, which he joined in June 2015. Before that, he worked at AXA Group, Credit Agricole and Generali.

North America
Andrew Donahue has joined Mount Street US as a director responsible for asset management within the firm’s special servicing team based in Kansas. He was previously an asset manager, special servicing at Midland Loan Services, which he joined in March 2011.

Sycamore Tree Capital Partners has appointed Paul Travers as an md and portfolio manager, responsible for originating and managing the firm’s CLOs, reporting to cio Trey Parker. In this newly created role, Travers will also join Sycamore Tree’s investment committee, alongside Parker, Mark Okada, Scott Farrell and Jon Poglitsch (SCI 20 November 2020).

Travers joins Sycamore Tree with more than 38 years of relevant industry experience. He was previously a loan and CLO portfolio manager and investment committee member at Onex Credit Partners, where he led the company’s launch and buildout of its US CLO platform. Prior to that, he worked at DiMaio Ahmad Capital, Credit Agricole Indosuez, Merrill Lynch Asset Management, Bear Stearns, BHF Bank and Chase Manhattan Bank.

Structural strengths to mitigate AFV risk
The sale of new passenger internal combustion engine (ICE) vehicles is set to be phased out in Japan by the mid-2030s in favour of alternative fuel vehicles (AFVs), as part of the country’s decarbonisation efforts. Although this could reduce car resale values in the portfolios of auto loan ABS over the long term, several structural strengths mitigate the risk, according to Moody's.

Balloon payment loans in auto ABS portfolios will face heightened risk, as these require borrowers to make a large final payment at loan maturity. If borrowers need to sell their vehicles to meet this payment amid falling car resale values given the shift to AFVs, they may default on loans.

"However, some balloon loans have a prefixed car price at maturity, which mitigates resale value risks. This only works, though, if the pre-agreed buyers like dealers or finance companies are still in the market at loan maturity," says Atsushi Karikomi, a Moody's vp and senior credit officer.

He adds: "Furthermore, auto ABS deals have short maturity terms, typically around three to four years. This also mitigates resale value risks as they tend to evolve over the longer term.”

As AFVs start to account for a larger portion of the underlying vehicles backing auto loan ABS, resale value risks are also expected arise from price uncertainty for used AFVs. This is because rapidly changing technology, regulations and consumer preferences influence AFVs' future prices.

STS trade receivables programme launched
Metals and natural resources merchant Traxys has launched a global multi-currency securitisation programme. Backed by credit insured trade receivables originated by Traxys’ European and US subsidiaries, it is euro- and US dollar-denominated and split into three maturity tranches extending to two years.

This securitisation program allows Traxys to continue diversifying its working capital solutions, creates up to US$250m of additional capacity and lowers the absolute cost of financing Traxys’ activities. The programme has a flexible structure and can be increased to meet Traxys’ business needs over time. Further, it is STS certified by SVI for both ABCP and non-ABCP investors.

Arranged by Société Générale, the programme is funded by HSBC, ING, MUFG and SG. Redbridge Debt & Treasury Advisory and Accola supported Traxys with the structuring and implementation of the programme.

Structured Finance

RFI issued on sustainable housing

Sector developments and company hires

RFI issued on sustainable housing
The FHFA is requiring Fannie Mae and Freddie Mac to submit Equitable Housing Finance Plans by end-2021, with the plans to be updated annually. The plans will identify and address barriers to sustainable housing opportunities, including the GSEs’ goals and action plans to advance equity in housing finance for the next three years. The FHFA also will require the enterprises to submit annual progress reports on the actions undertaken during the prior year to implement their plans.

Under a recently signed MOU between the FHFA and HUD regarding fair housing and fair lending coordination, HUD provided insight and expertise regarding this equitable housing finance initiative. Additionally, the FHFA has issued a request for input ​that seeks public comments until 25 October, to aid the enterprises in preparing their first plans and to aid the FHFA in overseeing the plans.

In other news…

CMBS delinquencies drop
The US CMBS delinquency rate fell 26bp to 3.33% in August from 3.59% in July, representing the largest monthly decline since the onset of the pandemic, according to Fitch. The agency credits the improvement to continued strong resolution volume, fewer new delinquencies and robust new issuance.

Resolutions totaled US$1.6bn in August, compared with US$1.7bn in July. These were mostly hotel (totalling US$490m) and retail loans (US$820m), including six regional malls (US$498m) - two of which were disposed of - and the US$132m PECO Portfolio (securitised in LBUBS 2007-C6) that was resolved with a 100% loss.

Meanwhile, new delinquencies were US$610m in August - the lowest monthly volume since April 2020 - down from US$853m in July. The roll rate of 30 to 60 days delinquent was only 8% from July to August, down from 35% from June to July. Finally, 30-day delinquencies fell to US$1.9bn from US$2.5bn.

Civil money penalty issued
The OCC has assessed a US$250m civil money penalty against Wells Fargo, based on the bank’s unsafe or unsound practices related to deficiencies in its home lending loss mitigation programme and violations of the 2018 Compliance Consent Order. The OCC also issued a Cease and Desist Order against the bank, based on its failure to establish an effective home lending loss mitigation programme.

The order requires the bank to take broad and comprehensive corrective actions to improve the execution, risk management and oversight of its loss mitigation programme. The order restricts Wells Fargo, while the order is effective, from acquiring certain third-party residential mortgage servicing and requires the bank to ensure that borrowers are not transferred out of its loan servicing portfolio until remediation is provided - except as required by an investor pursuant to a contractual right.

The OCC penalty will be paid to the US Treasury.